EXHIBIT
13










Parent
company of


First
Federal Savings and Loan Association of Hazard


and


First
Federal Savings Bank of Frankfort





2009


Annual
Report





KENTUCKY
FIRST FEDERAL BANCORP


Kentucky
First Federal Bancorp (“Kentucky First” or the “Company”) was formed under
federal law in March 2005 and is the holding company for First Federal Savings
and Loan Association of Hazard, Hazard, Kentucky (“First Federal of Hazard”) and
First Federal Savings Bank of Frankfort, Frankfort, Kentucky (“First Federal of
Frankfort”) (collectively, the “Banks”).   Kentucky First’s
operations consist primarily of operating the Banks as two independent,
community-oriented savings institutions.




First
Federal of Hazard is a federally chartered savings and loan association offering
traditional financial services to consumers in Perry and surrounding counties in
eastern Kentucky.  First Federal of Hazard engages primarily in the
business of attracting deposits from the general public and using such funds to
originate, when available, loans secured by first mortgages on owner-occupied,
residential real estate and, occasionally, other loans secured by real
estate.  To the extent there is insufficient loan demand in its market
area, and where appropriate under its investment policies, First Federal of
Hazard has historically invested in mortgage-backed and investment securities,
although since the reorganization, First Federal of Hazard has been purchasing
whole loans and participations in loans originated at First Federal of
Frankfort.




First
Federal of Frankfort is a federally chartered savings bank which is primarily
engaged in the business of attracting deposits from the general public and the
origination primarily of adjustable-rate loans secured by first mortgages on
owner-occupied and non-owner-occupied one-to four-family residences in Franklin,
Anderson, Scott, Shelby, Woodford and other counties in
Kentucky.  First Federal of Frankfort also originates, to a lesser
extent, home equity loans and loans secured by churches, multi-family
properties, professional office buildings and other types of
property.




MARKET
INFORMATION


The
Company’s common stock began trading under the symbol “KFFB” on the Nasdaq
National Market on March 3, 2005.  There are currently 7,513,776
shares of common stock outstanding and approximately 682 holders of record of
the common stock.  Following are the high and low closing prices, by
fiscal quarter, as reported on the Nasdaq National Market during the periods
indicated, as well as dividends declared on the common stock during each
quarter.




High
                      
                      
                      Low
                      
                      
                      Dividends
                        Per
      ShareFiscal
      2009First
      quarter
                      
                      $
                      10.00
                      
                      
                      $
                      9.25
                      
                      
                      $
                      0.10Second
      quarter
                      
                      
                      9.90
                      
                      
                      
                      8.80
                      
                      
                      
                      0.10Third
      quarter
                      
                      
                      10.40
                      
                      
                      
                      9.93
                      
                      
                      
                      0.10Fourth
      quarter
                      
                      
                      13.09
                      
                      
                      
                      10.30
                      
                      
                      
                      0.10





High
                  
                  
                  Low
                  
                  
                  Dividends
                    Per
      ShareFiscal
      2008First
      quarter
                  
                  $
                  10.59
                  
                  
                  $
                  9.50
                  
                  
                  $
                  0.10Second
      quarter
                  
                  
                  10.18
                  
                  
                  
                  9.80
                  
                  
                  
                  0.10Third
      quarter
                  
                  
                  10.23
                  
                  
                  
                  9.75
                  
                  
                  
                  0.10Fourth
      quarter
                  
                  
                  10.24
                  
                  
                  
                  9.35
                  
                  
                  
                  0.10





Comparative
Stock Performance Graph




The Common Stock commenced trading on
the Nasdaq National Market on March 3, 2005.  The graph and table
which follow show the cumulative total return on the Common Stock for the period
from March 3, 2005 through the fiscal year ended June 30, 2009 with (1) the
total cumulative return of all companies whose equity securities are traded on
the Nasdaq Stock Market, and (2) the total cumulative return of savings
institutions and savings institution holding companies as indicated by America’s
Community Bankers Index traded on the Nasdaq Stock Market.  The
comparison assumes $100 was invested on March 3, 2005 in the Common Stock and in
each of the foregoing indices and assumes reinvestment of
dividends.  The stockholder returns shown on the performance graph are
not necessarily indicative of the future performance of the Common Stock or of
any particular index.


ii


CUMULATIVE
TOTAL STOCKHOLDER RETURN


COMPARED
WITH PERFORMANCE OF SELECTED INDEXES


March
3, 2005 to June 30, 2009











COMPARISON
OF CUMULATIVE TOTAL RETURN*


AMONG
KENTUCKY FIRST FEDERAL BANCORP,


THE
NASDAQ STOCK MARKET (U.S.) INDEX AND AMERICA'S COMMUNITY BANKERS
INDEX





3/3/05
                
                
                6/30/05
                
                
                6/30/06
                
                
                6/30/07
                
                
                6/30/08
                
                
                6/30/09KENTUCKY
      FIRST FEDERAL BANCORP
                
                
                100.00
                
                
                
                101.95
                
                
                
                97.41
                
                
                
                94.07
                
                
                
                86.65
                
                
                
                112.60NASDAQ
      STOCK MARKET (COMPOSITE)
                
                
                100.00
                
                
                
                100.04
                
                
                
                108.36
                
                
                
                131.10
                
                
                
                116.12
                
                
                
                91.95AMERICA'S
      COMMUNITY BANKERS
                
                
                100.00
                
                
                
                102.35
                
                
                
                110.92
                
                
                
                107.48
                
                
                
                73.67
                
                
                
                57.58


iii


(1) TABLE OF CONTENTS


Kentucky
      First Federal Bancorp
                
                (ii)Market
      Information
                
                (ii)Comparative
      Stock Performance Graph
                
                (iii)Letter
      to Shareholders
                
                
                1Selected
      Consolidated Financial and Other Data
                
                
                3Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                
                5Consolidated
      Financial Statements
                
                
                27Corporate
      Information
                
                
                64


iv








Dear
Shareholder:





We are
pleased to present the 2009 Annual Report for Kentucky First Federal
Bancorp.  We encourage you to read both the Annual Report and Proxy
Statement.  We strongly encourage you to vote and, if possible, to
attend our annual meeting on November 10, 2009.





The
Boards, Officers, and Employees of the Company and its subsidiary banks continue
to be very pleased with our arrangement under Kentucky First
Federal.  We believe that we have continued to demonstrate to our
communities that our primary focus continues to be meeting the financial needs
of our hometowns.





The
financial industry seems to have been on a roller coaster these past twelve
months.  After surviving a frozen credit market and near collapse of
some of the largest investment banks in the world, investors remain hopeful that
the worst is behind us and that economic growth is on its way.  Asset
quality concerns continue to  impact the earnings of many banks both
large and small.  Although major stock indices have recovered nicely
in the past few months, many financial stocks have simply maintained their
prices.  Kentucky First Federal Bancorp recently hit a 52-week high
after being added to the Russell 2000 index.





The
Company’s core business performed very well.  Net earnings before
income taxes increased year over year and was led by a 14.5% increase in net
interest income.  However, as with most things, one usually must take
the bad along with the good.  Despite significant efforts to navigate
the treacherous waters of the past year and having weathered the storm in many
respects, the Company took a nonrecurring charge of $443,000 for federal income
taxes, which was a result of the preliminary denial by the Internal Revenue
Service of a key component of the Company’s claim for refund of income taxes for
the fiscal year ended June 30, 2006.  At issue is the timing of a
deduction of $1.3 million paid to holders of stock options in conjunction with
the acquisition of Frankfort First Bancorp, Inc., in 2005.  The IRS
does not disagree with the propriety of the deduction, but disagrees with the
timing and believes the deduction should have occurred in the prior tax year,
which is now closed under the statute of limitations imposed by the Internal
Revenue Code.  The Company only recently learned of the IRS position
and will explore the options available to refute its position.





There are
still many dangers in the real estate market as our communities struggle with
secondary and tertiary repercussions following the sub-prime meltdown and credit
contraction of 2008.  Those challenges include high unemployment,
potential losses in the commercial real estate sector and restoring the Federal
Deposit Insurance Corporation (“FDIC”) reserves after a number of bank failures
has diminished the fund.  Community banks that possess ample capital
and have demonstrated an ability to make sound loans, such as First Federal of
Hazard and First Federal of Frankfort, will be vitally important to the recovery
of our nation’s real estate market and our overall economy.  We remain
pleased that the Bauer Financial Rating Service continues to award both First
Federal of Hazard and First Federal of Frankfort their highest ranking of five
stars.


1


We would
like to recognize two employees who retired during the last fiscal
year.  Velma Kelly was a customer service representative and vital
part of First Federal of Hazard, having served there since
1967.   Sandy Stover, who had been the friendly face and voice
greeting many Frankfort customers since 2001, also retired in 2009.





As
always, we encourage you, our shareholders to visit our banks for your banking
needs, and we are always glad to talk to you any time you have a question or
concern.





Sincerely,





Tony
      Whitaker
              Don
      D. JenningsChairman
      and C.E.O.
              President
      and C.O.O.


2


SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA





Selected
Financial Condition Data (1)





At
      June 30,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(In
      thousands)Total
      assets
                
                $
                240,901
                
                
                $
                247,655
                
                
                $
                268,916
                
                
                $
                261,941
                
                
                $
                273,915Cash
      and cash equivalents
                
                
                4,217
                
                
                
                15,966
                
                
                
                2,720
                
                
                
                2,294
                
                
                
                8,358Interest-bearing
      deposits
                
                
                100
                
                
                
                100
                
                
                
                100
                
                
                
                100
                
                
                
                100Investment
      securities held to maturity
                
                
                14,999
                
                
                
                16,959
                
                
                
                59,606
                
                
                
                64,029
                
                
                
                72,189Investment
      securities available for sale
                
                
                5,451
                
                
                
                5,480
                
                
                
                13,298
                
                
                
                13,290
                
                
                
                14,547Loans
      receivable, net
                
                
                188,931
                
                
                
                182,051
                
                
                
                166,156
                
                
                
                155,386
                
                
                
                151,712Deposits
                
                
                139,743
                
                
                
                137,634
                
                
                
                139,893
                
                
                
                141,238
                
                
                
                155,044Federal
      Home Loan Bank advances
                
                
                40,156
                
                
                
                47,801
                
                
                
                65,132
                
                
                
                54,849
                
                
                
                50,985Shareholders’
      equity  (2)
                
                
                58,394
                
                
                
                59,793
                
                
                
                61,445
                
                
                
                63,881
                
                
                
                65,939Allowance
      for loan losses
                
                
                678
                
                
                
                666
                
                
                
                720
                
                
                
                724
                
                
                
                708Nonperforming
      loans
                
                
                3,872
                
                
                
                1,277
                
                
                
                968
                
                
                
                1,427
                
                
                
                1,747





Selected
Operating Data (1)





Year
      Ended June 30,2009
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005(Dollars
      in thousands, except per share data)Total
      interest income
                              
                              $
                              12,226
                              
                              
                              $
                              13,087
                              
                              
                              $
                              12,948
                              
                              
                              $
                              12,709
                              
                              
                              $
                              8,153Total
      interest expense
                              
                              
                              5,902
                              
                              
                              
                              7,565
                              
                              
                              
                              7,456
                              
                              
                              
                              6,096
                              
                              
                              
                              3,353Net
      interest income
                              
                              
                              6,324
                              
                              
                              
                              5,522
                              
                              
                              
                              5,492
                              
                              
                              
                              6,613
                              
                              
                              
                              4,800Provision
      for losses on loans
                              
                              
                              46
                              
                              
                              
                              12
                              
                              
                              
                              —
                              
                              
                              
                              32
                              
                              
                              
                              53Net
      interest income after provisionfor
      losses on loans
                              
                              
                              6,278
                              
                              
                              
                              5,510
                              
                              
                              
                              5,492
                              
                              
                              
                              6,581
                              
                              
                              
                              4,747Total
      other income
                              
                              
                              241
                              
                              
                              
                              182
                              
                              
                              
                              174
                              
                              
                              
                              216
                              
                              
                              
                              263Total
      general, administrativeand
      other expenses
                              
                              
                              4,608
                              
                              
                              
                              4,321
                              
                              
                              
                              4,364
                              
                              
                              
                              4,486
                              
                              
                              
                              2,509Income
      before federal income taxes
                              
                              
                              1,911
                              
                              
                              
                              1,371
                              
                              
                              
                              1,302
                              
                              
                              
                              2,311
                              
                              
                              
                              2,501Federal
      income taxes
                              
                              
                              1,103
                              
                              
                              
                              439
                              
                              
                              
                              417
                              
                              
                              
                              723
                              
                              
                              
                              872Net
      income
                              
                              $
                              808
                              
                              
                              $
                              932
                              
                              
                              $
                              885
                              
                              
                              $
                              1,588
                              
                              
                              $
                              1,629Net
      earnings per share – basic
                              
                              $
                              0.11
                              
                              
                              $
                              0.12
                              
                              
                              $
                              0.11
                              
                              
                              $
                              0.19
                              
                              
                              $
                              N/ANet
      earnings per share – diluted
                              
                              $
                              0.11
                              
                              
                              $
                              0.12
                              
                              
                              $
                              0.11
                              
                              
                              $
                              0.19
                              
                              
                              $
                              N/ACash
      dividends declared per common share
                              
                              $
                              0.40
                              
                              
                              $
                              0.40
                              
                              
                              $
                              0.40
                              
                              
                              $
                              0.40
                              
                              
                              $
                              0.10


_______________________________


(1)
            The
      incorporation of the Company, the issuance of its stock and the
      acquisition of Frankfort First were completed on March 2, 2005. 
      Information as of dates and for periods prior to March 2, 2005 are for
      First Federal of Hazard in mutual form.  In accordance with the
      purchase method of accounting, the Company’s results of operations for the
      year ended June 30, 2005 only reflect Frankfort First’s operating results
      for the four-month period ended June 30,
2005.


(2)
            Consists
      of only retained earnings at June 30,
2005.


3


Selected
Financial Ratios and Other Data (1)





Year
      Ended June 30,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Performance
      Ratios:Return  on
      average assets (net income
      divided by average total assets)
                
                
                0.33
                %
                
                
                0.35
                %
                
                
                0.33
                %
                
                
                0.59
                %
                
                
                0.88
                %Return  on
      average equity (net income
      divided by average equity)
                
                
                1.37
                
                
                
                1.54
                
                
                
                1.41
                
                
                
                2.68
                
                
                
                4.46Interest
      rate spread (combined
      weighted average interest rate earned less combined weighted average
      interest rate cost)
                
                
                2.29
                
                
                
                1.65
                
                
                
                1.61
                
                
                
                2.15
                
                
                
                2.30Net
      interest margin (net
      interest income divided by  average interest-earning
      assets)
                
                
                2.87
                
                
                
                2.29
                
                
                
                2.26
                
                
                
                2.63
                
                
                
                2.69Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                
                
                121.53
                
                
                
                120.28
                
                
                
                121.16
                
                
                
                118.77
                
                
                
                120.74Ratio
      of total general administrative and other expenses to average total
      assets
                
                
                1.90
                
                
                
                1.64
                
                
                
                1.64
                
                
                
                1.62
                
                
                
                1.35Efficiency
      ratio (2)
                
                
                70.19
                
                
                
                75.75
                
                
                
                77.02
                
                
                
                65.02
                
                
                
                49.56Dividend
      payout ratio (3)
                
                
                144.68
                
                
                
                126.82
                
                
                
                153.11
                
                
                
                97.36
                
                
                
                N/AAsset
      Quality Ratios:Nonperforming
      loans as a percent of total loans at end of period (4)
                
                
                2.05
                
                
                
                0.70
                
                
                
                0.58
                
                
                
                0.92
                
                
                
                1.15Nonperforming
      assets as a percent of total assets at end of period
                
                
                1.65
                
                
                
                0.52
                
                
                
                0.36
                
                
                
                0.54
                
                
                
                0.66Allowance
      for loan losses as a percent of total loans at end of
    period
                
                
                0.36
                
                
                
                0.36
                
                
                
                0.43
                
                
                
                0.46
                
                
                
                0.47Allowance
      for loan losses as a percent of nonperforming loans at end of
      period
                
                
                17.51
                
                
                
                52.15
                
                
                
                74.38
                
                
                
                50.74
                
                
                
                40.53Provision
      for loan losses to total loans
                
                
                0.02
                
                
                
                0.01
                
                
                
                —
                
                
                
                0.02
                
                
                
                0.03Net
      charge-offs to average loans outstanding
                
                
                0.02
                
                
                
                0.04
                
                
                
                —
                
                
                
                0.01
                
                
                
                0.20Capital
      Ratios:Average
      equity to average assets
                
                
                24.27
                
                
                
                22.94
                
                
                
                23.64
                
                
                
                21.95
                
                
                
                19.68Shareholders’
      equity or capital to total assets at end of period
                
                
                24.24
                
                
                
                24.14
                
                
                
                22.85
                
                
                
                24.39
                
                
                
                24.07Regulatory
      Capital Ratios:Tangible
      capital
                
                
                17.52
                
                
                
                16.33
                
                
                
                16.61
                
                
                
                17.42
                
                
                
                17.18Core
      capital
                
                
                17.52
                
                
                
                16.33
                
                
                
                16.61
                
                
                
                17.42
                
                
                
                17.18Risk-based
      capital
                
                
                34.41
                
                
                
                34.03
                
                
                
                38.61
                
                
                
                41.92
                
                
                
                43.83Number
      of banking offices
                
                
                4
                
                
                
                4
                
                
                
                4
                
                
                
                4
                
                
                
                4


______________________


(1)
            The
      incorporation of the Company, the issuance of its stock and the
      acquisition of Frankfort First were completed on March 2,
      2005.  Information as of dates and for periods prior to March 2,
      2005 are for First Federal of Hazard in mutual form.  In
      accordance with the purchase method of accounting, the Company’s results
      of operations for the year ended June 30, 2005 only reflect Frankfort
      First’s operating results for the four-month period ended June 30,
      2005.


(2)
            Efficiency
      ratio represents the ratio of general, administrative and other expenses
      divided by the sum of net interest income and total other
      income.


(3)
            Represents
      dividends paid to minority shareholders only as a percent of net
      earnings.  Does not include dividends waived by First Federal
      MHC.


(4)
            Nonperforming
      loans consist of nonaccrual loans and accruing loans greater than 90 days
      delinquent, while nonperforming assets consist of nonperforming loans and
      real estate acquired through
foreclosure.


4





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATIONS


References
in this Annual Report to “we,” “us,” and “our” refer to Kentucky First Federal
Bancorp and where appropriate, collectively to Kentucky First Federal Bancorp,
First Federal of Hazard and First Federal of Frankfort.




Forward-Looking
Statements




Certain
statements contained in this Annual Report that are not historical facts are
forward-looking statements that are subject to certain risks and
uncertainties.  When used herein, the terms “anticipates,” “plans,”
“expects,” “believes,” and similar expressions as they relate to the Company or
its management are intended to identify such forward-looking statements. 
The Company’s actual results, performance or achievements may materially differ
from those expressed or implied in the forward-looking statements.  Risks
and uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, prices for real
estate in the Company’s market areas, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, rapidly changing technology affecting financial
services and the risk factors described in Item 1A of our Annual Report on Form
10-K for the year ended June 30, 2009.  We wish to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.  We wish to advise readers that the factors
listed above could affect our financial performance and could cause our actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.




We do not
undertake, and specifically disclaim any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.




General





The
Company was incorporated as a mid-tier holding company under the laws of the
United States on March 2, 2005 upon the completion of the reorganization of
First Federal of Hazard into a federal mutual holding company form of
organization (the “Reorganization”).  On that date, Kentucky First
completed its minority stock offering and issued a total of 8,596,064 shares of
common stock, of which 4,727,938 shares, or 55%, were issued to First Federal
MHC, a federally chartered mutual holding company formed in connection with the
Reorganization, in exchange for the transfer of all of First Federal of Hazard’s
capital stock, and 2,127,572 shares were sold at a cash price of $10.00 per
share.




Also on
March 2, 2005, Kentucky First completed its acquisition of Frankfort First and
its wholly owned subsidiary, First Federal of Frankfort (the
“Merger”).  Under the terms of the agreement of merger, shareholders
of Frankfort First Bancorp received approximately 1,740,554 shares of Kentucky
First’s common stock and approximately $13.7 million in
cash.  Following the Reorganization and Merger, the Company retained
and holds all the capital stock of Frankfort First which holds all of the
capital stock of First Federal of Frankfort.  The Company also holds
all the capital stock of First Federal of Hazard.  First Federal of
Hazard and First Federal of Frankfort are operated as two independent savings
institutions with separate charters.  Each bank retains its own
management and boards of directors.  The members of management of
Kentucky First also serve in a management capacity at one of the two subsidiary
Banks, and the directors of Kentucky First also serve on the board of one of the
two subsidiary Banks.


5


Our
results of operations are dependent primarily on net interest income, which is
the difference between the income earned on our loans and securities and our
cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by the provision for losses on loans and
service charges and fees collected on our deposit accounts. Our general,
administrative and other expense primarily consists of employee compensation and
benefits expense, occupancy and equipment expense, data processing expense,
other operating expenses and state franchise and federal income taxes. Results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities.





Income.  We have two
primary sources of pre-tax income.  The first is net interest income,
which is the difference between interest income, the income that we earn on our
loans and investments, and interest expense, the interest that we pay on our
deposits and borrowings.





To a much lesser extent, we also
recognize pre-tax income from fee and service charges, which is the compensation
we receive from providing financial products and services.





Expenses.The
expenses we incur in operating our business consist of compensation, taxes and
benefits, office occupancy, data processing fees, taxes and other
expenses.





Compensation, taxes and benefits
consist primarily of the salaries and wages paid to our employees and directors,
payroll taxes and expenses for retirement and other employee
benefits.





Office occupancy expenses, which are
the fixed and variable costs of buildings and equipment, consist primarily of
taxes, depreciation charges, maintenance and costs of utilities.





Data processing fees primarily includes
fees paid to our third-party data processing providers.





Taxes consist of the current and
deferred portion of federal income taxes as well as franchise taxes paid to the
Commonwealth of Kentucky by the subsidiary Banks.





Other expenses include expenses for
attorneys, accountants and consultants, advertising, telephone, employee
training and education, charitable contributions, insurance, office supplies,
postage and other miscellaneous operating activities.





Critical
Accounting Policies





We consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets or on
income to be critical accounting policies.   In determining the
allowance for loan losses, management makes significant estimates and we
consider the allowance for loan losses to be a critical accounting
policy.  The allowance for loan losses is the estimated amount
considered necessary to cover probable incurred credit losses in the loan
portfolio at the balance sheet date.  The allowance is established
through the provision for losses on loans, which is charged against
income.





The management and the Boards of the
Company and of First Federal of Hazard and First Federal of Frankfort review the
allowance for loan losses on a periodic basis.  Consideration is given
to a variety of factors in establishing this estimate including, but not limited
to, current economic conditions, delinquency statistics, geographic and industry
concentrations, the adequacy of the underlying collateral, the financial
strength of the borrower, results of internal loan reviews, volume and mix of
the loan portfolio and other relevant factors.  This evaluation is
inherently subjective, as it requires material estimates that may be susceptible
to change.  Management considers the economic climate in the Banks’
respective lending areas to be among the factors most likely to have an impact
on the level of the required allowance for loan losses.  However, in
view of the fact that the local economies are diverse, without significant
dependence on a single industry or employer, the economic climate is considered
to be somewhat stable at June 30, 2009.


6


Nevertheless, management continues to
monitor and evaluate factors which could have an impact on the required level of
the allowance.  Management watches for national issues that may
negatively affect a significant percentage of homeowners in the Banks’ lending
areas.  These may include significant increases in unemployment or
significant depreciation in home prices.  Management reviews
employment statistics periodically when determining the allowance for loan
losses and generally finds the unemployment rates in both lending areas to be
high in relation to historical trends.  Given the aforementioned
indicators of economic stability at June 30, 2009, management at this time has
no plans to increase the component in the required allowance for loan losses
related to economic factors.  However, future economic events may
cause this to change.  Finally, management has no current plans to
alter the type of lending or collateral currently offered, but if such plans
change or market conditions result in large concentrations of certain types of
loans, such as commercial real estate or high loan-to-value ratio residential
loans, management would respond with an increase in the overall allowance for
loan losses.





The analysis has two components,
specific and general allocations.  Specific allocations are made for
loans that are determined to be impaired.  Impairment is measured by
determining the present value of expected future cash flows or, for
collateral-dependent loans, the fair value of the collateral adjusted for market
conditions and selling expenses.  The general allocation is determined
by segregating the remaining loans by type of loan, risk weighting (if
applicable) and payment history.  We also analyze historical loss
experience, delinquency trends, general economic conditions and geographic and
industry concentrations.  This analysis establishes factors that are
applied to the loan groups to determine the amount of the general
reserve.  Actual loan losses may be significantly more than the
allowances we have established and, if so, this could have a material negative
effect on our financial results.





Our
Operating Strategy





Our
mission is to operate and grow profitable, community-oriented financial
institutions serving primarily retail customers in our market
areas.  We plan to pursue a strategy of:





•
            operating
      two community-oriented savings institutions, First Federal of Hazard,
      which serves customers in Perry and surrounding counties in eastern
      Kentucky, and First Federal of Frankfort, which serves customers primarily
      in Franklin County and surrounding counties in central
      Kentucky.  Each Bank emphasizes traditional thrift activities of
      accepting deposits and originating residential mortgage loans for
      portfolio;





•
            increasing
      the yield on First Federal of Hazard’s assets by decreasing its reliance
      on low yielding government securities and reinvesting these assets into
      whole loans originated by First Federal of Frankfort, with First Federal
      of Frankfort retaining servicing on any loans sold.  Since the
      completion of the Frankfort First acquisition in 2005 and through June 30,
      2009, First Federal of Hazard had purchased approximately $62.2 million in
      loans from First Federal of
Frankfort;





•
            pursuing
      larger borrowing relationships than would otherwise be available to our
      separate banks (because of federal restrictions on loans to one borrower)
      by utilizing the ability to sell loans and participations between the
      banks;





•
            continuing
      our historic heavy reliance on our deposit base to fund our lending and
      investment activities and to supplement deposits with Federal Home Loan
      Bank of Cincinnati (“FHLB”) advances when advantageous or
      necessary.  We expect our projected deposit mix to generally
      retain its existing composition of passbook, transaction and certificate
      of deposit accounts;





•
            gradually
      pursuing opportunities to increase and diversify lending in our market
      areas;





•
            applying
      conservative underwriting practices to maintain the high quality of our
      loan portfolios;





•
            managing
      our net interest margin and interest rate risk;
  and





•
            entertaining
      possibilities of expansion into other markets through branching or
      acquisition, if such possibilities are beneficial to the Company’s
      shareholders, provide a good fit within the Company’s mutual holding
      company framework and can be accomplished without undue encumbrance of the
      Company’s other operational
areas.


7


Market
Risk Analysis





Qualitative
Aspects of Market Risk.Our most
significant form of market risk is interest rate risk.  We manage the
interest rate sensitivity of our interest-bearing liabilities and
interest-earning assets in an effort to minimize the adverse effects of changes
in the interest rate environment.  Deposit accounts typically react
more quickly to changes in market interest rates than mortgage loans because of
the shorter maturities of deposits.  As a result, sharp increases in
interest rates may adversely affect our earnings while decreases in interest
rates may beneficially affect our earnings.  To reduce the potential
volatility of our earnings, we have sought to improve the match between asset
and liability maturities (or rate adjustment periods), while maintaining an
acceptable interest rate spread.  Still, when market rates increase
rapidly, increases in the cost of deposits and borrowings outpace the increases
in the return on assets.  The Company’s assets are primarily comprised
of adjustable rate mortgages (all of which have some contractual limits in their
ability to react to market changes) and short-term securities.  Those
assets will, over time, re-price to counteract the increased costs of deposits
and borrowings.





Asset/Liability
Management.  Management
and the boards of the subsidiary Banks are responsible for the asset/liability
management issues that affect the individual Banks.  Either Bank may
work with its sister Bank to mitigate potential asset/liability risks to the
Banks and to the Company as a whole.  Interest rate risk is monitored
using the Office of Thrift Supervision Net Portfolio Value
(“NPV”).  NPV represents the fair value of portfolio equity and is
equal to the fair value of assets minus the fair value of liabilities, with
adjustments made for off-balance sheet items.  Management monitors and
considers methods of managing the rate sensitivity and repricing characteristics
of balance sheet components in an effort to maintain acceptable levels of change
in NPV in the event of changes in prevailing market interest
rates.  Interest rate sensitivity analysis is used to measure our
interest rate risk by computing estimated changes in NPV that are a result of
changes in the net present value of its cash flows from assets, liabilities, and
off-balance sheet items.  These changes in cash flow are estimated
based on hypothetical instantaneous and permanent increases and decreases in
market interest rates.





As part of our interest rate risk
policy, the Boards of Directors of the subsidiary Banks establish maximum
decreases in NPV given these assumed instantaneous changes in interest
rates.  Our exposure to interest rate risk is reviewed on a quarterly
basis by the Boards of Directors.  If estimated changes to NPV would
cause either bank to fall below the “well-capitalized” level, the Board will
direct management to adjust its asset and liability mix to bring interest rate
risk to a level which reflects the Board’s goals.


8


The following table sets forth the
interest rate sensitivity of our NPV as of June 30, 2009 in the event of
instantaneous and permanent increases and decreases in market interest rates,
respectively.  Due to the abnormally low prevailing interest rate
environment at June 30, 2009 and 2008, NPV estimates are not made for decreases
in interest rates greater than 100 basis points.  All market
risk-sensitive instruments presented in this table at June 30, 2009, are held to
maturity or available-for-sale.  We have no trading
securities.





June
      30, 2009Net
      Portfolio Value (1)
                    
                    
                    NPV
      as % of Portfolio
                      Value
      of Assets (2)Change
      in
                      Rates
                    
                    
                    Amount
                    
                    
                    $
      Change
                    
                    
                    %
      Change
                    
                    
                    NPV
                      Ratio (3)
                    
                    
                    Basis
                      Point
                      Changes(Dollars
      in thousands)First
      Federal of Hazard
                    
                    
                    +300
                    bp
                    
                    $
                    23,475
                    
                    
                    
                    -1,470
                    
                    
                    
                    -6
                    %
                    
                    
                    20.43
                    %
                    
                    
                    -58
                    bp+200
                    bp
                    
                    
                    24,173
                    
                    
                    
                    -772
                    
                    
                    
                    -3
                    %
                    
                    
                    20.79
                    %
                    
                    
                    -22
                    bp+100
                    bp
                    
                    
                    24,707
                    
                    
                    
                    -238
                    
                    
                    
                    -1
                    %
                    
                    
                    21.01
                    %
                    
                    
                    —0
                    bp
                    
                    
                    24,945
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    21.01
                    %-100
                    bp
                    
                    
                    24,700
                    
                    
                    
                    -245
                    
                    
                    
                    -1
                    %
                    
                    
                    20.70
                    %
                    
                    
                    -31
                    bpFirst
      Federal of Frankfort
                    
                    
                    +300
                    bp
                    
                    $
                    15,658
                    
                    
                    
                    -2,708
                    
                    
                    
                    -15
                    %
                    
                    
                    13.73
                    %
                    
                    
                    -171
                    bp+200
                    bp
                    
                    
                    17,080
                    
                    
                    
                    -1,286
                    
                    
                    
                    -7
                    %
                    
                    
                    14.70
                    %
                    
                    
                    -74
                    bp+100
                    bp
                    
                    
                    17,842
                    
                    
                    
                    -524
                    
                    
                    
                    -3
                    %
                    
                    
                    15.16
                    %
                    
                    
                    -28
                    bp0
                    bp
                    
                    
                    18,366
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    15.44
                    %-100
                    bp
                    
                    
                    18,620
                    
                    
                    
                    254
                    
                    
                    
                    1
                    %
                    
                    
                    15.53
                    %
                    
                    
                    9
                    bpConsolidated
                    
                    
                    +300
                    bp
                    
                    $
                    39,133
                    
                    
                    
                    -4,178
                    
                    
                    
                    -10
                    %
                    
                    
                    17.10
                    %
                    
                    
                    -112
                    bp+200
                    bp
                    
                    
                    41,253
                    
                    
                    
                    -2,058
                    
                    
                    
                    -5
                    %
                    
                    
                    17.75
                    %
                    
                    
                    -47
                    bp+100
                    bp
                    
                    
                    42,549
                    
                    
                    
                    -762
                    
                    
                    
                    -2
                    %
                    
                    
                    18.08
                    %
                    
                    
                    -14
                    bp0
                    bp
                    
                    
                    43,311
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    18.22
                    %-100
                    bp
                    
                    
                    43,320
                    
                    
                    
                    9
                    
                    
                    
                    —
                    
                    
                    
                    18.11
                    %
                    
                    
                    -11
                    bp


_______________


(1)
            Net
      portfolio value represents the discounted present value of the difference
      between incoming cash flows on interest-earning and other assets and
      outgoing cash flows on interest-bearing
  liabilities.


(2)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(3)
              NPV
      Ratio represents the net portfolio value divided by the present value of
      assets.




9


The following table sets forth the
interest rate sensitivity of our NPV as of June 30, 2008 in the event of
instantaneous and permanent increases and decreases in market interest rates,
respectively.





June
      30, 2008Net
      Portfolio Value (1)
                    
                    
                    NPV
      as % of Portfolio
                      Value
      of Assets (2)Change
      in
                      Rates
                    
                    
                    Amount
                    
                    
                    $
      Change
                    
                    
                    %
      Change
                    
                    
                    NPV
                      Ratio (3)
                    
                    
                    Basis
                      Point
                      Changes(Dollars
      in thousands)First
      Federal of Hazard
                    
                    
                    +300
                    bp
                    
                    $
                    18,491
                    
                    
                    
                    -3,515
                    
                    
                    
                    -16
                    %
                    
                    
                    17.11
                    %
                    
                    
                    -220
                    bp+200
                    bp
                    
                    
                    19,901
                    
                    
                    
                    -2,105
                    
                    
                    
                    -10
                    %
                    
                    
                    18.06
                    %
                    
                    
                    -125
                    bp+100
                    bp
                    
                    
                    21,137
                    
                    
                    
                    -869
                    
                    
                    
                    -4
                    %
                    
                    
                    18.83
                    %
                    
                    
                    -48
                    bp0
                    bp
                    
                    
                    22,006
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    19.31
                    %-100
                    bp
                    
                    
                    22,390
                    
                    
                    
                    384
                    
                    
                    
                    2
                    %
                    
                    
                    19.41
                    %
                    
                    
                    10
                    bpFirst
      Federal of Frankfort
                    
                    
                    +300
                    bp
                    
                    $
                    15,233
                    
                    
                    
                    -2,626
                    
                    
                    
                    -15
                    %
                    
                    
                    12.49
                    %
                    
                    
                    -159
                    bp+200
                    bp
                    
                    
                    16,388
                    
                    
                    
                    -1,471
                    
                    
                    
                    -8
                    %
                    
                    
                    13.24
                    %
                    
                    
                    -84
                    bp+100
                    bp
                    
                    
                    17,299
                    
                    
                    
                    -560
                    
                    
                    
                    -3
                    %
                    
                    
                    13.79
                    %
                    
                    
                    -29
                    bp0
                    bp
                    
                    
                    17,859
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14.08
                    %-100
                    bp
                    
                    
                    18,119
                    
                    
                    
                    260
                    
                    
                    
                    1
                    %
                    
                    
                    14.15
                    %
                    
                    
                    7
                    bpConsolidated
                    
                    
                    +300
                    bp
                    
                    $
                    33,724
                    
                    
                    
                    -6,141
                    
                    
                    
                    -15
                    %
                    
                    
                    14.66
                    %
                    
                    
                    -189
                    bp+200
                    bp
                    
                    
                    36,289
                    
                    
                    
                    -3,576
                    
                    
                    
                    -9
                    %
                    
                    
                    15.51
                    %
                    
                    
                    -104
                    bp+100
                    bp
                    
                    
                    38,436
                    
                    
                    
                    -1,429
                    
                    
                    
                    -4
                    %
                    
                    
                    16.17
                    %
                    
                    
                    -38
                    bp0
                    bp
                    
                    
                    39,865
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    16.55
                    %-100
                    bp
                    
                    
                    40,509
                    
                    
                    
                    644
                    
                    
                    
                    2
                    %
                    
                    
                    16.64
                    %
                    
                    
                    9
                    bp


_______________


(1)
            Net
      portfolio value represents the discounted present value of the difference
      between incoming cash flows on interest-earning and other assets and
      outgoing cash flows on interest-bearing
  liabilities.


(2)
              Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(3)
              NPV
      Ratio represents the net portfolio value divided by the present value of
      assets.





The preceding tables indicate that at
June 30, 2009 and 2008, in the event of a sudden and sustained increase in
prevailing market interest rates, our NPV would be expected to decrease, and
that in the event of a sudden and sustained decrease in prevailing interest
rates, our NPV would be expected to increase.  The projected decreases
in NPV in the event of sudden and sustained increases in prevailing interest
rates are within the parameters established by each subsidiary Bank’s Board of
Directors.  At all levels represented in the table, the Banks’ NPVs
after the rate increase or decrease would be above the “well-capitalized” level
based on the current level of assets.





NPV is calculated by the Office of
Thrift Supervision using information provided by the Company.  The
calculation is based on the net present value of discounted cash flows utilizing
market prepayment assumptions and market rates of
interest.  Computations or prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan prepayments, and deposit
run-offs.  These computations should not be relied upon as indicative
of actual results.  Further, the computations do not contemplate any
actions the Banks may undertake in response to changes in interest
rates.  Certain shortcomings are inherent in this method of computing
NPV.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in differing degrees
to changes in market interest rates.  The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates.


10


Statement
of Financial Condition





General.  At
June 30, 2009, total assets were $240.9 million, a decrease of $6.8
million, or 2.7%, from the $247.7 million total at June 30,
2008.  The decrease in total assets was comprised primarily of
decreases in cash and cash equivalents and held-to-maturity investment
securities  and was offset by an increase in loans
receivable.  At June 30, 2009, total liabilities were $182.5
million, a decrease of $5.4 million, or 2.9%, from total liabilities at
June 30, 2008.  The decrease in total liabilities was comprised
primarily of a decrease in FHLB Advances.





Loans.  Our primary
lending activity is the origination of loans for the purchase, refinance or
construction of one- to four-family residential real estate located in our
market areas.  As opportunities arise, we also originate church loans,
commercial real estate loans, and multi-family and nonresidential real estate
loans.  At June 30, 2009, one- to four- family residential real estate
loans totaled $163.1 million, or 85.8% of total loans, compared to
$158.0 million, or 86.1% of total loans, at June 30,
2008.  Construction real estate loans totaled $735,000, or 0.4% of
total loans, at June 30, 2009, compared to $3.5 million, or 1.9% of total loans
at June 30, 2008.  At June 30, 2009, multi-family real estate
loans totaled $7.3 million, or 3.8% of total loans, compared to $2.7 million or
1.5% of total loans at June 30, 2008, and nonresidential real estate and
other loans totaled $11.5 million, or 6.1% of total loans at June 30, 2009,
compared to $11.3 million, or 6.2% of total loans, at June 30,
2008.  We also originate consumer loans, comprised of home equity
lines of credit and loans secured by deposit accounts, which totaled $7.4
million, or 3.9% of total loans at June 30, 2009, compared to consumer loans of
$7.9 million or 4.3% of total loans at June 30, 2008.





The
following table sets forth the composition of our loan portfolio at the dates
indicated.




At
      June 30,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family
                
                $
                163,108
                
                
                
                85.8
                %
                
                $
                158,007
                
                
                
                86.1
                %
                
                $
                146,602
                
                
                
                86.7
                %
                
                $
                139,356
                
                
                
                88.5
                %
                
                $
                134,117
                
                
                
                87.3
                %Construction
                
                
                735
                
                
                
                0.4
                %
                
                
                3,528
                
                
                
                1.9
                %
                
                
                6,671
                
                
                
                3.9
                %
                
                
                2,703
                
                
                
                1.7
                %
                
                
                1,925
                
                
                
                1.3
                %Multi-family
                
                
                7,303
                
                
                
                3.8
                %
                
                
                2,684
                
                
                
                1.5
                %
                
                
                1,497
                
                
                
                0.9
                %
                
                
                296
                
                
                
                0.2
                %
                
                
                321
                
                
                
                0.2
                %Nonresidential
      and other
                
                
                11,460
                
                
                
                6.1
                %
                
                
                11,318
                
                
                
                6.2
                %
                
                
                6,898
                
                
                
                4.1
                %
                
                
                6,412
                
                
                
                4.1
                %
                
                
                7,202
                
                
                
                4.7
                %Consumer:Consumer
      and other
                
                
                4,497
                
                
                
                2.4
                %
                
                
                4,503
                
                
                
                2.5
                %
                
                
                4,290
                
                
                
                2.5
                %
                
                
                5,211
                
                
                
                3.3
                %
                
                
                6,024
                
                
                
                3.9
                %Loans
      on deposits
                
                
                2,909
                
                
                
                1.5
                %
                
                
                3,384
                
                
                
                1.8
                %
                
                
                3,204
                
                
                
                1.9
                %
                
                
                3,432
                
                
                
                2.2
                %
                
                
                4,027
                
                
                
                2.6
                %Total
      loans
                
                
                190,012
                
                
                
                100
                %
                
                
                183,424
                
                
                
                100
                %
                
                
                169,162
                
                
                
                100
                %
                
                
                157,410
                
                
                
                100
                %
                
                
                153,616
                
                
                
                100
                %Allowance
      for loan losses
                
                
                (678
                )
                
                
                
                
                
                
                (666
                )
                
                
                
                
                
                
                (720
                )
                
                
                
                
                
                
                (724
                )
                
                
                
                
                
                
                (708
                )Undisbursed
      construction loans
                
                
                (404
                )
                
                
                
                
                
                
                (696
                )
                
                
                
                
                
                
                (2,176
                )
                
                
                
                
                
                
                (1,169
                )
                
                
                
                
                
                
                (1,016
                )Deferred
      loan origination costs (fees)
                
                
                1
                
                
                
                
                
                
                
                (11
                )
                
                
                
                
                
                
                (110
                )
                
                
                
                
                
                
                (131
                )
                
                
                
                
                
                
                (180
                )Loans
      receivable, net
                
                $
                188,931
                
                
                
                
                
                
                $
                182,051
                
                
                
                
                
                
                $
                166,156
                
                
                
                
                
                
                $
                155,386
                
                
                
                
                
                
                $
                151,712


11


The following table sets forth certain
information at June 30, 2009 regarding the dollar amount of loans repricing
or maturing during the periods indicated.  The table does not include
any estimate of prepayments which significantly shorten the average life of all
loans and may cause our actual repayment experience to differ from that shown
below.  Demand loans having no stated maturity are reported as due in
one year or less.





Real
      Estate
                    Loans
                  
                  
                  Consumer
                    Loans
                  
                  
                  Total
      Loans(In
      thousands)One
      year or less
                  
                  $
                  25,490
                  
                  
                  $
                  7,406
                  
                  
                  $
                  32,896More
      than one year to five years
                  
                  
                  103,108
                  
                  
                  
                  —
                  
                  
                  
                  103,108More
      than five years
                  
                  
                  54,008
                  
                  
                  
                  —
                  
                  
                  
                  54,008Total
                  
                  $
                  182,606
                  
                  
                  $
                  7,406
                  
                  
                  $
                  190,012





As of June 30, 2009, there were $52.0
million fixed-rate and $130.5 million adjustable-rate loans maturing in more
than a year.





The following table shows loan
origination activity during the periods indicated.





Year
      Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2007(In
      thousands)Net
      loans at beginning of year
                  
                  $
                  182,051
                  
                  
                  $
                  166,156
                  
                  
                  $
                  155,386Loans
      originated:Real
      estate loans:Residential
                  
                  
                  50,222
                  
                  
                  
                  44,843
                  
                  
                  
                  30,647Construction
                  
                  
                  1,203
                  
                  
                  
                  4,380
                  
                  
                  
                  6,355Multi-family
                  
                  
                  917
                  
                  
                  
                  2,383
                  
                  
                  
                  1,203Nonresidential
      and other
                  
                  
                  5,295
                  
                  
                  
                  2,396
                  
                  
                  
                  1,030Consumer
      loans
                  
                  
                  4,326
                  
                  
                  
                  1,717
                  
                  
                  
                  75Total
      loans originated
                  
                  
                  61,963
                  
                  
                  
                  55,719
                  
                  
                  
                  39,310Deduct:Real
      estate loan principal repayments
                  
                  
                  (53,986
                  )
                  
                  
                  (38,118
                  )
                  
                  
                  (27,387
                  )Loan
      sales
                  
                  
                  (3,691
                  )
                  
                  
                  (1,564
                  )
                  
                  
                  (888
                  )Transfer
      to real estate acquired through foreclosure
                  
                  
                  (273
                  )
                  
                  
                  (28
                  )
                  
                  
                  (312
                  )Other
                  
                  
                  2,867
                  
                  
                  
                  (114
                  )
                  
                  
                  47Net
      loan activity
                  
                  
                  6,880
                  
                  
                  
                  15,895
                  
                  
                  
                  10,770Net
      loans at end of period
                  
                  $
                  188,931
                  
                  
                  $
                  182,051
                  
                  
                  $
                  166,156





Allowance for
Loan Losses and Asset Quality.  The allowance for
loan losses is a valuation allowance for the probable incurred losses in the
loan portfolio.  We evaluate the allowance for loan losses no less
than quarterly.  When additional allowances are needed a provision for
losses on loans is charged against earnings.  The recommendations for
increases or decreases to the allowance are presented by management to the
Banks’ boards of directors.  The Company’s board of directors oversees
the overall allowance level for the Company and may propose increases or
decreases for allowance levels at the banks.





The allowance for loan losses is
established to recognize the probable incurred losses associated with lending
activities.  Loss and risk factors are based on our historical loss
experience and industry averages and are adjusted for significant factors that
in management’s judgment affect the collectibility of the portfolio as of the
evaluation date.  These significant factors may include changes in
lending policies and procedures, changes in existing general economic and
business conditions affecting our primary lending area, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, recent loss experience, duration of the current business cycle and
bank regulatory examination results.


12


At June 30, 2009, the allowance for
loans losses totaled $678,000, or 0.36% of total loans, compared to $666,000, or
0.36% of total loans at June 30, 2008.  The allowance at June 30,
2009 included $56,000 designated as specific reserves.  Such reserves
are calculated when a non-homogenous loan is considered impaired—meaning that
there is a likelihood that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement.   All
of the Company’s loans are collateral-based, and in case of impairment, the
loans are carried at the lower of cost or fair value.  Of the specific
reserves, $52,000 was assigned to two loans belonging to one
borrower.  Those loans were secured by multi-family residential
property.  The Company has entered into foreclosure proceedings
against the borrower.





Nonperforming loans, which consist of
all loans 90 days or more past due, totaled $3.9 million at June 30, 2009
and $1.3 million at June 30, 2008.  Of this $2.6 million
increase, $2.0 million was attributable to the two relationships mentioned
above.  The allowance for loans losses totaled 17.5% and 52.2% of
nonperforming loans at June 30, 2009 and 2008, respectively.  In
determining the allowance for loan losses at any point in time, management and
the boards of directors of the subsidiary Banks apply a systematic process
focusing on the risk of loss in the portfolio.  First, the loan
portfolio is segregated by loan types to be evaluated collectively and loan
types to be evaluated individually.  Delinquent multi-family and
nonresidential loans are evaluated individually for potential
impairment.  Second, the allowance for loan losses is evaluated using
historic loss experience adjusted for significant factors by applying these loss
percentages to the loan types to be evaluated collectively in the
portfolio.  To the best of management’s knowledge, all known and
probable incurred losses that can be reasonably estimated have been recorded at
June 30, 2009.  Although management believes that its allowance for
loan losses conforms with generally accepted accounting principles based upon
the available facts and circumstances, there can be no assurance that additions
to the allowance will not be necessary in future periods, which would adversely
affect our results of operations.





Our banking regulators, as an integral
part of their examination process, periodically review our allowance for loan
losses.  The examinations may require us to make additional provisions
for loan losses based on judgments different from ours.  In addition,
because further events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above.  Any
material increase in the allowance for loan losses may adversely affect our
financial condition and results of operations.


13


Summary of Loan
Loss Experience. The following table
sets forth an analysis of the allowance for loan losses for the periods
indicated.  Where specific loan loss allowances have been established,
any difference between the loss allowance and the amount of loss realized has
been charged or credited to the allowance.





Year
      Ended June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005(Dollars
      in thousands)Allowance
      at beginning of period
                                      
                                      $
                                      666
                                      
                                      
                                      $
                                      720
                                      
                                      
                                      $
                                      724
                                      
                                      
                                      $
                                      708
                                      
                                      
                                      $
                                      665Allowance
      acquired – Frankfort First
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      133Provision
      for loan losses
                                      
                                      
                                      46
                                      
                                      
                                      
                                      12
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      32
                                      
                                      
                                      
                                      53Charge-offs:Real
      estate loans
                                      
                                      
                                      (34
                                      )
                                      
                                      
                                      (66
                                      )
                                      
                                      
                                      (4
                                      )
                                      
                                      
                                      (16
                                      )
                                      
                                      
                                      (145
                                      )Consumer
      loans
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
      charge-offs
                                      
                                      
                                      (34
                                      )
                                      
                                      
                                      (66
                                      )
                                      
                                      
                                      (4
                                      )
                                      
                                      
                                      (16
                                      )
                                      
                                      
                                      (145
                                      )Recoveries:Real
      estate loans
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2Consumer
      loans
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
      recoveries
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2Net
      charge-offs
                                      
                                      $
                                      (34
                                      )
                                      
                                      $
                                      (66
                                      )
                                      
                                      $
                                      (4
                                      )
                                      
                                      $
                                      (16
                                      )
                                      
                                      $
                                      (143
                                      )Allowance
      at end of period
                                      
                                      $
                                      678
                                      
                                      
                                      $
                                      666
                                      
                                      
                                      $
                                      720
                                      
                                      
                                      $
                                      724
                                      
                                      
                                      $
                                      708Allowance
      to nonperforming loans
                                      
                                      
                                      17.51
                                      %
                                      
                                      
                                      52.15
                                      %
                                      
                                      
                                      74.38
                                      %
                                      
                                      
                                      50.74
                                      %
                                      
                                      
                                      40.53
                                      %Allowance
      to total loans outstanding at end of period
                                      
                                      
                                      0.36
                                      %
                                      
                                      
                                      0.36
                                      %
                                      
                                      
                                      0.43
                                      %
                                      
                                      
                                      0.46
                                      %
                                      
                                      
                                      0.47
                                      %Net
      charge-offs to average loans outstandingduring
      the period
                                      
                                      
                                      0.02
                                      %
                                      
                                      
                                      0.04
                                      %
                                      
                                      
                                      —
                                      %
                                      
                                      
                                      0.01
                                      %
                                      
                                      
                                      0.20
                                      %


14


The
following table sets forth the breakdown of the allowance for loan losses by
loan category, which management believes can be allocated on an approximate
basis, at the dates indicated.





At June
      30,2009
                                                                                                                      
                                                                                                                      
                                                                                                                      2008
                                                                                                                      
                                                                                                                      
                                                                                                                      2007
                                                                                                                      
                                                                                                                      
                                                                                                                      2006
                                                                                                                      
                                                                                                                      
                                                                                                                      2005Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Allowance
                                                                                                                        toTotal
                                                                                                                        Allowance
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Loans
      in
                                                                                                                        Category
                                                                                                                        To
      Total
                                                                                                                        Loans
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Allowance
                                                                                                                        toTotal
                                                                                                                        Allowance
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Loans
      in
                                                                                                                        Category
                                                                                                                        To
      Total
                                                                                                                        Loans
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Allowance
                                                                                                                        toTotal
                                                                                                                        Allowance
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Loans
      in
                                                                                                                        Category
                                                                                                                        To
      Total
                                                                                                                        Loans
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Allowance
                                                                                                                        toTotal
                                                                                                                        Allowance
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Loans
      in
                                                                                                                        Category
                                                                                                                        To
      Total
                                                                                                                        Loans
                                                                                                                      
                                                                                                                      
                                                                                                                      Amount
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Allowance
                                                                                                                        toTotal
                                                                                                                        Allowance
                                                                                                                      
                                                                                                                      
                                                                                                                      %
      of
                                                                                                                        Loansin
                                                                                                                        Category
                                                                                                                        To
      Total
                                                                                                                        Loans(Dollars
      in thousands)Real
      Estate Loans:Residential
                                                                                                                      
                                                                                                                      $
                                                                                                                      542
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      80.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      85.8
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      584
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      87.7
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      86.1
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      636
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      88.3
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      86.7
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      633
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      87.4
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      88.5
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      626
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      88.3
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      87.3
                                                                                                                      %Construction
                                                                                                                      
                                                                                                                      
                                                                                                                      2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      13
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      29
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      12
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.7
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.7
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.3Multi-family
                                                                                                                      
                                                                                                                      
                                                                                                                      81
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      11.9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.8
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.0
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.2Nonresidential
      & other
                                                                                                                      
                                                                                                                      
                                                                                                                      38
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5.6
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6.1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      42
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6.3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      30
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      30
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.1
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      31
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4.7Consumer
      Loans:Consumer
      and other
                                                                                                                      
                                                                                                                      
                                                                                                                      15
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      17
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.6
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      18
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      24
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.3
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      26
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.6
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3.9Loans
      secured by deposits
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.8
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      —
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1.9
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      16
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.2
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      17
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.4
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2.6Total
      allowance for loan losses
                                                                                                                      
                                                                                                                      $
                                                                                                                      678
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      666
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      720
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      724
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      $
                                                                                                                      708
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %
                                                                                                                      
                                                                                                                      
                                                                                                                      100.0
                                                                                                                      %


15


Nonperforming and
Classified Assets.When a loan
becomes 90 days delinquent, the loan may be placed on nonaccrual status at which
time the accrual of interest ceases, the interest previously accrued to income
is reversed and interest income is thereafter recognized on a cash
basis.  Payments on a nonaccrual loan are applied to the outstanding
principal and interest as determined at the time of collection of the
loan.  In situations where management believes collection of interest
due is likely even if the loan is more than 90 days delinquent, then management
may decide not to place the loan on non-accrual status.





We consider repossessed assets and
loans that are 90 days or more past due to be nonperforming
assets.  Real estate that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is
sold.  When property is acquired it is recorded at the lower of its
cost, which is the unpaid balance of the loan, or fair market value at the date
of foreclosure.  Holding costs and declines in fair value after
acquisition of the property are charged against income.





Under current accounting guidelines, a
loan is defined as impaired when, based on current information and events, it is
probable that the creditor will be unable to collect all amounts due under the
contractual terms of the loan agreement.  We consider one- to
four-family mortgage loans and deposit loans to be homogeneous and collectively
evaluate them for impairment.  Other loans are evaluated for
impairment on an individual basis.  At June 30, 2009, three loans
were considered impaired with valuations.





The
following table provides information with respect to our nonperforming assets at
the dates indicated.  We did not have any troubled debt restructurings
at any of the dates presented.





Year
      Ended June 30,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(Dollars
      in thousands)Nonaccrual
      loans:Real
      estate loans
                
                $
                435
                
                
                $
                666
                
                
                $
                713
                
                
                $
                819
                
                
                $
                874Consumer
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                435
                
                
                
                666
                
                
                
                713
                
                
                
                819
                
                
                
                874Accruing
      loans past due 90 days or more:Real
      estate loans
                
                
                3,437
                
                
                
                611
                
                
                
                255
                
                
                
                608
                
                
                
                873Consumer
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      of accruing loans past due 90 days or more
                
                
                3,437
                
                
                
                611
                
                
                
                255
                
                
                
                608
                
                
                
                873Total
      nonperforming loans
                
                
                3,872
                
                
                
                1,277
                
                
                
                968
                
                
                
                1,427
                
                
                
                1,747Real
      estate acquired through foreclosure
                
                
                109
                
                
                
                21
                
                
                
                8
                
                
                
                51
                
                
                
                60Total
      nonperforming assets
                
                
                3,981
                
                
                $
                1,298
                
                
                $
                976
                
                
                $
                1,478
                
                
                $
                1,807Total
      nonperforming loans to total loans
                
                
                2.05
                %
                
                
                0.70
                %
                
                
                0.58
                %
                
                
                0.92
                %
                
                
                1.15
                %Total
      nonperforming loans to total assets
                
                
                1.61
                %
                
                
                0.52
                %
                
                
                0.36
                %
                
                
                0.54
                %
                
                
                0.64
                %Total
      nonperforming assets to total assets
                
                
                1.65
                %
                
                
                0.52
                %
                
                
                0.36
                %
                
                
                0.56
                %
                
                
                0.66
                %





Other than disclosed above, there are
no other loans at June 30, 2009 that we have serious doubts about the ability of
the borrowers to comply with the present loan repayment terms.





Interest income that would have been
recorded for the years ended June 30, 2009, 2008 and 2007, had nonaccrual
loans been current according to their original terms amounted to $37,000,
$33,000 and $85,000, respectively.  Income related to nonaccrual loans
included in interest income for the years ended June 30, 2009, 2008 and
2007 amounted to $10,000, $124,000 and $74,000, respectively.


16





Federal regulations require us to
regularly review and classify our assets.  In addition, our regulators
have the authority to identify problem assets and, if appropriate, require them
to be classified.  There are three classifications for problem assets:
substandard, doubtful and loss.  “Substandard assets” must have one or
more defined weaknesses and are characterized by the distinct possibility that
we will sustain some loss if the deficiencies are not
corrected.  “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss.  An
asset classified “loss” is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.  The
regulations also provide for a “special mention” category, described as assets
which do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention.  Special mention assets totaled
$639,000 and $628,000 at June 30, 2009 and 2008, respectively.





The following table shows the aggregate
amounts of our assets classified for regulatory purposes at the dates
indicated.





At June 30,2009
                  
                  
                  2008
                  
                  
                  2007(In thousands)Substandard
      assets
                  
                  $
                  7,905
                  
                  
                  $
                  2,051
                  
                  
                  $
                  1,490Doubtful
      assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Loss
      assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      classified assets
                  
                  $
                  7,905
                  
                  
                  $
                  2,051
                  
                  
                  $
                  1,490




The increase in substandard assets is
primarily attributable to the Company’s decision to classify the entire
relationships of three borrowers during the fiscal year ended June 30,
2009.  This designation was made in all cases because of some
delinquency in each of the borrower’s payment patterns, although not all of the
loans for each borrower were 90-days delinquent at June 30,
2009.  Subsequent to June 30, 2009, the Company began foreclosure
proceedings against one borrower with $501,000 in loans outstanding, as the
borrower had not demonstrated the willingness or ability to repay the loans
under the terms of the original note and mortgage.  Management is
actively working with the two other borrowers, who owe $4.7 million and
$601,000.




Substandard
assets at June 30, 2009, consisted of 51 loans totaling $7.9 million and three
parcels of real estate owned with an aggregate carrying value of
$109,000.  All substandard loans were secured by residential property
on which the banks have priority lien position.  The table below
summarizes substandard assets at June 30, 2009:





Number
                    
                    
                    
                    
                    
                    Average
                    
                    
                    Averageof
                    
                    
                    Carrying
                    
                    
                    Loan
                    
                    
                    Loan toLoans
                    
                    
                    Value
                    
                    
                    Amount
                    
                    
                    ValueSingle
      family, owner occupied
                    
                    
                    29
                    
                    
                    $
                    1,717
                    
                    
                    $
                    59
                    
                    
                    
                    65.1
                    %Single
      family, non-owner occupied
                    
                    
                    6
                    
                    
                    
                    560
                    
                    
                    
                    93
                    
                    
                    
                    82.6
                    %More
      than one single family, non-owner occupied
                    
                    
                    3
                    
                    
                    
                    3,203
                    
                    
                    
                    1,069
                    
                    
                    
                    78.3
                    %2-4
      family, owner occupied
                    
                    
                    1
                    
                    
                    
                    41
                    
                    
                    
                    42
                    
                    
                    
                    70.0
                    %2-4
      family, non-owner occupied
                    
                    
                    11
                    
                    
                    
                    1,933
                    
                    
                    
                    176
                    
                    
                    
                    70.1
                    %5
      or more family, non-owner occupied
                    
                    
                    1
                    
                    
                    
                    451
                    
                    
                    
                    452
                    
                    
                    
                    81.5
                    %Total
      substandard assets
                    
                    
                    51
                    
                    
                    $
                    7,905




17


Delinquencies.  The
following table provides information about delinquencies in our loan portfolios
at the dates indicated.




At June 30,2009
                  
                  
                  200830-59 Days
                    Past Due
                  
                  
                  60-89 Days
                    Past Due
                  
                  
                  30-59 Days
                    Past Due
                  
                  
                  60-89 Days
                    Past Due(In
      thousands)Real
      estate loans
                  
                  $
                  2,654
                  
                  
                  $
                  4,696
                  
                  
                  $
                  1,437
                  
                  
                  $
                  1,378Consumer
      loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  2,654
                  
                  
                  $
                  4,696
                  
                  
                  $
                  1,437
                  
                  
                  $
                  1,378





Securities.  Our securities
portfolio consists primarily of U.S. Government agency obligations as well as
mortgage-backed securities with maturities of 30 years or
less.  Investment and mortgage-backed securities totaled
$20.5 million at June 30, 2009, a decrease of $1.9 million, or 8.5%,
compared to the $22.4 million total at June 30, 2008.  The
reduction in these securities resulted from maturities, calls and prepayments of
investments and mortgage-backed securities.  All of our
mortgage-backed securities were issued by  Ginnie Mae, Fannie Mae or
Freddie Mac.




The
following table sets forth the carrying values and fair values of our securities
portfolio at the dates indicated.




At June 30,2009
                      
                      
                      2008
                      
                      
                      2007Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value(In
      thousands)Available
      for sale securities:U.S.
      Government agency obligations
                      
                      $
                      5,000
                      
                      
                      $
                      5,136
                      
                      
                      $
                      4,999
                      
                      
                      $
                      5,030
                      
                      
                      $
                      12,999
                      
                      
                      $
                      12,571Mortgage-backed
      securities
                      
                      
                      314
                      
                      
                      
                      315
                      
                      
                      
                      455
                      
                      
                      
                      450
                      
                      
                      
                      734
                      
                      
                      
                      727Total
                      
                      $
                      5,314
                      
                      
                      $
                      5,451
                      
                      
                      $
                      5,454
                      
                      
                      $
                      5,480
                      
                      
                      $
                      13,733
                      
                      
                      $
                      13,298Held
      to maturity securities:U.S.
      Government agency obligations
                      
                      $
                      3,000
                      
                      
                      $
                      3,002
                      
                      
                      $
                      3,000
                      
                      
                      $
                      3,001
                      
                      
                      $
                      43,848
                      
                      
                      $
                      42,957Mortgage-backed
      securities
                      
                      
                      11,999
                      
                      
                      
                      12,315
                      
                      
                      
                      13,959
                      
                      
                      
                      13,408
                      
                      
                      
                      15,758
                      
                      
                      
                      14,878Total
                      
                      $
                      14,999
                      
                      
                      $
                      15,317
                      
                      
                      $
                      16,959
                      
                      
                      $
                      16,409
                      
                      
                      $
                      59,606
                      
                      
                      $
                      57,835





At June 30, 2009 and 2008, we did not
own any securities, other than U.S. Government agency securities, that had an
aggregate book value in excess of 10% of our equity at that date.




18




The
following table sets forth the maturities and weighted average yields of
securities at June 30, 2009.  At June 30, 2009, we had no U.S.
Government agency securities with adjustable rates.




One Year or Less
                  
                  
                  More Than
                    One Year to
                    Five Years
                  
                  
                  More Than
                    Five Years to
                    Ten Years
                  
                  
                  More Than Ten Years
                  
                  
                  Total Investment PortfolioAmortized
                    Cost
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Amortized
                    Cost
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Amortized
                    Cost
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Amortized
                    Cost
                  
                  
                  Weighted
                    Average
                    Yield
                  
                  
                  Amortized
                    Cost
                  
                  
                  Fair
                    Value
                  
                  
                  Weighted
                    Average
                    Yield(Dollars in thousands)Available
      for sale securities:U.S.
      Government agency obligations
                  
                  $
                  5,000
                  
                  
                  
                  3.50
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  5,000
                  
                  
                  $
                  5,136
                  
                  
                  
                  3.50
                  %Mortgage-backed
      securities
                  
                  
                  8
                  
                  
                  
                  3.95
                  
                  
                  
                  36
                  
                  
                  
                  3.95
                  
                  
                  
                  53
                  
                  
                  
                  3.95
                  
                  
                  
                  217
                  
                  
                  
                  3.95
                  
                  
                  
                  314
                  
                  
                  
                  315
                  
                  
                  
                  3.95Total  available
      for sale securities
                  
                  $
                  5,008
                  
                  
                  
                  
                  
                  
                  $
                  36
                  
                  
                  
                  
                  
                  
                  $
                  53
                  
                  
                  
                  
                  
                  
                  $
                  217
                  
                  
                  
                  
                  
                  
                  $
                  5,314
                  
                  
                  $
                  5,451Held
      to maturity securities:U.S.
      Government agency obligations
                  
                  $
                  3,000
                  
                  
                  
                  3.02
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  3,000
                  
                  
                  $
                  3,002
                  
                  
                  
                  3.02Mortgage-backed
      securities
                  
                  
                  910
                  
                  
                  
                  4.18
                  
                  
                  
                  4,047
                  
                  
                  
                  4.19
                  
                  
                  
                  5,561
                  
                  
                  
                  4.20
                  
                  
                  
                  1,481
                  
                  
                  
                  5.29
                  
                  
                  
                  11,999
                  
                  
                  
                  12,315
                  
                  
                  
                  4.33Total
      held-to-maturity securities
                  
                  $
                  3,910
                  
                  
                  
                  
                  
                  
                  $
                  4,047
                  
                  
                  
                  
                  
                  
                  $
                  5,561
                  
                  
                  
                  
                  
                  
                  $
                  1,481
                  
                  
                  
                  
                  
                  
                  $
                  14,999
                  
                  
                  $
                  15,317


19


Other Assets.  Other
assets at June 30, 2009 include goodwill and other intangible assets of $14.9
million, which was a sole result of the Company’s acquisition of Frankfort First
and bank owned life insurance policies with a carrying value of  $2.4
million at both June 30, 2009 and 2008, of which First Federal of Frankfort is
the owner and beneficiary.  Both subsidiary Banks are members and
stockholders of the Federal Home Loan Bank of Cincinnati
(“FHLB”).  FHLB stock, at cost, totaled $5.6 million at both June 30,
2009 and 2008.





Deposits.  Our primary
source of funds is retail deposit accounts held primarily by individuals within
our market areas.  Deposits totaled $139.7 million at June 30,
2009, an increase of $2.1 million or 1.5%, compared to the $137.6 million total
at June 30, 2008.  Although management generally strives to
maintain a moderate rate of growth in deposits, primarily through marketing and
pricing strategies, market conditions and competition may curtail growth
opportunities.  Rather than striving to offer the highest interest
rate on deposit products in our market area, management of the Banks offer
deposit products that fit the Banks’ funding strategies.





The following table sets forth the
balances of our deposit products at the dates indicated.





At June 30,2009
                  
                  
                  2008
                  
                  
                  2007(In thousands)Certificate
      of deposit accounts
                  
                  $
                  98,518
                  
                  
                  $
                  97,020
                  
                  
                  $
                  96,354Demand,
      transaction and passbook savings accounts
                  
                  
                  41,225
                  
                  
                  
                  40,614
                  
                  
                  
                  43,539Total
                  
                  $
                  139,743
                  
                  
                  $
                  137,634
                  
                  
                  $
                  139,893





The following table indicates the
amount of certificate of deposit accounts with balances equal to or greater than
$100,000, by time remaining until maturity at June 30, 2009.





Maturity Period
                  
                  Certificates
                    of Deposit(In thousands)Three
      months or less
                  
                  $
                  4,436Over
      three months through six months
                  
                  
                  4,652Over
      six months through twelve months
                  
                  
                  10,066Over
      twelve months
                  
                  
                  9,987Total
                  
                  $
                  29,141





The
following table sets forth our certificate of deposit accounts classified by
rates at the dates indicated.





At June 30,2009
                  
                  
                  2008
                  
                  
                  2007(In thousands)Rate1.00
      -  1.99%
                  
                  $
                  4,173
                  
                  
                  $
                  1,241
                  
                  
                  $
                  1992.00
      -  2.99
                  
                  
                  29,168
                  
                  
                  
                  12,039
                  
                  
                  
                  4,8903.00
      -  3.99
                  
                  
                  36,066
                  
                  
                  
                  21,375
                  
                  
                  
                  14,5684.00
      -  4.99
                  
                  
                  14,291
                  
                  
                  
                  32,011
                  
                  
                  
                  16,6375.00
      -  5.99
                  
                  
                  14,820
                  
                  
                  
                  30,354
                  
                  
                  
                  60,060Total
                  
                  $
                  98,518
                  
                  
                  $
                  97,020
                  
                  
                  $
                  96,354


20


The
following table sets forth the amount and maturities of certificate accounts at
June 30, 2009.





Amount DueLess Than
                  One Year
                
                
                More Than
                  One Year to
                  Two Years
                
                
                More Than
                  Two Years to
                  Three Years
                
                
                More Than
                  Three Years
                
                
                Total
                
                
                Percentage of
                  Total Certificate
                  Accounts(Dollars in thousands)1.00
      –1.99%
                
                $
                4,173
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                4,173
                
                
                
                4.24
                %2.00
      – 2.99
                
                
                25,256
                
                
                
                3,879
                
                
                
                14
                
                
                
                19
                
                
                
                29,168
                
                
                
                29.613.00
      – 3.99
                
                
                24,169
                
                
                
                8,976
                
                
                
                2,425
                
                
                
                496
                
                
                
                36,066
                
                
                
                36.614.00
      – 4.99
                
                
                2,930
                
                
                
                263
                
                
                
                5,414
                
                
                
                5,684
                
                
                
                14,291
                
                
                
                14.515.00
      – 5.99
                
                
                6,940
                
                
                
                6,973
                
                
                
                837
                
                
                
                70
                
                
                
                14,820
                
                
                
                15.03Total
                
                $
                63,468
                
                
                $
                20,091
                
                
                $
                8,690
                
                
                $
                6,269
                
                
                $
                98,518
                
                
                
                100.00
                %





The
following table sets forth the average balances and rates paid on
deposits.





Year Ended June 30,2009
                
                
                2008
                
                
                2007Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                Average
                
                
                AverageBalance
                
                
                Rate
                
                
                Balance
                
                
                Rate
                
                
                Balance
                
                
                Rate(Dollars
      in thousands)Noninterest-bearing
      demand
                
                $
                788
                
                
                
                0.00
                %
                
                $
                719
                
                
                
                0.00
                %
                
                $
                762
                
                
                
                0.00
                %Interest-bearing
      demand
                
                
                10,366
                
                
                
                1.52
                %
                
                
                9,370
                
                
                
                1.65
                %
                
                
                8,754
                
                
                
                2.57
                %Passbook
                
                
                30,125
                
                
                
                1.01
                %
                
                
                32,410
                
                
                
                1.11
                %
                
                
                36,931
                
                
                
                1.19
                %Time
                
                
                96,807
                
                
                
                3.78
                %
                
                
                96,466
                
                
                
                4.52
                %
                
                
                92,690
                
                
                
                4.33
                %





The
following table sets forth the deposit activities for the periods
indicated.





Year Ended June 30,2009
                      
                      
                      2008
                      
                      
                      2007(In thousands)Beginning
      balance
                      
                      $
                      137,634
                      
                      
                      $
                      139,893
                      
                      
                      $
                      141,238Decrease
      before interest credited
                      
                      
                      (2,009
                      )
                      
                      
                      (7,131
                      )
                      
                      
                      (5,894
                      )Interest
      credited
                      
                      
                      4,118
                      
                      
                      
                      4,872
                      
                      
                      
                      4,549Net
      increase (decrease) in deposits
                      
                      
                      2,109
                      
                      
                      
                      (2,259
                      )
                      
                      
                      (1,345
                      )Ending
      balance
                      
                      $
                      139,743
                      
                      
                      $
                      137,634
                      
                      
                      $
                      139,893





Borrowings.  Advances from the
Federal Home Loan Bank of Cincinnati amounted to $40.2 million and
$47.8 million at June 30, 2009 and 2008,
respectively.


21


The following table presents certain
information regarding our Federal Home Loan Bank of Cincinnati advances during
the periods and at the dates indicated.





Year Ended June 30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007(Dollars in thousands)Balance
      outstanding at end of period
                                  
                                  $
                                  40,156
                                  
                                  
                                  $
                                  47,801
                                  
                                  
                                  $
                                  65,132Maximum
      amount of advances outstandingat
      any month end during the period
                                  
                                  $
                                  46,815
                                  
                                  
                                  $
                                  71,220
                                  
                                  
                                  $
                                  65,132Average
      advances outstandingduring
      the period
                                  
                                  $
                                  43,200
                                  
                                  
                                  $
                                  61,687
                                  
                                  
                                  $
                                  61,696Weighted
      average interest rateduring
      the period
                                  
                                  
                                  4.13
                                  %
                                  
                                  
                                  4.37
                                  %
                                  
                                  
                                  4.71
                                  %Weighted
      average interest rateat end of period
                                  
                                  
                                  5.84
                                  %
                                  
                                  
                                  5.21
                                  %
                                  
                                  
                                  5.75
                                  %





Shareholders’
Equity.  Shareholders’
equity totaled $58.4 million at June 30, 2009, a $1.4 million or 2.3%, decrease
compared to June 30, 2008.  The reduction resulted primarily from
repurchases of the Company’s common stock.





The Banks are required to maintain
minimum regulatory capital pursuant to federal regulations.  At June
30, 2009, both First Federal of Hazard’s and First Federal of Frankfort’s
regulatory capital substantially exceeded all minimum regulatory capital
requirements.  Management is not aware of any recent event that would
cause this classification to change.





Results
of Operations for the Years Ended June 30, 2009 and 2008





General.Net earnings totaled
$808,000 for the fiscal year ended June 30, 2009, a decrease of $124,000,
or 13.3%, from the net earnings recorded for the fiscal year ended June 30,
2008.  The decrease in earnings was due primarily to a $664,000 or
151.3% increase in federal income taxes and was somewhat offset by a $540,000 or
39.4% increase in earnings before taxes.  The increase in earnings
before taxes was due primarily to an $802,000 increase in net interest
income.





Interest
Income.Total interest income
for the fiscal year ended June 30, 2009 was $12.2 million, a decrease of
$861,000, or 6.6%, compared to the fiscal year ended June 30,
2008.  The decrease in interest income was due primarily to a decrease
in interest income on investment securities, which decreased by $1.2 million, or
81.1%, to $269,000 for the fiscal year ended June 30, 2009, compared to
fiscal 2008.  Compared to fiscal 2008, interest income on
mortgage-backed securities decreased $98,000 or 14.7% to $567,000 for the year
just ended, while interest income on interest-bearing deposits and other
decreased $108,000 or 24.5% to $333,000 for the year just
ended.  Interest income from loans increased $502,000 or 4.8% from
$10.6 million for the 2008 fiscal year to $11.1 million for fiscal
2009.





The
decrease in interest income from investment securities was attributable
primarily to a $32.6 million, or 79.9%, decrease in the average balance of
investment securities outstanding and was supported by a decrease of 21 basis
points in the average yield on investment securities to 3.29% for fiscal
2009.  Investment securities either matured or were called during the
period, as there were no sales of those securities during fiscal
2009.  The average balance of loans increased by $13.9 million or
8.0%, while the average rate earned on loans decreased by 18 basis points to
5.88% for the 2009 year. The average balance of mortgage-backed securities
decreased $2.1 million or 13.8% to $13.4 million, while the average yield
declined by 5 basis points to 4.24% for fiscal 2009.  The average
balance of other interest-earning assets decreased $223,000 or 2.1% to $110.6
million, while the average yield declined by 93 basis points to 3.15% for fiscal
2009.


22


Interest
Expense.Interest expense
totaled $5.9 million for the fiscal year ended June 30, 2009, a decrease of
$1.7 million, or 22.0%, from fiscal 2008.  The decrease in interest
expense resulted from lower costs of deposits and
borrowings.  Interest expense on deposits decreased $754,000 or
15.5%  to $4.1 million for the 2009 fiscal year, while the cost of
borrowings decreased $909,000 or 33.8% to $1.8 million for the 2009 fiscal
year.  Decreased costs on deposits was attributable primarily to a
decrease in rate paid on deposits, while the decreased costs on borrowings was
attributable primarily to a decrease in the average balance outstanding year to
year.  The average rate paid on deposits decreased 53 basis points to
2.98% for the year just ended, while the average deposits outstanding declined
$879,000 or 0.6% from year to year.  Consistent with its strategy,
Management was able to utilize excess liquidity to pay down borrowings during
2009.  Average borrowings decreased by  $18.5 million to
$43.2 million for the year ended June 30, 2009, while the average rate paid on
borrowings decreased 24 basis points to 4.13% for fiscal 2009.





Net Interest
Income.  As a result of the aforementioned changes in interest
income and interest expense, net interest income increased by $802,000, or
14.5%, during the fiscal year ended June 30, 2009, compared to fiscal
2008.  The average interest rate spread increased from 1.65% for the
fiscal year ended June 30, 2008 to 2.29% for fiscal 2009.  The
net interest margin increased from 2.29% for the fiscal year ended June 30,
2008 to 2.87% for fiscal 2009.





Average Balances
and Yields.  The following
table presents information regarding average balances of assets and liabilities,
the total dollar amounts of interest income and dividends, the total dollar
amount of interest expense and the resulting average yields and
costs.  The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.  For purposes of this table,
average balances have been calculated using the average of daily balances and
nonaccrual loans are included in average balances only.  We did not
hold any non-taxable investment securities during any of the periods presented
in the table.





Year Ended June 30,2009
                  
                  
                  2008Average
                    Balance
                  
                  
                  Interest
                    And
                    Dividends
                  
                  
                  Yield/
                    Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                    And
                    Dividends
                  
                  
                  Yield/
                    Cost(Dollars in thousands)Interest-earning
      assets:Loans
      receivable
                  
                  $
                  188,163
                  
                  
                  $
                  11,057
                  
                  
                  
                  5.88
                  %
                  
                  $
                  174,259
                  
                  
                  $
                  10,555
                  
                  
                  
                  6.06
                  %Mortgage-backed
      securities
                  
                  
                  13,381
                  
                  
                  
                  567
                  
                  
                  
                  4.24
                  
                  
                  
                  15,514
                  
                  
                  
                  665
                  
                  
                  
                  4.29Investment
      securities
                  
                  
                  8,187
                  
                  
                  
                  269
                  
                  
                  
                  3.29
                  
                  
                  
                  40,751
                  
                  
                  
                  1,426
                  
                  
                  
                  3.50Other
      interest-earning assets
                  
                  
                  10,588
                  
                  
                  
                  333
                  
                  
                  
                  3.15
                  
                  
                  
                  10,811
                  
                  
                  
                  441
                  
                  
                  
                  4.08Total
      interest-earning assets
                  
                  
                  220,319
                  
                  
                  
                  12,226
                  
                  
                  
                  5.55
                  
                  
                  
                  241,335
                  
                  
                  
                  13,087
                  
                  
                  
                  5.42Noninterest-earning
      assets
                  
                  
                  22,668
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  22,517Total
      assets
                  
                  $
                  242,987
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  263,852Interest-bearing
      liabilities:Demand
      deposits
                  
                  $
                  10,366
                  
                  
                  $
                  158
                  
                  
                  
                  1.52
                  %
                  
                  $
                  9,370
                  
                  
                  $
                  155
                  
                  
                  
                  1.65
                  %Noninterest-Bearing
      demand deposits
                  
                  
                  788
                  
                  
                  
                  —
                  
                  
                  
                  0.00
                  
                  
                  
                  719
                  
                  
                  
                  —
                  
                  
                  
                  0.00Savings
                  
                  
                  30,125
                  
                  
                  
                  303
                  
                  
                  
                  1.01
                  
                  
                  
                  32,410
                  
                  
                  
                  360
                  
                  
                  
                  1.11Certificates
      of deposit
                  
                  
                  96,807
                  
                  
                  
                  3,657
                  
                  
                  
                  3.78
                  
                  
                  
                  96,466
                  
                  
                  
                  4,357
                  
                  
                  
                  4.52Total
      deposits
                  
                  
                  138,086
                  
                  
                  
                  4,118
                  
                  
                  
                  2.98
                  
                  
                  
                  138,965
                  
                  
                  
                  4,872
                  
                  
                  
                  3.51Borrowings
                  
                  
                  43,200
                  
                  
                  
                  1,784
                  
                  
                  
                  4.13
                  
                  
                  
                  61,687
                  
                  
                  
                  2,693
                  
                  
                  
                  4.37Total
      interest-bearing liabilities
                  
                  
                  181,286
                  
                  
                  
                  5,902
                  
                  
                  
                  3.26
                  
                  
                  
                  200,652
                  
                  
                  
                  7,565
                  
                  
                  
                  3.77Noninterest-bearing
      liabilities
                  
                  
                  2,723
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,665Total
      liabilities
                  
                  
                  184,009
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  203,317Shareholders’
      equity
                  
                  
                  58,978
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  60,535Total
      liabilities and shareholders’ equity
                  
                  $
                  242,987
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  263,852Net
      interest income/average yield
                  
                  
                  
                  
                  
                  $
                  6,324
                  
                  
                  
                  2.29
                  %
                  
                  
                  
                  
                  
                  $
                  5,522
                  
                  
                  
                  1.65
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.87
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.29
                  %Average
      interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  121.53
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  120.28
                  %


23


Rate/Volume
Analysis.The
following table sets forth the effects of changing rates and volumes on our net
interest income.  The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume).  The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate).  For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionately based on the changes due to rate and the changes
due to volume.  The net column represents the sum of the prior
columns.





Twelve months ended June 30,
                                                                                                                                
                                                                                                                                
                                                                                                                                Twelve months ended June 30,2009 to June 30, 2008
                                                                                                                                
                                                                                                                                
                                                                                                                                2008 to June 30, 2007Increase (Decrease)
                                                                                                                                
                                                                                                                                
                                                                                                                                Increase (Decrease)Due to Changes In
                                                                                                                                
                                                                                                                                
                                                                                                                                Due to Changes InRate
                                                                                                                                
                                                                                                                                
                                                                                                                                Volume
                                                                                                                                
                                                                                                                                
                                                                                                                                Total
                                                                                                                                
                                                                                                                                
                                                                                                                                Rate
                                                                                                                                
                                                                                                                                
                                                                                                                                Volume
                                                                                                                                
                                                                                                                                
                                                                                                                                Total(In
      thousands)Interest-earning
      assets:Loans
      receivable
                                                                                                                                
                                                                                                                                $
                                                                                                                                810
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                (308
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                502
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                737
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                16
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                753Mortgage-backed
      securities
                                                                                                                                
                                                                                                                                
                                                                                                                                (90
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (8
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (98
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (101
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (2
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (103
                                                                                                                                )Investment
      securities
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,075
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (82
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,157
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (563
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (10
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (573
                                                                                                                                )Other
      interest-earning assets
                                                                                                                                
                                                                                                                                
                                                                                                                                (9
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (99
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (108
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                113
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (51
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                62Total
      interest-earning assets
                                                                                                                                
                                                                                                                                
                                                                                                                                (364
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (497
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (861
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                186
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (47
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                139Interest-bearing
      liabilities:Checking
      accounts
                                                                                                                                
                                                                                                                                
                                                                                                                                12
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (9
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                3
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                17
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (87
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (70
                                                                                                                                )Savings
      accounts
                                                                                                                                
                                                                                                                                
                                                                                                                                (24
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (33
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (57
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (51
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (28
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (79
                                                                                                                                )Certificates
      of deposit
                                                                                                                                
                                                                                                                                
                                                                                                                                15
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (715
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (700
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                162
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                310
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                472FHLB
      Advances
                                                                                                                                
                                                                                                                                
                                                                                                                                (768
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (141
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (909
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                -
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (214
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (214
                                                                                                                                )Total
      interest-bearing liabilities
                                                                                                                                
                                                                                                                                
                                                                                                                                (765
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (898
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                (1,663
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                128
                                                                                                                                
                                                                                                                                
                                                                                                                                
                                                                                                                                (19
                                                                                                                                )
                                                                                                                                
                                                                                                                                
                                                                                                                                109Increase
      in net interest income
                                                                                                                                
                                                                                                                                $
                                                                                                                                401
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                401
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                802
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                58
                                                                                                                                
                                                                                                                                
                                                                                                                                $
                                                                                                                                (28
                                                                                                                                )
                                                                                                                                
                                                                                                                                $
                                                                                                                                30





Provision for
Losses on Loans.  A provision for losses on loans is charged to
earnings to maintain the total allowance for loan losses at a level calculated
by management based on historical experience, the volume and type of lending
conducted by the Banks, the status of past due principal and interest payments
and other factors related to the collectibility of the loan
portfolio.  Based upon an analysis of these factors, management
recorded a provision of $46,000 for losses on loans for the fiscal year ended
June 30, 2009, an increase of $34,000 compared to a provision of $12,000
for fiscal 2008.  The provision recorded during the fiscal year ended
June 30, 2009 generally reflects management’s perception of the risk
prevalent in the economy integrated with the overall change in the level of
nonperforming loans year over year.  Management believes all
nonperforming loans are adequately collateralized; however, there can be no
assurance that the loan loss allowance will be adequate to absorb losses on
known nonperforming assets or that the allowance will be adequate to cover
losses on nonperforming assets in the future.





Other  Income.Other
operating income increased $59,000, to $241,000 for the fiscal year ended June
30, 2009, due primarily to a $41,000 or 178.3% increase in gain on sale of
loans.    Other operating income is generally comprised of
service charges and fees charged on loan and deposit accounts.





General,
Administrative and Other Expense.General, administrative and
other expense increased $287,000 or 6.6% to $4.6 million for the fiscal year
ended June 30, 2009 compared to fiscal 2008.  The increase in general,
administrative and other expense is primarily attributed to an increase in other
operating expenses, which increased $214,000 or 28.3% to $970,000 for the year
just ended.


24


The
increase in other operating expenses was attributed primarily to an increase in
audit and accounting expense and FDIC insurance year to year.  Audit
and accounting fees increased $91,000 or 101.1% to $181,000 for the fiscal year
ended June 30, 2009, primarily as a result of costs associated with compliance
with the Sarbanes-Oxley Act of 2004.  In addition, FDIC insurance
increased $87,000 or 543.8% to $103,000 for the 2009 fiscal year compared to
$16,000 for the prior fiscal year.  Higher FDIC premiums were the
result of higher assessments by the FDIC for the recurring quarterly assessment
and a special assessment equal to five basis points of total assets (less Tier 1
capital), which was imposed on all banks.  See Footnote A22, “FDIC
Assessments and One-time Assessment Credit” for additional
information.





Federal Income
Taxes.The provision for federal income tax increased $664,000 or 151.3%
from $439,000 for the fiscal year ended June 30, 2008 to $1.1 million for the
fiscal year ended June 30, 2009, primarily due to a $443,000 nonrecurring charge
to income, which was a result of the preliminary denial by the Internal Revenue
Service (“IRS”) of a key component of the Company’s claim for refund of income
taxes for the fiscal year ended June 30, 2006.  At issue is the timing
of a deduction of $1.3 million paid to holders of stock options in conjunction
with the acquisition of Frankfort First Bancorp, Inc., in 2005.  The
IRS does not disagree with the propriety of the deduction, but disagrees with
the timing and believes the deduction should have occurred in the prior tax
year, which is now closed under the statute of limitations imposed by the
Internal Revenue Code.  The Company only recently learned of the IRS
position and will explore the options available to refute its
position.  The effective tax rates for the years ended June 30, 2009
and 2008 were 57.7% and 32.0%, respectively.





Liquidity
and Capital Resources





Liquidity is the ability to meet
current and future short-term financial obligations.  Our primary
sources of funds consist of cash and deposits at other banks, deposit inflows,
loan repayments and maturities, calls and sales of investment and
mortgage-backed securities and advances from the FHLB.  While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.





We periodically assess our available
liquidity and projected upcoming liquidity demands.  We regularly
adjust our investments in liquid assets based upon our assessment of
(1) expected loan demand, (2) expected deposit flows, (3) yields
available on interest-earning deposits and securities, and (4) the
objectives of our asset/liability management program.  Excess liquid
assets are invested generally in interest-earning deposits, federal funds and
short- and intermediate-term U.S. Government agency obligations.





Our most liquid assets are cash,
federal funds sold and interest-bearing deposits.  The levels of these
assets depend on our operating, financing, lending and investing activities
during any given period.  At June 30, 2009 and June 30, 2008,
cash and cash equivalents totaled $4.2 million and $16.0 million,
respectively.  Investment securities classified as available-for-sale,
which provide additional sources of liquidity, totaled $5.5 million at both
June 30, 2009 and 2008.  At June 30, 2009, we had the ability to
borrow a total $119.9 million from the FHLB, of which $39.7 million (before
premium) was outstanding.





We are not aware of any trends and/or
demands, commitments, events or uncertainties that could result in a material
protracted decrease in liquidity.  We expect that all of our liquidity
needs, including the contractual commitments set forth in the table below can be
met by our currently available liquid assets and cash flows.  In the
event any unforeseen demand or commitments were to occur, we would access our
borrowing capacity with the FHLB.  We expect that our currently
available liquid assets and our ability to borrow from the FHLB would be
sufficient to satisfy our liquidity needs without any material adverse effect on
our liquidity.





Our primary investing activities are
the origination of loans and the purchase of investment
securities.  In fiscal 2009 and 2008, we originated $61.2 million and
$54.1 million of loans, respectively.  During fiscal 2009, these
activities were funded primarily by proceeds from principal repayments on loans
of $54.0 million.  During fiscal 2008, these activities were funded
primarily by proceeds from the principal repayments on loans of $38.1 million
and maturities of investment securities and mortgage-backed securities of $50.9
million.


25


Financing
activities consist primarily of activity in deposit accounts and in FHLB
advances.  We experienced a net increase of $2.1 million in total
deposits for the year ended June 30, 2009, while we experienced a net decrease
of $2.3 million for the year ended June 30, 2008.  Deposit flows are
affected by the overall level of interest rates, the interest rates and products
offered by us and our local competitors and other factors.  While we
generally manage the pricing of our deposits to be competitive and to increase
core deposit relationships, during fiscal 2008, management chose to allow the
deposit base to reprice to lower overall levels over attracting new
deposits.  For the year ended June 30, 2009, our net decrease in FHLB
advances totaled $7.6 million, as we repaid short-term funds with additional
liquidity available to us.





Commitments,
Contractual Obligations and Off-balance-sheet Transactions





At June 30, 2009, we had $1.5 million
in mortgage commitments.  Certificates of deposit due within one year
of June 30, 2009 totaled $66.2 million, or 47.4% of total
deposits.  If these deposits do not remain with us, we might be
required to seek other sources of funds, including FHLB advances or other
certificates of deposit.  Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before June 30,
2010.  We believe, however, based on past experience, that a
significant portion of our certificates of deposit will remain with
us.  We have the ability to attract and retain deposits by adjusting
the interest rates offered.





The following table sets forth our
contractual obligations and loan commitments as of June 30,
2009.




Total
                                            Amounts
                                            Committed
                                          
                                          
                                          Less
                                            Than
                                            One
                                            Year
                                          
                                          
                                          One to
                                            Three
                                            Years
                                          
                                          
                                          Four to
                                            Five
                                            Years
                                          
                                          
                                          More
                                            than
                                            Five
                                            Years(In thousands)Federal Home Loan Bank advances (1)
                                          
                                          $
                                          39,684
                                          
                                          
                                          $
                                          24,135
                                          
                                          
                                          $
                                          8,249
                                          
                                          
                                          $
                                          5,236
                                          
                                          
                                          $
                                          2,064One
      to four family residential real estate
                                          
                                          
                                          1,481
                                          
                                          
                                          
                                          1,481
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Unused
      lines of credit
                                          
                                          
                                          9,780
                                          
                                          
                                          
                                          9,780
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Undisbursed
      loans
                                          
                                          
                                          404
                                          
                                          
                                          
                                          404
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Total
      commitments
                                          
                                          $
                                          51,349
                                          
                                          
                                          $
                                          35,800
                                          
                                          
                                          $
                                          8,249
                                          
                                          
                                          $
                                          5,236
                                          
                                          
                                          $
                                          2,064







(1) Net of
premium on FHLB borrowings





For the year ended June 30, 2009,
other than loan commitments, we engaged in no off-balance-sheet transactions
reasonably likely to have a material effect on our financial condition, results
of operations or cash flows.





Impact
of Inflation and Changing Prices




Our
consolidated financial statements and accompanying notes have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation.  The primary impact of inflation on our
operations is reflected in increased operating costs.  Unlike most
industrial companies, virtually all of our assets and liabilities are monetary
in nature.  As a result, interest rates generally have a more
significant impact on our performance than do general levels of
inflation.  Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and
services.


26


Report
of Independent Registered Public Accounting Firm





Audit
Committee, Board of Directors and Stockholders


Kentucky
First Federal Bancorp


Hazard,
Kentucky





We have
audited the accompanying consolidated statements of financial condition of
Kentucky First Federal Bancorp as of June 30, 2009 and 2008, and the related
consolidated statements of earnings, comprehensive income, shareholders’ equity
and cash flows for each of the years in the two-year period ended June 30,
2009.  The Company’s management is responsible for these financial
statements.  Our responsibility is to express an opinion on these
financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the 2009 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky First
Federal Bancorp as of June 30, 2009 and 2008, and the results of its operations
and its cash flows for the years in the two-year period ended June 30, 2009, in
conformity with accounting principles generally accepted in the United States of
America.




As
discussed in Note A to the financial statements, effective July 1, 2008, the
Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements.”




/s/           BKD,LLP




Cincinnati,
Ohio


September
28, 2009





27




KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION





June 30,
2009 and 2008


(In
thousands, except share data)





2009
                            
                            
                            2008ASSETSCash
      and due from banks
                            
                            $
                            1,548
                            
                            
                            $
                            790Interest-bearing
      demand deposits
                            
                            
                            2,669
                            
                            
                            
                            15,176Cash
      and cash equivalents
                            
                            
                            4,217
                            
                            
                            
                            15,966Interest-bearing
      deposits
                            
                            
                            100
                            
                            
                            
                            100Available
      for sale securities
                            
                            
                            5,451
                            
                            
                            
                            5,480Held-to-maturity
      securities, at amortized cost- approximate fair value of $15,317 and
      $16,409 at June 30, 2009 and 2008, respectively
                            
                            
                            14,999
                            
                            
                            
                            16,959Loans
      available for sale
                            
                            
                            230
                            
                            
                            
                            86Loans
      receivable
                            
                            
                            189,609
                            
                            
                            
                            182,717Allowance
      for loan and lease losses
                            
                            
                            (678
                            )
                            
                            
                            (666
                            )Real
      estate acquired through foreclosure
                            
                            
                            109
                            
                            
                            
                            21Office
      premises and equipment
                            
                            
                            2,844
                            
                            
                            
                            2,727Federal
      Home Loan Bank stock
                            
                            
                            5,641
                            
                            
                            
                            5,566Accrued
      interest receivable
                            
                            
                            750
                            
                            
                            
                            628Bank-owned
      life insurance
                            
                            
                            2,428
                            
                            
                            
                            2,339Goodwill
                            
                            
                            14,507
                            
                            
                            
                            14,507Other
      intangible assets
                            
                            
                            349
                            
                            
                            
                            480Prepaid
      expenses and other assets
                            
                            
                            345
                            
                            
                            
                            266Prepaid
      federal income taxes
                            
                            
                            -
                            
                            
                            
                            479Total
      assets
                            
                            $
                            240,901
                            
                            
                            $
                            247,655LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits
                            
                            $
                            139,743
                            
                            
                            $
                            137,634Advances
      from the Federal Home Loan Bank
                            
                            
                            40,156
                            
                            
                            
                            47,801Advances
      by borrowers for taxes and insurance
                            
                            
                            290
                            
                            
                            
                            331Accrued
      interest payable
                            
                            
                            189
                            
                            
                            
                            245Accrued
      federal income taxes
                            
                            
                            67
                            
                            
                            
                            -Deferred
      federal income taxes
                            
                            
                            1,339
                            
                            
                            
                            1,234Other
      liabilities
                            
                            
                            723
                            
                            
                            
                            617Total
      liabilities
                            
                            
                            182,507
                            
                            
                            
                            187,862Commitments
      and contingencies
                            
                            
                            -
                            
                            
                            
                            -Shareholders’
      equityPreferred
      stock, 500,000 shares authorized, $.01 par value; no shares
      issued
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares
      issued
                            
                            
                            86
                            
                            
                            
                            86Additional
      paid-in capital
                            
                            
                            36,223
                            
                            
                            
                            35,834Retained
      earnings
                            
                            
                            31,930
                            
                            
                            
                            32,291Shares
      acquired by stock benefit plans
                            
                            
                            (2,557
                            )
                            
                            
                            (2,735
                            )Treasury
      shares at cost, 728,930 and 559,330 common shares atJune 30, 2009
      and 2008, respectively
                            
                            
                            (7,379
                            )
                            
                            
                            (5,700
                            )Accumulated
      other comprehensive income
                            
                            
                            91
                            
                            
                            
                            17Total
      shareholders’ equity
                            
                            
                            58,394
                            
                            
                            
                            59,793Total
      liabilities and shareholders’ equity
                            
                            $
                            240,901
                            
                            
                            $
                            247,655





The
accompanying notes are an integral part of these
statements.


28


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF EARNINGS





For the
years ended June 30, 2009 and 2008


(In
thousands, except share data)





2009
                
                
                2008Interest
      incomeLoans
                
                $
                11,057
                
                
                $
                10,555Mortgage-backed
      securities
                
                
                567
                
                
                
                665Investment
      securities
                
                
                269
                
                
                
                1,426Interest-bearing
      deposits and other
                
                
                333
                
                
                
                441Total
      interest income
                
                
                12,226
                
                
                
                13,087Interest
      expenseDeposits
                
                
                4,118
                
                
                
                4,872Borrowings
                
                
                1,784
                
                
                
                2,693Total
      interest expense
                
                
                5,902
                
                
                
                7,565Net
      interest income
                
                
                6,324
                
                
                
                5,522Provision
      for losses on loans
                
                
                46
                
                
                
                12Net
      interest income after provision for losses on loans
                
                
                6,278
                
                
                
                5,510Other
      incomeEarnings
      on bank-owned life insurance
                
                
                89
                
                
                
                83Gain
      on sale of loans
                
                
                64
                
                
                
                23Gain
      on sale of real estate acquired through foreclosure
                
                
                3
                
                
                
                -Other
      operating
                
                
                85
                
                
                
                76Total
      other income
                
                
                241
                
                
                
                182General,
      administrative and other expenseEmployee
      compensation and benefits
                
                
                2,885
                
                
                
                2,911Occupancy
      and equipment
                
                
                411
                
                
                
                344Franchise
      and other taxes
                
                
                180
                
                
                
                157Data
      processing
                
                
                162
                
                
                
                153Other
      operating
                
                
                970
                
                
                
                756Total
      general, administrative and other expense
                
                
                4,608
                
                
                
                4,321Earnings
      before income taxes
                
                
                1,911
                
                
                
                1,371Federal
      income taxesCurrent
                
                
                1,036
                
                
                
                225Deferred
                
                
                67
                
                
                
                214Total
      federal income taxes
                
                
                1,103
                
                
                
                439NET
      EARNINGS
                
                $
                808
                
                
                $
                932EARNINGS
      PER SHAREBasic
                
                $
                0.11
                
                
                $
                0.12Diluted
                
                $
                0.11
                
                
                $
                0.12





The
accompanying notes are an integral part of these
statements.


29


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME





For the
years ended June 30, 2009 and 2008


(In
thousands)





2009
                  
                  
                  2008Net
      earnings
                  
                  $
                  808
                  
                  
                  $
                  932Other
      comprehensive income, net of tax-related effects:Unrealized holding gains on
      securities during the year, net of taxes of $38 and $157 in 2009 and 2008,
      respectively
                  
                  
                  74
                  
                  
                  
                  304Comprehensive
      income
                  
                  $
                  882
                  
                  
                  $
                  1,236Accumulated
      other comprehensive income
                  
                  $
                  91
                  
                  
                  $
                  17





The
accompanying notes are an integral part of these
statements.


30


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY





For the
years ended June 30, 2009 and 2008


(In
thousands, except share data)





UnrealizedShares
                      
                      
                      
                      
                      
                      gains (losses)acquired
                      
                      
                      
                      
                      
                      on securitiesAdditional
                      
                      
                      
                      
                      
                      by stock
                      
                      
                      
                      
                      
                      designatedCommon
                      
                      
                      paid-in
                      
                      
                      Retained
                      
                      
                      benefit
                      
                      
                      Treasury
                      
                      
                      as availablestock
                      
                      
                      capital
                      
                      
                      earnings
                      
                      
                      plans
                      
                      
                      shares
                      
                      
                      for
      sale
                      
                      
                      TotalBalance
      at July 1, 2007
                      
                      $
                      86
                      
                      
                      $
                      35,459
                      
                      
                      $
                      32,291
                      
                      
                      $
                      (3,013
                      )
                      
                      $
                      (3,091
                      )
                      
                      $
                      (287
                      )
                      
                      $
                      61,445Adjustment
      related to adoption of FIN 48
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250Net
      earnings for the year ended June 30, 2008
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      932
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      932Amortization
      expense of stock benefit plans
                      
                      
                      -
                      
                      
                      
                      257
                      
                      
                      
                      -
                      
                      
                      
                      278
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      535Compensation
      expense related to vesting stock options
                      
                      
                      -
                      
                      
                      
                      118
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      118Acquisition
      of shares for Treasury
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,609
                      )
                      
                      
                      -
                      
                      
                      
                      (2,609
                      )Unrealized
      gains on securities designated asavailable
      for sale, net of related tax effects
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      304
                      
                      
                      
                      304Cash
      dividends of $0.40 per common share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,182
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,182
                      )Balance
      at June 30, 2008
                      
                      
                      86
                      
                      
                      
                      35,834
                      
                      
                      
                      32,291
                      
                      
                      
                      (2,735
                      )
                      
                      
                      (5,700
                      )
                      
                      
                      17
                      
                      
                      
                      59,793Net
      earnings for the year ended June 30, 2009
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      808
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      808Amortization
      expense of stock benefit plans
                      
                      
                      -
                      
                      
                      
                      271
                      
                      
                      
                      -
                      
                      
                      
                      178
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      449Compensation
      expense related to vesting stock options
                      
                      
                      -
                      
                      
                      
                      118
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      118Acquisition
      of shares for Treasury
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,679
                      )
                      
                      
                      -
                      
                      
                      
                      (1,679
                      )Unrealized
      gains on securities designated asavailable
      for sale, net of related tax effects
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      74
                      
                      
                      
                      74Cash
      dividends of $0.40 per common share
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,169
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,169
                      )Balance
      at June 30, 2009
                      
                      $
                      86
                      
                      
                      $
                      36,223
                      
                      
                      $
                      31,930
                      
                      
                      $
                      (2,557
                      )
                      
                      $
                      (7,379
                      )
                      
                      $
                      91
                      
                      
                      $
                      58,394





The
accompanying notes are an integral part of these
statements.


31


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF CASH FLOWS





For the
years ended June 30, 2009 and 2008


(In
thousands)





2009
                
                
                2008Cash
      flows from operating activities:Net
      earnings for the year
                
                $
                808
                
                
                $
                932Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Amortization
      of premiums and discounts on investment securities - net
                
                
                6
                
                
                
                1Depreciation
                
                
                177
                
                
                
                145Amortization
      of deferred loan origination (fees) costs
                
                
                10
                
                
                
                39Amortization
      of premiums on FHLB advances
                
                
                (490
                )
                
                
                (525
                )Amortization
      of core deposit intangibles
                
                
                131
                
                
                
                132Gain
      on sale of loans
                
                
                (64
                )
                
                
                (23
                )Gain
      on sale of real estate acquired through foreclosure
                
                
                (3
                )
                
                
                -Amortization
      of stock benefit plans and stock options expense
                
                
                567
                
                
                
                560Federal
      Home Loan Bank stock dividends
                
                
                (75
                )
                
                
                (145
                )Bank-owned
      life insurance earnings
                
                
                (89
                )
                
                
                (83
                )Provision
      for losses on loans
                
                
                46
                
                
                
                12Mortgage
      loans originated for sale
                
                
                (3,691
                )
                
                
                (1,627
                )Proceeds
      from sale of mortgage loans
                
                
                3,611
                
                
                
                1,564Increase
      (decrease) in cash, due to changes in:Accrued
      interest receivable
                
                
                (122
                )
                
                
                307Prepaid
      expenses and other assets
                
                
                (79
                )
                
                
                10Accrued
      interest payable
                
                
                (56
                )
                
                
                (120
                )Accounts
      payable and other liabilities
                
                
                106
                
                
                
                (98
                )Federal
      income taxesCurrent
                
                
                546
                
                
                
                30Deferred
                
                
                67
                
                
                
                147Net
      cash provided by operating activities
                
                
                1,406
                
                
                
                1,258Cash
      flows provided by (used in) investing activities:Investment
      securities maturities, prepayments and calls:Held
      to maturity
                
                
                1,960
                
                
                
                42,647Available
      for sale
                
                
                135
                
                
                
                8,278Loan
      disbursements
                
                
                (61,195
                )
                
                
                (54,092
                )Principal
      repayments on loans
                
                
                53,986
                
                
                
                38,118Proceeds
      from sale of real estate acquired through foreclosure
                
                
                188
                
                
                
                15Proceeds
      from sale of office premises and equipment
                
                
                -
                
                
                
                -Purchase
      of office premises and equipment
                
                
                (294
                )
                
                
                (110
                )Net
      cash provided by (used in) investing activities
                
                
                (5,220
                )
                
                
                34,856Cash
      flows provided by (used in) financing activities:Net
      increase (decrease) in deposits
                
                
                2,109
                
                
                
                (2,259
                )Advances
      by borrowers for taxes and insurance
                
                
                (41
                )
                
                
                (12
                )Proceeds
      from Federal Home Loan Bank advances
                
                
                17,800
                
                
                
                25,600Repayments
      on Federal Home Loan Bank advances
                
                
                (24,955
                )
                
                
                (42,406
                )Purchase
      of shares for stock benefit plans
                
                
                -
                
                
                
                -Treasury
      stock repurchases
                
                
                (1,679
                )
                
                
                (2,609
                )Dividends
      paid on common stock
                
                
                (1,169
                )
                
                
                (1,182
                )Net
      cash used in financing activities
                
                
                (7,935
                )
                
                
                (22,868
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (11,749
                )
                
                
                13,246Cash
      and cash equivalents at beginning of year
                
                
                15,966
                
                
                
                2,720Cash
      and cash equivalents at end of year
                
                $
                4,217
                
                
                $
                15,966





The
accompanying notes are an integral part of these statements.


32


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)





For the
years ended June 30, 2009 and 2008


(In
thousands)





2009
                    
                    
                    2008Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Federal
      income taxes
                    
                    $
                    490
                    
                    
                    $
                    260Interest
      on deposits and borrowings
                    
                    $
                    6,449
                    
                    
                    $
                    8,210Supplemental
      disclosure of noncash investing activities:Transfers
      from loans to real estate acquired through foreclosure
                    
                    $
                    273
                    
                    
                    $
                    28Loans
      disbursed upon sales of real estate acquired through
      foreclosure
                    
                    $
                    128
                    
                    
                    $
                    -Capitalization
      of mortgage servicing rights
                    
                    $
                    20
                    
                    
                    $
                    8





The
accompanying notes are an integral part of these
statements.


33


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





June 30,
2009 and 2008





NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Kentucky
First Federal Bancorp (the “Company”) is a savings and loan holding company
whose activities are primarily limited to holding the stock and managing the
operations of First Federal Savings and Loan Association of Hazard, Kentucky
(“First Federal of Hazard”) and Frankfort First Bancorp, Inc., (“Frankfort
First”) the holding company for First Federal Savings Bank of Frankfort (“First
Federal of Frankfort”).  First Federal of Hazard and First Federal of
Frankfort are collectively referred to herein as “the Banks.”  First
Federal of Hazard is a community-oriented savings and loan association dedicated
to serving consumers in Perry and surrounding counties in eastern Kentucky,
while First Federal of Frankfort operates through three banking offices located
in Frankfort, Kentucky.  Both institutions engage primarily in the
business of attracting deposits from the general public and applying those funds
to the origination of loans for residential and consumer
purposes.  First Federal of Frankfort also originates, to a lesser
extent, church loans, home equity and other loans.  The Banks’
profitability is significantly dependent on net interest income, which is the
difference between interest income generated from interest-earning assets (i.e.
loans and investments) and the interest expense paid on interest-bearing
liabilities (i.e. customer deposits and borrowed funds).  Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities and the interest received or paid on these
balances.  The level of interest rates paid or received by the Banks
can be significantly influenced by a number of environmental factors, such as
governmental monetary policy, that are outside of management’s
control.





The
consolidated financial information presented herein has been prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and general accounting practices within the financial
services industry.  In preparing consolidated financial statements in
accordance with U. S. GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting
period.  Actual results could differ from such estimates.





The
following is a summary of the Company’s significant accounting policies which
have been consistently applied in the preparation of the accompanying
consolidated financial statements.





1.  Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company, First
Federal of Hazard, Frankfort First and First Federal of
Frankfort.  All significant intercompany accounts and transactions
have been eliminated in consolidation.





2.  Investment and
Mortgage-backed Securities





The
Company accounts for investment and mortgage-backed securities by categorizing
those investments as held-to-maturity or available for
sale.  Securities classified as held-to-maturity are to be carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity.  Securities designated as available for sale
are carried at fair value with resulting unrealized gains or losses recorded to
shareholders’ equity.





Realized
gains and losses on sales of securities are recognized using the specific
identification method.


34


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





3.  Loans
Receivable





Loans
receivable are stated at the principal amount outstanding, adjusted for deferred
loan origination fees and the allowance for loan losses.  Interest is
accrued as earned unless the collectibility of the loan is in
doubt.  An allowance may be established for interest on loans that are
contractually past due based on management’s periodic evaluation.  The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management’s judgment, the borrower’s
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status.  If the ultimate
collectibility of the loan is in doubt, in whole or in part, all payments
received on nonaccrual loans are applied to reduce principal until such doubt is
eliminated.





Loans
held for sale are carried at the lower of cost (less principal payments
received) or fair value (market value), calculated on an aggregate
basis.  At June 30, 2009 and 2008, the Company had $230,000 and
$86,000 in loans held for sale, respectively.





In
selling loans, the Company utilizes a program with the Federal Home Loan Bank,
retaining servicing on loans sold.  Mortgage servicing rights on
originated loans that have been sold are initially recorded at fair
value.  Capitalized servicing rights are amortized in proportion to
and over the period of estimated servicing revenues.  The Company
recorded amortization related to mortgage servicing rights totaling $10,000
during the year ended June 30, 2009 and $4,000 during the year ended June 30,
2008.  The carrying value of the Company’s mortgage servicing rights,
which approximated fair value, totaled approximately $83,000 and $63,000 at June
30, 2009 and 2008, respectively.





The
Company was servicing mortgage loans of approximately $10.4 million and $7.9
million that had been sold to the Federal Home Loan Bank at June 30, 2009, and
2008, respectively.





4.  Loan Origination
Fees





The Banks
account for loan origination fees (net of direct origination costs) by deferring
and amortizing those fees to interest income using the level-yield method,
giving effect to actual loan prepayments.  Loan origination costs are
primarily the direct costs attributable to originating a loan, i.e., principally
actual personnel costs.  Fees received for loan commitments that are
expected to be drawn upon, based on the Banks’ experience with similar
commitments, are deferred and amortized over the life of the loan using the
level-yield method.  Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line
basis.


35


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





5.  Allowance for Loan
Losses





It is the
Banks’ policy to provide valuation allowances for estimated losses on loans
based on past loss experience, trends in the level of delinquent and problem
loans, adverse situations that may affect the borrower’s ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area.  When the collection
of a loan becomes doubtful, or otherwise troubled, the Banks record a loan
charge-off equal to the difference between the fair value of the property
securing the loan and the loan’s carrying value.  Major loans and
lending areas are reviewed periodically to determine potential problems at an
early date.  The allowance for loan losses is increased by charges to
earnings and decreased by charge-offs (net of recoveries).





The Banks
account for impaired loans by determining the present value of expected future
cash flows discounted at the loan’s effective interest rate or, as an
alternative, at the loan’s observable market price or fair value of the
collateral.  The Banks’ current procedures for evaluating impaired
loans result in carrying such loans at the lower of cost or fair
value.





A loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.  In applying the policy,
the Banks consider investments in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment.  With respect to
the Banks’ investment in multi-family and nonresidential loans, and the
evaluation of impairment thereof, such loans are collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value.





Collateral-dependent
loans which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment under
the policy at that time.





6.  Federal Home Loan Bank
Stock





Federal
Home Loan Bank stock is a required investment for institutions that are members
of the Federal Home Loan Bank system.  The required investment in the
common stock is based on a predetermined formula and carried at
cost.





7.  Real Estate Acquired through
Foreclosure





Real
estate acquired through foreclosure is carried at the lower of the loan’s unpaid
principal balance (cost) or fair value less estimated selling expenses at the
date of acquisition.  A charge-off is recorded for any write-down in
the loan’s carrying value to fair value at the date of
acquisition.  Real estate loss provisions are recorded if the fair
value of the property subsequently declines below the value determined at the
recording date.  In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property, which
would be capitalized, are considered.  Costs relating to holding
real estate acquired through foreclosure, net of rental income, are charged
against earnings as incurred.


36


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





8.  Office Premises and
Equipment





Office
premises and equipment are carried at cost and include expenditures which extend
the useful lives of existing assets.  Maintenance, repairs and minor
renewals are expensed as incurred.  For financial reporting,
depreciation is provided on the straight-line method over the useful lives of
the assets, estimated to be forty years for buildings, ten to forty years for
building improvements, and five to ten years for furniture and
equipment.





9.  Income
Taxes





The
Company accounts for federal income taxes by computing a deferred tax liability
or deferred tax asset by applying current statutory tax rates to net taxable or
deductible differences between the tax basis of an asset or liability and its
reported amount in the financial statements.  These differences will
result in taxable or deductible amounts in future periods.  Deferred
tax assets are recorded only to the extent that the amount of net deductible
temporary differences or carryforward attributes may be utilized against current
period earnings, carried back against prior years earnings, offset against
taxable temporary differences reversing in future periods, or utilized to the
extent of management’s estimate of future taxable income.  A valuation
allowance is provided for deferred tax assets if it is more likely than not that
a deferred tax asset will not be realized.  Deferred tax liabilities
are provided on the total amount of net temporary differences taxable in the
future.  Kentucky First Federal Bancorp and Frankfort First Bancorp,
Inc., each are subject to state income taxes in the Commonwealth of
Kentucky.  Neither of the Banks are subject to state income tax in the
Commonwealth.





10.  Retirement and Employee
Benefit Plans





The Banks
each participate in a noncontributory, multi-employer defined benefit pension
fund covering all employees who qualify as to length of
service.  Contributions are based upon covered employees’ ages and
salaries and are dependent upon the ultimate prescribed benefits of the
participants and the funded status of the plan. The Company recognized expense
related to the plans totaling approximately $303,000 and $392,000 for the fiscal
years ended June 30, 2009 and 2008.





The
Company also maintains nonqualified deferred unfunded compensation plans for the
benefit of certain directors.  The Company recognized expense related
to these plans in the amount of $19,000 for each of the fiscal years ended June
30, 2009 and 2008.




37




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





10.  Retirement and Employee
Benefit Plans (continued)





The
Company has an Employee Stock Ownership Plan (“ESOP”) which provides retirement
benefits for substantially all full-time employees who have completed one year
of service and have attained the age of 21.  Annual contributions are
made to the ESOP equal to the ESOP’s debt service less dividends received by the
ESOP on unallocated shares.  Shares in the ESOP were acquired using
funds provided by a loan from the Company and accordingly the cost of those
shares is shown as a reduction of stockholders’ equity.  Shares are
released to participants proportionately as the loan is
repaid.  Dividends on allocated shares are recorded as dividends and
charged to retained earnings.  Dividends on unallocated shares are
used to repay the loan and are treated as compensation
expense.  Compensation expense is recorded equal to the fair market
value of the stock allocated to participants during a given fiscal year and for
shares committed to be released.  Allocation of shares to the ESOP
participants is contingent upon the repayment of a loan to Kentucky First
Federal Bancorp totaling $2.6 million and $2.7 million at June 30, 2009 and
2008, respectively.  The Company recorded expense for the ESOP of
approximately $185,000 for each of the years ended June 30, 2009 and
2008.





For
      the fiscal year endedJune
      30,2009
                  
                  
                  2008Allocated
      shares
                  
                  
                  63,756
                  
                  
                  
                  49,320Shares
      committed to be released
                  
                  
                  8,639
                  
                  
                  
                  9,267Unearned
      shares
                  
                  
                  254,933
                  
                  
                  
                  273,217Total
      ESOP shares
                  
                  
                  327,328
                  
                  
                  
                  331,804Fair
      value of unearned shares at end of period (expressed in
      thousands)
                  
                  $
                  3,097
                  
                  
                  $
                  2,555





11.  Share-Based Compensation
Plans





In fiscal
2006, the Company initiated the 2005 Equity Incentive Plan (“EIP” or the “Plan”)
which provides for two share-based compensation plans, which are described
below.


38


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





11. Share-Based Compensation
Plans  (continued)





The
compensation cost that has been charged against income for those share-based
plans was $380,000, and $376,000 for the fiscal years ended June 30, 2009 and
2008, respectively.  The total income tax benefit recognized
in the statement of earnings for share-based compensation arrangements was
$129,000 and $100,000 for the fiscal years ended June 30, 2009 and 2008,
respectively.





The EIP
provides for grants of up to 421,216 stock options.  It also provides
that one-fifth of the options granted become vested and exercisable on the first
five anniversaries of the date of grant.  The contractual term of the
options is ten years.  All option awards are granted with an exercise
price equal to the market price of the Company’s stock at the date of
grant.





The
Company accounts for the plans using a fair value-based method for valuing
stock-based compensation, which measures compensation cost at the grant date
based on the fair value of the award.  Compensation is then recognized
over the service period, which is usually the vesting period.





The fair
value of the option grants are estimated on the date of grant using the modified
Black-Scholes options-pricing model.   At June 30, 2009, the only
options granted relate to the fiscal year 2006 with the following
weighted-average assumptions used for the grant:  dividend yield of
3.96%; expected volatility of 20.0%, which equals the weighted average
volatility; risk-free interest rate of 4.49%; and expected lives of 7
years.  The risk-free reinvestment rate is an arithmetic average of
the rates on five- and ten-year treasuries as of December 13, 2005, while the
volatility of the options was estimated using historical and implied stock price
volatility experience of comparable firms.





A summary
of the status of the Company’s stock option plan as of June 30, 2009, and
changes during the year then ended is presented below:





Weighted-
                            
                            
                            Aggregateaverage
                            
                            
                            Intrinsicexercise
                            
                            
                            ValueShares
                            
                            
                            price
                            
                            
                            $(000)Outstanding
      at beginning of year
                            
                            
                            339,200
                            
                            
                            $
                            10.10Granted
                            
                            
                            -
                            
                            
                            
                            -Exercised
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at end of year
                            
                            
                            339,200
                            
                            
                            $
                            10.10
                            
                            
                            $
                            695Options
      exercisable at end of year
                            
                            
                            203,520
                            
                            
                            $
                            10.10
                            
                            
                            $
                            417Weighted
      average fair value of options granted in fiscal year 2006
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            1.75Weighted
      average remaining contractual term of options outstanding and
      exercisable
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6.5 years




39




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





11. Share-Based Compensation
Plans  (continued)





The EIP
also provides for the purchase of 168,486 shares of common stock and the
issuance of such shares in the form of restricted stock awards to members of the
board of directors, management and certain employees.  Common shares
awarded under the restricted stock plan vest over a five year period, commencing
with the date of the grant and are expensed based on their fair market value at
the grant date.


The
following table summarizes the activity with regard to restricted stock awards
during fiscal 2009:





Weighted-averagegrant dateShares
                    
                    
                    fair valueNonvested
      at July 1, 2008
                    
                    
                    77,700
                    
                    
                    $
                    10.10Vested
                    
                    
                    (25,900
                    )
                    
                    
                    10.10Forfeited
                    
                    
                    -
                    
                    
                    
                    -Nonvested
      at June 30, 2009
                    
                    
                    51,800
                    
                    
                    $
                    10.10





As of
June 30, 2009, there was $570,000 of total unrecognized compensation cost
related to the share-based compensation plans.  The cost is expected
to be recognized over a weighted average period of 1.5 years.  The
total fair value of shares vested during the years ended June 30, 2009 and 2008
was $253,000 and $259,000, respectively.





12.  Earnings Per
Share





Diluted
earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued or released under
the Company’s share-based compensation plans.  There is no adjustment
to net earnings for the calculation of diluted earnings per
share.  The computations were as follows:





For
      the fiscal year endedJune
      30,2009
                  
                  
                  2008Weighted-average
      common shares outstanding (basic)
                  
                  
                  7,559,903
                  
                  
                  
                  7,739,519Dilutive
      effect of assumed exercise of stock options
                  
                  
                  9,396
                  
                  
                  
                  -Weighted-average
      common shares outstanding (diluted)
                  
                  
                  7,569,299
                  
                  
                  
                  7,739,519





Basic
earnings per share is computed based upon the weighted-average shares
outstanding during the year less shares in the ESOP that are unallocated and not
committed to be released and unearned restricted stock.  For 2009 all
options were dilutive, as the exercise price was greater than the average market
price of the common stock.  For fiscal year 2008 all outstanding
options were antidilutive.


40


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)




13.  Disclosures About Fair Value
of Assets and Liabilities




Effective
July 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (FAS 157).  FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements.




FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.  The
standard describes three levels of inputs that may be used to measure fair
value:




Level 1 - Quoted prices in
active markets for identical assets or liabilities.




Level 2 - Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.




Level 3– Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.




Following
is a description of the valuation methodologies used for assets measured at fair
value on a recurring basis and recognized in the accompanying statement of
condition, as well as the general classification of such instruments pursuant to
the valuation hierarchy.




Available-for-Sale
Securities




Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  If quoted
market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted
cash flows.  Level 2 securities include U.S. government agency bonds
and mortgage-backed securities.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying statements of financial condition measured at
fair value on a recurring basis and the level within the FAS 157 fair value
hierarchy in which the fair value measurements fall at June 30,
2009:





Fair Value Measurements Using(in thousands)Quotes Pricesin Active
                                  
                                  
                                  SignificantMarkets for
                                  
                                  
                                  Other
                                  
                                  
                                  SignificantIdentical
                                  
                                  
                                  Observable
                                  
                                  
                                  UnobservableAssets
                                  
                                  
                                  Inputs
                                  
                                  
                                  InputsFair Value
                                  
                                  
                                  (Level 1)
                                  
                                  
                                  (Level 2)
                                  
                                  
                                  (Level 3)Available-for-sale
      securities
                                  
                                  $
                                  5,451
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  5,451
                                  
                                  
                                  $
                                  -


41





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





13. Fair Value of Assets and
Liabilities (continued)





Impaired
Loans





Loans for
which it is probable that the Company will not collect all principal and
interest due according to contractual terms are measured for impairment in
accordance with the provisions of Financial Accounting Standard No. 114 (FAS
114), “Accounting by Creditors for Impairment of a Loan”.





If the
impaired loan is identified as collateral-dependent, then the fair value method
of measuring the amount of impairment is utilized.  This method
requires obtaining a current independent appraisal of the collateral and
applying a discount factor to the value.





Impaired
loans are classified within Level 3 of the fair value hierarchy.





Real
Estate Acquired Through Foreclosure





Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value (based on current appraised value) at the date
of foreclosure, establishing a new cost basis.  Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less cost to
sell.  Management has determined fair value measurements on other real
estate owned primarily through evaluations of appraisals performed, and current
and past offers for the other real estate under evaluation.  Due to
the nature of the valuation inputs, real estate acquired through foreclosure is
classified within Level 3 of the hierarchy.




The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying statements of financial condition measured at
fair value on a nonrecurring basis and the level within the FAS 157 fair value
hierarchy in which the fair value measurements fall at June 30,
2009:





Fair Value Measurements
    Using(in
      thousands)Quotes
      Pricesin
      Active
                          
                          
                          SignificantMarkets
      for
                          
                          
                          Other
                          
                          
                          SignificantIdentical
                          
                          
                          Observable
                          
                          
                          UnobservableAssets
                          
                          
                          Inputs
                          
                          
                          InputsFair Value
                          
                          
                          (Level 1)
                          
                          
                          (Level 2)
                          
                          
                          (Level 3)Impaired
      loans
                          
                          $
                          1,097
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,097Real
      estate acquired through foreclosure
                          
                          
                          96
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          96





SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires
disclosure of the fair value of financial instruments, both assets and
liabilities, whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that
value.  For financial instruments where quoted market prices are not
available, fair values are based on estimates using present value and other
valuation methods.





42





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





13. Fair Value of Assets and
Liabilities (continued)





The
methods used are greatly affected by the assumptions applied, including the
discount rate and estimates of future cash flows.  Therefore, the fair
values presented may not represent amounts that could be realized in an exchange
for certain financial instruments.





The
following methods were used to estimate the fair value of all other financial
instruments recognized in the accompanying statements of financial condition at
amounts other than fair value at June 30, 2009 and 2008:





Cash and cash
      equivalents:  The carrying amounts presented in the
      consolidated statements of financial condition for cash and cash
      equivalents are deemed to approximate fair
  value.





Held-to-maturity
      securities:  For held-to-maturity securities, fair value
      is deemed to equal the quoted market
price.





Loans
      available-for-sale:  Loans originated and intended for
      sale in the secondary market are carried at the lower of cost or fair
      value.  When the Bank decides to sell loans not previously
      classified as held for sale, such loans are transferred into a
      held-for-sale classification, and the recorded loan values are adjusted to
      the lower of cost or fair value.





Loans
      receivable:  The loan portfolio has been segregated into
      categories with similar characteristics, such as one- to four-family
      residential, multi-family residential and nonresidential real
      estate.  These loan categories were further delineated into
      fixed-rate and adjustable-rate loans.  The fair values for the
      resultant loan categories were computed via discounted cash flow analysis,
      using current interest rates offered for loans with similar terms to
      borrowers of similar credit quality.  For loans on deposit
      accounts and consumer and other loans, fair values were deemed to equal
      the historic carrying values.





Federal Home Loan Bank
      stock, interest-earning deposits and accrued interest
      receivable:  The carrying amount presented in the
      consolidated  statements of financial condition is deemed to
      approximate fair value.





Deposits:  The
      fair value of NOW accounts, passbook accounts, money market deposits and
      advances by borrowers for taxes and insurance are deemed to approximate
      the amount payable on demand.  Fair values for fixed-rate
      certificates of deposit have been estimated using a discounted cash flow
      calculation using the interest rates currently offered for deposits of
      similar remaining maturities.  The historical carrying amount of
      accrued interest payable on deposits is deemed to approximate fair
      value.





Advances from the
      Federal Home Loan Bank:  The fair value of these advances
      is estimated using the rates currently offered for similar advances of
      similar remaining maturities or, when available, quoted market
      prices.


43


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





13. Fair Value of Assets and
Liabilities (continued)





Advances by borrowers for
taxes and insurance and accrued interest payable:  The carrying
amount presented in the consolidated statement of financial condition is deemed
to approximate fair value.





Commitments to extend
credit:  For fixed-rate and adjustable-rate loan commitments,
the fair value estimate considers the difference between current levels of
interest rates and committed rates.  The fair value of outstanding
loan commitments at June 30, 2009 and 2008, was not material.





Based on
the foregoing methods and assumptions, the carrying value and fair value of the
Company’s financial instruments at June 30 are as follows:





2009
                      
                      
                      2008Carrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      Fairvalue
                      
                      
                      value
                      
                      
                      value
                      
                      
                      value(In
      Thousands)Financial
      assetsCash
      and cash equivalents
                      
                      $
                      4,217
                      
                      
                      $
                      4,217
                      
                      
                      $
                      15,966
                      
                      
                      $
                      15,966Interest-earning
      deposits
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100
                      
                      
                      
                      100Available-for-sale
      securities
                      
                      
                      5,451
                      
                      
                      
                      5,451
                      
                      
                      
                      5,480
                      
                      
                      
                      5,480Held-to-maturity
      securities
                      
                      
                      14,999
                      
                      
                      
                      15,317
                      
                      
                      
                      16,959
                      
                      
                      
                      16,409Loans
      available for sale
                      
                      
                      230
                      
                      
                      
                      230
                      
                      
                      
                      86
                      
                      
                      
                      86Loans
      receivable - net
                      
                      
                      188,931
                      
                      
                      
                      193,165
                      
                      
                      
                      182,051
                      
                      
                      
                      181,523Federal
      Home Loan Bank stock
                      
                      
                      5,641
                      
                      
                      
                      5,641
                      
                      
                      
                      5,566
                      
                      
                      
                      5,566Accrued
      interest receivable
                      
                      
                      750
                      
                      
                      
                      750
                      
                      
                      
                      628
                      
                      
                      
                      628Financial
      liabilitiesDeposits
                      
                      $
                      139,743
                      
                      
                      
                      142,772
                      
                      
                      $
                      137,634
                      
                      
                      $
                      139,392Advances
      from the Federal Home Loan Bank
                      
                      
                      40,156
                      
                      
                      
                      41,613
                      
                      
                      
                      47,801
                      
                      
                      
                      48,600Advances
      by borrowers for taxes and insurance
                      
                      
                      290
                      
                      
                      
                      290
                      
                      
                      
                      331
                      
                      
                      
                      331Accrued
      interest payable
                      
                      
                      189
                      
                      
                      
                      189
                      
                      
                      
                      245
                      
                      
                      
                      245





14.  Cash and Cash
Equivalents





For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks and interest-bearing deposits in other financial institutions with
original maturities of less than ninety days.





15.  Goodwill and Other
Intangible Assets





Goodwill
and other intangible assets arising from the Frankfort First acquisition are
accounted for in accordance with SFAS No. 142, “Goodwill and Intangible
Assets.”  Pursuant to SFAS No. 142, acquired goodwill is not amortized
but is tested for impairment at the reporting unit annually or whenever an
impairment indicator arises.  The Company evaluated the goodwill in
March 2009 and concluded there was no impairment.


44


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





15.  Goodwill and Other
Intangible Assets (continued)





The
Company’s core deposit intangible is being amortized on a straight-line basis
over an original period of seven years.  The carrying basis and
accumulated amortization of recognized intangible assets at June 30, 2009 and
2008 is as follows:





2009
                  
                  
                  2008(in
      thousands)Core
      depositsGross
      Carrying Amount
                  
                  $
                  918
                  
                  
                  $
                  918Accumulated
      Amortization
                  
                  
                  569
                  
                  
                  
                  438$
                  349
                  
                  
                  $
                  480





Amortization
expense for each of the years ended June 30, 2009 and 2008 was
$131,000.  The following table summarizes the Company’s current
estimates for future amortization expense of the core deposit
intangible:





(In thousands)2010
                  
                  $
                  1312011
                  
                  $
                  1312012
                  
                  $
                  87





16.  Cash Surrender Value of Life
Insurance





The cash
surrender value of bank-owned life insurance policies represents the value of
life insurance policies on certain officers of the Company for which the Company
is the beneficiary.  The Company accounts for these assets using the
cash surrender value method in determining the carrying value of the insurance
policies.





17.  Treasury
Stock





Treasury
stock is stated at cost.  Cost is determined by the first-in,
first-out method.


45


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





18.  Related Party
Transactions





Loans
outstanding to executive officers, directors, significant shareholders and their
affiliates (related parties) at June 30, 2009 and 2008 are summarized as
follows:





2009
                  
                  
                  2008(In
      thousands)Outstanding
      principal, beginning of year
                  
                  $
                  369
                  
                  
                  $
                  1,046Principal
      disbursed during the year
                  
                  
                  119
                  
                  
                  
                  20Principal
      repaid and refinanced during the year
                  
                  
                  (101
                  )
                  
                  
                  (116
                  )Other
                  
                  
                  —
                  
                  
                  
                  (581
                  )Outstanding
      principal, end of year
                  
                  $
                  387
                  
                  
                  $
                  369





Deposits
from related parties held by the Company at June 30, 2009 and 2008 totaled $2.7
million and $1.9 million, respectively.





In
management’s opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons.  Further, in
management’s opinion, these loans did not involve more than normal risk of
collectibility or present other unfavorable features.





19.  Effects of Recent Accounting
Pronouncements





In
December 2007, the FASB issued SFAS No 141 (revised 2007), “Business
Combinations,” which replaces SFAS 141.  This Statement applies to all
transactions or other events in which one entity obtains control of one or more
businesses.  It requires all assets acquired, liabilities assumed and
any noncontrolling interest to be measured at fair value at the acquisition
date.  The Statement requires certain costs such as
acquisition-related costs that were previously recognized as a component of the
purchase price, and expected restructuring costs that were previously recognized
as an assumed liability, to be recognized separately from the acquisition as an
expense when incurred.





FAS
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008 and may not be applied before that
date.  The initial adoption of this statement is not expected to have
a material adverse effect on the Company’s financial position or results of
operations.


46


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





19.  Effects of Recent Accounting
Pronouncements (continued)





Concurrent
with SFAS No. 141 (R), the FASB issued SFAS No. 160, “Noncontrolling Interests
in Condensed consolidated financial Statements, an Amendment of ARB
51.”  SFAS No. 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest (formerly known as minority interest)
in a subsidiary and for the deconsolidation of a subsidiary.  A
subsidiary, as defined by SFAS No. 160, includes a variable interest entity that
is consolidated by a primary beneficiary.





A
noncontrolling interest in a subsidiary, previously reported in the statement of
financial position as a liability or in the mezzanine section outside of
permanent equity, will be included within consolidated equity as a separate line
item upon adoption of SFAS No. 160.  Further, consolidated net income
will be reported at amounts that include both the parent (or primary
beneficiary) and the noncontrolling interest with separate disclosure on the
face of the consolidated statement of income of the amounts attributable to the
parent and to the noncontrolling interest.  SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008.  The initial adoption of this statement is
not expected to have a material adverse effect on the Company’s financial
position or results of operations.





On April
9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”) regarding the
accounting treatment for investments including mortgage-backed
securities.  These FSPs changed the method for determining if an
Other-than temporary impairment (“OTTI”) exists and the amount of OTTI to be
recorded through an entity’s income statement.  The changes brought
about by the FSPs provide greater clarity and reflect a more accurate
representation of the credit and noncredit components of an OTTI
event.  The three FSPs are as follows:





·
            FAS
      “SFAS 157-4 Determining Fair Value When the Volume and Level of Activity
      for the Assets or Liability Have Significantly Decreased and Identifying
      Transactions That Are Not Orderly” addresses the criteria to be used in
      the determination of an active market in determining whether observable
      transactions are Level 1 or Level 2 under the framework established
      by  SFAS 157, “Fair Value Measurements.”  The FSP
      reiterates that fair value is based on the notion of exit price in an
      orderly transaction between willing market participants at the valuation
      date.


·
            FSP
      “SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
      Other-than-Temporary Impairments” provide
      additional guidance designed to create greater clarity and consistency in
      accounting for and presenting impairment losses on debt
      securities.


·
            FSP
      “SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
      Financial Instruments”enhances
      consistency in financial reporting by increasing the frequency of fair
      value disclosures.





These
staff positions are effective for financial statements issued for periods ending
after June 15, 2009, with early application possible for the quarter ended March
31, 2009.  The Company elected not to adopt any of the above positions
early.  Adoption of these staff positions did not have a material
effect on the Company’s financial position or results of
operations.


47


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)




19. Effects of Recent Accounting
Pronouncements (continued)





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” to incorporate the
accounting and disclosure requirements for subsequent events into U.S. generally
accepted accounting principles.  SFAS No. 165 introduces new
terminology, defines a date through which management must evaluate subsequent
events, and lists the circumstances under which an entity must recognize and
disclose events or transactions occurring after the balance sheet
date.  The Company adopted SFAS No. 165 as of June 30, 2009, which was
the required effective date.





The
Company evaluated its June 30, 2009 consolidated financial statements through
September 28, 2009, the date the consolidated financial statements were
issued.  The Company is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets: an Amendment of FASB No. 140.”  SFAS No. 166 changes the
derecognition guidance for transferors of financial assets, including entities
that sponsor securitizations, to align that guidance with the original intent of
SFAS No. 140, “Accounting for the Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.”  SFAS No. 166 also eliminates the
exemption from consolidation for qualifying special-purpose entities
(“QSPEs”).  As a result, all existing QSPEs need to be evaluated to
determine whether the QSPE should be consolidated in accordance with SFAS No.
166.





SFAS No.
166 is effective as of the beginning of a reporting entity’s first annual
reporting period beginning after November 15, 2009, (July 1, 2010 as to the
Company) for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter.  The recognition and
measurement provisions of SFAS No. 166 must be applied to transfers that occur
on or after the effective date.  Early application is
prohibited.  SFAS No. 166 also requires additional disclosures about
transfers of financial assets that occur both before and after the effective
date.  The Company does not believe that the adoption of SFAS No. 166
will have a significant effect on its consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” to improve how enterprises account for and disclose their involvement
with variable interest entities (“VIEs”), which are special-purpose entities,
and other entities whose equity at risk is insufficient or lack certain
characteristics.  Among other things, SFAS No. 167 changes how an
entity determines whether it is the primary beneficiary of a variable interest
entity (“VIE”) and whether that VIE should be consolidated.  SFAS No.
167 requires an entity to provide significantly more disclosures about its
involvement with VIEs.  As a result, the Company must comprehensively
review its involvements with VIEs and potential VIEs, including entities
previously considered to be qualifying special purpose entities, to determine
the effect on its consolidated financial statements and related
disclosures.





SFAS No.
167 is effective as of the beginning of a reporting entity’s first annual
reporting period that begins after November 15, 2009, (July 1, 2010 as to the
Company) and for interim periods within the first annual reporting
period.  Earlier application is prohibited.  The Company
does not believe that the adoption of SFAS No. 167 will have a significant
effect on its consolidated financial statements.


48


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





20.
            Change in Accounting
      Principles





The
Company or one of its subsidiaries files income tax returns in the U.S. federal
and Kentucky jurisdictions.  With few exceptions, the Company is no
longer subject to U.S. federal, state and local examinations by tax authorities
for years before 2006.




The
Company adopted the provisions of the FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
No. 109, on July 1, 2007.  FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  The adoption of FIN 48 resulted in a
$250,000 increase to the beginning balance of retained earnings, with no impact
on the results of operations of the Company.




The
following financial statement line items for the year ended June 30, 2008 were
affected by the change in accounting principle.





June
      30, 2008 (in thousands)As Computed
                      Pre-FIN 48
                    
                    
                    As Reported
                      Under FIN 48
                    
                    
                    Effect of ChangeBalance
      SheetRefundable
      income taxes
                    
                    $
                    220
                    
                    
                    $
                    479
                    
                    
                    $
                    250Retained
      earnings
                    
                    
                    32,041
                    
                    
                    
                    32,291
                    
                    
                    
                    250





21.
            FDIC Assessments and
      One-time Assessment Credit





Effective
November 17, 2006, the Federal Deposit Insurance Corporation (“FDIC”)
implemented a one-time credit of $4.7 billion to eligible
institutions.  The purpose of the credit is to recognize contributions
made by certain institutions to capitalize the Bank Insurance Fund and Savings
Association Insurance Fund, which have now been merged into the Deposit
Insurance Fund.  The banks are eligible institutions and have received
notice from the FDIC that their remaining share of the credit was $72,000 at
June 30, 2009.  The credit has been reflected in the accompanying
financial statements as a reduction of the estimated FDIC premiums due at June
30, 2009.





At June
30, 2009, accrued FDIC assessments was $71,000, which was composed of $43,000
and $100,000 for the recurring quarterly assessment and the special assessment
for the period ended June 30, 2009, respectively, less the $72,000 credit
referenced above.





22.
            Reclassifications





Certain
prior year amounts have been reclassified to conform to the 2009 consolidated
financial statement presentation.  These reclassifications had no
effect on net income.


49


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





NOTE
B - INVESTMENT SECURITIES





The
amortized cost, gross unrealized gains, gross unrealized losses and estimated
fair values of investment securities at June 30, 2009 and 2008 are summarized as
follows:





2009Gross
                      
                      
                      Gross
                      
                      
                      EstimatedAmortized
                      
                      
                      unrealized
                      
                      
                      unrealized
                      
                      
                      faircost
                      
                      
                      gains
                      
                      
                      losses
                      
                      
                      value(In
      thousands)Available-for-sale
      SecuritiesU.S.
      government agencies
                      
                      $
                      5,000
                      
                      
                      $
                      136
                      
                      
                      $
                      -
                      
                      
                      $
                      5,136Mortgage-backed
      securities
                      
                      
                      314
                      
                      
                      
                      2
                      
                      
                      
                      (1
                      )
                      
                      
                      315$
                      5,314
                      
                      
                      $
                      138
                      
                      
                      $
                      (1
                      )
                      
                      $
                      5,451Held-to-maturity
      SecuritiesU.S.
      government agencies
                      
                      $
                      3,000
                      
                      
                      $
                      2
                      
                      
                      $
                      -
                      
                      
                      $
                      3,002Mortgage-backed
      securities
                      
                      
                      11,999
                      
                      
                      
                      316
                      
                      
                      
                      -
                      
                      
                      
                      12,315$
                      14,999
                      
                      
                      $
                      318
                      
                      
                      $
                      -
                      
                      
                      $
                      15,317





2008Gross
                      
                      
                      Gross
                      
                      
                      EstimatedAmortized
                      
                      
                      Unrealized
                      
                      
                      unrealized
                      
                      
                      faircost
                      
                      
                      Gains
                      
                      
                      losses
                      
                      
                      value(In
      thousands)Available-for-sale
      SecuritiesU.S.
      government agencies
                      
                      $
                      4,999
                      
                      
                      $
                      31
                      
                      
                      $
                      -
                      
                      
                      $
                      5,030Mortgage-backed
      securities
                      
                      
                      455
                      
                      
                      
                      4
                      
                      
                      
                      (9
                      )
                      
                      
                      450$
                      5,454
                      
                      
                      $
                      35
                      
                      
                      $
                      (9
                      )
                      
                      $
                      5,480Held-to-maturity
      SecuritiesU.S.
      government agencies
                      
                      $
                      3,000
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      3,001Mortgage-backed
      securities
                      
                      
                      13,959
                      
                      
                      
                      4
                      
                      
                      
                      (555
                      )
                      
                      
                      13,408$
                      16,959
                      
                      
                      $
                      5
                      
                      
                      $
                      (555
                      )
                      
                      $
                      16,409





50





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE B - INVESTMENT SECURITIES
(continued)





The
amortized cost and estimated fair value of investment securities as of June 30,
2009 and 2008, by contractual maturity, are shown below.  Actual
maturities may differ from contractual maturities, because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.





2009
                          
                          
                          2008Estimated
                          
                          
                          
                          
                          
                          Estimatedfair
                          
                          
                          Amortized
                          
                          
                          fair
                          
                          
                          Amortizedvalue
                          
                          
                          cost
                          
                          
                          value
                          
                          
                          cost(In
      thousands)Available-for-saleWithin
      one year
                          
                          $
                          5,136
                          
                          
                          $
                          5,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -One
      year through five years
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,030
                          
                          
                          
                          4,9995,136
                          
                          
                          
                          5,000
                          
                          
                          
                          5,030
                          
                          
                          
                          4,999Mortgage-backed
      securities
                          
                          
                          315
                          
                          
                          
                          314
                          
                          
                          
                          450
                          
                          
                          
                          455Totals
                          
                          $
                          5,451
                          
                          
                          $
                          5,314
                          
                          
                          $
                          5,480
                          
                          
                          $
                          5,454Held-to-maturityWithin
      one year
                          
                          $
                          3,002
                          
                          
                          $
                          3,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -One
      year through five years
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,001
                          
                          
                          
                          3,0003,002
                          
                          
                          
                          3,000
                          
                          
                          
                          3,001
                          
                          
                          
                          3,000Mortgage-backed
      securities
                          
                          
                          12,315
                          
                          
                          
                          11,999
                          
                          
                          
                          13,408
                          
                          
                          
                          13,959Totals
                          
                          $
                          15,317
                          
                          
                          $
                          14,999
                          
                          
                          $
                          16,409
                          
                          
                          $
                          16,959





There
were no sales of investment securities during the fiscal years ended June 30,
2009 or 2008.


51





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE B - INVESTMENT SECURITIES
(continued)





The table
below indicates the length of time individual securities have been in a
continuous unrealized loss position at June 30, 2009 and 2008:




June
      30, 2009Less
      than 12 months
                              
                              
                              12
      months or longer
                              
                              
                              TotalDescription
      of
                              
                              Fair
                              
                              
                              Unrealized
                              
                              
                              Fair
                              
                              
                              Unrealized
                              
                              
                              Fair
                              
                              
                              Unrealizedsecurities
                              
                              value
                              
                              
                              losses
                              
                              
                              value
                              
                              
                              losses
                              
                              
                              value
                              
                              
                              losses(Dollars
      in thousands)U.S.
      Governmentagency
      securities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -Mortgage-backedsecurities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              57
                              
                              
                              
                              1
                              
                              
                              
                              57
                              
                              
                              
                              1Total
      temporarilyimpaired
      securities
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              57
                              
                              
                              $
                              1
                              
                              
                              $
                              57
                              
                              
                              $
                              1


June
      30, 2008Less
      than 12 months
                          
                          
                          12
      months or longer
                          
                          
                          TotalDescription
      of
                          
                          Fair
                          
                          
                          Unrealized
                          
                          
                          Fair
                          
                          
                          Unrealized
                          
                          
                          Fair
                          
                          
                          Unrealizedsecurities
                          
                          value
                          
                          
                          losses
                          
                          
                          value
                          
                          
                          losses
                          
                          
                          value
                          
                          
                          losses(Dollars
      in thousands)U.S.
      Governmentagency
      securities
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Mortgage-backedsecurities
                          
                          
                          4,094
                          
                          
                          
                          81
                          
                          
                          
                          9,450
                          
                          
                          
                          483
                          
                          
                          
                          13,544
                          
                          
                          
                          564Total
      temporarilyimpaired
      securities
                          
                          $
                          4,094
                          
                          
                          $
                          81
                          
                          
                          $
                          9,450
                          
                          
                          $
                          483
                          
                          
                          $
                          13,544
                          
                          
                          $
                          564





Management
has the intent and ability to hold these available-for-sale securities until
they have a recovery in value and the held-to-maturity securities until
maturity.  The decline in the fair value is primarily due to changes
in market interest rates.  The fair values are expected to recover as
securities approach maturity dates.


52




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE
C - LOANS RECEIVABLE




The
composition of the loan portfolio at June 30 is as follows:





2009
                  
                  
                  2008(In
      thousands)Residential
      real estateOne-
      to four-family
                  
                  $
                  163,108
                  
                  
                  $
                  158,007Multi-family
                  
                  
                  7,303
                  
                  
                  
                  2,684Construction
                  
                  
                  735
                  
                  
                  
                  3,528Nonresidential
      real estate and land
                  
                  
                  11,460
                  
                  
                  
                  11,318Loans
      on deposits
                  
                  
                  2,909
                  
                  
                  
                  3,384Consumer
      and other
                  
                  
                  4,497
                  
                  
                  
                  4,503190,012
                  
                  
                  
                  183,424Less:Undisbursed
      portion of loans in process
                  
                  
                  404
                  
                  
                  
                  696Deferred
      loan origination fees (cost)
                  
                  
                  (1
                  )
                  
                  
                  11Allowance
      for loan losses
                  
                  
                  678
                  
                  
                  
                  666$
                  188,931
                  
                  
                  $
                  182,051





NOTE
D - ALLOWANCE FOR LOAN LOSSES




The
activity in the allowance for loan losses is summarized as follows for the years
ended June 30:





2009
                  
                  
                  2008(In
      thousands)Balance
      at beginning of year
                  
                  $
                  666
                  
                  
                  $
                  720Provision
      for losses on loans
                  
                  
                  46
                  
                  
                  
                  12Charge-offs
                  
                  
                  (34
                  )
                  
                  
                  (66
                  )Balance
      at end of year
                  
                  $
                  678
                  
                  
                  $
                  666





As of
June 30, 2009 and 2008, the general portion of the allowance for loan losses is
includible as a component of the Banks’ regulatory risk-based
capital.





At June
30, 2009 impaired loans totaled $5.2 million, and an allowance for loan losses
of $56,000 related to impaired loans of $1.1 million.  At June 30,
2009, impaired loans of $4.1 million had no related allowance for loan
losses.  At June 30, 2008, there were no impaired loans and,
therefore, there was no allowance for loan losses related to impaired
loans.





For the
fiscal year ended June 30, 2009, interest of $273,000 and $185,000 was
recognized on an accrual and cash basis, respectively based on average impaired
loans of $5.2 million





53





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE D - ALLOWANCE FOR LOAN LOSSES  (continued)





At June
30, 2009 and 2008, accruing loans delinquent 90 days or more totaled
approximately $3.6 million and $611,000, respectively. Nonaccrual loans at June
30, 2009 and 2008, were approximately $435,000 and $666,000,
respectively.





NOTE
E - OFFICE PREMISES AND EQUIPMENT





Office
premises and equipment at June 30 are comprised of the following:





2009
                  
                  
                  2008(In
      thousands)Land
                  
                  $
                  860
                  
                  
                  $
                  860Buildings
      and improvements
                  
                  
                  3,666
                  
                  
                  
                  3,502Furniture
      and equipment
                  
                  
                  1,335
                  
                  
                  
                  1,232Automobiles
                  
                  
                  32
                  
                  
                  
                  275,893
                  
                  
                  
                  5,621Less
      accumulated depreciation
                  
                  
                  3,049
                  
                  
                  
                  2,894$
                  2,844
                  
                  
                  $
                  2,727





NOTE F - DEPOSITS





Deposits
consist of the following major classifications at June 30:





2009
                    
                    
                    2008(In
      thousands)Non-interest
      bearing checking accounts
                    
                    $
                    846
                    
                    
                    $
                    888Checking
      accounts
                    
                    
                    6,346
                    
                    
                    
                    5,572Savings
      accounts
                    
                    
                    30,093
                    
                    
                    
                    31,222Money
      market demand deposits
                    
                    
                    3,940
                    
                    
                    
                    2,932Total
      demand, transaction and passbook deposits
                    
                    
                    41,225
                    
                    
                    
                    40,614Certificates
      of deposit:Original
      maturities of:Less
      than 12 months
                    
                    
                    5,028
                    
                    
                    
                    5,23312
      months to 36 months
                    
                    
                    81,552
                    
                    
                    
                    79,456More
      than 36 months
                    
                    
                    11,938
                    
                    
                    
                    12,331Total
      certificates of deposit
                    
                    
                    98,518
                    
                    
                    
                    97,020Total
      deposits
                    
                    $
                    139,743
                    
                    
                    $
                    137,634





At June
30, 2009 and 2008, the Banks had certificate of deposit accounts with balances
equal to or in excess of $100,000 totaling approximately $29.1 million and $29.3
million, respectively.





54




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE F -
DEPOSITS  (continued)





Maturities
of outstanding certificates of deposit at June 30 are summarized as
follows:





2009(In
      thousands)2010
                  
                  $
                  66,1802011
                  
                  
                  20,7922012
                  
                  
                  9,3072013
                  
                  
                  2,0512014
      and thereafter
                  
                  
                  188$
                  98,518








NOTE
G - ADVANCES FROM THE FEDERAL HOME LOAN BANK





Advances
from the Federal Home Loan Bank, collateralized at June 30, 2009 and 2008 by
pledges of certain residential mortgage loans totaling $53.6 million and $59.2
million, respectively, and the Banks’ investment in Federal Home Loan Bank
stock, are summarized as follows:





Maturingyear
      endingInterest
      rate
                                                                                                  
                                                                                                  June
      30,
                                                                                                  
                                                                                                  2009(In
      thousands)5.96%
      - 6.86%
                                                                                                  
                                                                                                  2010
                                                                                                  
                                                                                                  $
                                                                                                  24,1355.80%
      - 6.22%
                                                                                                  
                                                                                                  2011
                                                                                                  
                                                                                                  
                                                                                                  8,1336.90%
                                                                                                  
                                                                                                  2012
                                                                                                  
                                                                                                  
                                                                                                  1164.25%
                                                                                                  
                                                                                                  2013
                                                                                                  
                                                                                                  
                                                                                                  5,0786.15%
      - 6.95%
                                                                                                  
                                                                                                  2014
                                                                                                  
                                                                                                  
                                                                                                  786.30%
      - 6.35%
                                                                                                  
                                                                                                  2015
                                                                                                  
                                                                                                  
                                                                                                  806.20%
                                                                                                  
                                                                                                  2016
                                                                                                  
                                                                                                  
                                                                                                  626.20%
                                                                                                  
                                                                                                  2017
                                                                                                  
                                                                                                  
                                                                                                  23.95%
                                                                                                  
                                                                                                  2018
                                                                                                  
                                                                                                  __2,00039,684Premium
      assigned to borrowings inFrankfort
      First acquisition, net of amortization
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  472$
                                                                                                  40,156Weighted-average
      interest rate
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5.84
                                                                                                  %


55


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE
H - FEDERAL INCOME TAXES





Federal
income taxes on earnings differs from that computed at the statutory corporate
tax rate for the years ended June 30, 2009 and 2008, as follows:





2009
                                
                                
                                2008(In
      thousands)Federal
      income taxes at the statutory rate
                                
                                $
                                640
                                
                                
                                $
                                466Increase
      (decrease) resulting primarily from:Cash
      surrender value of life insurance
                                
                                
                                (29
                                )
                                
                                
                                (27
                                )Disallowed
      deduction claimed on amended return for $1.3 millionpaid
      to option holders in acquisition of Frankfort First Bancorp,
      Inc.
                                
                                
                                492
                                
                                
                                
                                -$
                                1,103
                                
                                
                                $
                                439





The
composition of the Company’s net deferred tax liability at June 30 is as
follows:





2009
                    
                    
                    2008(In
      thousands)Taxes
      (payable) refundable on temporarydifferences
      at estimated corporate tax rate:Deferred
      tax assets:General
      loan loss allowance
                    
                    $
                    231
                    
                    
                    $
                    227Deferred
      loan origination fees
                    
                    
                    —
                    
                    
                    
                    20Deferred
      compensation and benefits
                    
                    
                    212
                    
                    
                    
                    220Charitable
      contributions
                    
                    
                    9
                    
                    
                    
                    10Purchase
      accounting adjustments
                    
                    
                    160
                    
                    
                    
                    —Nonaccrued
      interest on loans
                    
                    
                    9
                    
                    
                    
                    —Total
      deferred tax assets
                    
                    
                    621
                    
                    
                    
                    477Deferred
      tax liabilities:Federal
      Home Loan Bank stock dividends
                    
                    
                    (1,271
                    )
                    
                    
                    (1,246
                    )Deferred
      loan origination costs
                    
                    
                    (32
                    )
                    
                    
                    —Purchase
      accounting adjustments
                    
                    
                    (572
                    )
                    
                    
                    (267
                    )Unrealized
      gains on securities available for sale
                    
                    
                    (47
                    )
                    
                    
                    (9
                    )Book/tax
      depreciation
                    
                    
                    (38
                    )
                    
                    
                    (189
                    )Total
      deferred tax liabilities
                    
                    
                    (1,960
                    )
                    
                    
                    (1,711
                    )Net
      deferred tax liability
                    
                    $
                    (1,339
                    )
                    
                    $
                    (1,234
                    )


56





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE H - FEDERAL INCOME
TAXES  (continued)





The 2009
provision for federal income taxes includes a one-time nonrecurring charge of
$443,000, which relates to the preliminary denial by the Internal Revenue
Service of a $1.3 million deduction on the basis of timing.  This is a
significant estimate that could materially change within the next 12
months.





Prior to
1997, the Banks were allowed a special bad debt deduction, generally limited to
8% of otherwise taxable income, and subject to certain limitations based on
aggregate loans and deposit account balances at the end of the
year.  If the amounts that qualified as deductions for federal income
taxes are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate.  Retained
earnings at June 30, 2009, include approximately $5.4million for which
federal income taxes have not been provided.  The amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately$1.8 million at June 30,
2009.





NOTE
I - LOAN COMMITMENTS





The Banks
are a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of their customers, including
commitments to extend credit.  Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statements of financial condition.  The
contract or notional amounts of the commitments reflect the extent of the Banks’
involvement in such financial instruments.





The
Banks’ exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented by
the contractual notional amount of those instruments.  The Banks use
the same credit policies in making commitments and conditional obligations as
those utilized for on-balance-sheet instruments.





At June
30, 2009 and 2008, the Banks had outstanding commitments of approximately $1.5
million and $946,000, respectively, to originate loans.  Additionally,
First Federal of Frankfort was obligated under unused lines of credit for equity
loans totaling $9.8 million and $9.5 million at the end of fiscal years 2009 and
2008, respectively.  In the opinion of the Banks’ management, all loan
commitments equaled or exceeded prevalent market interest rates as of June 30,
2009, and will be funded from normal cash flow from operations.





From time
to time balances with correspondent banks may exceed the FDIC $250,000 insurable
limit.


57


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE
J - REGULATORY CAPITAL





The Banks
are subject to minimum regulatory capital standards promulgated by the Office of
Thrift Supervision (the “OTS”).  Failure to meet minimum capital
requirements can initiate certain mandatory — and possibly additional
discretionary — actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks’ assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices.  The Banks’ capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.





The
minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the
risk-based capital requirement.  The tangible capital requirement
provides for minimum tangible capital (defined as shareholders’ equity less all
intangible assets) equal to 1.5% of adjusted total assets.  The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible assets)
generally equal to 4.0%


of
adjusted total assets, except for those associations with the highest
examination rating and acceptable levels of risk.  The risk-based
capital requirement provides for the maintenance of core capital plus general
loss allowances equal to 8.0% of risk-weighted assets.  In computing
risk-weighted assets, the Banks multiply the value of each asset on their
respective statements of financial condition by a defined risk-weighting factor,
e.g., one- to four-family residential loans carry a risk-weighted factor of
50%.





During
fiscal 2009, the Banks were notified by the OTS that each was categorized as
“well-capitalized” under the regulatory framework for prompt corrective
action.  There are no conditions or events since that notification
that management believes has changed the Banks’ categories.  To be
categorized as “well-capitalized” the Banks must maintain minimum capital ratios
as set forth in the following tables:





As of June 30, 2009To be “well-capitalized” underFor capital
                  
                  
                  prompt correctiveActual
                  
                  
                  adequacy purposes
                  
                  
                  action provisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(Dollars
      in thousands)Tangible
      capitalFirst
      Federal of Hazard
                  
                  $
                  22,799
                  
                  
                  
                  20.0
                  %
                  
                  $
                  31,711
                  
                  
                  
                  31.5
                  %
                  
                  $
                  35,705
                  
                  
                  
                  3 5.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,438
                  
                  
                  
                  15.1
                  %
                  
                  $
                  31,734
                  
                  
                  
                  31.5
                  %
                  
                  $
                  35,779
                  
                  
                  
                  3 5.0
                  %Core
      capitalFirst
      Federal of Hazard
                  
                  $
                  22,799
                  
                  
                  
                  20.0
                  %
                  
                  $
                  34,564
                  
                  
                  
                  34.0
                  %
                  
                  $
                  36,846
                  
                  
                  
                  3 6.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,438
                  
                  
                  
                  15.1
                  %
                  
                  $
                  34,623
                  
                  
                  
                  34.0
                  %
                  
                  $
                  36,935
                  
                  
                  
                  3 6.0
                  %Risk-based
      capitalFirst
      Federal of Hazard
                  
                  $
                  23,289
                  
                  
                  
                  42.4
                  %
                  
                  $
                  34,392
                  
                  
                  
                  38.0
                  %
                  
                  $
                  35,490
                  
                  
                  
                  310.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,570
                  
                  
                  
                  27.5
                  %
                  
                  $
                  35,109
                  
                  
                  
                  38.0
                  %
                  
                  $
                  36,386
                  
                  
                  
                  310.0
                  %


58





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE J - REGULATORY CAPITAL(continued)





As of June 30, 2008To be “well-capitalized” underFor capital
                  
                  
                  prompt correctiveActual
                  
                  
                  adequacy purposes
                  
                  
                  action provisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(Dollars in thousands)Tangible
      capitalFirst
      Federal of Hazard
                  
                  $
                  21,483
                  
                  
                  
                  19.2
                  %
                  
                  $
                  31,679
                  
                  
                  
                  31.5
                  %
                  
                  $
                  35,598
                  
                  
                  
                  3 5.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,203
                  
                  
                  
                  13.8
                  %
                  
                  $
                  31,874
                  
                  
                  
                  31.5
                  %
                  
                  $
                  36,248
                  
                  
                  
                  3 5.0
                  %Core
      capitalFirst
      Federal of Hazard
                  
                  $
                  21,483
                  
                  
                  
                  19.2
                  %
                  
                  $
                  34,478
                  
                  
                  
                  34.0
                  %
                  
                  $
                  36,717
                  
                  
                  
                  3 6.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,203
                  
                  
                  
                  13.8
                  %
                  
                  $
                  34,998
                  
                  
                  
                  34.0
                  %
                  
                  $
                  37,498
                  
                  
                  
                  3 6.0
                  %Risk-based
      capitalFirst
      Federal of Hazard
                  
                  $
                  22,016
                  
                  
                  
                  46.9
                  %
                  
                  $
                  33,754
                  
                  
                  
                  38.0
                  %
                  
                  $
                  34,692
                  
                  
                  
                  310.0
                  %First
      Federal of Frankfort
                  
                  $
                  17,336
                  
                  
                  
                  25.2
                  %
                  
                  $
                  35,496
                  
                  
                  
                  38.0
                  %
                  
                  $
                  36,870
                  
                  
                  
                  310.0
                  %





As of
June 30, 2009 and 2008, management believes that First Federal of Hazard and
First Federal of Frankfort met all capital adequacy requirements to which the
Banks were subject.





The
Banks’ management believes that, under the current regulatory capital
regulations, both Banks will continue to meet their minimum capital requirements
in the foreseeable future.  However, events beyond the control of the
Banks, such as increased interest rates or a downturn in the economy in the
Banks’ market area, could adversely affect future earnings and, consequently,
the ability to meet future minimum regulatory capital requirements.





Regulations
of the OTS governing mutual holding companies permit First Federal MHC to waive
the receipt by it of any common stock dividend declared by Kentucky First
Federal Bancorp, provided the OTS does not object to such
waiver.  Pursuant to these provisions, First Federal MHC waived $1.9
million in dividends during the fiscal year ended June 30,
2009.


59


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE
K - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL
BANCORP





The
following condensed financial statements summarize the financial position of
Kentucky First Federal Bancorp as of June 30, 2009 and 2008, and the results of
its operations and its cash flows for the fiscal years ended June 30, 2009 and
2008.





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF FINANCIAL CONDITION


June 30,
2009 and 2008


(In
thousands)


2009
                        
                        
                        2008ASSETSInterest-bearing
      deposits in First Federal of Hazard
                        
                        $
                        14
                        
                        
                        $
                        2Interest-bearing
      deposits in First Federal of Frankfort
                        
                        
                        21
                        
                        
                        
                        2,766Other
      interest-bearing deposits
                        
                        
                        61
                        
                        
                        
                        76Investment
      in First Federal of Hazard
                        
                        
                        25,531
                        
                        
                        
                        24,334Investment
      in Frankfort First
                        
                        
                        32,400
                        
                        
                        
                        32,257Prepaid
      expenses and other assets
                        
                        
                        538
                        
                        
                        
                        1,038Total
      assets
                        
                        $
                        58,565
                        
                        
                        $
                        60,473LIABILITIES
      AND SHAREHOLDERS’ EQUITYAccounts
      payable and other liabilities
                        
                        $
                        171
                        
                        
                        $
                        131Loan
      from Frankfort First
                        
                        
                        —
                        
                        
                        
                        549Total
      liabilities
                        
                        
                        171
                        
                        
                        
                        680Shareholders’
      equityCommon
      stock
                        
                        
                        86
                        
                        
                        
                        86Additional
      paid-in capital
                        
                        
                        36,223
                        
                        
                        
                        35,834Retained
      earnings
                        
                        
                        31,930
                        
                        
                        
                        32,291Shares
      acquired by stock benefit plans
                        
                        
                        (2,557
                        )
                        
                        
                        (2,735
                        )Shares
      acquired for treasury – at cost
                        
                        
                        (7,379
                        )
                        
                        
                        (5,700
                        )Accumulated
      other comprehensive income (loss)
                        
                        
                        91
                        
                        
                        
                        17Total
      shareholders’ equity
                        
                        
                        58,394
                        
                        
                        
                        59,793Total
      liabilities and shareholders’ equity
                        
                        $
                        58,565
                        
                        
                        $
                        60,473


60


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE K - CONDENSED FINANCIAL
STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP(continued)





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF EARNINGS


Years
ended June 30, 2009 and 2008


(In
thousands)





2009
                  
                  
                  2008RevenueInterest
      income
                  
                  $
                  188
                  
                  
                  $
                  187Dividends
      from First Federal of Hazard
                  
                  
                  —
                  
                  
                  
                  4,500Equity
      in undistributed (excess distributed) earnings of First Federal of
      Hazard
                  
                  
                  1,018
                  
                  
                  
                  (3,932
                  )Dividends
      from Frankfort First
                  
                  
                  492
                  
                  
                  
                  630Equity
      in undistributed earnings of Frankfort First
                  
                  
                  134
                  
                  
                  
                  53Total
      revenue
                  
                  
                  1,832
                  
                  
                  
                  1,438General
      and administrative expenses
                  
                  
                  723
                  
                  
                  
                  669Earnings
      before income taxes
                  
                  
                  1,109
                  
                  
                  
                  769Federal
      income tax expense (credits)
                  
                  
                  301
                  
                  
                  
                  (163
                  )NET
      EARNINGS
                  
                  $
                  808
                  
                  
                  $
                  932





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF CASH FLOWS


For Years
ended June 30, 2009 and 2008


(In
thousands)





2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      earnings for the year
                  
                  $
                  808
                  
                  
                  $
                  932Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Excess
      (deficit) distributions over earnings (undistributed earnings) from
      consolidated subsidiaries
                  
                  
                  (1,152
                  )
                  
                  
                  3,879Noncash
      compensation expense
                  
                  
                  567
                  
                  
                  
                  483Increase
      (decrease) in cash due to changes in:Prepaid
      expenses and other assets
                  
                  
                  386
                  
                  
                  
                  (90
                  )Other
      liabilities
                  
                  
                  40
                  
                  
                  
                  (7
                  )Net
      cash provided by operating activities
                  
                  
                  649
                  
                  
                  
                  5,197


61





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2009 and 2008





NOTE K - CONDENSED FINANCIAL
STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP(continued)





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF CASH FLOWS (continued)


For Years
ended June 30, 2009 and 2008


(In
thousands)


2009
                  
                  
                  2008Cash
      flows provided by (used in) financing activities:Dividends
      paid on common stock
                  
                  
                  (1,169
                  )
                  
                  
                  (1,182
                  )Repurchase
      of treasury shares
                  
                  
                  (1,679
                  )
                  
                  
                  (2,609
                  )Advances
      from (repaid to) Frankfort First Bancorp, Inc.
                  
                  
                  (549
                  )
                  
                  
                  299Net
      cash used in financing activities
                  
                  
                  (3,397
                  )
                  
                  
                  (3,492
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (2,748
                  )
                  
                  
                  1,705Cash
      and cash equivalents at beginning of year
                  
                  
                  2,844
                  
                  
                  
                  1,139Cash
      and cash equivalents at end of year
                  
                  $
                  96
                  
                  
                  $
                  2,844





The Banks
are subject to regulations imposed by the OTS regarding the amount of capital
distributions payable to the Company.  Generally, the Banks’ payments
of dividends is limited, without prior OTS approval, to net earnings for the
current calendar year plus the two preceding calendar years, less capital
distributions paid over the comparable time period.  Insured
institutions are required to file an application with the OTS for capital
distributions in excess of this limitation.





NOTE
L – STOCK REPURCHASE PROGRAM





On
October 17, 2008, the Board of Directors authorized the purchase of up to
150,000 shares of the Company’s stock.  The program is expected to be
completed within one year, and the shares repurchased will be held as treasury
stock.  Repurchases will be effected through open market purchases or
unsolicited privately negotiated transactions.  The stock repurchase
program will be dependent on market conditions and there is no guarantee as to
the exact number of shares that the Company will repurchase.


62


The
Board of Kentucky First Federal Bancorp would like to recognize our employees
who are working hard every day to maximize the value of your
investment:





First Federal Savings & Loan of
      Hazard
              
              First Federal Savings Bank of
      FrankfortDeborah
      Bersaglia, Assistant
              
              Wick
      Asbury, Vice
      President/LendingVice
      President/Assistant Secretary/Collection
              
              Brenda
      Baldwin, AccountingPhyllis
      Campbell, Customer
      Service
              
              Stan
      Betsworth, Vice
      President/LendingHolly
      Caudill, Customer
      Service
              
              Phyllis
      Bowman, Loan
      ServicingSandy
      Craft, Assistant Vice
      President
              
              Lisa
      Brinley, Branch
      ManagerLou
      Ella R. Farler, Assistant
      Vice
              
              Andrea
      Cline, Customer
      ServicePresident/Data
      Processing
              
              Carolyn
      Eades, Receptionist/Customer
      ServiceDeloris
      S. Justice, Accounting
      Assistant
              
              Diana
      Eads, Customer
      ServiceKaye
      Craft, Treasurer
              
              Stacey
      Greenawalt, Vice
      President/LendingBrenda
      Lovelace, Customer
      Service
              
              Barry
      Holder, Customer
      ServiceFred
      Skaggs, Vice
      President/Lending/Secretary
              
              Clay
      Hulette, President/TreasurerMargaret
      Pelley, Customer
      Service
              
              Don
      D. Jennings, Chief
      Executive OfficerPeggy
      Hopper Steele, Assistant
      Data
              
              Teresa
      A. Kuhl, Executive Vice
      President/Processing
              
              Operations/Human
      ResourcesMolly
      Ann E. Toler, Assistant
      Vice President
              
              Janet
      Lewis, Branch
      ManagerTeller
      Operations
              
              Patty
      Luttrell, Loan
      Processing/ComplianceTony
      Whitaker,
      President
              
              Tracey
      McCoun, Customer
      ServiceCarla
      McMillen, Customer
      ServiceKim
      Moore, Customer Service
      ManagerCarolyn
      Mulcahy, AccountingJeanie
      Murphy, Customer
      ServiceDavid
      Semones, Loan
      ProcessingMartha
      Sowders, Customer
      ServiceMelissa
      Thompson, Administrative
      AssistantYvonne
      Thornberry, Loan
      Processing/ServicingNancy
      Watts, Customer Service/
      InsuranceProcessing


63





Kentucky
      First Federal Bancorp
                    
                    First
      Federal Savings and
                      Loan
      Association of Hazard
                    
                    First
      Federal Savings Bank of
                      FrankfortBoard of Directors
                    
                    Board of Directors
                    
                    Board of DirectorsStephen
      G. Barker, Attorney
      and
                      Assistant
      General Counsel to the
                      Kentucky
      River Properties, LLC
                      Walt
      Ecton,
      Attorney
                      William
      D. Gorman, Mayor
      of
                      the
      City of Hazard
                    
                    Stephen
      G. Barker
                      Walter
      G. Ecton, Jr.
                      William
      D. Gorman
                      Tony
      Whitaker
                    
                    Charles
      A. Cotton, III
                      C.
      Michael Davenport
                      Danny
      A. Garland
                      David
      R. Harrod
                      Don
      D. Jennings
                      William
      C. Jennings, ChairmanDavid
      R. Harrod C.P.A.
      and
                      principal
      of Harrod and
                      Associates,
      P.S.C.
                    
                    
                    
                    William
      M. Johnson
                      Frank
      McGrath
                      Herman
      D. Regan, Jr.Don
      D. Jennings, President,
                      Kentucky
      First Federal BancorpHerman
      D. Regan, Jr., Retired
                      President
      of Kenvirons, Inc.Tony
      Whitaker, Chairman
      ofKentucky
      First Federal BancorpOffice LocationsFirst
      Federal of FrankfortEast
      BranchFirst
      Federal of Hazard
                    
                    First
      Federal of Frankfort
                    
                    1980
      Versailles RoadMain
      Office
                    
                    Main
      Office
                    
                    Frankfort,
      KY 40601479
      Main Street
                    
                    216
      West Main StreetP.O.
      Box 1069
                    
                    P.O.
      Box 535
                    
                    First
      Federal of FrankfortHazard,
      KY 41702-1069
                    
                    Frankfort,
      KY 40602-0535
                    
                    West
      Branch1220
      US 127 SouthFrankfort,
      KY 40601Chairman
      and CEO
                    
                    
                    
                    Shareholder
      Inquiries andTony
      Whitaker
                    
                    Special
      Counsel
                    
                    Availability of 10-K Report:A(606)
      436-3860
                      firstfederal@windstream.net
                    
                    Kilpatrick
      Stockton
                      LLP
                    
                    COPY
      OF THE COMPANY’S
                      ANNUAL
      REPORT ON FORM607
      14th
      Street, NW
                    
                    10-K
      FOR THE YEAR ENDEDWashington,
      DC 20005
                    
                    JUNE
      30, 2009, AS FILEDInvestor
      Relations
                    
                    
                    
                    WITH
      THE SECURITIES ANDDon
      Jennings
                    
                    Transfer
      Agent and Registrar
                    
                    EXCHANGE
      COMMISSIONDjenni7474@aol.com
                    
                    Illinois
      Stock Transfer Company
                    
                    WILL
      BE FURNISHED209
      W Jackson Blvd, Ste 903
                    
                    WITHOUT
      CHARGE TOClay
      Hulette
                    
                    Chicago,
      IL 60606-6905
                    
                    SHAREHOLDERS
      AS OF THErchulette@hotmail.com
                    
                    (312)
      427-2953
                    
                    RECORD
      DATE FOR THENOVEMBER
      10, 2009(502)
      223-1638
                    
                    Annual
      Meeting
                    
                    ANNUAL
      MEETING UPONP.O.
      Box 535
                    
                    The
      Annual Meeting of Share-
                    
                    WRITTEN
      REQUEST TO:Frankfort,
      KY 40602
                    
                    holders
      will be held onNovember
      10, 2009 at
                    
                    INVESTOR
      RELATIONSIndependent
      Auditors
                    
                    3:30
      p.m., Eastern Time, at
                    
                    KENTUCKY
      FIRSTBKD,
      LLP
                    
                    the
      First Federal Center on the
                    
                    FEDERAL
      BANCORP312
      Walnut Street, Suite 3000
                    
                    campus
      of Hazard Community
                    
                    P.O.
      BOX 535Cincinnati,
      OH 45202
                    
                    and
      Technical College, One
                    
                    FRANKFORT,
      KY 40602Community
      College Blvd,Hazard,
      KY


64