EXHIBIT
13











Parent
company of


First
Federal Savings and Loan Association of Hazard


and


First
Federal Savings Bank of Frankfort





2010


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 other 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 7,751,703
shares of common stock outstanding and approximately 668 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 2010First
      quarter
            
            $
            15.00
            
            
            $
            11.59
            
            
            $
            0.10Second
      quarter
            
            
            13.40
            
            
            
            10.15
            
            
            
            0.10Third
      quarter
            
            
            12.46
            
            
            
            9.75
            
            
            
            0.10Fourth
      quarter
            
            
            11.42
            
            
            
            7.80
            
            
            
            0.10





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


ii




(1)
                TABLE OF
      CONTENTS


Kentucky
      First Federal Bancorp
              (ii)Market
      Information
              (ii)Letter
      to Shareholders
              1Selected
      Consolidated Financial and Other Data
              2Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              4Consolidated
      Financial Statements
              30Corporate
      Information
              70


iii








Dear
Shareholder:





We are
pleased to present the 2010 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 11, 2010.





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.





As the
financial industry remains in a state of turmoil caused by a slow real estate
market, high unemployment, new regulation, and continued uncertainty, we have
generally maintained a steady level of core earnings.  The Company’s
net interest income saw an increase year over year.  Net income did
decrease rather significantly as we made provisions for potential losses
stemming from problems a few (particularly one) of our large residential real
estate borrowers are having.





Our
stock price has been fairly volatile in the last year.  In June of
2009 we entered the Russell 2000 index as our market capitalization exceeded the
minimum threshold for inclusion.  We believe this was the primary
factor that caused our stock price to increase.  Although our market
capitalization remained fairly constant, increased prices of other stocks pushed
them ahead of ours and we fell back off of the index in 2010, which we think
caused some downward pressure on our stock price and from which we have
rebounded somewhat.





Amid the
considerable uncertainty caused by the Dodd-Frank Wall Street Reform and
Consumer Protection Act passed in July, there is some clarification for
us.  The Office of Thrift Supervision, the primary regulator of our
two banks since 1989 and the regulator of our holding company since it was
formed, will be absorbed into the Office of the Comptroller of the
Currency.  The regulation of our holding company will be transferred
to the Federal Reserve.  The Act preserves the thrift charter and
makes provisions to retain key characteristics of mutual holding
companies.





We would
like to recognize and congratulate Fred Skaggs, who has served First Federal of
Hazard since 1973.  Fred was the bank’s Vice President and loan
officer and he served Kentucky First Federal as Vice President and
Secretary.





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.





SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA





Selected
Financial Condition Data





At June 30,2010
                
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006(In
      thousands)Total
      assets
                
                $
                236,939
                
                
                $
                240,901
                
                
                $
                247,655
                
                
                $
                268,916
                
                
                $
                261,941Cash
      and cash equivalents
                
                
                8,362
                
                
                
                4,217
                
                
                
                15,966
                
                
                
                2,720
                
                
                
                2,294Interest-bearing
      deposits
                
                
                100
                
                
                
                100
                
                
                
                100
                
                
                
                100
                
                
                
                100Securities
      held to maturity
                
                
                9,435
                
                
                
                14,999
                
                
                
                16,959
                
                
                
                59,606
                
                
                
                64,029Securities
      available for sale
                
                
                246
                
                
                
                5,451
                
                
                
                5,480
                
                
                
                13,298
                
                
                
                13,290Loans,
      net
                
                
                190,618
                
                
                
                188,931
                
                
                
                182,051
                
                
                
                166,156
                
                
                
                155,386Deposits
                
                
                144,969
                
                
                
                139,743
                
                
                
                137,634
                
                
                
                139,893
                
                
                
                141,238Federal
      Home Loan Bank advances
                
                
                32,009
                
                
                
                40,156
                
                
                
                47,801
                
                
                
                65,132
                
                
                
                54,849Shareholders’
      equity
                
                
                57,732
                
                
                
                58,538
                
                
                
                60,017
                
                
                
                61,445
                
                
                
                63,881Allowance
      for loan losses
                
                
                1,535
                
                
                
                678
                
                
                
                666
                
                
                
                720
                
                
                
                724Nonperforming
      loans (90 days delinquent and nonaccrual)
                
                
                7,783
                
                
                
                3,872
                
                
                
                1,277
                
                
                
                968
                
                
                
                1,427





Selected
Operating Data





Year Ended June 30,2010
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006(Dollars
      in thousands, except per share data)Total
      interest income
                          
                          $
                          11,378
                          
                          
                          $
                          12,226
                          
                          
                          $
                          13,087
                          
                          
                          $
                          12,948
                          
                          
                          $
                          12,709Total
      interest expense
                          
                          
                          4,980
                          
                          
                          
                          5,902
                          
                          
                          
                          7,565
                          
                          
                          
                          7,456
                          
                          
                          
                          6,096Net
      interest income
                          
                          
                          6,398
                          
                          
                          
                          6,324
                          
                          
                          
                          5,522
                          
                          
                          
                          5,492
                          
                          
                          
                          6,613Provision
      for losses on loans
                          
                          
                          1,044
                          
                          
                          
                          46
                          
                          
                          
                          12
                          
                          
                          
                          —
                          
                          
                          
                          32Net
      interest income after provisionfor losses on
      loans
                          
                          
                          5,354
                          
                          
                          
                          6,278
                          
                          
                          
                          5,510
                          
                          
                          
                          5,492
                          
                          
                          
                          6,581Total
      non-interest income
                          
                          
                          289
                          
                          
                          
                          241
                          
                          
                          
                          182
                          
                          
                          
                          174
                          
                          
                          
                          216Total
      non-interest expenses
                          
                          
                          5,003
                          
                          
                          
                          4,608
                          
                          
                          
                          4,321
                          
                          
                          
                          4,364
                          
                          
                          
                          4,486Income
      before federal income taxes
                          
                          
                          640
                          
                          
                          
                          1,911
                          
                          
                          
                          1,371
                          
                          
                          
                          1,302
                          
                          
                          
                          2,311Federal
      income taxes
                          
                          
                          215
                          
                          
                          
                          1,183
                          
                          
                          
                          439
                          
                          
                          
                          417
                          
                          
                          
                          723Net
      income
                          
                          $
                          425
                          
                          
                          $
                          728
                          
                          
                          $
                          932
                          
                          
                          $
                          885
                          
                          
                          $
                          1,588Net
      earnings per share – basic
                          
                          $
                          0.06
                          
                          
                          $
                          0.10
                          
                          
                          $
                          0.12
                          
                          
                          $
                          0.11
                          
                          
                          $
                          0.19Net
      earnings per share – diluted
                          
                          $
                          0.06
                          
                          
                          $
                          0.10
                          
                          
                          $
                          0.12
                          
                          
                          $
                          0.11
                          
                          
                          $
                          0.19Cash
      dividends declared per common share
                          
                          $
                          0.40
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.40
                          
                          
                          $
                          0.40


2


Selected
Financial Ratios and Other Data (1)





Year Ended June 30,2010
                
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006Performance
      Ratios:Return
      on average assets (net
      income divided by average total assets)
                
                
                0.18
                %
                
                
                0.30
                %
                
                
                0.35
                %
                
                
                0.33
                %
                
                
                0.59
                %Return
      on average equity (net
      income divided by average equity)
                
                
                0.73
                
                
                
                1.23
                
                
                
                1.53
                
                
                
                1.41
                
                
                
                2.68Interest
      rate spread (combined
      weighted average interest rate earned less combined weighted average
      interest rate cost)
                
                
                2.48
                
                
                
                2.29
                
                
                
                1.65
                
                
                
                1.61
                
                
                
                2.15Net
      interest margin (net
      interest income divided by  average interest-earning
      assets)
                
                
                2.96
                
                
                
                2.87
                
                
                
                2.29
                
                
                
                2.26
                
                
                
                2.63Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                
                
                120.93
                
                
                
                121.53
                
                
                
                120.28
                
                
                
                121.16
                
                
                
                118.77Ratio
      of total non-interest expenses to average total assets
                
                
                2.10
                
                
                
                1.90
                
                
                
                1.64
                
                
                
                1.64
                
                
                
                1.62Efficiency
      ratio (1)
                
                
                74.82
                
                
                
                70.19
                
                
                
                75.75
                
                
                
                77.02
                
                
                
                65.02Dividend
      payout ratio (2)
                
                
                267.29
                
                
                
                144.68
                
                
                
                126.82
                
                
                
                153.11
                
                
                
                97.36Asset
      Quality Ratios:Nonperforming
      loans as a percent of total loans at end of period (3)
                
                
                4.05
                
                
                
                2.05
                
                
                
                0.70
                
                
                
                0.58
                
                
                
                0.92Nonperforming
      assets as a percent of total assets at end of period (3)
                
                
                3.60
                
                
                
                1.65
                
                
                
                0.52
                
                
                
                0.36
                
                
                
                0.54Allowance
      for loan losses as a percent of total loans at end of
    period
                
                
                0.80
                
                
                
                0.36
                
                
                
                0.36
                
                
                
                0.43
                
                
                
                0.46Allowance
      for loan losses as a percent of nonperforming loans at end of
      period
                
                
                19.72
                
                
                
                17.51
                
                
                
                52.15
                
                
                
                74.38
                
                
                
                50.74Provision
      for loan losses to total loans
                
                
                0.54
                
                
                
                0.02
                
                
                
                0.01
                
                
                
                —
                
                
                
                0.02Net
      charge-offs to average loans outstanding
                
                
                0.10
                
                
                
                0.02
                
                
                
                0.04
                
                
                
                —
                
                
                
                0.01Capital
      Ratios:Average
      equity to average assets
                
                
                24.27
                
                
                
                24.40
                
                
                
                23.03
                
                
                
                23.64
                
                
                
                21.95Shareholders’
      equity or capital to total assets at end of period
                
                
                24.37
                
                
                
                24.30
                
                
                
                24.23
                
                
                
                22.85
                
                
                
                24.39Regulatory
      Capital Ratios:Tangible
      capital
                
                
                19.40
                
                
                
                17.48
                
                
                
                16.33
                
                
                
                16.61
                
                
                
                17.42Core
      capital
                
                
                19.40
                
                
                
                17.48
                
                
                
                16.33
                
                
                
                16.61
                
                
                
                17.42Risk-based
      capital
                
                
                36.50
                
                
                
                34.34
                
                
                
                34.03
                
                
                
                38.61
                
                
                
                41.92Number
      of banking offices
                
                
                4
                
                
                
                4
                
                
                
                4
                
                
                
                4
                
                
                
                4





(1)
            Efficiency
      ratio represents the ratio of non-interest expenses divided by the sum of
      net interest income and total non-interest
  income.


(2)
            Represents
      dividends paid as a percent of net earnings.  Dividends paid
      does not include dividends waived by First Federal
  MHC.


(3)
            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.


3


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, 2010.  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.


4


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




Our accounting and reporting policies
comply with U.S. GAAP and conform to general practices within the banking
industry. We believe that of our significant accounting policies, the following
may involve a higher degree of management assumptions and judgments that could
result in materially different amounts to be reported if conditions or
underlying circumstances were to change.





Allowance for Loan
Losses


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 quarterly 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.


5


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.  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.  Loans are classified as either
homogenous or other.  Homogenous loans  are analyzed in the
aggregate according to various criteria.  Non-homogenous loans receive
additional scrutiny and are classified as impaired or
unimpaired.  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.  A loan is considered to be collateral-dependent when the
circumstances of the borrower indicate that we can no longer rely upon the
overall financial strength of that borrower to comply with the terms of the loan
and that the loan will likely be repaid in whole or in part by proceeds from the
sale of the collateral.  Updated independent appraisals are ordered in
most situations where management has determined to evaluate a loan for
impairment.  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.





Goodwill





We test
goodwill for impairment at least annually and more frequently if circumstances
indicate their value may not be recoverable. We test goodwill for impairment by
comparing the fair value of the reporting unit to the book value of the
reporting unit. If the fair value, net of goodwill, exceeds book value, then
goodwill is not considered to be impaired. Based on the annual goodwill
impairment test as of March 31, 2010, management does not believe any of
the goodwill is impaired as of that date. While management believes no
impairment existed at June 30, 2010 under accounting standards applicable at
that date, different conditions or assumptions, or changes in cash flows or
profitability, if significantly negative or unfavorable, could have a material
adverse effect on the outcome of the impairment evaluation and financial
condition or future results of operations.





Deferred
Tax Asset





We
evaluate deferred tax assets quarterly. We will realize this asset to the extent
it is profitable or carry back tax losses to periods in which we paid income
taxes. Our determination of the realization of the deferred tax asset will be
based upon management’s judgment of various future events and uncertainties,
including the timing and amount of future income we will earn and the
implementation of various tax plans to maximize realization of the deferred tax
assets. Management believes the Company will generate sufficient operating
earnings to realize the deferred tax benefits. Examinations of our income
tax returns or changes in tax law may impact the tax liabilities and resulting
provisions for income taxes.





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;


6


•
            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.





The following table sets forth the
interest rate sensitivity of our NPV as of June 30, 2010 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, 2010, 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, 2010, are held to
maturity or available-for-sale.  We have no trading
securities.





June 30, 2010Net 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
                                              
                                              $
                                              20,663
                                              
                                              
                                              
                                              -1,244
                                              
                                              
                                              
                                              -6
                                              %
                                              
                                              
                                              19.14
                                              %
                                              
                                              
                                              -153
                                              bp+200
                                              bp
                                              
                                              
                                              21,345
                                              
                                              
                                              
                                              -562
                                              
                                              
                                              
                                              -3
                                              %
                                              
                                              
                                              19.53
                                              %
                                              
                                              
                                              -114
                                              bp+100
                                              bp
                                              
                                              
                                              21,808
                                              
                                              
                                              
                                              -99
                                              
                                              
                                              
                                              0
                                              %
                                              
                                              
                                              19.74
                                              %
                                              
                                              
                                              -94
                                              bp0
                                              bp
                                              
                                              
                                              21,907
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              20.68
                                              %-100
                                              bp
                                              
                                              
                                              21,586
                                              
                                              
                                              
                                              -321
                                              
                                              
                                              
                                              -1
                                              %
                                              
                                              
                                              19.33
                                              %
                                              
                                              
                                              -134
                                              bpFirst
      Federal of Frankfort
                                              
                                              
                                              +300
                                              bp
                                              
                                              $
                                              25,455
                                              
                                              
                                              
                                              1,538
                                              
                                              
                                              
                                              6
                                              %
                                              
                                              
                                              20.27
                                              %
                                              
                                              
                                              302
                                              bp+200
                                              bp
                                              
                                              
                                              25,459
                                              
                                              
                                              
                                              1,542
                                              
                                              
                                              
                                              6
                                              %
                                              
                                              
                                              20.01
                                              %
                                              
                                              
                                              276
                                              bp+100
                                              bp
                                              
                                              
                                              24,924
                                              
                                              
                                              
                                              1,007
                                              
                                              
                                              
                                              4
                                              %
                                              
                                              
                                              19.39
                                              %
                                              
                                              
                                              215
                                              bp0
                                              bp
                                              
                                              
                                              23,917
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              17.24
                                              %-100
                                              bp
                                              
                                              
                                              22,281
                                              
                                              
                                              
                                              -1,636
                                              
                                              
                                              
                                              -7
                                              %
                                              
                                              
                                              17.15
                                              %
                                              
                                              
                                              -9
                                              bpConsolidated
                                              
                                              
                                              +300
                                              bp
                                              
                                              $
                                              46,118
                                              
                                              
                                              
                                              294
                                              
                                              
                                              
                                              1
                                              %
                                              
                                              
                                              19.75
                                              %
                                              
                                              
                                              102
                                              bp+200
                                              bp
                                              
                                              
                                              46,804
                                              
                                              
                                              
                                              980
                                              
                                              
                                              
                                              2
                                              %
                                              
                                              
                                              19.79
                                              %
                                              
                                              
                                              106
                                              bp+100
                                              bp
                                              
                                              
                                              46,732
                                              
                                              
                                              
                                              908
                                              
                                              
                                              
                                              2
                                              %
                                              
                                              
                                              19.55
                                              %
                                              
                                              
                                              82
                                              bp0
                                              bp
                                              
                                              
                                              45,824
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              18.73
                                              %-100
                                              bp
                                              
                                              
                                              43,867
                                              
                                              
                                              
                                              -1,957
                                              
                                              
                                              
                                              -4
                                              %
                                              
                                              
                                              18.16
                                              %
                                              
                                              
                                              -57
                                              bp


8


(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 table indicates that at June 30, 2010, in the event of a sudden and
sustained increase in prevailing market interest rates, our NPV would be
expected to increase, and that in the event of a sudden and sustained decrease
in prevailing interest rates, our NPV would be expected to
decrease.  The projected decrease in NPV in the event of sudden and
sustained decrease in prevailing interest rates is 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.


9


Statement
of Financial Condition





General.  At
June 30, 2010, total assets were $236.9 million, a decrease of $4.0
million, or 1.6%, from the $240.9 million total at June 30,
2009.  The decrease in total assets was comprised primarily of
decreases in available-for-sale and held-to-maturity investment
securities  and was offset by an increase in loans
receivable.  At June 30, 2010, total liabilities were $179.2
million, a decrease of $3.2 million, or 1.7%, from total liabilities at
June 30, 2009.  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, 2010, one- to four- family residential real estate
loans totaled $165.8 million, or 86.0% of total loans, compared to
$163.1 million, or 85.8% of total loans, at June 30,
2009.  Construction real estate loans totaled $1.9 million, or 0.9% of
total loans, at June 30, 2010, compared to $735,000, or 0.4% of total loans at
June 30, 2009.  At June 30, 2010, multi-family real estate loans
totaled $6.7 million, or 3.5% of total loans, compared to $7.3 million or 3.8%
of total loans at June 30, 2009, and nonresidential real estate and other
loans totaled $10.9 million, or 5.7% of total loans at June 30, 2010, compared
to $11.5 million, or 6.1% of total loans, at June 30, 2009.  We
also originate consumer loans, comprised of home equity lines of credit and
loans secured by deposit accounts, which totaled $7.6 million, or 3.9% of total
loans at June 30, 2010, compared to consumer loans of $7.4 million or 3.9%
of total loans at June 30, 2009.





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




At
      June 30,2010
                
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family
                
                $
                165,818
                
                
                
                86.0
                %
                
                $
                163,108
                
                
                
                85.8
                %
                
                $
                158,007
                
                
                
                86.1
                %
                
                $
                146,602
                
                
                
                86.7
                %
                
                $
                139,356
                
                
                
                88.5
                %Construction
                
                
                1,916
                
                
                
                0.9
                %
                
                
                735
                
                
                
                0.4
                %
                
                
                3,528
                
                
                
                1.9
                %
                
                
                6,671
                
                
                
                3.9
                %
                
                
                2,703
                
                
                
                1.7
                %Multi-family
                
                
                6,689
                
                
                
                3.5
                %
                
                
                7,303
                
                
                
                3.8
                %
                
                
                2,684
                
                
                
                1.5
                %
                
                
                1,497
                
                
                
                0.9
                %
                
                
                296
                
                
                
                0.2
                %Nonresidential
      and other
                
                
                10,943
                
                
                
                5.7
                %
                
                
                11,460
                
                
                
                6.1
                %
                
                
                11,318
                
                
                
                6.2
                %
                
                
                6,898
                
                
                
                4.1
                %
                
                
                6,412
                
                
                
                4.1
                %Consumer:Consumer
      and other
                
                
                4,802
                
                
                
                2.5
                %
                
                
                4,497
                
                
                
                2.4
                %
                
                
                4,503
                
                
                
                2.5
                %
                
                
                4,290
                
                
                
                2.5
                %
                
                
                5,211
                
                
                
                3.3
                %Loans
      on deposits
                
                
                2,754
                
                
                
                1.4
                %
                
                
                2,909
                
                
                
                1.5
                %
                
                
                3,384
                
                
                
                1.8
                %
                
                
                3,204
                
                
                
                1.9
                %
                
                
                3,432
                
                
                
                2.2
                %Total
      loans
                
                
                192,922
                
                
                
                100
                %
                
                
                190,012
                
                
                
                100
                %
                
                
                183,424
                
                
                
                100
                %
                
                
                169,162
                
                
                
                100
                %
                
                
                157,410
                
                
                
                100
                %Allowance
      for loan losses
                
                
                (1,535
                )
                
                
                
                
                
                
                (678
                )
                
                
                
                
                
                
                (666
                )
                
                
                
                
                
                
                (720
                )
                
                
                
                
                
                
                (724
                )Undisbursed
      construction loans
                
                
                (631
                )
                
                
                
                
                
                
                (404
                )
                
                
                
                
                
                
                (696
                )
                
                
                
                
                
                
                (2,176
                )
                
                
                
                
                
                
                (1,169
                )Deferred
      loan origination costs (fees)
                
                
                (138
                )
                
                
                
                
                
                
                1
                
                
                
                
                
                
                
                (11
                )
                
                
                
                
                
                
                (110
                )
                
                
                
                
                
                
                (131
                )Loans
      receivable, net
                
                $
                190,618
                
                
                
                
                
                
                $
                188,931
                
                
                
                
                
                
                $
                182,051
                
                
                
                
                
                
                $
                166,156
                
                
                
                
                
                
                $
                155,386


10


The following table sets forth certain
information at June 30, 2010 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
                  
                  $
                  34,255
                  
                  
                  $
                  7,556
                  
                  
                  $
                  41,811More
      than one year to five years
                  
                  
                  96,573
                  
                  
                  
                  —
                  
                  
                  
                  96,573More
      than five years
                  
                  
                  54,538
                  
                  
                  
                  —
                  
                  
                  
                  54,538Total
                  
                  $
                  185,366
                  
                  
                  $
                  7,556
                  
                  
                  $
                  192,922





As of June 30, 2010, there were $62.5
million fixed-rate and $122.9 million adjustable-rate real estate loans maturing
in more than a year.





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





Year Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2008(In
      thousands)Net
      loans at beginning of year
                    
                    $
                    188,931
                    
                    
                    $
                    182,051
                    
                    
                    $
                    166,156Loans
      originated:Real
      estate loans:Residential
                    
                    
                    33,643
                    
                    
                    
                    46,531
                    
                    
                    
                    43,279Construction
                    
                    
                    1,277
                    
                    
                    
                    1,203
                    
                    
                    
                    4,380Multi-family
                    
                    
                    315
                    
                    
                    
                    917
                    
                    
                    
                    2,383Nonresidential
      and other
                    
                    
                    1,077
                    
                    
                    
                    5,295
                    
                    
                    
                    2,396Consumer
      loans
                    
                    
                    962
                    
                    
                    
                    4,326
                    
                    
                    
                    1,717Total
      loans originated
                    
                    
                    37,274
                    
                    
                    
                    58,272
                    
                    
                    
                    54,155Deduct:Real
      estate loan principal repayments and other
                    
                    
                    (33,644
                    )
                    
                    
                    (51,107
                    )
                    
                    
                    (38,286
                    )Decrease
      (increase) in allowance
                    
                    
                    (857
                    )
                    
                    
                    (12
                    )
                    
                    
                    54Transfer
      to real estate acquired through foreclosure
                    
                    
                    (1,076
                    )
                    
                    
                    (273
                    )
                    
                    
                    (28
                    )Other
                    
                    
                    (10
                    )
                    
                    
                    —
                    
                    
                    
                    —Net
      loan activity
                    
                    
                    1,687
                    
                    
                    
                    6,880
                    
                    
                    
                    15,895Net
      loans at end of period
                    
                    $
                    190,618
                    
                    
                    $
                    188,931
                    
                    
                    $
                    182,051





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.


11


At June 30, 2010, the allowance for
loans losses totaled $1.5 million, or 0.80% of total loans, compared to
$678,000, or 0.36% of total loans at June 30, 2009.  The
allowance at June 30, 2010 included $904,000 designated as specific
reserves.  Such reserves are calculated when a non-homogenous loan is
considered impaired.  An impaired loan is one in which it is likely
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, $847,000 was
assigned to various loans belonging to one borrower.  Those loans,
which totaled $4.7 million at June 30, 2010, were secured by single- and
multi-family residential property, the value of which we estimate to be
approximately $4.2 million, based on recent appraisals.  We estimate
that disposition costs associated with this property will be approximately
$300,000.  The Company has entered into foreclosure proceedings
against the borrower.





Nonperforming loans, which consist of
all loans 90 days or more past due and nonaccrual loans, totaled $7.8 million at
June 30, 2010 and $3.9 million at June 30, 2009, an increase of $3.9
million.  The borrower relationship mentioned above was responsible
for $4.7 million, or 60%, of our nonperforming loans at June 30,
2010.  The allowance for loans losses totaled 19.7% and 17.5% of
nonperforming loans at June 30, 2010 and 2009, 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, 2010.  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.


12


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 30,2010
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Allowance
      at beginning of period
                  
                  $
                  678
                  
                  
                  $
                  666
                  
                  
                  $
                  720
                  
                  
                  $
                  724
                  
                  
                  $
                  708Provision
      for loan losses
                  
                  
                  1,044
                  
                  
                  
                  46
                  
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  32Charge-offs:Real
      estate loans
                  
                  
                  (187
                  )
                  
                  
                  (34
                  )
                  
                  
                  (66
                  )
                  
                  
                  (4
                  )
                  
                  
                  (16
                  )Consumer
      loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      charge-offs
                  
                  
                  (187
                  )
                  
                  
                  (34
                  )
                  
                  
                  (66
                  )
                  
                  
                  (4
                  )
                  
                  
                  (16
                  )Recoveries:Real
      estate loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Consumer
      loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      recoveries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      charge-offs
                  
                  $
                  (187
                  )
                  
                  $
                  (34
                  )
                  
                  $
                  (66
                  )
                  
                  $
                  (4
                  )
                  
                  $
                  (16
                  )Allowance
      at end of period
                  
                  $
                  1,535
                  
                  
                  $
                  678
                  
                  
                  $
                  666
                  
                  
                  $
                  720
                  
                  
                  $
                  724Allowance
      to nonperforming loans
                  
                  
                  19.72
                  %
                  
                  
                  17.51
                  %
                  
                  
                  52.15
                  %
                  
                  
                  74.38
                  %
                  
                  
                  50.74
                  %Allowance
      to total loans outstanding at end of period
                  
                  
                  0.80
                  %
                  
                  
                  0.36
                  %
                  
                  
                  0.36
                  %
                  
                  
                  0.43
                  %
                  
                  
                  0.46
                  %Net
      charge-offs to average loans outstanding during the period
                  
                  
                  0.10
                  %
                  
                  
                  0.02
                  %
                  
                  
                  0.04
                  %
                  
                  
                  —
                  %
                  
                  
                  0.01
                  %


13


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 30,2010
                                                                                            
                                                                                            2009
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            2007
                                                                                            
                                                                                            2006Amount
                                                                                            
                                                                                            % of
                                                                                              Allowance
                                                                                              to Total
                                                                                              Allowance
                                                                                            
                                                                                            % of
                                                                                              Loans in
                                                                                              Category
                                                                                              To Total
                                                                                              Loans
                                                                                            
                                                                                            Amount
                                                                                            
                                                                                            % of
                                                                                              Allowance
                                                                                              to Total
                                                                                              Allowance
                                                                                            
                                                                                            % of
                                                                                              Loans in
                                                                                              Category
                                                                                              To Total
                                                                                              Loans
                                                                                            
                                                                                            Amount
                                                                                            
                                                                                            % of
                                                                                              Allowance
                                                                                              to Total
                                                                                              Allowance
                                                                                            
                                                                                            % of
                                                                                              Loans in
                                                                                              Category
                                                                                              To Total
                                                                                              Loans
                                                                                            
                                                                                            Amount
                                                                                            
                                                                                            % of
                                                                                              Allowance
                                                                                              to Total
                                                                                              Allowance
                                                                                            
                                                                                            % of
                                                                                              Loans in
                                                                                              Category
                                                                                              To Total
                                                                                              Loans
                                                                                            
                                                                                            Amount
                                                                                            
                                                                                            % of
                                                                                              Allowance
                                                                                              to Total
                                                                                              Allowance
                                                                                            
                                                                                            % of
                                                                                              Loans in
                                                                                              Category
                                                                                              To Total
                                                                                              Loans(Dollars
      in thousands)Real
      Estate Loans:Residential
                                                                                            
                                                                                            $
                                                                                            1,200
                                                                                            
                                                                                            
                                                                                            78.2
                                                                                            %
                                                                                            
                                                                                            86.0
                                                                                            %
                                                                                            $
                                                                                            542
                                                                                            
                                                                                            
                                                                                            80.0
                                                                                            %
                                                                                            
                                                                                            85.8
                                                                                            %
                                                                                            $
                                                                                            584
                                                                                            
                                                                                            
                                                                                            87.7
                                                                                            %
                                                                                            
                                                                                            86.1
                                                                                            %
                                                                                            $
                                                                                            636
                                                                                            
                                                                                            
                                                                                            88.3
                                                                                            %
                                                                                            
                                                                                            86.7
                                                                                            %
                                                                                            $
                                                                                            633
                                                                                            
                                                                                            
                                                                                            87.4
                                                                                            %
                                                                                            
                                                                                            88.5
                                                                                            %Construction
                                                                                            
                                                                                            
                                                                                            6
                                                                                            
                                                                                            
                                                                                            0.4
                                                                                            
                                                                                            
                                                                                            0.9
                                                                                            
                                                                                            
                                                                                            2
                                                                                            
                                                                                            
                                                                                            0.3
                                                                                            
                                                                                            
                                                                                            0.4
                                                                                            
                                                                                            
                                                                                            13
                                                                                            
                                                                                            
                                                                                            2.0
                                                                                            
                                                                                            
                                                                                            1.9
                                                                                            
                                                                                            
                                                                                            29
                                                                                            
                                                                                            
                                                                                            4.0
                                                                                            
                                                                                            
                                                                                            3.9
                                                                                            
                                                                                            
                                                                                            12
                                                                                            
                                                                                            
                                                                                            1.7
                                                                                            
                                                                                            
                                                                                            1.7Multi-family
                                                                                            
                                                                                            
                                                                                            277
                                                                                            
                                                                                            
                                                                                            18.1
                                                                                            
                                                                                            
                                                                                            3.5
                                                                                            
                                                                                            
                                                                                            81
                                                                                            
                                                                                            
                                                                                            11.9
                                                                                            
                                                                                            
                                                                                            3.8
                                                                                            
                                                                                            
                                                                                            10
                                                                                            
                                                                                            
                                                                                            1.4
                                                                                            
                                                                                            
                                                                                            1.5
                                                                                            
                                                                                            
                                                                                            7
                                                                                            
                                                                                            
                                                                                            1.0
                                                                                            
                                                                                            
                                                                                            0.9
                                                                                            
                                                                                            
                                                                                            9
                                                                                            
                                                                                            
                                                                                            1.3
                                                                                            
                                                                                            
                                                                                            0.2Nonresidential
      & other
                                                                                            
                                                                                            
                                                                                            36
                                                                                            
                                                                                            
                                                                                            2.3
                                                                                            
                                                                                            
                                                                                            5.7
                                                                                            
                                                                                            
                                                                                            38
                                                                                            
                                                                                            
                                                                                            5.6
                                                                                            
                                                                                            
                                                                                            6.1
                                                                                            
                                                                                            
                                                                                            42
                                                                                            
                                                                                            
                                                                                            6.3
                                                                                            
                                                                                            
                                                                                            6.2
                                                                                            
                                                                                            
                                                                                            30
                                                                                            
                                                                                            
                                                                                            4.2
                                                                                            
                                                                                            
                                                                                            4.1
                                                                                            
                                                                                            
                                                                                            30
                                                                                            
                                                                                            
                                                                                            4.1
                                                                                            
                                                                                            
                                                                                            4.1Consumer
      Loans:Consumer
      and other
                                                                                            
                                                                                            
                                                                                            16
                                                                                            
                                                                                            
                                                                                            1.0
                                                                                            
                                                                                            
                                                                                            2.5
                                                                                            
                                                                                            
                                                                                            15
                                                                                            
                                                                                            
                                                                                            2.2
                                                                                            
                                                                                            
                                                                                            2.4
                                                                                            
                                                                                            
                                                                                            17
                                                                                            
                                                                                            
                                                                                            2.6
                                                                                            
                                                                                            
                                                                                            2.5
                                                                                            
                                                                                            
                                                                                            18
                                                                                            
                                                                                            
                                                                                            2.5
                                                                                            
                                                                                            
                                                                                            2.5
                                                                                            
                                                                                            
                                                                                            24
                                                                                            
                                                                                            
                                                                                            3.3
                                                                                            
                                                                                            
                                                                                            3.3Loans
      secured by deposits
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            1.4
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            1.5
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            1.8
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            1.9
                                                                                            
                                                                                            
                                                                                            16
                                                                                            
                                                                                            
                                                                                            2.2
                                                                                            
                                                                                            
                                                                                            2.2Total
      allowance for loan losses
                                                                                            
                                                                                            $
                                                                                            1,535
                                                                                            
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            $
                                                                                            678
                                                                                            
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            $
                                                                                            666
                                                                                            
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            $
                                                                                            720
                                                                                            
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            $
                                                                                            724
                                                                                            
                                                                                            
                                                                                            100.0
                                                                                            %
                                                                                            
                                                                                            100.0
                                                                                            %


14


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 fair value less
estimated selling costs 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, 2010, 16 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 30,2010
                
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006(Dollars
      in thousands)Nonaccrual
      loans:Real
      estate loans
                
                $
                7,671
                
                
                $
                435
                
                
                $
                666
                
                
                $
                713
                
                
                $
                819Consumer
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                7,671
                
                
                
                435
                
                
                
                666
                
                
                
                713
                
                
                
                819Accruing
      loans past due 90 days or more:Real
      estate loans
                
                
                112
                
                
                
                3,437
                
                
                
                611
                
                
                
                255
                
                
                
                608Consumer
      loans
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      of accruing loans past due 90 days or more
                
                
                112
                
                
                
                3,437
                
                
                
                611
                
                
                
                255
                
                
                
                608Total
      nonperforming loans
                
                
                7,783
                
                
                
                3,872
                
                
                
                1,277
                
                
                
                968
                
                
                
                1,427Real
      estate acquired through foreclosure
                
                
                748
                
                
                
                109
                
                
                
                21
                
                
                
                8
                
                
                
                51Total
      nonperforming assets
                
                $
                8,531
                
                
                $
                3,981
                
                
                $
                1,298
                
                
                $
                976
                
                
                $
                1,478Total
      nonperforming loans to total loans
                
                
                4.05
                %
                
                
                2.05
                %
                
                
                0.70
                %
                
                
                0.58
                %
                
                
                0.92
                %Total
      nonperforming loans to total assets
                
                
                3.29
                %
                
                
                1.61
                %
                
                
                0.52
                %
                
                
                0.36
                %
                
                
                0.54
                %Total
      nonperforming assets to total assets
                
                
                3.60
                %
                
                
                1.65
                %
                
                
                0.52
                %
                
                
                0.36
                %
                
                
                0.56
                %





Other than disclosed above, there are
no other loans at June 30, 2010 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, 2010 and 2009, had nonaccrual loans
been current according to their original terms amounted to $279,000, and
$37,000, respectively.  Income related to nonaccrual loans included in
interest income for the years ended June 30, 2010 and 2009 amounted to
$31,000, and $10,000, respectively.


15





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
$269,000 and $639,000 at June 30, 2010 and 2009, respectively.





The following table shows the aggregate
amounts of our assets classified for regulatory purposes at the dates indicated
(amounts net of specific reserves):





At June 30,2010
                  
                  
                  2009
                  
                  
                  2008(In
      thousands)Substandard
      assets
                  
                  $
                  7,840
                  
                  
                  $
                  7,905
                  
                  
                  $
                  2,051Doubtful
      assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Loss
      assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      classified assets
                  
                  $
                  7,840
                  
                  
                  $
                  7,905
                  
                  
                  $
                  2,051




Substandard assets have decreased
slightly year to year.  At June 30, 2010, 74% of the Company’s
substandard assets were represented by four borrowers.  All four
relationships were secured by residential rental properties, plus one of the
borrower’s primary residence.  At June 30, 2009, three of these
relationships had been identified as substandard.  During the year,
the Company completed foreclosure proceedings on one of these borrowers and took
possession of the properties.  The resulting real estate owned
comprises $513,000 of substandard assets at June 30, 2010 although $80,000 of
that amount was sold subsequently.   One of the borrowers who
represents $602,000 of substandard assets is currently in negotiations to
restructure his debt.  Based on recent appraisals, the Company
believes the obligation is sufficiently covered by the value of the
assets.  The largest of these borrowers represents $3.9 million of
substandard assets.  Based on appraisal completed during the fiscal
year, the Company has assigned specific reserves totaling $847,000 to this
relationship.  Essentially, the assignment of reserves reduces the
carrying value of the assets which, in part, explains why substandard assets
decreased year to year.  In July 2010, the Company initiated
foreclosure proceedings against this borrower and petitioned the court for the
right to collect the rents.  This right was granted for most of the
properties in August and the Company has begun collecting these
rents.  The fourth substandard relationship was
first  identified at June 30, 2010 and comprises
$781,000.  Based on recent appraisals, no specific reserve has been
assigned to these properties.  The Company has also begun foreclosure
proceedings and has secured the rights to collect rents.


16


Substandard
assets at June 30, 2010, consisted of 53 loans totaling $7.1 million and seven
parcels of real estate owned with an aggregate carrying value of
$748,000.  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, 2010:





Number
      ofLoans
      and
                  
                  
                  CarryingOREO
                  
                  
                  ValueSingle
      family, owner occupied
                  
                  
                  32
                  
                  
                  $
                  2,138Single
      family, non-owner occupied
                  
                  
                  5
                  
                  
                  
                  285More
      than one single family, non-owner occupied
                  
                  
                  3
                  
                  
                  
                  2,6132-4
      family, owner occupied
                  
                  
                  2
                  
                  
                  
                  392-4
      family, non-owner occupied
                  
                  
                  16
                  
                  
                  
                  2,0985
      or more family, non-owner occupied
                  
                  
                  2
                  
                  
                  
                  667Total
      substandard assets
                  
                  
                  60
                  
                  
                  $
                  7,840





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




At June 30,2010
                  
                  
                  200930-59 Days
                    Past Due
                  
                  
                  60-89 Days
                    Past Due
                  
                  
                  30-59 Days
                    Past Due
                  
                  
                  60-89 Days
                    Past Due(In thousands)Real
      estate loans
                  
                  $
                  1,026
                  
                  
                  $
                  1,467
                  
                  
                  $
                  2,654
                  
                  
                  $
                  4,696Consumer
      loans
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  1,026
                  
                  
                  $
                  1,467
                  
                  
                  $
                  2,654
                  
                  
                  $
                  4,696





Securities.  Our securities
portfolio consists primarily of mortgage-backed securities with maturities of 30
years or less.  Securities totaled $9.7 million at June 30, 2010,
a decrease of $10.8 million, or 52.7%, compared to the $20.5 million total
at June 30, 2009.  The reduction in these securities resulted from
maturities, calls and prepayments of U.S. Government agency securities and
mortgage-backed securities.  All of our mortgage-backed securities
were issued by  Ginnie Mae, Fannie Mae or Freddie
Mac.


17




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




At June 30,2010
                  
                  
                  2009
                  
                  
                  2008Amortized
                    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
                  
                  
                  $
                  5,030Agency
      mortgage-backed: residential
                  
                  
                  240
                  
                  
                  
                  246
                  
                  
                  
                  314
                  
                  
                  
                  315
                  
                  
                  
                  455
                  
                  
                  
                  450Total
                  
                  $
                  240
                  
                  
                  $
                  246
                  
                  
                  $
                  5,314
                  
                  
                  $
                  5,451
                  
                  
                  $
                  5,454
                  
                  
                  $
                  5,480Held
      to maturity securities:U.S.
      Government agency obligations
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,000
                  
                  
                  $
                  3,002
                  
                  
                  $
                  3,000
                  
                  
                  $
                  3,001Agency
      mortgage-backed: residential
                  
                  
                  9,435
                  
                  
                  
                  10,026
                  
                  
                  
                  11,999
                  
                  
                  
                  12,315
                  
                  
                  
                  13,959
                  
                  
                  
                  13,408Total
                  
                  $
                  9,435
                  
                  
                  $
                  10,026
                  
                  
                  $
                  14,999
                  
                  
                  $
                  15,317
                  
                  
                  $
                  16,959
                  
                  
                  $
                  16,409





At June 30, 2010 and 2009, we did not
own any 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, 2010.




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
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  —
                  
                  
                  
                  —
                  %
                  
                  $
                  -
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  %Agency
      mortgage-backed: residential
                  
                  
                  7
                  
                  
                  
                  3.39
                  
                  
                  
                  31
                  
                  
                  
                  3.39
                  
                  
                  
                  45
                  
                  
                  
                  3.39
                  
                  
                  
                  157
                  
                  
                  
                  3.39
                  
                  
                  
                  240
                  
                  
                  
                  246
                  
                  
                  
                  3.39Total  available
      for sale securities
                  
                  $
                  7
                  
                  
                  
                  
                  
                  
                  $
                  31
                  
                  
                  
                  
                  
                  
                  $
                  45
                  
                  
                  
                  
                  
                  
                  $
                  157
                  
                  
                  
                  
                  
                  
                  $
                  240
                  
                  
                  $
                  246Held
      to maturity securities:U.S.
      Government agency obligations
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —Agency
      mortgage-backed: residential
                  
                  
                  807
                  
                  
                  
                  4.18
                  
                  
                  
                  3,586
                  
                  
                  
                  4.18
                  
                  
                  
                  3,828
                  
                  
                  
                  4.20
                  
                  
                  
                  1,214
                  
                  
                  
                  5.28
                  
                  
                  
                  9,435
                  
                  
                  
                  10,026
                  
                  
                  
                  4.33Total
      held-to-maturity securities
                  
                  $
                  807
                  
                  
                  
                  
                  
                  
                  $
                  3,586
                  
                  
                  
                  
                  
                  
                  $
                  3,828
                  
                  
                  
                  
                  
                  
                  $
                  1,214
                  
                  
                  
                  
                  
                  
                  $
                  9,435
                  
                  
                  $
                  10,026


19


Other Assets.  Other
assets at June 30, 2010 include goodwill and other intangible assets of $14.7
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  $2.5
million and $2.4 million at June 30, 2010 and 2009, respectively, 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,
2010 and 2009.





Deposits. Our primary source of funds
is retail deposit accounts held primarily by individuals within our market
areas. Deposits totaled $145.0 million at June 30, 2010, an increase of $5.2
million or 3.7%, compared to the $139.7 million total at June 30, 2009. The
increase in deposits occurred primarily as a result of retail deposit customers
seeking relative safety of bank deposit products. 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 30,2010
                  
                  
                  2009
                  
                  
                  2008(In thousands)Certificate
      of deposit accounts
                  
                  $
                  102,666
                  
                  
                  $
                  98,518
                  
                  
                  $
                  97,020Demand,
      transaction and passbook savings accounts
                  
                  
                  42,303
                  
                  
                  
                  41,225
                  
                  
                  
                  40,614Total
                  
                  $
                  144,969
                  
                  
                  $
                  139,743
                  
                  
                  $
                  137,634





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, 2010.





Maturity Period
                    
                    Certificates
                      of Deposit(In thousands)Three
      months or less
                    
                    $
                    5,290Over
      three months through six months
                    
                    
                    7,063Over
      six months through twelve months
                    
                    
                    12,358Over
      twelve months
                    
                    
                    9,593Total
                    
                    $
                    34,304





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





At June 30,2010
                  
                  
                  2009
                  
                  
                  2008(In thousands)Rate0.01
      -  0.99%
                  
                  $
                  1,507
                  
                  
                  $
                  —
                  
                  
                  $
                  —1.00
      -  1.99
                  
                  
                  21,326
                  
                  
                  
                  4,173
                  
                  
                  
                  1,2412.00
      -  2.99
                  
                  
                  51,586
                  
                  
                  
                  29,168
                  
                  
                  
                  12,0393.00
      -  3.99
                  
                  
                  12,337
                  
                  
                  
                  36,066
                  
                  
                  
                  21,3754.00
      -  4.99
                  
                  
                  7,962
                  
                  
                  
                  14,291
                  
                  
                  
                  32,0115.00
      -  5.99
                  
                  
                  7,948
                  
                  
                  
                  14,820
                  
                  
                  
                  30,354Total
                  
                  $
                  102,666
                  
                  
                  $
                  98,518
                  
                  
                  $
                  97,020




20


The
following table sets forth the amount and maturities of certificate accounts at
June 30, 2010.





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)0.01
      –0.99%
                    
                    $
                    1,507
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,507
                    
                    
                    
                    1.46
                    %1.00
      – 1.99
                    
                    
                    17,511
                    
                    
                    
                    3,744
                    
                    
                    
                    71
                    
                    
                    
                    —
                    
                    
                    
                    21,326
                    
                    
                    
                    20.772.00
      – 2.99
                    
                    
                    36,660
                    
                    
                    
                    11,165
                    
                    
                    
                    2,454
                    
                    
                    
                    1,307
                    
                    
                    
                    51,586
                    
                    
                    
                    50.253.00
      – 3.99
                    
                    
                    8,930
                    
                    
                    
                    2,413
                    
                    
                    
                    958
                    
                    
                    
                    36
                    
                    
                    
                    12,337
                    
                    
                    
                    12.024.00
      – 4.99
                    
                    
                    1,526
                    
                    
                    
                    5,495
                    
                    
                    
                    922
                    
                    
                    
                    19
                    
                    
                    
                    7,962
                    
                    
                    
                    7.765.00
      – 5.99
                    
                    
                    7,017
                    
                    
                    
                    843
                    
                    
                    
                    88
                    
                    
                    
                    —
                    
                    
                    
                    7,948
                    
                    
                    
                    7.74Total
                    
                    $
                    73,151
                    
                    
                    $
                    23,660
                    
                    
                    $
                    4,493
                    
                    
                    $
                    1,362
                    
                    
                    $
                    102,666
                    
                    
                    
                    100.00
                    %





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





Year Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2008Average
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  AverageBalance
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Rate(Dollars in thousands)Noninterest-bearing
      demand
                  
                  $
                  1,012
                  
                  
                  
                  0.00
                  %
                  
                  $
                  788
                  
                  
                  
                  0.00
                  %
                  
                  $
                  719
                  
                  
                  
                  0.00
                  %Interest-bearing
      demand
                  
                  
                  11,973
                  
                  
                  
                  0.87
                  %
                  
                  
                  10,366
                  
                  
                  
                  1.52
                  %
                  
                  
                  9,370
                  
                  
                  
                  1.65
                  %Passbook
      savings accounts
                  
                  
                  29,433
                  
                  
                  
                  1.00
                  %
                  
                  
                  30,125
                  
                  
                  
                  1.01
                  %
                  
                  
                  32,410
                  
                  
                  
                  1.11
                  %Certificates
      of deposit
                  
                  
                  100,723
                  
                  
                  
                  3.01
                  %
                  
                  
                  96,807
                  
                  
                  
                  3.78
                  %
                  
                  
                  96,466
                  
                  
                  
                  4.52
                  %





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





Year Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2008(In thousands)Beginning
      balance
                      
                      $
                      139,743
                      
                      
                      $
                      137,634
                      
                      
                      $
                      139,893Increase
      (decrease) before interest credited
                      
                      
                      1,793
                      
                      
                      
                      (2,009
                      )
                      
                      
                      (7,131
                      )Interest
      credited
                      
                      
                      3,433
                      
                      
                      
                      4,118
                      
                      
                      
                      4,872Net
      increase (decrease) in deposits
                      
                      
                      5,226
                      
                      
                      
                      2,109
                      
                      
                      
                      (2,259
                      )Ending
      balance
                      
                      $
                      144,969
                      
                      
                      $
                      139,743
                      
                      
                      $
                      137,634





Borrowings.  Advances from the
Federal Home Loan Bank of Cincinnati amounted to $32.0 million and
$40.2 million at June 30, 2010 and 2009,
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 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2008(Dollars in thousands)Balance
      outstanding at end of period
                                  
                                  $
                                  32,009
                                  
                                  
                                  $
                                  40,156
                                  
                                  
                                  $
                                  47,801Maximum
      amount of advances outstandingat any month end during the
      period
                                  
                                  $
                                  37,564
                                  
                                  
                                  $
                                  46,815
                                  
                                  
                                  $
                                  71,220Average
      advances outstandingduring the period
                                  
                                  $
                                  35,325
                                  
                                  
                                  $
                                  43,200
                                  
                                  
                                  $
                                  61,687Weighted
      average interest rateduring the period
                                  
                                  
                                  4.38
                                  %
                                  
                                  
                                  4.13
                                  %
                                  
                                  
                                  4.37
                                  %Weighted
      average interest rateat end of period
                                  
                                  
                                  3.58
                                  %
                                  
                                  
                                  5.84
                                  %
                                  
                                  
                                  5.21
                                  %





Shareholders’
Equity.  Shareholders’
equity totaled $57.7 million at June 30, 2010, an $806,000 or 1.4%, decrease
compared to June 30, 2009.  The reduction resulted primarily from
dividends paid in excess of earnings for the year and repurchases of the
Company’s common stock.





The Banks are required to maintain
minimum regulatory capital pursuant to federal regulations.  At June
30, 2010, 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, 2010 and 2009





General.Net earnings totaled
$425,000 for the fiscal year ended June 30, 2010, a decrease of $303,000,
or 41.6%, from the net earnings recorded for the fiscal year ended June 30,
2009.  The decrease in earnings was due primarily to a $998,000
increase in provision for losses on loans and a $395,000 or 8.6% increase in
non-interest expense.  Partially offsetting the increased level of
costs for the year was a $74,000 increase in net interest income.





Interest
Income.Total interest income
for the fiscal year ended June 30, 2010 was $11.4 million, a decrease of
$848,000, or 6.9%, compared to the fiscal year ended June 30,
2009.  The decrease in interest income was due primarily to a decrease
in interest income on loans, which decreased by $582,000, or 5.3%, to $10.5
million for the fiscal year ended June 30, 2010, compared to fiscal
2009.  Also contributing to the reduction in interest income were
decreases in interest income from investment securities and mortgage-backed
securities. Compared to fiscal 2009, interest income on mortgage-backed
securities decreased $93,000 or 16.4% to $474,000 for the year just ended, while
interest income on other securities decreased $100,000 or 37.2% to $169,000 for
the year just ended.





Interest
income from loans decreased chiefly due to a reduction in the average rate
earned on the loan portfolio, as the average balance of loans actually increased
year to year.  The average rate earned on loans decreased by 38 basis
points to 5.50% for the 2010 year, as the average balance of loans outstanding
increased by $2.2 million or 1.2% to $190.4 million.  The decrease in
the average rate earned on loans for fiscal 2010 occurred primarily as a result
of borrowers refinancing to lower rates and to a lesser degree by loans
repricing as scheduled.  Many loans repricing during the past year
experienced a rate reduction, as the index we utilize for adjustable rate loans
declined as a result of the soft real estate market nation-wide.  The
decrease in interest income from other securities was attributable primarily to
a $3.3 million, or 39.4%, decrease in the average balance of other securities
outstanding, despite an increase of 12 basis points in the average yield on
investment securities to 3.41% for fiscal 2010.  Other securities
either matured or were called during the period, as there were no sales of those
securities during fiscal 2010.  The average balance of mortgage-backed
securities decreased $2.2 million or 16.8% to $11.1 million, while the average
yield increased by 2 basis points to 4.26% for fiscal 2010.  The
average balance of other interest-earning assets decreased $1.2 million or 11.7%
to $9.4 million, while the average yield declined by 37 basis points to 2.78%
for fiscal 2010.


22


Interest
Expense.Interest expense
totaled $5.0 million for the fiscal year ended June 30, 2010, a decrease of
$922,000, or 15.6%, from fiscal 2009.  The decrease in interest
expense resulted from lower costs of deposits and
borrowings.  Interest expense on deposits decreased $685,000 or
16.6%  to $3.4 million for the 2010 fiscal year, while the cost of
borrowings decreased $237,000 or 13.3% to $1.5 million for the 2010 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 58 basis points to
2.40% for the year just ended, while the average deposits outstanding increased
$5.1 million or 3.7% from year to year.  Average borrowings decreased
by  $7.9 million to $35.3 million for the year ended June 30, 2010,
while the average rate paid on borrowings increased 25 basis points to 4.38% for
fiscal 2010.





Net Interest
Income.  As a result of the aforementioned changes in interest
income and interest expense, net interest income increased by $74,000, or 1.2%,
during the fiscal year ended June 30, 2010, compared to fiscal
2009.  The average interest rate spread increased from 2.29% for the
fiscal year ended June 30, 2009 to 2.48% for fiscal 2010.  The
net interest margin increased from 2.87% for the fiscal year ended June 30,
2009 to 2.96% for fiscal 2010.


23


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 securities during any of the periods presented in the
table.





Year Ended June 30,2010
                            
                            
                            2009Average
                              Balance
                            
                            
                            Interest
                              And
                              Dividends
                            
                            
                            Yield/
                              Cost
                            
                            
                            Average
                              Balance
                            
                            
                            Interest
                              And
                              Dividends
                            
                            
                            Yield/
                              Cost(Dollars in thousands)Interest-earning
      assets:Loans
                            
                            $
                            190,372
                            
                            
                            $
                            10,475
                            
                            
                            
                            5.50
                            %
                            
                            $
                            188,163
                            
                            
                            $
                            11,057
                            
                            
                            
                            5.88
                            %Mortgage-backed
      securities
                            
                            
                            11,139
                            
                            
                            
                            474
                            
                            
                            
                            4.26
                            
                            
                            
                            13,381
                            
                            
                            
                            567
                            
                            
                            
                            4.24Other
      securities
                            
                            
                            4,961
                            
                            
                            
                            169
                            
                            
                            
                            3.41
                            
                            
                            
                            8,187
                            
                            
                            
                            269
                            
                            
                            
                            3.29Other
      interest-earning assets
                            
                            
                            9,354
                            
                            
                            
                            260
                            
                            
                            
                            2.78
                            
                            
                            
                            10,588
                            
                            
                            
                            333
                            
                            
                            
                            3.15Total
      interest-earning assets
                            
                            
                            215,826
                            
                            
                            
                            11,378
                            
                            
                            
                            5.27
                            
                            
                            
                            220,319
                            
                            
                            
                            12,226
                            
                            
                            
                            5.55Noninterest-earning
      assets
                            
                            
                            22,952
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            22,668Total
      assets
                            
                            $
                            238,778
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            242,987Interest-bearing
      liabilities:Demand
      deposits
                            
                            $
                            11,973
                            
                            
                            $
                            104
                            
                            
                            
                            0.87
                            %
                            
                            $
                            10,366
                            
                            
                            $
                            158
                            
                            
                            
                            1.52
                            %Noninterest-Bearing
      demand deposits
                            
                            
                            1,012
                            
                            
                            
                            —
                            
                            
                            
                            0.00
                            
                            
                            
                            788
                            
                            
                            
                            —
                            
                            
                            
                            0.00Savings
                            
                            
                            29,433
                            
                            
                            
                            294
                            
                            
                            
                            1.00
                            
                            
                            
                            30,125
                            
                            
                            
                            303
                            
                            
                            
                            1.01Certificates
      of deposit
                            
                            
                            100,723
                            
                            
                            
                            3,035
                            
                            
                            
                            3.01
                            
                            
                            
                            96,807
                            
                            
                            
                            3,657
                            
                            
                            
                            3.78Total
      deposits
                            
                            
                            143,141
                            
                            
                            
                            3,433
                            
                            
                            
                            2.40
                            
                            
                            
                            138,086
                            
                            
                            
                            4,118
                            
                            
                            
                            2.98Borrowings
                            
                            
                            35,325
                            
                            
                            
                            1,547
                            
                            
                            
                            4.38
                            
                            
                            
                            43,200
                            
                            
                            
                            1,784
                            
                            
                            
                            4.13Total
      interest-bearing liabilities
                            
                            
                            178,466
                            
                            
                            
                            4,980
                            
                            
                            
                            2.79
                            
                            
                            
                            181,286
                            
                            
                            
                            5,902
                            
                            
                            
                            3.26Noninterest-bearing
      liabilities
                            
                            
                            2,353
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,423Total
      liabilities
                            
                            
                            180,819
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            183,709Shareholders’
      equity
                            
                            
                            57,959
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            59,278Total
      liabilities and shareholders’ equity
                            
                            $
                            238,778
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            242,987Net
      interest income/average yield
                            
                            
                            
                            
                            
                            $
                            6,398
                            
                            
                            
                            2.48
                            %
                            
                            
                            
                            
                            
                            $
                            6,324
                            
                            
                            
                            2.29
                            %Net
      interest margin
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2.96
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2.87
                            %Average
      interest-earning assets to average interest-bearing
      liabilities
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            120.93
                            %
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            121.53
                            %




24


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 30,2010 to June 30, 2009
                  
                  
                  2009 to June 30, 2008Increase (Decrease)
                  
                  
                  Increase (Decrease)Due to Changes In
                  
                  
                  Due to Changes InVolume
                  
                  
                  Rate
                  
                  
                  Total
                  
                  
                  Volume
                  
                  
                  Rate
                  
                  
                  Total(In thousands)Interest-earning
      assets:Loans
      receivable
                  
                  $
                  134
                  
                  
                  $
                  (716
                  )
                  
                  $
                  (582
                  )
                  
                  $
                  810
                  
                  
                  $
                  (308
                  )
                  
                  $
                  502Mortgage-backed
      securities
                  
                  
                  (95
                  )
                  
                  
                  2
                  
                  
                  
                  (93
                  )
                  
                  
                  (90
                  )
                  
                  
                  (8
                  )
                  
                  
                  (98
                  )Other
      securities
                  
                  
                  (110
                  )
                  
                  
                  10
                  
                  
                  
                  (100
                  )
                  
                  
                  (1,075
                  )
                  
                  
                  (82
                  )
                  
                  
                  (1,157
                  )Other
      interest-earning assets
                  
                  
                  (36
                  )
                  
                  
                  (37
                  )
                  
                  
                  (73
                  )
                  
                  
                  (9
                  )
                  
                  
                  (99
                  )
                  
                  
                  (108
                  )Total
      interest-earning assets
                  
                  
                  (107
                  )
                  
                  
                  (741
                  )
                  
                  
                  (848
                  )
                  
                  
                  (364
                  )
                  
                  
                  (497
                  )
                  
                  
                  (861
                  )Interest-bearing
      liabilities:Checking
      accounts
                  
                  
                  31
                  
                  
                  
                  (85
                  )
                  
                  
                  (54
                  )
                  
                  
                  12
                  
                  
                  
                  (9
                  )
                  
                  
                  3Savings
      accounts
                  
                  
                  (6
                  )
                  
                  
                  (3
                  )
                  
                  
                  (9
                  )
                  
                  
                  (24
                  )
                  
                  
                  (33
                  )
                  
                  
                  (57
                  )Certificates
      of deposit
                  
                  
                  155
                  
                  
                  
                  (777
                  )
                  
                  
                  (622
                  )
                  
                  
                  15
                  
                  
                  
                  (715
                  )
                  
                  
                  (700
                  )FHLB
      Advances
                  
                  
                  (354
                  )
                  
                  
                  117
                  
                  
                  
                  (237
                  )
                  
                  
                  (768
                  )
                  
                  
                  (141
                  )
                  
                  
                  (909
                  )Total
      interest-bearing liabilities
                  
                  
                  (174
                  )
                  
                  
                  (748
                  )
                  
                  
                  (922
                  )
                  
                  
                  (765
                  )
                  
                  
                  (898
                  )
                  
                  
                  (1,663
                  )Increase
      in net interest income
                  
                  $
                  67
                  
                  
                  $
                  7
                  
                  
                  $
                  74
                  
                  
                  $
                  401
                  
                  
                  $
                  401
                  
                  
                  $
                  802





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 $1.044 million for losses on loans for the fiscal year
ended June 30, 2010, an increase of $998,000 compared to a provision of
$46,000 for fiscal 2009.  The provision recorded during the fiscal
year ended June 30, 2010 generally reflects deterioration in asset quality,
which occurred primarily in the first quarter of the fiscal year just
ended.  Specific valuation allowances at June 30, 2010 totaled
$904,000, while general valuation allowances totaled $631,000 at that
date.  Management believes all nonperforming loans are adequately
collateralized or have been written down to their realizable value; 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.  See
discussion about Allowance Loan
Losses and Asset Quality.





Non-interest  Income.Other
operating income increased $48,000, to $289,000 for the fiscal year ended June
30, 2010, due primarily to a $60,000 or 93.8% increase in gain on sale of
loans.    The popularity of long-term fixed rate loans,
which the Company sells into the secondary market, was responsible for this
increase.  Non-interest income is generally comprised of service
charges and fees charged on loan and deposit accounts.





Non-interest
Expense.Non-interest expense increased $395,000 or 8.6% to $5.0 million
for the fiscal year ended June 30, 2010 compared to fiscal 2009.  The
increase in non-interest expense is primarily attributed to an increase in
salaries and employee benefits and FDIC insurance.  Salaries and
employee benefits increased $210,000 or 7.3% to $3.1 million for the year just
ended, while FDIC insurance increased $93,000 or 90.3% to $196,000 for the year
just ended.


25





The
increase in salaries and employee benefits was attributed primarily to an
increase in retirement expense year to year.  Retirement expense
increased $104,000 or 34.3% to $407,000 for the fiscal year ended June 30, 2010,
primarily as a result of additional funding required for the Banks’
multi-employer defined benefit pension plans.





Federal Income
Taxes.The provision for federal income tax decreased $968,000 or 81.8%
from $1.2 million for the fiscal year ended June 30, 2009 to $215,000 for the
fiscal year ended June 30, 2010, primarily due to a $443,000 charge for an
uncertain tax position arising in the prior year.  This charge was the
result of 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.  The Company is pursuing its claim for
refund.  The effective tax rates for the years ended June 30, 2010 and
2009 were 33.6% and 61.9%, 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, 2010 and June 30, 2009,
cash and cash equivalents totaled $8.4 million and $4.2 million,
respectively.  Securities classified as available-for-sale, which
provide additional sources of liquidity, totaled $246,000 and $5.5 million at
June 30, 2010 and 2009, respectively.  At June 30, 2010, we had
the ability to borrow a total $97.3 million from the FHLB, of which $31.9
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 2010 and 2009, we originated $37.3 million and
$58.3 million of loans, respectively.  During fiscal 2010, these
activities were funded primarily by proceeds from principal repayments on loans
of $33.7 million and maturities of securities of $10.6
million.  During fiscal 2009, these activities were funded primarily
by proceeds from the principal repayments on loans of $51.1 million and
maturities of securities of $2.1 million.


26


Financing
activities consist primarily of activity in deposit accounts and in FHLB
advances.  We experienced a net increase in total deposits of $5.2
million and $2.1 million for the years ended June 30, 2010, and 2009,
respectively.  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.  We generally manage the pricing of our
deposits to be competitive and to increase core deposit
relationships.  For the year ended June 30, 2010, our net decrease in
FHLB advances totaled $8.1 million, as we repaid short-term funds with
additional liquidity available to us.





Commitments
and Contractual Obligations





At June 30, 2010, we had $878,000 in
mortgage commitments.  Certificates of deposit due within one year of
June 30, 2010 totaled $73.2 million, or 50.5% 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, 2011.  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,
2010.





Total
                    Amounts
                    Committed
                  
                  
                  Less
                    Than
                    One
                    Year
                  
                  
                  One to
                    Three
                    Years
                  
                  
                  Four to
                    Five
                    Years
                  
                  
                  More
                    than
                    Five
                    Years(In thousands)Certificates
      of deposit
                  
                  $
                  102,666
                  
                  
                  $
                  73,151
                  
                  
                  $
                  28,153
                  
                  
                  $
                  398
                  
                  
                  $
                  964Federal
      Home Loan Bank advances (1)
                  
                  
                  31,889
                  
                  
                  
                  11,640
                  
                  
                  
                  10,994
                  
                  
                  
                  4,921
                  
                  
                  
                  4,334One
      to four family residential real estate
                  
                  
                  878
                  
                  
                  
                  878
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Unused
      lines of credit
                  
                  
                  9,217
                  
                  
                  
                  9,217
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Undisbursed
      loans
                  
                  
                  631
                  
                  
                  
                  631
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      commitments
                  
                  $
                  145,281
                  
                  
                  $
                  95,517
                  
                  
                  $
                  39,147
                  
                  
                  $
                  5,319
                  
                  
                  $
                  5,298





(1)
            Net
      of premium on FHLB borrowings





For the year ended June 30, 2010,
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.


27


Dividend
Policy





During each of the preceding two fiscal
years, the Company has paid an aggregate dividend in excess of the Company’s net
income.  In fiscal 2010, the Company paid an aggregate dividend of
$1.1 million, which exceeded net income by $711,000.  In fiscal 2009,
the Company paid an aggregate dividend of $1.2 million which exceeded net income
by $441,000.  Unexpected events in each of the years caused income to
be less than anticipated.  In fiscal 2010, the provision for loan
losses increased by $1.0 million, primarily due to problems experienced by one
borrower.  In fiscal 2009, a preliminary denial by the Internal
Revenue Service of a previously claimed tax deduction resulted in additional tax
expense of $443,000.  Management believes that, despite these
shortfalls, the Company has sufficient capital to continue the current dividend
policy without affecting the well-capitalized status of either subsidiary
bank.  Indeed, the banks still far exceed all regulatory required
capital levels.  However, if management should anticipate a long-term
trend in which dividends consistently exceed net income, the dividend policy
would be reconsidered.  Management cautions that comparison between
the Company’s published earnings per share and the Company’s published dividends
per share does not lead to an accurate portrayal of the relationship between net
income and dividends paid.  Approximately 61% of the shares of
Kentucky First Federal are held by First Federal Mutual Holding
Company.  Since the Company’s inception, First Federal Mutual Holding
Company has applied to the Office of Thrift Supervision for, and been granted,
permission to waive its right to dividends paid by Kentucky First
Federal.    While the Office of Thrift Supervision will be
eliminated by the Dodd Frank Wall Street Reform and Consumer Protection Act, a
provision in the act allows mutual holding companies, who have waived their
dividends prior to December 1, 2009, to continue to waive these dividends
without objection by the Federal Reserve.  This action is conditioned
on providing appropriate notice and absent the Federal Reserve’s determination
that the waiver would be detrimental to the safe and sound operations of the
banks.  Should the regulatory environment change so that these
dividend waivers are prohibited or inadvisable, the Company would reconsider its
dividend policy.




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.


28










Crowe
      Horwath LLP
                Independent
      Member Crowe Horwath International
              9600
      Brownsboro Road, Suite 400
                Post
      Office Box 22649
                Louisville,
      Kentucky 40252-0649
                Tel     502.326.3996
                Fax   
      502.420.4400
                www.crowehorwath.com




Report of
Independent Registered Public Accounting Firm





Kentucky
First Federal Bancorp


Frankfort,
Kentucky





We have
audited the accompanying consolidated balance sheet of Kentucky First Federal
Bancorp as of June 30, 2010, and the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity, and cash flows for the
year ended June 30, 2010.  These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit included consideration of internal control over
financial reporting as a basis for designing audit 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. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of June 30,
2010, and the results of its operations and its cash flows for the year ended
June 30, 2010, in conformity with U.S. generally accepted accounting
principles.









Crowe Horwath
      LLP




Louisville,
Kentucky


October
5, 2010


29




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 the related consolidated
statements of earnings, comprehensive income, shareholders’ equity and cash
flows for the year then ended.  The Company's management is
responsible for these financial statements.  Our responsibility is to
express an opinion on these financial statements based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit 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 audit 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 audit provides a reasonable basis
for our opinion.




In our
opinion, the 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 the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.




/s/BKD,LLP





Cincinnati,
Ohio


September
28, 2009, except for Notes A.20, H, J, and K as to which the date is September
30, 2010


30





KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
BALANCE SHEETS





June 30,
2010 and 2009


(Dollar
amounts in thousands, except per share data)





2010
                          
                          
                          2009ASSETSCash
      and due from financial institutions
                          
                          $
                          1,118
                          
                          
                          $
                          1,548Interest-bearing
      demand deposits
                          
                          
                          7,244
                          
                          
                          
                          2,669Cash
      and cash equivalents
                          
                          
                          8,362
                          
                          
                          
                          4,217Interest-bearing
      deposits in other financial institutions
                          
                          
                          100
                          
                          
                          
                          100Securities
      available for sale
                          
                          
                          246
                          
                          
                          
                          5,451Securities
      held-to-maturity, at amortized cost- approximate fair value of $10,026 and
      $15,317 at June 30, 2010 and 2009, respectively
                          
                          
                          9,435
                          
                          
                          
                          14,999Loans
      held for sale
                          
                          
                          370
                          
                          
                          
                          230Loans
                          
                          
                          192,153
                          
                          
                          
                          189,609Allowance
      for loan and lease losses
                          
                          
                          (1,535
                          )
                          
                          
                          (678
                          )Real
      estate owned, net
                          
                          
                          748
                          
                          
                          
                          109Premises
      and equipment, net
                          
                          
                          2,731
                          
                          
                          
                          2,844Federal
      Home Loan Bank stock
                          
                          
                          5,641
                          
                          
                          
                          5,641Accrued
      interest receivable
                          
                          
                          518
                          
                          
                          
                          750Bank-owned
      life insurance
                          
                          
                          2,518
                          
                          
                          
                          2,428Goodwill
                          
                          
                          14,507
                          
                          
                          
                          14,507Other
      intangible assets
                          
                          
                          218
                          
                          
                          
                          349Prepaid
      FDIC assessments
                          
                          
                          542
                          
                          
                          
                          -Prepaid
      expenses and other assets
                          
                          
                          385
                          
                          
                          
                          345Total
      assets
                          
                          $
                          236,939
                          
                          
                          $
                          240,901LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits
                          
                          $
                          144,969
                          
                          
                          $
                          139,743Federal
      Home Loan Bank advances
                          
                          
                          32,009
                          
                          
                          
                          40,156Advances
      by borrowers for taxes and insurance
                          
                          
                          335
                          
                          
                          
                          290Accrued
      interest payable
                          
                          
                          145
                          
                          
                          
                          189Accrued
      federal income taxes
                          
                          
                          242
                          
                          
                          
                          147Deferred
      federal income taxes
                          
                          
                          831
                          
                          
                          
                          1,115Other
      liabilities
                          
                          
                          676
                          
                          
                          
                          723Total
      liabilities
                          
                          
                          179,207
                          
                          
                          
                          182,363Commitments
      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 and outstanding
                          
                          
                          86
                          
                          
                          
                          86Additional
      paid-in capital
                          
                          
                          36,597
                          
                          
                          
                          36,223Retained
      earnings
                          
                          
                          31,363
                          
                          
                          
                          32,074Unearned
      employee stock ownership plan (ESOP)
                          
                          
                          (2,366
                          )
                          
                          
                          (2,557
                          )Treasury
      shares at cost, 745,530 and 728,930 common shares at  June 30,
      2010 and 2009, respectively
                          
                          
                          (7,952
                          )
                          
                          
                          (7,379
                          )Accumulated
      other comprehensive income
                          
                          
                          4
                          
                          
                          
                          91Total
      shareholders’ equity
                          
                          
                          57,732
                          
                          
                          
                          58,538Total
      liabilities and shareholders’ equity
                          
                          $
                          236,939
                          
                          
                          $
                          240,901





The
accompanying notes are an integral part of these
statements.


31


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF INCOME





For the
years ended June 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





2010
                
                
                2009Interest
      incomeLoans
                
                $
                10,475
                
                
                $
                11,057Mortgage-backed
      securities
                
                
                474
                
                
                
                567Other
      securities
                
                
                169
                
                
                
                269Interest-bearing
      deposits and other
                
                
                260
                
                
                
                333Total
      interest income
                
                
                11,378
                
                
                
                12,226Interest
      expenseDeposits
                
                
                3,433
                
                
                
                4,118Borrowings
                
                
                1,547
                
                
                
                1,784Total
      interest expense
                
                
                4,980
                
                
                
                5,902Net
      interest income
                
                
                6,398
                
                
                
                6,324Provision
      for loan losses
                
                
                1,044
                
                
                
                46Net
      interest income after provision for loan losses
                
                
                5,354
                
                
                
                6,278Non-interest
      incomeEarnings
      on bank-owned life insurance
                
                
                90
                
                
                
                89Gain
      on sale of loans
                
                
                124
                
                
                
                64Net
      gain (loss) on sale of real estate owned
                
                
                (27
                )
                
                
                3Other
                
                
                102
                
                
                
                85Total
      non-interest income
                
                
                289
                
                
                
                241Non-interest
      expenseSalaries
      and employee benefits
                
                
                3,095
                
                
                
                2,885Occupancy
      and equipment
                
                
                329
                
                
                
                411Franchise
      and other taxes
                
                
                190
                
                
                
                180Data
      processing
                
                
                242
                
                
                
                162Federal
      deposit insurance
                
                
                196
                
                
                
                103Audit
      and accounting
                
                
                166
                
                
                
                181Amortization
      of intangible assets
                
                
                131
                
                
                
                131Other
      operating
                
                
                654
                
                
                
                555Total
      non-interest expense
                
                
                5,003
                
                
                
                4,608Income
      before income taxes
                
                
                640
                
                
                
                1,911Federal
      income taxesCurrent
                
                
                409
                
                
                
                1,116Deferred
                
                
                (194
                )
                
                
                67Total
      federal income taxes
                
                
                215
                
                
                
                1,183NET
      INCOME
                
                $
                425
                
                
                $
                728EARNINGS
      PER SHAREBasic
      and diluted
                
                $
                0.06
                
                
                $
                0.10





The
accompanying notes are an integral part of these
statements.


32


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME





For the
years ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





2010
                
                
                2009Net
      income
                
                $
                425
                
                
                $
                728Other
      comprehensive income (loss), net of tax-related effects:Unrealized
      holding gains (losses) on securities available for sale during the year,
      net of tax (benefit) of $(45) and $38 in 2010 and 2009,
      respectively
                
                
                (87
                )
                
                
                74Comprehensive
      income
                
                $
                338
                
                
                $
                802Accumulated
      other comprehensive income
                
                $
                4
                
                
                $
                91





The
accompanying notes are an integral part of these
statements.


33


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY





For the
years ended June 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





Unearnedemployeestock
                  
                  
                  
                  
                  
                  AccumulatedAdditional
                  
                  
                  
                  
                  
                  ownership
                  
                  
                  
                  
                  
                  otherCommon
                  
                  
                  paid-in
                  
                  
                  Retained
                  
                  
                  plan
                  
                  
                  Treasury
                  
                  
                  comprehensivestock
                  
                  
                  capital
                  
                  
                  earnings
                  
                  
                  (ESOP)
                  
                  
                  shares
                  
                  
                  income
                  
                  
                  TotalBalance
      at July 1, 2008
                  
                  $
                  86
                  
                  
                  $
                  35,834
                  
                  
                  $
                  32,515
                  
                  
                  $
                  (2,735
                  )
                  
                  $
                  (5,700
                  )
                  
                  $
                  17
                  
                  
                  $
                  60,017Net
      income for the year ended June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  728
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  728Allocation
      of ESOP shares
                  
                  
                  -
                  
                  
                  
                  185
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  185Amortization
      expense of stock benefit plans
                  
                  
                  -
                  
                  
                  
                  86
                  
                  
                  
                  -
                  
                  
                  
                  178
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  264Compensation
      expense related to vesting stock options
                  
                  
                  -
                  
                  
                  
                  118
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  118Acquisition
      of shares for Treasury
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,679
                  )
                  
                  
                  -
                  
                  
                  
                  (1,679
                  )Unrealized
      gains on securities designated as available 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
                  
                  
                  
                  32,074
                  
                  
                  
                  (2,557
                  )
                  
                  
                  (7,379
                  )
                  
                  
                  91
                  
                  
                  
                  58,538Net
      income for the year ended June 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  425
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  425Allocation
      of ESOP shares
                  
                  
                  -
                  
                  
                  
                  185
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  185Amortization
      expense of stock benefit plans
                  
                  
                  -
                  
                  
                  
                  74
                  
                  
                  
                  -
                  
                  
                  
                  191
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  265Compensation
      expense related to vesting stock options
                  
                  
                  -
                  
                  
                  
                  115
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  115Acquisition
      of shares for Treasury, net of shares issued upon stock options
      exercise
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (573
                  )
                  
                  
                  -
                  
                  
                  
                  (573
                  )Unrealized
      losses on securities available for sale, net of related tax
      effects
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (87
                  )
                  
                  
                  (87
                  )Cash
      dividends of $0.40 per common share
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,136
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,136
                  )Balance
      at June 30, 2010
                  
                  $
                  86
                  
                  
                  $
                  36,597
                  
                  
                  $
                  31,363
                  
                  
                  $
                  (2,366
                  )
                  
                  $
                  (7,952
                  )
                  
                  $
                  4
                  
                  
                  $
                  57,732





The
accompanying notes are an integral part of these
statements.


34


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF CASH FLOWS





For the
years ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income
                  
                  $
                  425
                  
                  
                  $
                  728Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of premiums and discounts on investment securities - net
                  
                  
                  -
                  
                  
                  
                  6Depreciation
                  
                  
                  172
                  
                  
                  
                  177Amortization
      of deferred loan origination (fees) costs
                  
                  
                  (10
                  )
                  
                  
                  10Amortization
      of premiums on FHLB advances
                  
                  
                  (352
                  )
                  
                  
                  (490
                  )Amortization
      of core deposit intangibles
                  
                  
                  131
                  
                  
                  
                  131Net
      gain on sale of loans
                  
                  
                  (124
                  )
                  
                  
                  (64
                  )Net
      loss (gain) on sale of real estate owned
                  
                  
                  27
                  
                  
                  
                  (3
                  )ESOP
      compensation expense
                  
                  
                  191
                  
                  
                  
                  185Amortization
      of stock benefit plans and stock options expense
                  
                  
                  374
                  
                  
                  
                  382Federal
      Home Loan Bank stock dividends
                  
                  
                  -
                  
                  
                  
                  (75
                  )Earnings
      on bank-owned life insurance
                  
                  
                  (90
                  )
                  
                  
                  (89
                  )Provision
      for loan losses
                  
                  
                  1,044
                  
                  
                  
                  46Origination
      of loans held for sale
                  
                  
                  (4,251
                  )
                  
                  
                  (3,691
                  )Proceeds
      from loans held for sale
                  
                  
                  4,235
                  
                  
                  
                  3,611Increase
      (decrease) in cash, due to changes in:Accrued
      interest receivable
                  
                  
                  232
                  
                  
                  
                  (122
                  )Prepaid
      expenses and other assets
                  
                  
                  (582
                  )
                  
                  
                  (79
                  )Accrued
      interest payable
                  
                  
                  (44
                  )
                  
                  
                  (56
                  )Accounts
      payable and other liabilities
                  
                  
                  (47
                  )
                  
                  
                  106Federal
      income taxesCurrent
                  
                  
                  95
                  
                  
                  
                  626Deferred
                  
                  
                  (239
                  )
                  
                  
                  67Net
      cash provided by operating activities
                  
                  
                  1,187
                  
                  
                  
                  1,406Cash
      flows from investing activities:Investment
      securities maturities, prepayments and calls:Held
      to maturity
                  
                  
                  5,564
                  
                  
                  
                  1,960Available
      for sale
                  
                  
                  5,073
                  
                  
                  
                  135Loans
      originated for investment, net of principal collected
                  
                  
                  (3,797
                  )
                  
                  
                  (7,209
                  )Proceeds
      from sale of real estate owned
                  
                  
                  410
                  
                  
                  
                  188Additions
      to premises and equipment, net
                  
                  
                  (59
                  )
                  
                  
                  (294
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  7,191
                  
                  
                  
                  (5,220
                  )Cash
      flows from financing activities:Net
      change in deposits
                  
                  
                  5,226
                  
                  
                  
                  2,109Payments
      by borrowers for taxes and insurance, net
                  
                  
                  45
                  
                  
                  
                  (41
                  )Proceeds
      from Federal Home Loan Bank advances
                  
                  
                  18,500
                  
                  
                  
                  17,800Repayments
      on Federal Home Loan Bank advances
                  
                  
                  (26,295
                  )
                  
                  
                  (24,955
                  )Treasury
      stock repurchases
                  
                  
                  (573
                  )
                  
                  
                  (1,679
                  )Dividends
      paid on common stock
                  
                  
                  (1,136
                  )
                  
                  
                  (1,169
                  )Net
      cash used in financing activities
                  
                  
                  (4,233
                  )
                  
                  
                  (7,935
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  4,145
                  
                  
                  
                  (11,749
                  )Beginning
      cash and cash equivalents
                  
                  
                  4,217
                  
                  
                  
                  15,966Ending
      cash and cash equivalents
                  
                  $
                  8,362
                  
                  
                  $
                  4,217





The
accompanying notes are an integral part of these
statements.


35


KENTUCKY
FIRST FEDERAL BANCORP





CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)





For the
years ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





2010
                    
                    
                    2009Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Federal
      income taxes
                    
                    $
                    360
                    
                    
                    $
                    490Interest
      on deposits and borrowings
                    
                    $
                    5,376
                    
                    
                    $
                    6,449Supplemental
      disclosure of noncash investing activities:Transfers
      from loans to real estate acquired through foreclosure
                    
                    $
                    1,076
                    
                    
                    $
                    273Loans
      disbursed upon sales of real estate acquired through
      foreclosure
                    
                    $
                    410
                    
                    
                    $
                    128





The
accompanying notes are an integral part of these
statements.


36


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





June 30,
2010 and 2009





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.  There are no
significant concentrations of loans to any one industry or
customer.  However, the customers’ ability to repay their loans is
dependent on the real estate and general economic conditions in the banks’
specific operating areas.  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 U.S. generally accepted accounting principles (“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. Use of
Estimates:  To prepare financial statements in conformity with
U.S. GAAP, management makes estimates and assumptions based on available
information.  These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and actual
results could differ.  The allowance for loan losses, goodwill, loan
servicing rights, deferred tax assets and fair values of financial instruments
are particularly subject to change.




37




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





3.  Securities:  Debt
securities are classified 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.





Interest
income includes amortization of purchase premium or
discount.  Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed
securities where prepayments are anticipated.  Gains and losses on
sales are recorded on the trade date and determined using the specific
identification method.





Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.





4.  Loans:  Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal amount outstanding,
adjusted for deferred loan origination fees and the allowance for loan
losses.  Interest income is accrued on the unpaid principal balance
unless the collectibility of the loan is in doubt.  Loan origination
fees, net of certain direct origination costs, are deferred and recognized in
interest income using the level-yield method without anticipating
prepayments.  Interest income on loans is generally discontinued at
the time a loan is 90 days delinquent unless the loan is well-secured and in
process of collection.  Past due status is based on the contractual
terms of the loan.  Past due status is based on the contractual terms
of the loan.  In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.  Nonaccrual loans and loans past due 90 days
still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.   A loan is moved to non-accrual status in accordance with
the Company’s policy, typically after 90 days of non-payment.





All
interest accrued but not received for loans placed on nonaccrual is reversed
against interest income.  Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual.  Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.





5.  Loans held for
sale:  Loans held for sale are carried at the lower of cost
(less principal payments received) or fair value, calculated on an aggregate
basis.  At June 30, 2010 and 2009, the Company had $370,000 and
$230,000 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 $15,000
during the year ended June 30, 2010 and $10,000 during the year ended June 30,
2009.  The carrying value of the Company’s mortgage servicing rights,
which approximated fair value, totaled approximately $102,000 and $83,000 at
June 30, 2010 and 2009, respectively.


38


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





5.  Loans held for sale:
(continued)





The
Company was servicing mortgage loans of approximately $12.8 million and $10.4
million that had been sold to the Federal Home Loan Bank at June 30, 2010, and
2009, respectively.  During the fiscal year ended June 30, 2010, we
sold $4.2 million in loans under the FHLB program and the average balance of
loans we serviced was $11.4 million.





Servicing
rights are evaluated for impairment based upon the fair value of the rights as
compared to carrying amount.  Impairment is recognized through a
valuation allowance for an individual grouping, to the extent that fair value is
less than the carrying amount.  If the Company later determines that
all or a portion of the impairment no longer exists for a particular grouping, a
reduction of the allowance may be recorded as an increase to
income.  Changes in valuation allowances are reported with other
non-interest incomeon the income
statement.  The fair values of servicing rights are subject to
significant fluctuations as a result of changes in estimated and actual
prepayment speeds and default rates and losses.





Servicing
fee income which is reported on the income statement as other non-interest
incomeis recorded
for fees earned for servicing loans.  The fees are based on a
contractual percentage of the outstanding principal and are recorded as income
when earned.  The amortization of mortgage servicing rights is netted
against loan servicing fee income.  Servicing fees totaled $28,000 and
$22,000 for the years ended June 30, 2010 and 2009,
respectively.  Late fees and ancillary fees related to loan servicing
are not material.





6.  Allowance for Loan
Losses:  The allowance for loan losses is a valuation allowance
for probable incurred credit losses.  Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.  Subsequent recoveries, if any, are credited to the
allowance.  Management estimates the allowance balance required using
past loss experience, the nature and volume of the portfolio, 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.  Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management’s
judgment, should be charged off.





The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful.  The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors.





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, reduced by estimated selling costs.


39


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





6.  Allowance for loan
losses: (continued)





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.  Although all of our
loans are secured by collateral, we rely heavily on the capacity of our
borrowers to generate sufficient cash flow to service their debt.  As
a result, our loans do not become collateral-dependent until there is
deterioration in the borrower’s cash flow and financial condition, which makes
it necessary for us to look to the collateral for our sole source of
repayment.  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.





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.  In the calculation of our general valuation allowance we
consider the potential for outdated appraisal values to be of minimal risk and,
therefore, do not attribute a specific factor to it.





With
respect to the Banks’ investment in multi-family and nonresidential loans, and
the evaluation of impairment thereof, such loans are nonhomogenous and, as such,
are deemed to be collateral-dependent when they become more than ninety days
delinquent.  We obtain updated independent appraisals  in
these situations or when we suspect that the previous appraisal may no longer be
reflective of the property’s current fair value.  This process varies
from loan to loan, borrower to borrower, and also varies based on the nature of
the collateral.





We
utilize updated independent appraisals to determine fair value for
collateral-dependent loans, adjusted for estimated selling costs, in determining
our specific reserve.  In some situations management does not secure
an updated independent appraisal.  These situations may involve small
loan amounts or loans that, in management’s opinion, have an abnormally low
loan-to-value ratio.





7.  Federal Home Loan Bank
Stock:  The banks are members of the FHLB
system.  Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts.  FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery
of par value.  Both cash and stock dividends are reported as
income.





8.  Real Estate
Owned:  Real estate acquired through or instead of foreclosure
is initially recorded at fair value less estimated selling expenses at the date
of acquisition.  After the recording date decreases in the fair value
of the property are charged to earnings as loss provisions are recorded as
adjustments to the carrying value.  Costs relating to holding real
estate owned, net of rental income, are charged against earnings as
incurred.





9.  Premises and
Equipment:  Land is carried at cost.  Premises and
equipment are carried at cost less accumulated depreciation.  The cost
of premises and equipment includes 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.


40


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





10.  Income
Taxes:  Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities.  Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax
rates.  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, if needed, reduces deferred tax assets
to the amount expected to be realized.  Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in the
future.





The
Company adopted guidance issued by the FASB with respect to accounting for
uncertainty in income taxes as of July 1, 2007.  A tax provision is
recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur.  The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on
examination.  For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded.  The Company recognizes interest
and/or penalties related to income tax matters as income tax
expense.





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.





11.  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.  Benefits are based on
years of service and the average of the highest five consecutive annual salaries
before retirement.  Specific plan asset and accumulated benefit
information for the Company’s portion of the fund is not
available.  Under ERISA, a contributor to a multi-employer pension
plan may be liable in the event of complete or partial withdrawal for the
benefit payments guaranteed under ERISA, but there is no intention to
withdraw.  Pension expense is the net contributions, which 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 $407,000
and $303,000 for the fiscal years ended June 30, 2010 and 2009.





The
Company also maintains a nonqualified deferred compensation plan for the benefit
of certain directors, which is closed to any future deferrals.  Under
the plan, the Company pays each participant, or their beneficiary, the amount of
fees deferred plus interest under terms selected by the individual participants
prior to compensation deferral.  Payments are made to participants
either in a lump sum or in monthly installments not to exceed 10
years.  Payments may commence upon the director’s attainment of a
certain age or upon the individual’s termination of service.  The
expense incurred for the deferred compensation was $7,000 and $19,000 for the
fiscal years ended June 30, 2010 and 2009, respectively.


41


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





11.  Retirement and Employee
Benefit Plans:  (continued)





First
Federal of Hazard 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 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 $2.5 million and $2.6 million at June 30, 2010 and
2009, respectively.  The Company recorded expense for the ESOP of
approximately $185,000 for each of the years ended June 30, 2010 and
2009.





For the
fiscal year ended


June
      30,2010
                  
                  
                  2009Allocated
      shares
                  
                  
                  70,762
                  
                  
                  
                  63,756Shares
      committed to be released
                  
                  
                  9,018
                  
                  
                  
                  8,639Unearned
      shares
                  
                  
                  238,447
                  
                  
                  
                  254,933Total
      ESOP shares
                  
                  
                  318,227
                  
                  
                  
                  327,328Fair
      value of unearned shares at end of period (expressed in
      thousands)
                  
                  $
                  2,151
                  
                  
                  $
                  3,097





First
Federal of Frankfort maintains a 401(k) plan for the benefit of all full-time
employees.  No employer contributions have been made to the 401(k)
plan.





12. Share-Based Compensation
Plans:  Compensation cost is recognized for stock options and
restricted stock awards issued to employees, based on the fair value of these
awards at the date of the grant.  A Black-Scholes model is utilized to
estimate the fair value of stock options, while the market price of the
Company’s common stock at the date of the grant is used for restricted stock
awards.  Compensation cost is recognized over the required service
period, generally defined as the vesting period.  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.





The
compensation cost that has been charged against income for those share-based
plans was $377,000, and $380,000 for the fiscal years ended June 30, 2010 and
2009, respectively.  The total income tax benefit recognized in the
statement of income for share-based compensation arrangements was $128,000 and
$129,000 for the fiscal years ended June 30, 2010 and 2009,
respectively.


42


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





12. Share-Based Compensation
Plans  (continued)





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.





At June
30, 2010, the only options outstanding are related to those granted in the
fiscal year 2006





A summary
of the status of the Company’s stock option plan as of June 30, 2010, 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
                                          
                                          
                                          6,655
                                          
                                          
                                          
                                          -Forfeited
                                          
                                          
                                          6,745
                                          
                                          
                                          
                                          -Outstanding
      at end of year
                                          
                                          
                                          325,800
                                          
                                          
                                          $
                                          10.10
                                          
                                          
                                          $
                                          -Options
      exercisable at end of year
                                          
                                          
                                          259,640
                                          
                                          
                                          $
                                          10.10
                                          
                                          
                                          $
                                          -Weighted
      average fair value of options granted
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          1.75Weighted
      average remaining contractual term of optionsoutstanding
      and exercisable
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          5.5
      years





Information
related to the stock option plan during each year ended June 30,
follows:





2010
                  
                  
                  2009(Dollar
      amounts in 000’s)Intrinsic
      value of options exercised
                  
                  $
                  76
                  
                  
                  $
                  -Cash
      received from option exercises
                  
                  
                  67
                  
                  
                  
                  -Tax
      benefit realized from option exercises
                  
                  
                  9
                  
                  
                  
                  -





As of
June 30, 2010, there was $57,000 of total unrecognized compensation cost related
to nonvested stock options granted under the Plan.  The cost is
expected to be recognized over a weighted-average period of 0.5
years.


43


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





12. 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 value at the
grant date.





The
following table summarizes the activity with regard to restricted stock awards
during fiscal 2010:





Weighted-averagegrant
      dateShares
                  
                  
                  fair
      valueNonvested
      at July 1, 2009
                  
                  
                  51,800
                  
                  
                  $
                  10.10Vested
                  
                  
                  (25,900
                  )
                  
                  
                  10.10Forfeited
                  
                  
                  (1,000
                  )
                  
                  
                  -Nonvested
      at June 30, 2010
                  
                  
                  24,900
                  
                  
                  $
                  10.10





As of
June 30, 2010, there was $44,000 of total unrecognized compensation cost related
to the restricted stock awards.  The cost is expected to be recognized
over a weighted average period of 0.5 years.  The total fair value of
shares vested during the years ended June 30, 2010 and 2009 was $306,000 and
$253,000, respectively.  We expect 24,900 shares to vest in December
2010.





13. 
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 factors used in the basic and diluted
earnings per share computations follow:





For
      the fiscal year endedJune
      30,2010
                  
                  
                  2009Net
      income
                  
                  $
                  425
                  
                  
                  $
                  728Less
      earnings allocated to unvested shares
                  
                  
                  10
                  
                  
                  
                  10Net
      income allocated to common shareholders, basic and diluted
                  
                  $
                  415
                  
                  
                  $
                  718


44


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





13.  Earnings Per
Share:  (continued)





For
      the fiscal year endedJune
      30,2010
                          
                          
                          2009BasicWeighted-average
      common shares including unvestedcommon
      shares outstanding
                          
                          
                          7,561,705
                          
                          
                          
                          7,559,903Less:
      Weighted-average unvested common shares
                          
                          
                          37,512
                          
                          
                          
                          64,056Weighted-average
      common shares outstanding
                          
                          
                          7,524,193
                          
                          
                          
                          7,495,847DilutedAdd:
      Dilutive effect of assumed exercise of stock options
                          
                          
                          27,764
                          
                          
                          
                          9,396Weighted-average
      common shares outstanding (diluted)
                          
                          
                          7,551,957
                          
                          
                          
                          7,505,243





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 fiscal
years 2010 and 2009 all options were dilutive, as the exercise price was less
than the average market price of the common stock.




14.  Fair Value of Assets and
Liabilities:  Fair value is the exchange price that would be
received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement
date.  There are three levels of inputs that may be used to measure
fair values:




Level 1 - Quoted prices
in active markets for identical assets or liabilities that the entity has the
ability to access as of the measurement date.




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– Significant
unobservable inputs that reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.


45


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)




14.  Fair Value of Assets and
Liabilities(continued)




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.




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
measured at fair value on a recurring basis at June 30, 2010 and
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)2010Agency
      mortgage-backed: residential
                      
                      $
                      246
                      
                      
                      $
                      -
                      
                      
                      $
                      246
                      
                      
                      $
                      -2009U.S.
      government agencies
                      
                      $
                      5,136
                      
                      
                      $
                      -
                      
                      
                      $
                      5,136
                      
                      
                      $
                      -Agency
      mortgage-backed: residential
                      
                      
                      315
                      
                      
                      
                      -
                      
                      
                      
                      315
                      
                      
                      
                      -





Impaired
Loans





The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent independent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such
adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value.  Independent
appraisals for collateral-dependent loans are updated periodically (usually
every 9-12 months).


46





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





14. Fair Value of Assets and
Liabilities (continued)




The
following table presents the fair value measurements of assets and liabilities
measured at fair value on a nonrecurring basis at June 30,
2010.  There were no assets or liabilities measured at fair value on a
nonrecurring basis as of 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)2010Impaired
      loans
                      
                      $
                      4,366
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      4,3662009Impaired
      loans
                      
                      $
                      1,097
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,097





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $5.4 million, with a
valuation allowance of $904,000 at June 30, 2010.  At June 30, 2009,
the Company had impaired loans with a fair value of $1.1 million.  A
specific provision for loan losses of $904,000 was included for the year ended
June 30, 2010.





The
following 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.





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.


47


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





14. Fair Value of Assets and
Liabilities (continued)





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, 2010 and 2009:





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
methods for securities were previously described.





Loans held for
sale:  Fair value of loans originated and intended for sale in
the secondary market are determined by FHLB pricing
schedules.





Loans:  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:  It was not practicable to determine the fair value of
FHLB stock due to restrictions placed on its transferability.





Accrued interest
receivable:  The carrying amount is the estimated fair
value.





Deposits:  The
fair value of NOW accounts, passbook accounts, and money market deposits 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.


48


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





14. Fair Value of Assets and
Liabilities (continued)





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.





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, 2010 and 2009, 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:





2010
                                    
                                    
                                    2009Carrying
                                    
                                    
                                    Fair
                                    
                                    
                                    Carrying
                                    
                                    
                                    Fairvalue
                                    
                                    
                                    value
                                    
                                    
                                    value
                                    
                                    
                                    value(In
      Thousands)Financial
      assetsCash
      and cash equivalents
                                    
                                    $
                                    8,362
                                    
                                    
                                    $
                                    8,362
                                    
                                    
                                    $
                                    4,217
                                    
                                    
                                    $
                                    4,217Interest-earning
      deposits
                                    
                                    
                                    100
                                    
                                    
                                    
                                    100
                                    
                                    
                                    
                                    100
                                    
                                    
                                    
                                    100Available-for-sale
      securities
                                    
                                    
                                    246
                                    
                                    
                                    
                                    246
                                    
                                    
                                    
                                    5,451
                                    
                                    
                                    
                                    5,451Held-to-maturity
      securities
                                    
                                    
                                    9,435
                                    
                                    
                                    
                                    10,026
                                    
                                    
                                    
                                    14,999
                                    
                                    
                                    
                                    15,317Loans
      held for sale
                                    
                                    
                                    370
                                    
                                    
                                    
                                    383
                                    
                                    
                                    
                                    230
                                    
                                    
                                    
                                    230Loans
      receivable - net
                                    
                                    
                                    190,618
                                    
                                    
                                    
                                    198,203
                                    
                                    
                                    
                                    188,931
                                    
                                    
                                    
                                    193,165Federal
      Home Loan Bank stock
                                    
                                    
                                    5,641
                                    
                                    
                                    
                                    N/A
                                    
                                    
                                    
                                    5,641
                                    
                                    
                                    
                                    N/AAccrued
      interest receivable
                                    
                                    
                                    518
                                    
                                    
                                    
                                    518
                                    
                                    
                                    
                                    750
                                    
                                    
                                    
                                    750Financial
      liabilitiesDeposits
                                    
                                    $
                                    144,969
                                    
                                    
                                    
                                    147,280
                                    
                                    
                                    $
                                    139,743
                                    
                                    
                                    $
                                    142,772Advances
      from the Federal Home Loan Bank
                                    
                                    
                                    32,009
                                    
                                    
                                    
                                    30,590
                                    
                                    
                                    
                                    40,156
                                    
                                    
                                    
                                    41,613Advances
      by borrowers for taxes and insurance
                                    
                                    
                                    335
                                    
                                    
                                    
                                    335
                                    
                                    
                                    
                                    290
                                    
                                    
                                    
                                    290Accrued
      interest payable
                                    
                                    
                                    145
                                    
                                    
                                    
                                    145
                                    
                                    
                                    
                                    189
                                    
                                    
                                    
                                    189





15.  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.


49


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





16.  Goodwill and Other
Intangible Assets:  Goodwill resulting from business
combinations prior to January 1, 2009 represents the excess of the purchase
price over the fair value of the net assets of businesses
acquired.  Goodwill resulting from business combinations after January
1, 2009, is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests
in the acquiree, over the fair value of the net assets acquired and liabilities
assumed as of the acquisition date.   Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but tested for impairment at least
annually. The Company has selected March 31 as the date to perform the annual
impairment test.  Intangible assets with definite useful lives are
amortized over their estimated useful lives to their estimated residual values.
Goodwill is the only intangible asset with an indefinite life on our balance
sheet.





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, 2010 and
2009 is as follows:





2010
                  
                  
                  2009(in
      thousands)Core
      depositsGross
      Carrying Amount
                  
                  $
                  918
                  
                  
                  $
                  918Accumulated
      Amortization
                  
                  
                  700
                  
                  
                  
                  569$
                  218
                  
                  
                  $
                  349





Amortization
expense for each of the years ended June 30, 2010 and 2009 was
$131,000.  The following table summarizes the Company’s current
estimates for future amortization expense of the core deposit
intangible:





(In thousands)2011
                  
                  $
                  1312012
                  
                  $
                  87





17.  Cash Surrender Value of Life
Insurance:  First Federal of Frankfort has purchased life
insurance policies on certain key executives.  Bank-owned life
insurance is recorded at the amount that can be realized under the insurance
contract at the balance sheet date, which is the cash surrender value adjusted
for other charges or other amounts due that are probable at
settlement.





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


50


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





19. Related Party
Transactions:  Loans outstanding to executive officers,
directors, significant shareholders and their affiliates (related parties) at
June 30, 2010 and 2009 are summarized as follows:





2010
                  
                  
                  2009(In
      thousands)Outstanding
      principal, beginning of year
                  
                  $
                  387
                  
                  
                  $
                  369Changes
      in composition of related parties
                  
                  
                  214Principal
      disbursed during the year
                  
                  
                  31
                  
                  
                  
                  119Principal
      repaid and refinanced during the year
                  
                  
                  (39
                  )
                  
                  
                  (101
                  )Outstanding
      principal, end of year
                  
                  $
                  593
                  
                  
                  $
                  387





Deposits
from related parties held by the Company at June 30, 2010 and 2009 totaled $1.3
million and $2.7 million, respectively.





20.  Comprehensive
Income:  Comprehensive income consists of net income and other
comprehensive income.  Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as
separate components of equity.





21.  Loss
Contingencies:  Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.  Management does not believe there now are such
matters that will have a material effect on the financial
statements.





22.  Equity:  Stock
dividends in excess of 20% are reported by transferring the par value of the
stock issued from retained earnings to common stock.  Stock dividends
for 20% or less are reported by transferring the fair value, as of the
ex-dividend date, of the stock issued from retained earnings to common stock and
additional paid-in capital.  Fractional share amounts are paid in cash
with a reduction in retained earnings.





23.   Dividend
Restriction:  Banking regulations require maintaining certain
capital levels and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.





24.  
Operating
Segments:  While the chief decision-makers monitor the revenue
streams of the various products and services, operations are managed and
financial performance is evaluated on a Company-wide basis.  Operating
segments are aggregated into one as operating results for all segments are
similar.  Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating
segment.


51


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)





25.  Reclassifications:  Some
items in the prior year financial statements were reclassified to conform to the
current presentation.





26.  New Accounting
Standards





In
May 2009, the FASB issued guidance which requires the effects of events
that occur subsequent to the balance-sheet date be evaluated through the date
the financial statements are either issued or available to be
issued.   Companies should disclose the date through which
subsequent events have been evaluated and whether that date is the date the
financial statements were issued or the date the financial statements were
available to be issued. Companies are required to reflect in their financial
statements the effects of subsequent events that provide additional evidence
about conditions at the balance-sheet date (recognized subsequent
events).  Companies are also prohibited from reflecting in their
financial statements the effects of subsequent events that provide evidence
about conditions that arose after the balance-sheet date (nonrecognized
subsequent events), but requires information about those events to be disclosed
if the financial statements would otherwise be misleading.  This
guidance was effective for interim and annual financial periods ending after
June 15, 2009 with prospective application.





In
June 2009, the FASB replacedThe Hierarchy of Generally Accepted
Accounting Principles, with  the FASB Accounting Standards
CodificationTM (The
Codification) as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. The
Codification was effective for financial statements issued for periods ending
after September 15, 2009.





In June
2008, theFASB
issued guidance which addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, included in the earnings allocation in computing earnings per share
(EPS) under the two-class method.   Unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of EPS pursuant to the two-class method.  This guidance was
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period
EPS data presented were to be adjusted retrospectively (including interim
financial statements, summaries of earnings, and selected financial data) to
conform to the provisions of this guidance.





In
connection with our adoption of FSP ASC 260-10, weighted average voting and
unvested common shares outstanding include unvested shares issued through the
year 2010 incentive compensation plan shares of 25,900 and 51,800 at June 30,
2010 and 2009, respectively.


52





Kentucky
First Federal Bancorp





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





26.  New Accounting Standards
(continued)





On June
12, 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and
Servicing.The new
guidance amends ASC 860, and will require more information about transfers of
financial assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures. The new standard will be effective July 1, 2010 and the adoption of
this standard is not expected to have a material effect on the Company’s results
of operations or financial position.





On June
12, 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation
(Statement No. 167 amends FIN 46(R)).  The new guidance replaces the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with a qualitative approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity (VIE) that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity.   Unlike previous guidance, this Statement requires ongoing
reconsideration of whether (1) an entity is a VIE and (2) an enterprise is the
primary beneficiary of a VIE.  It is expected that the amendments will
result in more entities consolidating VIEs that previously were not consolidated
 This new guidance will also require additional disclosures about the
Company’s involvement in variable interest entities.   This new guidance
will become effective July 1, 2010 and its adoption is not expected to have a
material effect on the Company’s results of operations or financial
position.





The FASB
issued new accounting guidance under Accounting Standards Update (ASU) No.
2010-06 that requires new disclosures and clarifies existing disclosure
requirements about fair value measurement as set forth in ASC Subtopic
820-10.  The objective of the new guidance is to improve these
disclosures and increase transparency in financial
reporting.  Specifically, the new guidance requires a reporting entity
to disclose separately the amounts of significant transfers in and out of Level
1 and Level 2 fair value measurements and describe the reasons for the
transfers.  It also requires in the reconciliation for fair value
measurements using significant unobservable inputs, separate presentation of
information about purchases, sales, issuances and settlements.  In
addition, the guidance clarifies the requirements of the following existing
disclosures:





·
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities;
  and


·
            A
      reporting entity should provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.





ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  Early application is permitted.


53


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
B - SECURITIES





The
following table summarizes the amortized cost and fair value of the available
for sale securities and held to maturity investment securities portfolio at June
30, 2010 and 2009 and the corresponding amounts of gross unrealized gains and
losses recognized in accumulated other comprehensive income were as
follows:





2010Gross
                          
                          
                          Gross
                          
                          
                          EstimatedAmortized
                          
                          
                          unrealized
                          
                          
                          unrealized
                          
                          
                          faircost
                          
                          
                          gains
                          
                          
                          losses
                          
                          
                          value(In
      thousands)Available-for-sale
      SecuritiesAgency  mortgage-backed:
      residential
                          
                          $
                          240
                          
                          
                          $
                          7
                          
                          
                          $
                          (1
                          )
                          
                          $
                          246Held-to-maturity
      SecuritiesAgency
      mortgage-backed: residential
                          
                          $
                          9,435
                          
                          
                          $
                          591
                          
                          
                          $
                          -
                          
                          
                          $
                          10,0262009Gross
                          
                          
                          Gross
                          
                          
                          
                          EstimatedAmortized
                          
                          
                          unrealized
                          
                          
                          unrealized
                          
                          
                          faircost
                          
                          
                          gains
                          
                          
                          losses
                          
                          
                          value(In
      thousands)Available-for-sale
      SecuritiesU.S.
      government agencies
                          
                          $
                          5,000
                          
                          
                          $
                          136
                          
                          
                          $
                          -
                          
                          
                          $
                          5,136Agency
      mortgage-backed: residential
                          
                          
                          314
                          
                          
                          
                          2
                          
                          
                          
                          (1
                          )
                          
                          
                          315$
                          5,314
                          
                          
                          $
                          138
                          
                          
                          $
                          (1
                          )
                          
                          $
                          5,451Held-to-maturity
      SecuritiesU.S.
      government agencies
                          
                          $
                          3,000
                          
                          
                          $
                          2
                          
                          
                          $
                          -
                          
                          
                          $
                          3,002Agency
      mortgage-backed: residential
                          
                          
                          11,999
                          
                          
                          
                          316
                          
                          
                          
                          -
                          
                          
                          
                          12,315$
                          14,999
                          
                          
                          $
                          318
                          
                          
                          $
                          -
                          
                          
                          $
                          15,317


54


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE B - SECURITIES
(continued)





The
amortized cost and estimated fair value of securities as of June 30, 2010 and
2009, 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.  Securities without a single maturity, primarily
mortgage-backed, are shown separately.





2010
                                        
                                        
                                        2009Estimated
                                        
                                        
                                        
                                        
                                        
                                        Estimatedfair
                                        
                                        
                                        Amortized
                                        
                                        
                                        fair
                                        
                                        
                                        Amortizedvalue
                                        
                                        
                                        cost
                                        
                                        
                                        value
                                        
                                        
                                        cost(In
      thousands)Available-for-saleWithin
      one year
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        5,136
                                        
                                        
                                        $
                                        5,000One
      year through five years
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -5,136
                                        
                                        
                                        
                                        5,000Agency
      mortgage-backed: residential
                                        
                                        
                                        246
                                        
                                        
                                        
                                        240
                                        
                                        
                                        
                                        315
                                        
                                        
                                        
                                        314Totals
                                        
                                        $
                                        246
                                        
                                        
                                        $
                                        240
                                        
                                        
                                        $
                                        5,451
                                        
                                        
                                        $
                                        5,314Held-to-maturityWithin
      one year
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        3,002
                                        
                                        
                                        $
                                        3,000One
      year through five years
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -3,002
                                        
                                        
                                        
                                        3,000Agency
      mortgage-backed: residential
                                        
                                        
                                        10,026
                                        
                                        
                                        
                                        9,435
                                        
                                        
                                        
                                        12,315
                                        
                                        
                                        
                                        11,999Totals
                                        
                                        $
                                        10,026
                                        
                                        
                                        $
                                        9,435
                                        
                                        
                                        $
                                        15,317
                                        
                                        
                                        $
                                        14,999





There
were no sales of securities during the fiscal years ended June 30, 2010 or
2009.


55


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE B - SECURITIES
(continued)




The
following table summarizes the securities with unrealized losses at June 30,
2010 and 2009 aggregated by major security type and length of time in a
continuous unrealized loss position:





June
      30, 2010Less
      than 12 months
                                                                                                    
                                                                                                    
                                                                                                    12
      months or longer
                                                                                                    
                                                                                                    
                                                                                                    TotalDescription
      of
                                                                                                    
                                                                                                    Fair
                                                                                                    
                                                                                                    
                                                                                                    Unrealized
                                                                                                    
                                                                                                    
                                                                                                    Fair
                                                                                                    
                                                                                                    
                                                                                                    Unrealized
                                                                                                    
                                                                                                    
                                                                                                    Fair
                                                                                                    
                                                                                                    
                                                                                                    Unrealizedsecurities
                                                                                                    
                                                                                                    value
                                                                                                    
                                                                                                    
                                                                                                    losses
                                                                                                    
                                                                                                    
                                                                                                    value
                                                                                                    
                                                                                                    
                                                                                                    losses
                                                                                                    
                                                                                                    
                                                                                                    value
                                                                                                    
                                                                                                    
                                                                                                    losses(Dollars
      in thousands)Agency
      mortgage-backedresidential
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    45
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    45
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1
                                                                                                    )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)Agency
      mortgage-backedresidential
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    57
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    57
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (1
                                                                                                    )





Management
does not intend to sell nor does it believe that we will be required to sell
these securities before 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.


56


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
C - LOANS




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





2010
                  
                  
                  2009(In
      thousands)Residential
      real estateOne-
      to four-family
                  
                  $
                  165,818
                  
                  
                  $
                  163,108Multi-family
                  
                  
                  6,689
                  
                  
                  
                  7,303Construction
                  
                  
                  1,916
                  
                  
                  
                  735Nonresidential
      real estate and land
                  
                  
                  10,943
                  
                  
                  
                  11,460Loans
      on deposits
                  
                  
                  2,754
                  
                  
                  
                  2,909Consumer
      and other
                  
                  
                  4,802
                  
                  
                  
                  4,497192,922
                  
                  
                  
                  190,012Less:Undisbursed
      portion of loans in process
                  
                  
                  631
                  
                  
                  
                  404Deferred
      loan origination fees (cost)
                  
                  
                  138
                  
                  
                  
                  (1
                  )Allowance
      for loan losses
                  
                  
                  1,535
                  
                  
                  
                  678$
                  190,618
                  
                  
                  $
                  188,931




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





2010
                  
                  
                  2009(In
      thousands)Balance
      at beginning of year
                  
                  $
                  678
                  
                  
                  $
                  666Provision
      for losses on loans
                  
                  
                  1,044
                  
                  
                  
                  46Charge-offs
                  
                  
                  (187
                  )
                  
                  
                  (34
                  )Balance
      at end of year
                  
                  $
                  1,535
                  
                  
                  $
                  678





Individually
impaired loans were as follows:





2010
                  
                  
                  2009(In
      thousands)Year-end
      loans with no allocated allowance for loan losses
                  
                  $
                  1,348
                  
                  
                  $
                  4,086Year-end
      loans with allocated allowance for loan losses
                  
                  
                  5,370
                  
                  
                  
                  1,153Total
      loans at year-end
                  
                  $
                  6,718
                  
                  
                  $
                  5,239Amount
      of the allowance for loan losses allocated
                  
                  $
                  904
                  
                  
                  $
                  56


57




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE C - LOANS  (continued)





2010
                  
                  
                  2009(In
      thousands)Average
      of individually impaired loans during year
                  
                  $
                  6,961
                  
                  
                  $
                  5,239Interest
      income recognized during impairment
                  
                  
                  31
                  
                  
                  
                  273Cash-basis
      interest income recognized
                  
                  
                  31
                  
                  
                  
                  185





Nonaccrual
loans and loans past due 90 days still on accrual were as follows:





2010
                  
                  
                  2009(In
      thousands)Loans
      past due over 90 days still on accrual
                  
                  $
                  112
                  
                  
                  $
                  3,437Nonaccrual
      loans
                  
                  
                  7,671
                  
                  
                  
                  435





NOTE
D – REAL ESTATE OWNED





Activity
in real estate owned was as follows:


2010
                  
                  
                  2009(In
      thousands)Balance
      at beginning of year
                  
                  $
                  109
                  
                  
                  $
                  21Additions
                  
                  
                  1,076
                  
                  
                  
                  273Disposals
                  
                  
                  (437
                  )
                  
                  
                  (185
                  )Balance
      at end of year
                  
                  $
                  748
                  
                  
                  $
                  109


58


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
E - PREMISES AND EQUIPMENT





Premises
and equipment at June 30 are comprised of the following:





2010
                    
                    
                    2009(In
      thousands)Land
                    
                    $
                    860
                    
                    
                    $
                    860Buildings
      and improvements
                    
                    
                    3,695
                    
                    
                    
                    3,666Furniture
      and equipment
                    
                    
                    1,347
                    
                    
                    
                    1,335Automobiles
                    
                    
                    32
                    
                    
                    
                    325,934
                    
                    
                    
                    5,893Less
      accumulated depreciation
                    
                    
                    3,203
                    
                    
                    
                    3,049$
                    2,731
                    
                    
                    $
                    2,844





NOTE F - DEPOSITS





Deposits
consist of the following major classifications at June 30:





2010
                  
                  
                  2009(In
      thousands)Non-interest
      bearing checking accounts
                  
                  $
                  754
                  
                  
                  $
                  846Checking
      accounts
                  
                  
                  7,440
                  
                  
                  
                  6,346Savings
      accounts
                  
                  
                  29,506
                  
                  
                  
                  30,093Money
      market demand deposits
                  
                  
                  4,603
                  
                  
                  
                  3,940Total
      demand, transaction and passbook deposits
                  
                  
                  42,303
                  
                  
                  
                  41,225Certificates
      of deposit:Original
      maturities of:Less
      than 12 months
                  
                  
                  4,487
                  
                  
                  
                  5,02812
      months to 36 months
                  
                  
                  87,471
                  
                  
                  
                  81,552More
      than 36 months
                  
                  
                  10,708
                  
                  
                  
                  11,938Total
      certificates of deposit
                  
                  
                  102,666
                  
                  
                  
                  98,518Total
      deposits
                  
                  $
                  144,969
                  
                  
                  $
                  139,743





At June
30, 2010 and 2009, the Banks had certificate of deposit accounts with balances
equal to or in excess of $100,000 totaling approximately $34.3 million and $29.1
million, respectively.


59





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE F -
DEPOSITS  (continued)





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





2010(In
      thousands)2011
                  
                  $
                  73,1512012
                  
                  
                  23,6602013
                  
                  
                  4,4932014
                  
                  
                  3982015
      and thereafter
                  
                  
                  964$
                  102,666





NOTE
G - ADVANCES FROM THE FEDERAL HOME LOAN BANK





Advances
from the Federal Home Loan Bank, collateralized at June 30, 2010 and 2009 by
pledges of certain residential mortgage loans totaling $ $46.4 million and $53.6
million, respectively, and the Banks’ investment in Federal Home Loan Bank
stock.





At June
30, 2010, the interest rates for the advances were fixed and ranged from
1.77% to 6.95%, with a weighted-average interest rate of 3.58%.  The
advances will mature as follows:





Maturingyear
      endingJune
      30, 2010(In
      thousands)2011
                      
                      $
                      11,6402012
                      
                      
                      3,1842013
                      
                      
                      7,8102014
                      
                      
                      2,5552015
                      
                      
                      2,3662016
                      
                      
                      6232017
                      
                      
                      4312018-2020
                      
                      3,28031,889Premium
      assigned to borrowings inFrankfort
      First acquisition, net of amortization
                      
                      
                      120$
                      32,009


60


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
G - ADVANCES FROM THE FEDERAL HOME LOAN BANK (continued)





At June
30, 2009, the interest rates for the advances were fixed and ranged from 3.95%
to 6.95%, with a weighted-average interest rate of 5.84%.  The
advances will mature as follows:





Maturingyear
      endingJune
      30, 2009(In
      thousands)2010
                    
                    $
                    24,1352011
                    
                    
                    8,1332012
                    
                    
                    1162013
                    
                    
                    5,0782014
                    
                    
                    782015
                    
                    
                    802016
                    
                    
                    622017
                    
                    
                    22018
                    
                    2,00039,684Premium
      assigned to borrowings inFrankfort
      First acquisition, net of amortization
                    
                    
                    472$
                    40,156





Each
advance is payable at its maturity date, with a prepayment penalty for fixed
rate advances.  Based on collateral composed of first mortgage loans
and the Company’s holdings of FHLB stock, the Company was eligible to borrow up
to $65.4 million  as of June 30, 2010.





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, 2010 and 2009, as follows:





2010
                  
                  
                  2009(In
      thousands)Federal
      income taxes at the statutory rate
                  
                  $
                  218
                  
                  
                  $
                  640Increase
      (decrease) resulting primarily from:Cash
      surrender value of life insurance
                  
                  
                  (30
                  )
                  
                  
                  (29
                  )Incentive
      stock options
                  
                  
                  27
                  
                  
                  
                  28Recapture
      of thrift reserves
                  
                  
                  -
                  
                  
                  
                  80Disallowed
      deduction claimed on amended return for $1.3 million paid to option
      holders in acquisition of Frankfort First Bancorp, Inc. and other
      audit adjustments
                  
                  
                  -
                  
                  
                  
                  464$
                  215
                  
                  
                  $
                  1,183


61





KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE H - FEDERAL INCOME
TAXES  (continued)





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




2010
                          
                          
                          2009(In
      thousands)Taxes
      (payable) refundable on temporarydifferences
      at estimated corporate tax rate:Deferred
      tax assets:General
      loan loss allowance
                          
                          $
                          522
                          
                          
                          $
                          231Deferred
      loan origination fees
                          
                          
                          5
                          
                          
                          
                          —Deferred
      compensation and benefits
                          
                          
                          224
                          
                          
                          
                          212Charitable
      contributions
                          
                          
                          3
                          
                          
                          
                          9Purchase
      accounting adjustments
                          
                          
                          41
                          
                          
                          
                          160Nonaccrued
      interest on loans
                          
                          
                          22
                          
                          
                          
                          9Other
                          
                          
                          -
                          
                          
                          
                          27Total
      deferred tax assets
                          
                          
                          817
                          
                          
                          
                          648Deferred
      tax liabilities:Federal
      Home Loan Bank stock dividends
                          
                          
                          (1,074
                          )
                          
                          
                          (1,074
                          )Deferred
      loan origination costs
                          
                          
                          (37
                          )
                          
                          
                          (32
                          )Purchase
      accounting adjustments
                          
                          
                          (527
                          )
                          
                          
                          (572
                          )Unrealized
      gains on securities available for sale
                          
                          
                          -
                          
                          
                          
                          (47
                          )Book/tax
      depreciation
                          
                          
                          (53
                          )
                          
                          
                          (38
                          )Total
      deferred tax liabilities
                          
                          
                          (1,691
                          )
                          
                          
                          (1,763
                          )Net
      deferred tax liability
                          
                          $
                          (874
                          )
                          
                          $
                          (1,115
                          )


Unrecognized Tax
Benefits





The
Company adopted FASB ASC 740-10, Income Taxes (FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes),on July
1, 2007.   A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:





2010
                  
                  
                  2009Balance
      at July 1
                  
                  $
                  253
                  
                  
                  $
                  173Additions/(reductions)
      based on tax  positions for the current year
                  
                  
                  —
                  
                  
                  $
                  80Balance
      at June 30
                  
                  $
                  253
                  
                  
                  $
                  253





No cash
settlements were paid during the period July 1, 2009 through June 30,
2010.  Approximately $253 of unrecognized tax benefits, if recognized,
would favorably affect the effective income tax rate in future
periods.  The Company expects its unrecognized tax benefits will
change in the next twelve months.  The Company is planning to amend
its June 30, 2009 federal return to report the additional tax liability of
$80.  The remaining unrecognized tax benefits may be settled as part
of the current IRS examination.


62


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE H - FEDERAL INCOME
TAXES  (continued)





The 2009
provision for federal income taxes includes a 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.  The 2009 provision
also includes a charge of $80,000, which is a correction to previously stated
tax expense and relates to a dividend from a bank subsidiary that was in excess
of the accumulated earnings and profits of the subsidiary.  The
dividend constituted a distribution of the thrift reserve and was, therefore, a
taxable event.





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 excess of accumulated earnings and profits, such distributions
will be subject to federal income taxes at the then current corporate income tax
rate.  Retained earnings at June 30, 2010, include approximately
$5.2million 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,
2010.





The
Company and its subsidiaries are subject to U.S. federal income tax as well as
income tax of the state of Kentucky.  The Company is no longer subject
to examination by taxing authorities for years before 2006.





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, 2010 and 2009, the Banks had outstanding commitments of approximately
$878,000 and $1.5 million, respectively, to originate mortgage
loans.  Additionally, First Federal of Frankfort was obligated under
unused lines of credit for equity loans totaling $9.2 million and $9.8 million
at the end of fiscal years 2010 and 2009, respectively.  Commitments
to make loans are generally made for periods of 60 days or less.  The
fixed rate loan commitments at June 30, 2010 totaled $352,000 and had interest
rates ranging from 5.0% to 6.41% and maturities ranging from 15 years to 30
years.





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


63


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





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 2010, 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:


64


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
J - REGULATORY CAPITAL (continued)


As
      of June 30, 2010To
      be “well-capitalized”
      underFor
      capital
                      
                      
                      prompt
      correctiveActual
                      
                      
                      adequacy purposes
                      
                      
                      action provisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio(Dollars
      in thousands)Tangible
      capitalFirst
      Federal of Hazard
                      
                      $
                      18,627
                      
                      
                      
                      17.6
                      %
                      
                      3$1,589
                      
                      
                      31.5
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/AFirst
      Federal of Frankfort
                      
                      $
                      17,570
                      
                      
                      
                      14.2
                      %
                      
                      3$1,858
                      
                      
                      31.5
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/AConsolidated
                      
                      $
                      42,995
                      
                      
                      
                      19.4
                      %
                      
                      3$3,333
                      
                      
                      31.5
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/ATier
      1 core capitalFirst
      Federal of Hazard
                      
                      $
                      18,627
                      
                      
                      
                      17.6
                      %
                      
                      3$4,238
                      
                      
                      34.0
                      %
                      
                      3$6,357
                      
                      
                      
                      3 5.0
                      %First
      Federal of Frankfort
                      
                      $
                      17,570
                      
                      
                      
                      14.2
                      %
                      
                      3$4,955
                      
                      
                      34.0
                      %
                      
                      3$7,433
                      
                      
                      
                      3 5.0
                      %Consolidated
                      
                      $
                      42,995
                      
                      
                      
                      19.4
                      %
                      
                      3$8,888
                      
                      
                      34.0
                      %
                      
                      3$13,332
                      
                      
                      
                      3 5.0
                      %Total
      risk-based capitalFirst
      Federal of Hazard
                      
                      $
                      19,102
                      
                      
                      
                      36.6
                      %
                      
                      3$4,176
                      
                      
                      38.0
                      %
                      
                      3$5,220
                      
                      
                      
                      310.0
                      %First
      Federal of Frankfort
                      
                      $
                      17,726
                      
                      
                      
                      26.1
                      %
                      
                      3$5,429
                      
                      
                      38.0
                      %
                      
                      3$6,787
                      
                      
                      
                      310.0
                      %Consolidated
                      
                      $
                      43,626
                      
                      
                      
                      36.5
                      %
                      
                      3$9,433
                      
                      
                      38.0
                      %
                      
                      3$11,791
                      
                      
                      
                      310.0
                      %Tier
      1 risk-based capitalFirst
      Federal of Hazard
                      
                      $
                      18,627
                      
                      
                      
                      35.7
                      %
                      
                      N/A
                      
                      
                      N/A
                      
                      
                      3$6,357
                      
                      
                      
                      3 6.0
                      %First
      Federal of Frankfort
                      
                      $
                      17,570
                      
                      
                      
                      25.9
                      %
                      
                      N/A
                      
                      
                      N/A
                      
                      
                      3$7,433
                      
                      
                      
                      3 6.0
                      %Consolidated
                      
                      $
                      42,995
                      
                      
                      
                      36.5
                      %
                      
                      N/A
                      
                      
                      N/A
                      
                      
                      3$13,332
                      
                      
                      
                      3 6.0
                      %


65


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





NOTE
J - REGULATORY CAPITAL (continued)




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
                        %
                        
                        3$1,711
                        
                        
                        31.5
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/AFirst
      Federal of Frankfort
                        
                        $
                        17,358
                        
                        
                        
                        15.0
                        %
                        
                        3$1,734
                        
                        
                        31.5
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/AConsolidated
                        
                        $
                        40,779
                        
                        
                        
                        17.8
                        %
                        
                        3$3,445
                        
                        
                        31.5
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ACore
      capitalFirst
      Federal of Hazard
                        
                        $
                        22,799
                        
                        
                        
                        20.0
                        %
                        
                        3$4,564
                        
                        
                        34.0
                        %
                        
                        3$5,705
                        
                        
                        
                        3 5.0
                        %First
      Federal of Frankfort
                        
                        $
                        17,358
                        
                        
                        
                        15.0
                        %
                        
                        3$4,623
                        
                        
                        34.0
                        %
                        
                        3$5,779
                        
                        
                        
                        3 5.0
                        %Consolidated
                        
                        $
                        40,157
                        
                        
                        
                        17.5
                        %
                        
                        3$9,187
                        
                        
                        34.0
                        %
                        
                        3$11,484
                        
                        
                        
                        3 5.0
                        %Risk-based
      capitalFirst
      Federal of Hazard
                        
                        $
                        23,289
                        
                        
                        
                        42.5
                        %
                        
                        3$4,392
                        
                        
                        38.0
                        %
                        
                        3$5,490
                        
                        
                        
                        310.0
                        %First
      Federal of Frankfort
                        
                        $
                        17,490
                        
                        
                        
                        27.4
                        %
                        
                        3$5,109
                        
                        
                        38.0
                        %
                        
                        3$6,386
                        
                        
                        
                        310.0
                        %Consolidated
                        
                        $
                        40,779
                        
                        
                        
                        34.4
                        %
                        
                        3$9,500
                        
                        
                        38.0
                        %
                        
                        3$11,875
                        
                        
                        
                        310.0
                        %Tier
      1 risk-based capitalFirst
      Federal of Hazard
                        
                        $
                        22,799
                        
                        
                        
                        41.6
                        %
                        
                        N/A
                        
                        
                        N/A
                        
                        
                        3$6,357
                        
                        
                        
                        3 6.0
                        %First
      Federal of Frankfort
                        
                        $
                        17,358
                        
                        
                        
                        27.2
                        %
                        
                        N/A
                        
                        
                        N/A
                        
                        
                        3$7,438
                        
                        
                        
                        3 6.0
                        %Consolidated
                        
                        $
                        40,157
                        
                        
                        
                        33.9
                        %
                        
                        N/A
                        
                        
                        N/A
                        
                        
                        3$13,795
                        
                        
                        
                        3 6.0
                        %





As of
June 30, 2010 and 2009, 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, 2010.





66




KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





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, 2010 and 2009, and the results of
its operations and its cash flows for the fiscal years ended June 30, 2010 and
2009.





KENTUCKY
FIRST FEDERAL BANCORP


BALANCE
SHEETS


June 30,
2010 and 2009


(In
thousands)


2010
                  
                  
                  2009ASSETSInterest-bearing
      deposits in First Federal of Hazard
                  
                  $
                  353
                  
                  
                  $
                  14Interest-bearing
      deposits in First Federal of Frankfort
                  
                  
                  3,813
                  
                  
                  
                  21Other
      interest-bearing deposits
                  
                  
                  35
                  
                  
                  
                  61Investment
      in First Federal of Hazard
                  
                  
                  21,085
                  
                  
                  
                  25,531Investment
      in Frankfort First
                  
                  
                  32,707
                  
                  
                  
                  32,707Prepaid
      expenses and other assets
                  
                  
                  89
                  
                  
                  
                  375Total
      assets
                  
                  $
                  58,082
                  
                  
                  $
                  58,709LIABILITIES
      AND SHAREHOLDERS’ EQUITYAccounts
      payable and other liabilities
                  
                  $
                  350
                  
                  
                  $
                  171Total
      liabilities
                  
                  
                  350
                  
                  
                  
                  171Shareholders’
      equityCommon
      stock
                  
                  
                  86
                  
                  
                  
                  86Additional
      paid-in capital
                  
                  
                  36,597
                  
                  
                  
                  36,223Retained
      earnings
                  
                  
                  31,363
                  
                  
                  
                  32,074Shares
      acquired by stock benefit plans
                  
                  
                  (2,366
                  )
                  
                  
                  (2,557
                  )Shares
      acquired for treasury – at cost
                  
                  
                  (7,952
                  )
                  
                  
                  (7,379
                  )Accumulated
      other comprehensive income
                  
                  
                  4
                  
                  
                  
                  91Total
      shareholders’ equity
                  
                  
                  57,732
                  
                  
                  
                  58,538Total
      liabilities and shareholders’ equity
                  
                  $
                  58,082
                  
                  
                  $
                  58,709


67


KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





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





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF INCOME


Years
ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





2010
                          
                          
                          2009RevenueInterest
      income
                          
                          $
                          172
                          
                          
                          $
                          188Dividends
      from First Federal of Hazard
                          
                          
                          5,000
                          
                          
                          
                          —Equity
      in undistributed (excess distributed) earnings ofFirst
      Federal of Hazard
                          
                          
                          (4,459
                          )
                          
                          
                          1,018Dividends
      from Frankfort First
                          
                          
                          190
                          
                          
                          
                          492Equity
      in undistributed earnings ofFrankfort
      First
                          
                          
                          80
                          
                          
                          
                          54Total
      revenue
                          
                          
                          983
                          
                          
                          
                          1,752Non-interest
      expenses
                          
                          
                          707
                          
                          
                          
                          723Earnings
      before income taxes
                          
                          
                          276
                          
                          
                          
                          1,029Federal
      income tax expense (credits)
                          
                          
                          (149
                          )
                          
                          
                          301NET
      INCOME
                          
                          $
                          425
                          
                          
                          $
                          728





KENTUCKY
FIRST FEDERAL BANCORP


STATEMENTS
OF CASH FLOWS


For Years
ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





2010
                        
                        
                        2009Cash
      flows from operating activities:Net
      earnings for the year
                        
                        $
                        425
                        
                        
                        $
                        728Adjustments
      to reconcile net earnings to netcash
      provided by operating activities:Excess
      (deficit) distributions over earnings (undistributed
    earnings)from
      consolidated subsidiaries
                        
                        
                        4,359
                        
                        
                        
                        (1,072
                        )Noncash
      compensation expense
                        
                        
                        565
                        
                        
                        
                        567Increase
      (decrease) in cash due to changes in:Prepaid
      expenses and other assets
                        
                        
                        363
                        
                        
                        
                        386Other
      liabilities
                        
                        
                        102
                        
                        
                        
                        40Net
      cash provided by operating activities
                        
                        
                        5,814
                        
                        
                        
                        649








KENTUCKY
FIRST FEDERAL BANCORP





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)





June 30,
2010 and 2009





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, 2010 and 2009


(Dollar
Amounts in thousands)


2010
                  
                  
                  2009Cash
      flows from financing activities:Dividends
      paid on common stock
                  
                  
                  (1,136
                  )
                  
                  
                  (1,169
                  )Repurchase
      of treasury shares
                  
                  
                  (573
                  )
                  
                  
                  (1,679
                  )Advances
      from (repaid to) Frankfort First Bancorp, Inc.
                  
                  
                  —
                  
                  
                  
                  (549
                  )Net
      cash used in financing activities
                  
                  
                  (1,709
                  )
                  
                  
                  (3,397
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  4,105
                  
                  
                  
                  (2,748
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  96
                  
                  
                  
                  2,844Cash
      and cash equivalents at end of year
                  
                  $
                  4,201
                  
                  
                  $
                  96





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.





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
      C. Bersaglia, Vice
      President/
              
              Wick
      Asbury, Vice
      President/LendingSecretary
              
              Brenda
      Baldwin, AccountingPhyllis
      N. Campbell, Customer
      Service
                Holly
      Caudill, Loan
      Officer
              
              Stan
      Betsworth, Vice
      President/Lending
                Phyllis
      Bowman, Loan
      ServicingSandra
      C. Craft, Vice
      President/Loan Officer
              
              Lisa
      Brinley, Branch
      ManagerLou
      Ella R. Farler, Executive Vice
      President
              
              Andrea
      Cline, Customer
      ServiceDeloris
      S. Justice, Assistant
      Vice President
              
              Carolyn
      Eades, Receptionist/Customer
      ServiceKaye
      Craft, Vice
      President/Treasurer
              
              Diana
      Eads, Customer
      ServiceBrenda
      W. Lovelace, Assistant
      Vice President
              
              Stacey
      Greenawalt, Vice
      President/LendingMargaret
      P. Pelley, Customer
      Service
              
              Barry
      Holder, Customer
      ServicePeggy
      H. Steele, Assistant
      Vice President
              
              R.
      Clay Hulette, President/TreasurerSusie
      W. Steele, Customer
      Service
              
              Don
      D. Jennings, Chief
      Executive OfficerMolly
      Ann E. Toler, Vice
      President
              
              Teresa
      A. Kuhl, Executive Vice
      President/Tony
      Whitaker,
      President
              
              Operations/Human
      ResourcesJanet
      Lewis, Branch
      ManagerPatty
      Luttrell, Loan
      Processing/ComplianceTracey
      McCoun, Customer
      ServiceCarla
      McMillen, Customer
      ServiceKim
      Moore, Customer Service
      ManagerCarolyn
      Mulcahy, AccountingJeanie
      Murphy, Customer
      ServiceDavid
      Semones, Loan
      ProcessingMartha
      Sowders, Customer
      Service
                Lee
      Ann Hockensmith, Executive Office
      CoordinatorYvonne
      Thornberry, Loan
      Processing/ServicingNancy
      Watts, Loan Servicing/
      InsuranceProcessing








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
              Executive
      Vice President and
              General
      Counsel to
              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, Chairman
              William
      M. JohnsonDavid
      R. Harrod C.P.A.
      and
              principal
      of Harrod and
              Associates,
      P.S.C.
            
            
            
            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
            
            Special
      Counsel
            
            Shareholder
      Inquiries andTony
      Whitaker
            
            Kilpatrick
      Stockton LLP
            
            Availability of 10-K Report:A(606)
      436-3860
              firstfederal@windstream.net
            
            607
      14th
      Street, NW
              Washington,
      DC 20005
            
            COPY
      OF THE COMPANY’S
              ANNUAL
      REPORT ON FORM10-K
      FOR THE YEAR ENDEDTransfer
      Agent and Registrar
            
            JUNE
      30, 2010, AS FILEDInvestor
      Relations
            
            IST
            
            WITH
      THE SECURITIES ANDDon
      Jennings
            
            209
      W Jackson Blvd, Ste 903
            
            EXCHANGE
      COMMISSIONdjennings@ffsbfrankfort.com
            
            Chicago,
      IL 60606-6905
            
            WILL
      BE FURNISHED(312)
      427-2953
            
            WITHOUT
      CHARGE TOClay
      Hulette
            
            
            
            SHAREHOLDERS
      AS OF THEchulette@ffsbfrankfort.com
            
            Annual
      Meeting
            
            RECORD
      DATE FOR THEThe
      Annual Meeting of Share-
            
            NOVEMBER
      11, 2010(502)
      223-1638
            
            holders
      will be held on
            
            ANNUAL
      MEETING UPONP.O.
      Box 535
            
            November
      11, 2010 at
            
            WRITTEN
      REQUEST TO:Frankfort,
      KY 40602
            
            3:30
      p.m., Eastern Time, atthe
      First Federal Center on the
            
            INVESTOR
      RELATIONSIndependent
      Auditors
            
            campus
      of Hazard Community
            
            KENTUCKY
      FIRSTCrowe
      Horwath LLP
            
            and
      Technical College, One
            
            FEDERAL
      BANCORP9600
      Brownsboro Rd., Ste 400
            
            Community
      College Blvd,
            
            P.O.
      BOX 535Louisville,
      KY 40252
            
            Hazard,
      KY
            
            FRANKFORT,
      KY 40602