<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   ---------
(Mark One)                       FORM 10-KSB
  [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]

For the fiscal year ended June 30, 1997

  [_]      TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from              to
                               ------------    -------------

                          Commission File No. 1-13904
                                              -------

                         KENTUCKY FIRST BANCORP, INC.
      -------------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

        Delaware                                                 61-1281483
---------------------------------                          -------------------
(State or other jurisdiction                                 (I.R.S. employer
of incorporation or organization)                          identification no.)

306 North Main Street, Cynthiana, Kentucky                       41031-1210
------------------------------------------                  ------------------
(Address of principal executive offices)                         (Zip Code)

        Issuer's telephone number, including area code: (606) 234-1440

          Securities registered pursuant to Section 12(b) of the Act:

Common stock, par value $.01 per share              American Stock Exchange
--------------------------------------         -------------------------------
          (Title of Class)                (Name of Exchange on Which Registered

          Securities registered pursuant to Section 12(g) of the Act:
                                Not Applicable

Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or such shorter period that
the registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes  X   No
                                                   ---     ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

Registrant's revenues for the fiscal year ended June 30, 1997:  $6,455,000

As of September 19, 1997, the aggregate market value of the 1,082,776 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $14,752,823 based on the closing sales price of
$13.625 per share of the registrant's Common Stock on September 19, 1997 as
listed on the American Stock Exchange. For purposes of this calculation, it is
assumed that directors, executive officers and beneficial owners of more than 5%
of the registrant's outstanding voting stock are affiliates.

Number of shares of Common Stock outstanding as of September 19, 1997: 1,302,694

Transitional Small Business Disclosure Format   Yes     No  X
                                                    ---    ---

                      DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:

        1.    Portions of Proxy Statement for the 1997 Annual Meeting of 
              Stockholders. (Part III)
<PAGE>
 
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

         The Company. Kentucky First Bancorp, Inc. (the "Company"), a Delaware
corporation, was organized at the direction of the Board of Directors of First
Federal Savings Bank, Cynthiana, Kentucky ("First Federal" or the "Bank") in
April 1995 to acquire all of the capital stock to be issued by the Bank in its
conversion from mutual to stock form (the "Conversion"). The Conversion was
completed August 28, 1995, with the Company issuing 1,388,625 shares of its
common stock, par value $0.01 per share (the "Common Stock") to the public, and
the Bank issuing all of its issued and outstanding common stock to the Company.
Prior to the Conversion, the Company did not engage in any material operations.
The Company does not have any significant assets other than the outstanding
capital stock of the Bank, cash and investment securities and a note receivable
from the ESOP. The Company's principal business is the business of the Bank. At
June 30, 1997, the Company had total assets of $88.9 million, deposits of $55.4
million, net loans receivable of $48.9 million and shareholders' equity of $14.7
million.

         The Bank. First Federal was formed in 1888 under the name of Cynthiana
Building & Saving Association. In 1966 the Bank converted to a
federally-chartered savings and loan association and adopted the name of First
Federal Savings and Loan Association of Cynthiana. The Bank converted to a
federally chartered savings bank under the name of First Federal Savings Bank in
January 1988. The Bank operates two offices in Cynthiana, Kentucky. The Bank is
principally engaged in the business of accepting deposits from the general
public through a variety of deposit programs and investing these funds by
originating and purchasing loans secured by one- to four-family residential
properties located in its market area, construction loans, commercial and
multi-family mortgage loans, agricultural loans, commercial business loans and
consumer loans.

         First Federal's business strategy is to operate a well capitalized,
profitable community savings association dedicated to financing home ownership
in its market area and providing quality service to its customers. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits for each depositor. The Bank is a member of the Federal Home
Loan Bank ("FHLB") of Cincinnati, which is one of the 12 district banks
comprising the FHLB System. The Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC. Such regulation is intended
primarily for the protection of depositors.

         Both the Company's and First Federal's executive offices are located at
306 North Main Street, Cynthiana, Kentucky 41031-1210, and its telephone number
is (606) 234-1440.

RECENT DEVELOPMENTS

         Pursuant to the provisions of The Financial Services Competition Act of
1997, which is pending before Congress, federal savings associations, such as
the Bank, would be required to convert to national banks two years after the
enactment of the bill, but could continue to exercise any authority which they
were legally entitled to exercise immediately prior to such conversion. Federal
associations would not be required to divest any branches and would be permitted
to continue to branch in any state in which they were located to the same extent
as national banks. Two years after enactment, state savings associations would
become regulated as commercial banks under federal law but would be allowed to
retain any investment that was permissible prior to that date. Unitary holding
companies such as the Company could continue to exercise any powers they had
prior to their subsidiary becoming a bank by operation of law as long as they
did not acquire another bank. Grandfathered unitary powers, however, could not
be transferred to another company which acquires control of the unitary holding
company after the effective date of the law. The BIF and the SAIF would merge
effective at the later of January 1, 2000 or two years after the date of
enactment. It is unknown whether this legislation or legislation of a similar
type will be enacted or, if enacted, what the impact would be on the Bank.

                                       2
<PAGE>
 
MARKET AREA

         The Bank considers its primary market area to consist of the eight
counties of Harrison, Pendleton, Scott, Grant, Robertson, Nicholas, Bourbon and
Fayette Counties, Kentucky. Management believes that most of the Bank's
depositors and borrowers are residents of these counties. The City of Cynthiana
is located in Harrison County which is the economic hub of the seven-county
area, excluding Fayette. Cynthiana is located 26 miles north of Lexington,
Kentucky, 100 miles east of Louisville, Kentucky and 80 miles south of
Cincinnati, Ohio. Based upon the 1990 population census, Cynthiana had a
population of 6,100 and approximately 16,000 persons lived in Harrison County.

         The economy in the Bank's market area is based on a mixture of
manufacturing and agriculture, primarily within the tobacco industry. Other
employment is provided by a variety of service employers, manufacturing
industries, wholesale/retail trade employers and state and local government.
Large local employers include 3-M, Grede Perm Cast (a Division of Grede
Foundries), Bullard Manufacturing, Bundy Tubing, Southland Container Concept
Packaging Group, and Trinity Industries. The Licking Valley Center of Maysville
Community College is also located in Cynthiana with an enrollment of
approximately 425 students. Presently, classes are held at various locations,
such as the local schools and churches. The college is seeking a site in
Cynthiana on which to build a permanent facility. Area businesses and community
leaders are being asked to pledge dollars toward this endeavor. This is a long
range plan that should come to fruition in the next five to six years. According
to the U.S. Bureau of Labor Statistics, the unemployment rate in Harrison County
as of December, 1996 was 5.2% as compared to 5.6% for the Commonwealth of
Kentucky.

         During March 1997, the City of Cynthiana and surrounding areas
experienced severe flooding. While neither of the Bank's offices was affected by
the flooding, approximately 340 homes and 60 businesses within Cynthiana were
affected as was the office for the County Clerk for Harrison County. As a
result, a large number of county real estate records were damaged. Although
restoration of these records has subsequently been completed, during the
restoration period, the Bank's mortgage loan origination volume was reduced
since title to certain properties could not be verified.

LENDING ACTIVITIES

         General. First Federal's primary lending activity is the origination
and purchase of conventional mortgage loans for the purpose of constructing,
purchasing or refinancing one- to four-family residential properties in its
primary market area. The Bank also makes construction loans and originates loans
secured by multi-family properties, commercial properties and originates
commercial, farm and consumer loans. In recent years, the Bank has purchased
whole loans and participation interests in loans secured by one- to four-family
properties and commercial and multi-family real estate. Such loans are
originated and serviced by an unaffiliated mortgage broker. See " --
Originations and Purchases of Loans."

         Savings institutions generally are subject to the lending limits
applicable to national banks. With certain limited exceptions, the maximum
amount that a savings institution or a national bank may lend to any borrower
(including certain related entities of the borrower) at one time may not exceed
15% of the unimpaired capital and surplus of the institution, plus an additional
10% of unimpaired capital and surplus for loans fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 15% of unimpaired capital and
surplus.

         At June 30, 1997, the maximum amount that the Bank could have loaned to
any one borrower without prior OTS approval was $2.0 million. At such date, the
largest aggregate amount of loans that the Bank had outstanding to any one
borrower was approximately $1.9 million.

                                       3
<PAGE>
 
         Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At June 30, 1997, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.

<TABLE> 
<CAPTION> 

                                                                                At June 30,
                                                            -----------------------------------------------------
                                                                    1997                           1996
                                                            --------------------            ---------------------
                                                            Amount            %             Amount             %
                                                            ------           ---            ------            ---
                                                                            (Dollars in thousands)
<S>                                                         <C>           <C>               <C>            <C> 
Type of Loan:
------------
Real estate loans:
  One- to four-family residential and construction (1)....  $   27,052     54.56%           $  24,830       56.79%
  Multi-family residential................................       5,972     12.04                4,477       10.24
  Agricultural............................................       5,726     11.55                5,206       11.91
  Commercial..............................................       5,829     11.75                5,256       12.02
                                                            ----------  --------            ---------     -------
     Total real estate loans..............................      44,579     89.90               39,769       90.96

Commercial loans..........................................       1,069      2.16                  821        1.88
Agricultural operating loans..............................       1,025      2.06                1,030        2.36

Consumer loans:
  Automobiles.............................................         296       .60                  249        0.57
  Mobile home.............................................         196       .40                  219        0.50
  Savings account.........................................         947      1.91                  710        1.62
  Other...................................................       1,471      2.97                  922        2.11
                                                            ----------  --------            ---------     -------
     Total consumer loans.................................       2,910      5.88                2,100        4.80
                                                            ----------  --------            ---------     -------
     Total loans..........................................      49,583    100.00%           $  43,720      100.00%
                                                                        ========                          =======

Less:
  Loans in process........................................         143                            178
  Deferred loan fees......................................          94                             78
  Unearned discount.......................................          54                             77
  Allowance for loan losses...............................         372                            367
                                                            ----------                      ---------
     Loans receivable, net................................  $   48,920                      $  43,020
                                                            ==========                      =========
</TABLE> 

-----------
(1)      At June 30, 1997, constructions loans amounted to $130,000 and 
         represented .26% of total gross loans.

LOAN MATURITY SCHEDULE

         The following table sets forth certain information at June 30, 1997
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.

<TABLE> 
<CAPTION> 

                                    Due Within           Due 1-5
                                      1 Year              Years            Due After 5
                                       After              After            Years After
                                      6/30/97            6/30/97             6/30/97            Total
                                      -------            -------             -------            -----
                                                     (In thousands)
<S>                                 <C>                  <C>                <C>               <C> 
Real estate mortgage............... $   1,295            $  6,370           $  36,914         $  44,579
Consumer...........................     2,094                  --                  --             2,094
Commercial.........................     2,910                  --                  --             2,910
                                    ---------            --------           ---------         ---------
     Total......................... $   6,299            $  6,370           $  36,914         $  49,583
                                    =========            ========           =========         =========
</TABLE> 

                                       4
<PAGE>
 
         The following table sets forth at June 30, 1997, the dollar amount of
all loans due one year or more after June 30, 1997 which have predetermined
interest rates and have floating or adjustable interest rates.

<TABLE> 
<CAPTION> 

                                                          Predetermined          Floating or
                                                              Rates           Adjustable Rates
                                                          -------------       ----------------
                                                                   (In thousands)
     <S>                                                   <C>                <C>   
     Real estate mortgage...............................   $    22,075           $    21,209
     Consumer...........................................            --                    --
     Commercial.........................................            --                    --
                                                           -----------           -----------
          Total.........................................   $    22,075           $    21,209
                                                           ===========           ===========
</TABLE> 

         Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, the Bank's mortgage loans generally give First Federal the right to
declare a loan due and payable in the event, among other things, that a borrower
sells the real property subject to the mortgage and the loan is not repaid.

         One- to Four-Family Real Estate Loans. The primary emphasis of the
Bank's lending activity is the origination of loans secured by first mortgages
on one- to four-family residential properties. At June 30, 1997, $27.1 million,
or 54.56% of the Bank's gross loan portfolio consisted of loans secured by one-
to four-family residential real properties primarily located in the Bank's
market area.

         The Bank originates both fixed rate and adjustable rate mortgage loans
("ARMs") with terms of up to 30 years. Currently, First Federal's adjustable
rate loans are indexed to the National Monthly Cost of Funds Rate to
SAIF-Insured Institutions (the "Index Rate"). In late March 1995, the Bank
changed the index used to the weekly average yield on U.S. Treasury Securities
adjusted to a Constant Maturity of One Year. The interest rates on these
mortgages are adjusted annually with a limitation of two percentage points per
adjustment and six percentage points over the life of the loan.
The minimum rate on such loans is 5%.

         The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans to 85% of the lesser of the appraised value or purchase
price of the property. The Bank recently began offering mortgage loans up to 95%
of the appraised value of the underlying property for single and two family
dwellings only that are located in Harrison County. Private mortgage insurance
is required.

         The retention of ARMs in the portfolio helps reduce First Federal's
exposure to increases in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of repricing of ARMs. It is possible that during periods of rising
interest rates, the risk of default on ARMs may increase due to the upward
adjustment of interest costs to the borrower. Although ARMs allow First Federal
to increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate ceiling contained in ARM contracts. Accordingly, there can be no
assurance that yields on First Federal's ARM's will adjust sufficiently to
compensate for increases in its cost of funds.

         Multi-family and Commercial Real Estate Loans. The Bank has been active
in the origination and purchase of loans secured by commercial real estate and
multi-family properties. At June 30, 1997, multi-family and commercial real
estate loans totaled $6.0 million and $5.8 million, respectively, and
represented 12.04% and 11.75%, respectively, of the Bank's gross loan portfolio.
Certain of these loans had been originated by an outside broker and subsequently
purchased by the Bank. See " -- Originations and Purchases of Loans."

         Multi-family and commercial real estate loans are made in amounts of up
to 80% of the appraised value of the property and may be on a fixed or
adjustable rate basis for terms of up to 30 years. Prior to committing to make a
multi-

                                       5
<PAGE>
 
family or commercial real estate loan, the Bank requires that the prospective
borrower provide a cash flow statement indicating sufficient cash flow from the
property to service the loan. The Bank reviews any tenant leases and requires
that the payments under such leases be assigned to the Bank.

         The Bank's multi-family real estate loans consist primarily of loans
secured by apartment buildings which are primarily located in the Bank's market
area. Generally, these apartment buildings are small with an average of eight to
twelve units. The Bank's largest multi-family property loan amounted to $559,000
at June 30, 1997 and was secured by 21 duplexes.

         The Bank's commercial real estate portfolio consists of loans secured
by office buildings, nursing homes, warehouse properties and churches. The
Bank's largest commercial real estate loan is secured by a nursing home located
in Butler, Kentucky. Such loan had a balance of $665,000 at June 30, 1997.

         Multi-family and commercial real estate lending entails significant
additional risks as compared to one-to four-family residential lending. Such
loans typically involve large loans to single borrowers or related borrowers. At
June 30, 1997, the average size of the Bank's multi-family and commercial real
estate loans was $154,000 as compared to the average size of residential real
estate loans which was $38,000. Such loans also involve a greater repayment risk
as repayment is typically dependent on the successful operation of the project
such that the income generated by the project is sufficient to cover operating
expenses and debt service, and these risks can be significantly affected by the
supply and demand conditions in the market for commercial property and
multi-family residential units. In addition, commercial real estate is more
likely to be subject to some form of environmental contamination. The Bank is
now pricing multi-family and commercial loans it originates 25 to 60 basis
points above the single-family loan rate to compensate the Bank for these
additional risks. However, the interest rates on purchased multi-family and
commercial real estate loans are established by the unaffiliated loan broker and
on average are at least 50 basis points above the rates charged by the Bank on
one-to four-family mortgage loans. To minimize these risks, the Bank generally
limits itself to loans secured by properties located in the Bank's market area.

         Construction Loans. First Federal engages in construction lending
involving loans to qualified borrowers for construction of one- to four-family
residential properties. Such loans convert to permanent financing upon
completion of construction. These properties are primarily located in the Bank's
market area. At June 30, 1997, the Bank's loan portfolio included $130,000 of
loans secured by properties under construction. All construction loans are
secured by a first lien on the property under construction. Loan proceeds are
disbursed in three increments as construction progresses and as inspections
warrant. Construction/permanent loans may have either an adjustable or fixed
rate and are underwritten in accordance with the same terms and requirements as
the Bank's permanent mortgages, except the loans generally provide for
disbursement in stages during a construction period of up to six months.
Interest is billed monthly during the construction phase. Monthly principal and
interest payments commence when the loan is converted to permanent financing.
Borrowers must satisfy all credit requirements which would apply to the Bank's
permanent mortgage loan financing for the subject property.

         Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with collateral having a value which is insufficient to
assure full repayment. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers (i.e., borrowers who satisfy all
credit requirements and whose loans satisfy all other underwriting standards
which would apply to the Bank's permanent mortgage loan financing for the
subject property) in the Bank's market area.

                                       6
<PAGE>
 
         The Bank makes a limited number of construction loans to contractors to
finance the construction of residential properties on a speculative basis. The
largest such loan had an outstanding balance of $577,000 as of June 30, 1997 and
was secured by seven single family homes with an aggregate appraised value of
$784,000. Terms of such loans provide that the Bank receives sufficient proceeds
from the sale of individual properties in the project to satisfy the mortgage on
that particular property. Certain of these construction loans were originated by
an outside broker and purchased by the Bank. The broker continues to service the
loans for the Bank including performing inspections and authorizing all draws
under the construction loan. See " -- Originations and Purchases of Loans."

         The Bank also makes a limited number of construction loans to finance
the construction of commercial and multi-family real estate.

         Consumer Loans. The consumer loans originated by the Bank include
automobile loans, savings account loans and unsecured loans. The Bank's loan
portfolio includes loans secured by mobile homes although the Bank no longer
originates such loans. The Bank's automobile loans are generally underwritten in
amounts up to 80% of the lesser of the purchase price of the automobile or the
loan value as published by the National Automobile Dealers Association. The
terms of such loans do not exceed 60 months. The Bank requires that the vehicles
be insured and the Bank be listed as loss payee on the insurance policy. The
Bank makes savings account loans for terms of up to the lesser of six months or
the maturity date of the certificate, securing the loan for up to 100% of the
face amount of the certificate or the balance in the savings account. The
interest rate charged on these loans is normally two percentage points above the
rate paid on the certificate account and the account must be pledged as
collateral to secure the loan. At June 30, 1997, the Bank's consumer loans
totaled $2.9 million, or 5.88% of the Bank's gross loan portfolio.

         The Bank intends to continue the origination of consumer loans.
Consumer loans tend to be originated at higher interest rates than mortgage
loans and for shorter terms. However, consumer loans generally involve more risk
than one- to four-family residential real estate loans. Repossessed collateral
for a defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various state and federal laws, including federal
and state bankruptcy and insolvency law, may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral. The Bank's risks associated with consumer
loans have been further limited by the modest amount of consumer loans made by
the Bank.

         Agricultural Loans. The Bank originates agricultural loans both for the
purchase or refinance of agriculture-related real estate and for operating
purposes. At June 30, 1997, the Bank had $5.7 million in agricultural real
estate loans, or 11.55% of its gross loan portfolio, and $1.0 million in
agricultural operating loans, or 2.06% of the Bank's gross loan portfolio.

         Agricultural real estate loans are primarily secured by first liens on
farmland or buildings thereon located in the Bank's market area. Loans are
generally underwritten in amounts of up to 65% of the lesser of the appraised
value or the fair market value of the property on loans secured by farm land and
80% of the lesser of the appraised or fair market value on loans secured by farm
buildings. Such loans may be underwritten on either a fixed rate or an
adjustable rate basis with a term of up to 30 years. In originating an
agricultural real estate loan, the Bank considers the debt service coverage of
the borrower's cash flow and the appraised value of the underlying property. The
average size of an agricultural real estate loan originated by the Bank is
approximately $55,000.

         Agricultural operating loans are made to finance the acquisition of
farm equipment, seed, fertilizer, cattle feed and other operating expenses of a
farm over the course of a year. As with agricultural real estate loans, the Bank
has been making these types of loans to satisfy the demand in its market area.
Because such loans are made to finance a

                                       7
<PAGE>
 
farm's annual operations, the terms of agricultural operating loans do not
exceed one year and are at a fixed rate. Interest payments are made at least
semi-annually and the rate may be changed semi-annually in accordance with
market rates.

         In underwriting agricultural operating loans, the Bank considers the
cash flow of the borrower based upon the farm's income stream as well as the
value of collateral used to secure the loan. Collateral generally consists of
the cash crops produced by the farm, predominantly tobacco in the Bank's market
area, and cattle. The Bank requires that the borrowers provide evidence of
hazard insurance on any equipment that will be collateral. Representatives of
the Bank inspect such collateral on a periodic basis. In certain instances, the
Bank may also take a lien on real estate as additional collateral for an
agricultural operating loan. In such instances, the Bank generally requires that
an appraisal of the real estate by a certified appraiser be performed, if the
loan is in excess of $100,000. For loans of less than $100,000, as circumstances
warrant, the appraisal may be performed by the Executive Committee.

         Agricultural real estate and operating loans involve a greater degree
of risk as payments on such loans depend, to a large degree, on the results of
operation of the related farm. In addition, agricultural operating loans are
generally made at the beginning of the growing season and are secured by the
crops, primarily tobacco, not yet grown. The ultimate value of the collateral
depends on the grade of tobacco produced and the prevailing price for that grade
at the time the tobacco is sold. As neither the grade of the tobacco nor the
market price to be obtained at the time of sale can be determined with certainty
at the inception of the loan, there is a risk that the ultimate value of the
collateral securing an agricultural operating loan may be significantly less
than the principal balance owed.

         Commercial Loans. The Bank originates a limited amount of commercial
loans to small and medium sized businesses located in its market area. At June
30, 1997, the Bank's commercial business loans amounted to $1.1 million, or
2.16% of the Bank's gross loan portfolio.

         Commercial loans are generally made to finance the purchase of
inventory, equipment and for short-term working capital. Such loans are
generally secured, although loans are sometimes granted on an unsecured basis.
Commercial business loans are generally written for a term of one year or less
although may be renewed by the Bank at maturity. Interest payments are made at
least semi-annually and the rate may be changed semi-annually in accordance with
market rates.

         Commercial loans involve a greater degree of risk than other types of
lending as payments on such loans are often dependent on successful operation of
the business involved which may be subject to a greater extent to adverse
conditions in the economy. The Bank seeks to minimize this risk through its
underwriting guidelines, which require that the loan be supported by adequate
cash flow of the borrower, profitability of the business and collateral.

         Loan Solicitation and Processing. Loan originations are derived from a
number of sources, including walk-in customers and referrals by realtors,
depositors and borrowers. The Bank has implemented a marketing program during
fiscal 1996 under the direction of the Bank's Vice President and Marketing
Officer, Diane Ritchie.

         Upon receipt of a loan application from a prospective borrower, a
credit report and employment and other verifications are ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. An appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser approved by the Bank, if the loan
is in excess of $100,000. For loans of less than $100,000, as circumstances
warrant, the appraisal may be performed by the Executive Committee.

         All one- to four-family and commercial mortgage loans above $125,000
are required to be presented to the Board of Directors for final approval.
Mortgage loans below that amount may be approved by individual loan officers.
Individual loan officers may approve unsecured consumer loans and agricultural
operating loans up to $10,000; unsecured consumer loans in amounts of up to
$40,000 may be approved by the Bank's Executive Committee with loans in excess
of such amounts approved by the Bank's Board of Directors. Commercial loans up
to $25,000 may be approved by a loan officer with loans in excess of that amount
up to $75,000 to be approved by the Bank's Executive

                                       8
<PAGE>
 
Committee. All commercial business loans in excess of $75,000 require the
approval of the Board of Directors. Loan applicants are promptly notified of the
decision of the Bank. Interest rates on approved loans are subject to change if
the loan is not funded within 45 days after the date of application, although
the Bank will commit to provide the financing for up to six months from the date
of approval. It has been management's experience that substantially all approved
loans are funded. Fire and casualty insurance, as well as flood insurance, are
required for all loans as appropriate, and a title opinion is required for loans
secured by real estate.

         Originations and Purchases of Loans. The Bank's loans are primarily
originated by salaried loan officers of the Bank. In addition, the Bank has
purchased one-to four-family mortgage loans from various sources in the Bank's
market area and has purchased a number of whole loans and participation
interests in loans from an established mortgage broker headquartered in
Lexington, Kentucky. Historically, the Bank has not originated any loans for
sale in the secondary market. The Bank expects to apply to become an eligible
seller/servicer. There can be no guarantee, however, that the Bank will be
approved.

         The Bank purchases loans to supplement its lending activities during
periods of low loan demand. The Bank has purchased one- to four-family loans
from various institutions and an unaffiliated mortgage broker, located in
Lexington, Kentucky. These loans are primarily secured by real estate located in
and around Lexington, Kentucky and continue to be serviced by the sellers. In
addition, the Bank has purchased whole loans and a limited number of
participation interests in a variety of commercial real estate and multi-family
real estate loans. These loans are originated by the unaffiliated mortgage
broker headquartered in Lexington, Kentucky and are secured by properties which
are primarily located in and around Lexington Kentucky. The mortgage broker does
not retain any ownership interest in the loans purchased by the Bank, although
the broker receives a fee for servicing the loans. As of June 30, 1997, the Bank
had purchased from this broker participation interests in four loans with
outstanding balances as of that date totaling $1.8 million, or 3.6% of total
gross loans and had purchased whole loans totaling $4.2 million, or 8.4% of
total gross loans. Thirteen of these loans or participation interests
aggregating $3.5 million, or 7.0% of total gross loans at June 30, 1997, were
secured by commercial or multi-family real estate.

         With respect to purchased multi-family and commercial loans, the Bank
reviews certain financial and property information provided to the Bank by the
broker prior to determining to approve the loan. Generally, the Bank's Executive
Committee also visits the property which will secure the loan. In the case of
purchased construction loans, a representative of the broker performs
inspections on the property and informs the Bank when additional advances are
warranted.

         Generally, in addition to the risks associated with the specific type
of loan purchased, the purchase of loans involves certain additional risks
resulting from the Bank's lower level of control over the origination and
subsequent administration of the loans. In addition, certain of the loans
purchased by the Bank in the past do not conform to the Bank's current
underwriting standards. In January, 1995, the Bank implemented a policy (and
informed the mortgage broker in this regard) that prior to its consideration of
any future loan purchases, the Bank will require a detailed description of the
proposed terms of the loan, copies of all applicable financial statements, tax
returns and credit reports, a current appraisal on the property securing the
proposed loan, occupancy information and copies of all underlying leases, if
applicable, and a signed application. If the proposed loan is to be a
construction loan, the Bank will also require all cost estimates and must
receive inspection certificates and lien waivers prior to making any
disbursements under the loan. The Bank will also require updated financial
information at least annually on all outstanding commercial and multi-family
real estate loans or participations.

         Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.

                                       9
<PAGE>
 
         In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, late payments and fees for
miscellaneous services related to its loans. The Bank charges an origination fee
for its adjustable rate mortgage loans and fixed rate mortgage loans.

         Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation of the Bank --
Regulatory Capital Requirements." OTS examiners may disagree with the insured
institution's classifications and amounts reserved. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. Management of the Bank reviews assets on a quarterly
basis, and at the end of each quarter prepares an asset classification listing
in conformity with the OTS regulations, which is reviewed by the Board of
Directors. The Bank also makes quarterly inspections of all property securing
delinquent loans. At June 30, 1997 the Bank had $46,000 and $164,000 in assets
classified as special mention and substandard, respectively, and had no assets
classified as doubtful or loss.

         Included in the balance of substandard loans was a loan to an
individual secured by a commercial property which had a balance of $34,000 as of
June 30, 1997. Payments on this loan are approximately 15 months delinquent
although the Bank has received sporadic payments.

         The remaining substandard loans consist primarily of loans secured by
one-to four-family properties.

         In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's earnings.

         General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. General allowances are included in calculating the
Bank's risk-based capital, while specific allowances are not so included.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss reserves when necessary. As of June 30, 1997, the Bank's allowance
for loan losses did not include any specific loss reserves.

                                       10
<PAGE>
 
         The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated. There were no charge-offs or recoveries
fiscal year 1996.

<TABLE> 
<CAPTION> 

                                                          Year Ended June 30,
                                                         --------------------- 
                                                           1997         1996
                                                         -------      -------- 
                                                             (In thousands)
<S>                                                      <C>          <C> 
Balance at beginning of period.........................  $   367      $   352
Charge-offs:
  Real estate loans:
    One- to four-family residential....................       --           --
    Multi-family residential...........................       --           --
    Agricultural.......................................       --           --
    Commercial and other...............................       --           --
    Construction.......................................       --           --
  Commercial loans.....................................       --           --
  Agricultural operating loans.........................       --           --
  Consumer loans:
    Automobile.........................................       --           --
    Savings account....................................       --           --
    Other consumer.....................................       12           --
                                                         -------      -------
      Total:...........................................       12           --
                                                         -------      -------
Recoveries:
    One- to four-family residential....................       --           --
    Multi-family residential...........................       --           --
    Agricultural.......................................       --           --
    Commercial and other...............................       --           --
    Construction.......................................       --           --
  Commercial loans.....................................       --           --
  Agricultural operating loans.........................       --           --
  Consumer loans:
    Automobile.........................................       --           --
    Savings account....................................       --           --
    Other consumer.....................................        2           --
                                                         -------      -------
      Total:...........................................        2           --
Net charge-offs........................................       10           --
                                                         -------      -------
Provision for losses on loans..........................       15           15
                                                         -------      -------
Balance at end of period...............................  $   372      $   367
                                                         =======      =======
Ratio of net charge-offs to average loans
  outstanding during the period........................      .02%        --  %
                                                         =======      =======
</TABLE> 

                                       11
<PAGE>
 
         The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.

<TABLE> 
<CAPTION> 

                                                                              At June 30,
                                                     ----------------------------------------------------------
                                                                1997                         1996
                                                     ----------------------------   ---------------------------
                                                                      Percent                      Percent
                                                                      of Loans                     of Loans
                                                                    in Each Cate-                in Each Cate-
                                                                    gory to Total                gory to Total
                                                      Amount           Loans         Amount         Loans
                                                      ------        -------------    ------      --------------
                                                                           (Dollars in thousands)
<S>                                                   <C>           <C>              <C>         <C>  
Real estate - mortgage:
  One- to four-family residential and
    construction...................................  $   151        53.42%           $  149        56.79%
  Multi-family residential.........................       --        12.04                --        10.24
  Agricultural.....................................       --        11.55                --        11.91
  Commercial.......................................      176        11.69               174        12.02
Commercial loans...................................        6         3.47                 6         1.88
Agricultural operating loans.......................       31         2.06                31         2.36
Consumer loans:
  Automobiles......................................       --         0.59                --         0.57
  Mobile homes.....................................       --         0.34                --         0.50
  Savings account..................................       --         1.91                --         1.62
  Other consumer loans.............................        8         2.93                 7         2.11
                                                     -------       ------            ------       ------
    Total allowance for loan losses................  $   372       100.00%           $  367       100.00%
                                                     =======       ======            ======       ======
</TABLE> 

         Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. Loans are placed on a non-accrual status when,
in the opinion of management, the collection of additional interest is doubtful.

         Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at its fair value less estimated costs of
sale. Any required write-down of the loan to its appraised fair market value
upon foreclosure is charged against the allowance for loan losses. Subsequent to
foreclosure, in accordance with generally accepted accounting principles, a
valuation allowance is established if the carrying value of the property exceeds
its fair value net of related selling expenses.

                                       12
<PAGE>
 
         The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of Statement of Financial Accounting
Standard ("SFAS") No. 15 at the dates indicated. In addition, the Bank had no
real estate acquired as a result of foreclosure.

<TABLE> 
<CAPTION> 

                                                                                  At June 30,
                                                                             ----------------------
                                                                               1997          1996
                                                                             --------       -------
                                                                             (Dollars in thousands)
<S>                                                                          <C>            <C> 
Loans accounted for on a non-accrual basis: (1)
  Real Estate:
    One- to four-family residential and construction.......................   $  --         $   --
    Multi-family residential...............................................      --             --
    Agricultural...........................................................      --             --
    Commercial.............................................................      34             36
  Commercial loans.........................................................      --             --
  Agricultural operating loans.............................................      --             --
  Consumer.................................................................      --             --
                                                                              -----         ------
     Total.................................................................      34             36
                                                                              -----         ------
                                                                                       
Accruing loans which are contractually past due 90 days or more:                       
  Real estate:                                                                         
    One- to four-family residential and construction.......................      25             --
    Multi-family residential...............................................      --             --
    Agricultural...........................................................      --             74
    Commercial.............................................................      --             --
  Commercial loans.........................................................      --             10
  Agricultural operating loans.............................................      --             --
  Consumer.................................................................      --              2
                                                                              -----         ------
     Total.................................................................      25             86
                                                                              -----         ------
                                                                                       
Total non-performing loans.................................................   $  59         $  122
                                                                              =====         ======
                                                                                       
Total non-performing loans as a percentage                                             
  of total net loans.......................................................     .12%          0.28%
                                                                              =====         ======
                                                                                       
Total non-performing assets as a percentage                                            
  of total assets..........................................................     .07%          0.14%
                                                                              =====         ======
</TABLE> 

----------------
(1)      Non-accrual status denotes loans on which, in the opinion of
         management, the collection of additional interest is unlikely. Payments
         received on a non-accrual loan are either applied to the outstanding
         principal balance or recorded as interest income, depending on
         assessment of the collectibility of the loan.


         Loans generally are placed on non-accrual status when they become 90
days past due unless they are well secured and in the process of collection.
During the year ended June 30, 1997, gross interest income of $3,000 would have
been recorded on loans accounted for on a non-accrual basis if the loans had
been current throughout the respective periods. Interest income recognized on
such loans during the year ended June 30, 1997, totaled approximately $2,000.
Accruing loans which were contractually past due 90 days or more at June 30,
1997 totaled $25,000 and consisted primarily of one real estate loan secured by
agricultural property which had a principal balance of $25,000 at June 30, 1997.
See " -- Asset Classification and Allowance for Loan Losses."

                                       13
<PAGE>
 
         Loans which are not currently classified as non-accrual, 90 days past
due or restructured but where known information about possible credit problems
of borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment terms and may result in
disclosure as non-accrual, 90 days past due or restructured amounted to $151,000
at June 30, 1997.

INVESTMENT ACTIVITIES

         First Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of
Cincinnati, certificates of deposits in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Cincinnati stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
which savings institutions are required to maintain. For additional information,
see "Regulation of the Bank -- Liquidity Requirements."

         The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. The investment activities of the Bank
consist primarily of investments in mortgage-backed and related securities and
other investment securities, consisting primarily of securities issued or
guaranteed by the U.S. Government or agencies thereof. The Bank's investment
securities include bonds issued by the Tennessee Valley Authority ("TVA"), which
are not guaranteed by the U.S. Government, and obligations of the Commonwealth
of Kentucky and political subdivisions thereof. The Bank generally does not
invest in obligations of states other than Kentucky. Such municipal securities
are not guaranteed by any third party. The Bank has also invested in structured
notes issued by the FHLB, as discussed below. Investment decisions generally are
made by the Investment Committee consisting of three directors of the Bank and
later ratified by the full Board of Directors.

         In accordance with SFAS No. 115, effective July 1, 1994, the Bank
classified its investments portfolio as held to maturity. The Bank's investment
securities were recorded at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method over the term of the related
security. During September 1995, the Financial Accounting Standards Board
("FASB") granted financial institutions the opportunity to reclassify investment
portfolios without calling into question the institution's prior intent with
respect to such securities under SFAS No. 115. The Company took advantage of
this opportunity by reclassifying approximately $3.0 million of investment
securities and $1.3 million of mortgage-backed securities from held-to-maturity
to the available for sale classification. All reclassifications were made on a
single day in conformity with the requirement. It was management's belief that
such changes would allow more flexibility in managing interest rate risk within
the investment and mortgage-backed securities portfolios. For further
information, see Notes A-2 and B of Notes to Consolidated Financial Statements.

         Mortgage-Related Securities. The Company invests in mortgage-related
securities such as collateralized mortgage obligations ("CMOs") and real estate
mortgage investment conduits ("REMICs"), primarily as an alternative to mortgage
loans or mortgage-backed securities. CMOs and REMICs are typically issued by a
special purpose entity, which may be organized in a variety of legal forms, such
as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities, which are used to collateralize the mortgage-related
securities. Once combined, the cash flows can be divided into "tranches" or
"classes" of individual securities, thereby creating more predictable average
lives for each security than the underlying pass-through pools. Accordingly,
under this security structure, all principal paydowns from the various mortgage
pools are allocated to a mortgage-related securities' class or classes
structured to have priority until it has been paid off. These securities
generally have fixed interest rates, and, as a result, changes in interest rates
generally would affect the market value and possibly the prepayment rates of
such securities.

                                       14
<PAGE>
 
         Some mortgage-related securities instruments are like traditional debt
instruments due to their stated principal amounts and traditionally defined
interest rate terms. Purchasers of certain other mortgage-related securities
instruments are entitled to the excess, if any, of the issuer's cash inflows.
These mortgage-related securities instruments may include instruments designated
as residual interest and are riskier in that they could result in the loss of a
portion of the original investment. Cash flows from residual interests are very
sensitive to prepayments and, thus, contain a high degree of interest rate risk.
The Bank does not purchase residual interests in mortgage-related securities.

         At June 30, 1997, the Bank had $5.8 million in CMOs and REMICs, which
amounted to 6.5% of total assets. All of the CMOs and REMICs owned by the Bank
are insured or guaranteed either directly or indirectly through mortgage-backed
securities underlying the obligations of either FNMA or FHLMC. The CMOs and
REMICs owned by the Bank include both fixed and floating rate instruments.

         Prepayments in the Bank's mortgage-related securities portfolio may be
affected by declining and rising interest rate environments. In a low and
declining interest rate environment, prepayments would be expected to increase.
In such an event, the Bank's fixed-rate CMOs and REMICs purchased at a premium
price could result in actual yields to the Bank that are lower than anticipated
yields. The Bank's floating rate CMOs and REMICs would be expected to generate
lower yields as a result of the effect of falling interest rates on the indexes
for determining payment of interest. Additionally, the increased principal
payments received may be subject to reinvestment at lower rates. Conversely, in
a period of rising rates, prepayments would be expected to decrease, which would
make less principal available for reinvestment at higher rates. In a rising rate
environment, floating rate instruments would generate higher yields to the
extent that the indexes for determining payment of interest did not exceed the
life-time interest rate caps. Such prepayment may subject the Bank's CMOs and
REMICs to yield and price volatility.

         Mortgage-Backed Securities. The Company also invests in traditional
mortgage-backed securities. Mortgage-backed securities represent a participation
interest in a pool of single-family or multi-family mortgages, the principal and
interest payments on which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form of
securities to investors such as the Bank. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA and GNMA which guarantee the
payment of principal and interest to investors. Mortgage-backed securities
generally increase the quality of the Company's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collaterize borrowings or other obligations of the Bank.

         Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.

         The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using the
interest method. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual prepayments of the underlying
mortgages depend on many factors, including the type of mortgage, the coupon
rate, the age of the mortgages, the geographical location of the underlying real
estate collateralizing the mortgages and general levels of market interest
rates. The difference between the interest rates on the underlying mortgages and
the prevailing mortgage interest rates is an important

                                       15
<PAGE>
 
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

         The Company's mortgage-backed securities portfolio consists primarily
of seasoned fixed-rate and adjustable rate mortgage-backed and mortgage-related
securities. At June 30, 1997, the Bank had $21.2 million in mortgage-backed
securities (representing 100% of the Bank's gross mortgage-backed securities
portfolio, or 23.8% of total assets), insured or guaranteed by FNMA, FHLMC or
GNMA.

         Structured Notes. The Company has also invested in structured notes
issued by the FHLBs. These securities represent obligations of the FHLBs to
repay principal with interest that is either fixed or fluctuates in accordance
with an interest formula tied to various indices. Certain of these securities
involve certain risks not associated with investments in a conventional debt
security. If the interest rate on a note is indexed, the change in the interest
rate may result in an interest rate that is less than that payable on a
conventional fixed rate debt security issued at the same time. Moreover, the
secondary market for such notes is affected by factors independent of the
creditworthiness of the issuer and the value of the index, including other
interest rates, the volatility of the index to which interest on the notes is
tied, time remaining to maturity, and the amount of such notes outstanding. The
Company has purchased its structured notes in an effort to increase the yield in
its investment portfolio.

                                       16
<PAGE>
 
         The following table sets forth the carrying value of the Company's
investments at the dates indicated.

<TABLE> 
<CAPTION> 

                                                                                 At June 30,
                                                                    -----------------------------
                                                                     1997                   1996
                                                                    ------                 ------
                                                                             (In thousands)
         <S>                                                        <C>               <C> 
         Investment securities held to maturity:
           U.S. government obligations...........................   $     --          $     --
           FHLB obligations......................................      4,886             4,386
           FHLMC notes...........................................      3,611             3,610
           FNMA notes............................................        996             2,089
           Municipal obligations.................................      2,240             2,379
                                                                    --------          --------
             Total investment  securities held to maturity.......     11,733            12,464
                                                                    ---------         --------

         Investment securities available for sale:
           Tennessee Valley Authority bonds......................        153               652
           FHLB obligations......................................      1,945             1,917
           FNMA notes............................................         --               500
           Municipal obligations.................................        104                --
                                                                    --------          --------
             Total investment securities available for sale......      2,202             3,069
                                                                    --------          --------
               Total investment securities.......................   $ 13,935          $ 15,533
                                                                    ========          ========

         Mortgage-backed securities held to maturity:
           FHLMC participation certificates......................   $  2,104          $  1,988
           GNMA participation certificates.......................      2,043             2,377
           FNMA participation certificates.......................     13,675            14,677
                                                                    --------          --------
             Total mortgage-backed securities held
               to maturity.......................................     17,822            19,042
                                                                    --------          --------

         Mortgage-backed securities available for sale:
           FHLMC participation certificates......................      3,348             4,135
                                                                    --------          --------
             Total mortgage-backed securities available for sale.      3,348             4,135
                                                                    --------          --------

             Total mortgage-backed securities....................     21,170            23,177

         Interest-earning deposits and certificates..............        762               643
                                                                    --------          ---------

               Total investments and mortgage-backed
                 securities:.....................................   $ 35,867          $ 39,353
                                                                    ========          ========
</TABLE> 

                                       17
<PAGE>
 
         The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Company's investment and
mortgage-backed securities, including those designated as available for sale at
June 30, 1997.

<TABLE> 
<CAPTION> 

                                           One Year or Less       One to Five Years       Five to Ten Years      
                                          --------------------   --------------------    --------------------    
                                          Carrying   Average     Carrying     Average    Carrying     Average    
                                           Value      Yield       Value        Yield      Value        Yield     
                                          -------    -------     -------      -------    -------      -------    
                                                       (Dollars in Thousands)
<S>                                       <C>        <C>         <C>         <C>        <C>           <C> 
Investment securities:
  U.S. obligations......................  $    --        -- %    $   250      7.12%     $  3,361      7.12%      
  Tennessee Valley Authority bonds             --        --          153      7.45            --        --       
  FHLB obligations......................    2,489      5.28        1,348      5.15         2,994      6.45       
  FNMA notes............................       --        --           --        --           996      7.09       
  State and municipal obligations.......      395      6.23          415      5.46           757      4.78       
  Mortgage-backed securities............       --        --          381      6.73           539      6.68       
  Interest-earning deposits and
    certificates of deposits............      762      6.27%          --        --            --       --        
                                          -------                -------                --------                 
      Total.............................  $ 3,646                $ 2,547                $  8,647                 
                                          =======                =======                ========                 

<CAPTION> 

                                           More than Ten Years       Total Investment Portfolio
                                           --------------------   --------------------------------
                                           Carrying   Average     Carrying       Market    Average
                                            Value      Yield       Value         Value      Yield
                                            -------    -------    --------     --------     ------
<S>                                        <C>        <C>         <C>          <C>         <C> 
Investment securities:
  U.S. obligations......................  $    --        -- %     $  3,611     $  3,570       7.12%
  Tennessee Valley Authority bonds             --        --            153          153       7.45
  FHLB obligations......................       --        --          6,831        6,711       5.76
  FNMA notes............................       --        --            996          983       7.09
  State and municipal obligations.......      777      6.24          2,344        2,374       5.63
  Mortgage-backed securities............   20,250      6.73         21,170       20,831       6.72
  Interest-earning deposits and
    certificates of deposits............       --        --            762          762       6.27%
                                          -------                 --------     --------
      Total.............................  $21,027                 $ 35,867     $ 35,384
                                          =======                 ========     ========
</TABLE> 

                                       18
<PAGE>
 
Deposit Activity and Other Sources of Funds

         General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, First Federal
derives funds primarily from loan principal repayments, maturing investment
securities, and interest payments. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.

         Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit currently
ranging in term from 91 days to five years. Deposit account terms vary,
principally on the basis of the minimum balance required, the time periods the
funds must remain on deposit and the interest rate. The Bank also offers
individual retirement accounts ("IRAs").

         The Bank's policies are designed primarily to attract deposits from
local residents rather than to solicit deposits from areas outside its primary
market. Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated upon funds acquisition and liquidity
requirements, rates paid by competitors, growth goals and federal regulations.

         Certificates of deposit in amounts of $100,000 or more ("Jumbos"),
totaled $3.5 million, or 6.3% of the Bank's total savings portfolio at June 30,
1997. The majority of these Jumbos represent deposits by individuals. This large
amount of Jumbos as a percentage of total deposits makes the Bank susceptible to
large deposit withdrawals if one or more depositors withdraw deposits from the
Bank. Such withdrawals may adversely affect the Bank's liquidity and funds
available for lending if the Bank was unable to obtain funds from alternative
sources. However, First Federal has no brokered funds, nor do these Jumbos
represent brokered funds.

         Savings deposits in the Bank as of June 30, 1997 were represented by
the various types of savings programs described below.

<TABLE> 
<CAPTION> 

                                                                                      June 30, 1997
  Interest     Minimum                                                   Minimum       Balance in     Percentage of
    Rate         Term           Category                                 Amount        Thousands      Total Savings
  --------     -------          --------                                 ------       -------------   --------------
  <S>          <C>              <C>                                     <C>           <C>             <C> 
   2.97 %      None             Passbook Savings                        $    50        $     6,163       11.12%
   --          None             Demand Checking                             200              1,758        3.17
   2.00        None             NOW Accounts                                400              5,025        9.06
   2.10        None             Super NOW Accounts                        1,000              3,312        6.00
   2.95        None             Money Market Deposit Accounts             2,500              2,356        4.25
*  4.09        None             First Money MMDA Accounts                10,000              1,169        2.11
   2.97        None             Christmas Clubs                              --                 43         .08

                                Certificates of Deposit
                                -----------------------

*  4.42        91 days          91-day Fixed Term, Fixed Rate             1,000                319         .58
*  5.04        6 months         6 Month Fixed Term, Fixed Rate            1,000              5,552       10.00
*  5.38        1 year           1 Year, Fixed Term, Fixed Rate            1,000              9,954       17.95
*  5.79        18 months        18 Month Fixed Term, Fixed Rate           1,000              5,449        9.83
*  5.33        18 months        IRA 18 Month Fixed Term, Fixed Rate         500              3,130        5.64
*  5.30        24 months        24 Month "Bump" **                        5,000              2,970        5.36
*  5.68        30 months        30 Month Fixed Term, Fixed Rate           1,000                674        1.21
*  5.71        36 months        36 Month Fixed Term, Fixed Rate           1,000              3,135        5.65
*  5.75        36 months        IRA 36 Month Fixed Term, Fixed Rate         500                  6          --
*  5.46        5 years          5 Year Fixed Term, Fixed Rate             1,000              3,948        7.12
*  5.46        5 years          IRA 5 Year, Fixed Term, Fixed Rate          500                480         .87
                                                                                       -----------      ------
                                                                                       $    55,443      100.00%
                                                                                       ===========      ======
</TABLE> 

-------------
*        Represents weighted average interest rate.
**       Certificate holder has option at any time during term of certificate to
         request a one-time increase to then-prevailing 24 month certificate of
         deposit rate.

                                       19
<PAGE>
 
         The following table sets forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.

<TABLE> 
<CAPTION> 

                                                                   Year Ended June 30,
                                         ------------------------------------------------------------------------ 
                                                       1997                                     1996
                                         -----------------------------              -----------------------------
                                          Interest-Bearing                          Interest-Bearing
                                          Demand and          Time                  Demand and             Time
                                          Savings Deposits    Deposits              Savings Deposits     Deposits
                                          ----------------    --------              ----------------     --------
                                                               (Dollars in thousands)
<S>                                      <C>                 <C>                    <C>                  <C> 

Average balance........................  $    19,242         $    35,785              $  16,700          $  34,847
Average rate...........................         2.17%               4.66%                  2.93%              5.21%
</TABLE> 

         The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.

<TABLE> 
<CAPTION> 

                                                                            Certificates
      Maturity Period                                                        of Deposit
      ---------------                                                       ------------
                                                                           (In thousands)
      <S>                                                                   <C> 
      Three months or less...............................................      $   760
      More than three through six months.................................          403
      More than six through 12 months....................................        1,001
      Over 12 months.....................................................        1,345
                                                                               -------
         Total...........................................................      $ 3,509
                                                                               =======
</TABLE> 

         Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are secured by the
Bank's one-to-four-family mortgage loans.

         The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, First Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation of the Bank --
Federal Home Loan Bank System."

                                       20
<PAGE>
 
         The following table sets forth certain information regarding the Bank's
FHLB advances (the Bank's only borrowings outstanding during the periods) at the
dates and for the periods indicated.

<TABLE> 
<CAPTION> 
 
                                                                          At or for the
                                                                       Year Ended June 30,
                                                                   -------------------------  
                                                                    1997               1996
                                                                   ------             ------
                                                                      (Dollars in thousands)
<S>                                                                <C>            <C> 
Amounts outstanding at end of period:
  FHLB advances..................................................  $ 17,970       $  14,528

Weighted average rate paid on:
  FHLB advances..................................................      5.40%           5.46%

<CAPTION> 

                                                                           For the Year
                                                                          Ended June 30,
                                                                   --------------------------- 
                                                                    1997                 1996
                                                                   ------               ------
                                                                      (Dollars in thousands)
<S>                                                                <C>                <C> 
Maximum amount of borrowings outstanding at any month end:
  FHLB advances and other borrowed money........................   $ 19,923           $ 14,528

<CAPTION> 

                                                                          For the Year
                                                                         Ended June 30,
                                                                   ---------------------------
                                                                    1997                 1996
                                                                   ------               ------
                                                                      (Dollars in thousands)
<S>                                                                <C>                <C> 
Approximate average borrowings outstanding with respect to:
  FHLB advances and other borrowed money.........................  $ 18,043           $  6,234

Approximate weighted average rate paid on: (1)
  FHLB advances and other borrowed money.........................      5.27%              5.07%
</TABLE> 

---------------
(1)      Weighted average computed by dividing total interest paid by average
balance outstanding.

         As of June 30, 1997, the Bank had $18.0 million in advances
outstanding. Further asset growth may be funded through additional advances.

SUBSIDIARY ACTIVITIES

         As a federally chartered savings bank, the Bank is permitted to invest
an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community-development purposes. Under such limitations, as of
June 30, 1997, the Bank was authorized to invest up to $2.6 million in the stock
of or loans to subsidiaries, including the additional 1.0% investment for
community inner-city and community development purposes. The Bank has one wholly
owned subsidiary: Cynthiana Service Corporation, a Kentucky corporation, formed
for the purpose of holding the Bank's investments in data processing operations.
At June 30, 1997, the Bank's total investment in the subsidiary was $15,000. The
operations of Cynthiana Service Corporation are not consolidated with the
operations of the Bank as the subsidiary's operations were immaterial.

                                       21
<PAGE>
 
PERFORMANCE RATIOS

         The table below sets forth certain performance ratios of the Company at
or for the years indicated.

<TABLE> 
<CAPTION> 

                                                                          At or for the
                                                                       Year Ended  June 30,
                                                                     -------------------------
                                                                      1997               1996
                                                                     -------            ------
   <S>                                                               <C>                <C> 
   Return on assets (net earnings divided by
      average total assets)....................................         0.86%             1.13%
   Return on average stockholders' equity (net earnings
      divided by average stockholders' equity)                          5.15              5.11
   Dividend payout ratio (dividends declared per share
      divided by net earnings per share).......................         5.83              0.38
   Interest rate spread (combined weighted average
      interest rate earned less combined weighted
      average interest rate cost)..............................         2.96              2.91
   Ratio of average interest-earning assets to
      average interest-bearing liabilities.....................       116.83            124.41
   Ratio of noninterest expense to average total assets........         2.38              2.14
</TABLE> 

COMPETITION

     The Company experiences competition both in attracting and retaining
savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits and loans in Harrison County and the other
counties in the Company's market area comes from other savings institutions,
credit unions, commercial banks, money market mutual funds, brokerage firms and
insurance companies. Within Harrison County, the Bank is the only thrift
institution although there are branches of commercial banks and one loan
production office of a commercial bank. Although the Bank believes it ranks
second in Harrison County in terms of total deposits, one of its primary
competitors may have resources substantially greater than that of the Bank and
can offer a wide variety of deposit and loan products. The primary factors in
competing for loans are interest rates and loan origination fees and the range
of services offered by various financial institutions.

EMPLOYEES

     As of June 30, 1997, the Company had 22 full-time employees, none of whom
was represented by a collective bargaining agreement. The Company believes that
it enjoys good relations with its personnel.

EXECUTIVE OFFICERS

     The following sets forth information with respect to the executive officers
of the Company who do not serve on the Board of Directors.

<TABLE> 
<CAPTION> 

                            Age at
                           June 30,
     Name                    1997        Title
     ----                  --------      -----
     <S>                   <C>           <C> 
     Kevin R. Tolle         40           Secretary/Treasurer
     Robbie G. Cox          50           Vice President and Financial Officer
</TABLE> 

                                       22
<PAGE>
 
         KEVIN R. TOLLE is Secretary/Treasurer of the Company and Vice President
and Secretary of the Bank. Mr. Tolle joined the Bank in 1975 as a teller and was
promoted to his current position in 1994. He has served as the Bank's mortgage
loan officer since 1986. He serves as a member of the Harrison County Habitat
for Humanity and is a past member of the Cynthiana-Harrison County Jaycees and
the Harrison County United Fund Board. He is a member of the New Friendship
Baptist Church in Harrison County.

         ROBBIE G. COX is Vice President and Financial Officer of the Company
and Vice President of the Bank, a position he has held since joining the Bank in
December 1986. From September 1992 to December 31, 1993 he also served as Chief
Executive Officer of the Bank and served as President and Chief Executive
Officer of the Bank from January 1994 to May 1994. Mr. Cox is a member and past
president of the Cynthiana Lions Club and Deacon at Cynthiana Christian Church.

REGULATION OF THE COMPANY

         GENERAL. The Company is a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such the Company
is registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.

         ACTIVITIES RESTRICTIONS. The Board of Directors of the Company
presently operates the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then such unitary holding company shall also
presently become subject to the activities restrictions applicable to multiple
holding companies and unless the savings association requalifies as a QTL within
one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the Bank -- Qualified
Thrift Lender Test."

         If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than (i) furnishing or performing
management services for a subsidiary savings institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.

                                       23
<PAGE>
 
         TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Savings associations are also
subject to the anti-tying provisions of Section 106(b) of the Bank Holding
Company Act of 1956 ("BHCA") which prohibits a depository institution from
extending credit to or offering any other services, or fixing or varying the
consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or not obtain services of a competitor of the institution, subject to
certain exceptions.

         Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings institution, and
certain affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the institution's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral) and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus unless the institution has less than $100 million in deposits in which
case the aggregate limit may be increased to no more than two times unimpaired
capital and surplus. Section 22(h) also prohibits loans, above amounts
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the institution with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal
Reserve Board pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons unless the loan is
made pursuant to a benefit or compensation plan that is widely available to
other employees and does not give preference to insiders. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.

         Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act and Regulation on loans
to executive officers and the restrictions of 12 U.S.C. ss. 1972 on certain
tying arrangements and extensions of credit by correspondent banks. Section
22(g) of the Federal Reserve Act requires that loans to executive officers of
depository institutions not be made on terms more favorable than those afforded
to other borrowers, requires approval for such extensions of credit by the board
of directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. Section 1972 prohibits (i) a depository institution from extending
credit to or offering any other services, or fixing or varying the consideration
for such extension of credit or service, on the condition that the customer
obtain some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless

                                       24
<PAGE>
 
such extension of credit is on substantially the same terms as those prevailing
at the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.

         RESTRICTIONS ON ACQUISITIONS. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Under certain circumstances, a registered savings and loan holding
company is permitted to acquire, with the approval of the Director of OTS, up to
15% of the voting shares of an under-capitalized savings institution pursuant to
a "qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.

         The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

         The OTS regulations permit federal associations to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal association may not establish an out-of-state
branch unless (i) the federal association qualifies as a "domestic building and
loan association" under ss.7701(a)(19) of the Code and the total assets
attributable to all branches of the association in the state would qualify such
branches taken as a whole for treatment as a domestic building and loan
association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.

         Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for bank holding companies, if the savings institution
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting bank will be
required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the Bank
Holding Company Act.

                                       25
<PAGE>
 
REGULATION OF THE BANK

         GENERAL. As a federally chartered savings institution, First Federal is
subject to extensive regulation by the OTS. The lending activities and other
investments of First Federal must comply with various state and federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with various regulatory requirements. The FDIC also has the authority to conduct
special examinations of the Bank because its deposits are insured by SAIF. The
Bank must file reports with these agencies describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear else where herein.

         REGULATORY CAPITAL REQUIREMENTS. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See "-- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships. Both core and
tangible capital are further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken solely as an agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. At June 30,
1997, First Federal had no such investments.

         Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings association's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.

         In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the savings association's high loan-to-value
ratio land loans and non-residential construction loans and equity investments
other than those deducted from core and tangible capital. At June 30, 1997, the
Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require deduction from total
capital.

         The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.

                                       26
<PAGE>
 
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by FNMA and the FHLMC are assigned a 20% risk weight.
Cash and U.S. Government securities backed by the full faith and credit of the
U.S. Government are given a 0% risk weight. As of June 30, 1997, the Bank's
risk-weighted assets were approximately $48.1 million.

         The table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 1997.

<TABLE> 
<CAPTION> 

                                                                                            Percent of
                                                                          Amount            Assets(1)
                                                                          ------            ---------
                                                                             (Dollars in Thousands)
          <S>                                                            <C>                <C> 
          Tangible capital.............................................  $  13,022              14.7%
          Tangible capital requirement.................................      1,326               1.5
                                                                         ---------            ------
            Excess.....................................................  $  11,696              13.2%
                                                                         =========             =====

          Core capital.................................................  $  13,022              14.7%
          Core capital requirement.....................................      2,652               3.0
                                                                         ---------            ------
            Excess.....................................................  $  10,370              11.7%
                                                                         =========             =====

          Total capital (i.e., core and supplementary capital)           $  13,394              27.8%
          Risk-based capital requirement...............................      3,849               8.0
                                                                         ---------            ------
            Excess.....................................................  $   9,545              19.8%
                                                                         =========             =====
</TABLE> 

--------------
(1)      Based upon adjusted total assets for purposes of the tangible, core and
         Tier 1 capital requirements, and risk-weighted assets for purposes of
         the risk-based capital requirements.

         OTS regulations require savings institutions with more than a "normal"
level of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is measured in terms of the sensitivity of its
"net portfolio value" to changes in interest rates. Net portfolio value is
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution will be considered to
have a "normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.

         The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. The Bank has determined that, on the basis of
current financial data, it will

                                       27
<PAGE>
 
not be deemed to have more than normal level of interest rate risk under the new
rule and does not expect that it will be required to increase its total capital
as a result of the rule upon its implementation.

         In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of
capital-to-assets as the OTS determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The OTS
may treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

         PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings institution is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.

         Under implementing regulations, the federal banking regulators,
including the OTS, generally measure a depository institution's capital adequacy
on the basis of the institution's total risk-based capital ratio (the ratio of
its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
institution that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1
risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0%
or greater. An "adequately capitalized" savings institution is a savings
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier

                                       28
<PAGE>
 
1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of
4.0% or greater (or 3.0% or greater if the savings institution has a composite 1
CAMEL rating). An "undercapitalized institution" is a savings institution that
has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating). A
"significantly undercapitalized" institution is defined as a savings institution
that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier
1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less
than 3.0%. A "critically undercapitalized" savings institution is defined as a
savings institution that has a ratio of "tangible equity" to total assets of
less than 2.0%. Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all intangibles other than
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category (but may not reclassify a significantly
undercapitalized institution as critically under-capitalized) if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMEL rating
category. The Bank is classified as "well capitalized" under these regulations.

         QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity, and not retain any investment
not permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).

         To qualify as a QTL, a savings institution must maintain at least 65%
of its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20% of
assets. Qualified Thrift Investments consist of: (i) loans, equity positions, or
securities related to domestic, residential real estate or manufactured housing,
and educational, small business and credit card loans; (ii) shares of stock
issued by an FHLB. Subject to a 20% of portfolio assets limit, however, savings
institutions are able to treat the following as Qualified Thrift Investments:
(i) 50% of the dollar amount of residential mortgage loans subject to sale under
certain conditions but do not include any intangible assets; (ii) investments,
both debt and equity, in the capital stock or obligations of and any other
security issued by a service corporation or operating subsidiary, provided that
such subsidiary derives at least 80% of its annual gross revenues from
activities directly related to purchasing, refinancing, constructing, improving
or repairing domestic residential housing or manufactured housing; (iii) 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas; (iv) loans
for the purchase, construction, development or improvement of community service
facilities, (v) loans for personal, family, household or educational purposes,
provided that the dollar amount treated as Qualified Thrift Investments may not
exceed 10% of the savings association's portfolio assets; and (vi) shares of
stock issued by FNMA or FHLMC.

         A savings institution must maintain its status as a QTL on a monthly
basis in nine out of every 12 months. A savings institution that fails to
maintain Qualified Thrift Lender status will be permitted to requalify once, and
if it fails the QTL Test a second time, it will become immediately subject to
all penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon failure to qualify as a
QTL for two years, a savings association must convert to a commercial bank. At
June 30, 1997, approximately 78% of the Bank's assets were invested in Qualified
Thrift Investments.

                                       29
<PAGE>
 
         DIVIDEND LIMITATIONS. Under OTS regulations, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings institution subsidiaries of savings and loan
holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.

         Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net income for the previous four quarters or (ii) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.

         Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.

         SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Bank already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.

         Additionally, under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings.

                                       30
<PAGE>
 
Under the proposed guidelines, a savings institution should maintain systems,
commensurate with its size and the nature and scope of its operations, to
identify problem assets and prevent deterioration in those assets as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the Bank's operations.

         DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

         Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.

         For the past several semi-annual periods, institutions with
SAIF-assessable deposits, like the Bank, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the Bank
Insurance Fund ("BIF"). In order to recapitalize the SAIF and address the
premium disparity, the recently-enacted Deposit Insurance Funds Act of 1996
authorized the FDIC to impose a one-time special assessment on institutions with
SAIF-assessable deposits based on the amount determined by the FDIC to be
necessary to increase the reserve levels of the SAIF to the designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points based on the amount of their SAIF-assessable deposits as of
March 31, 1995. As a result of the special assessment the Bank incurred a
pre-tax expense of $351,000 during the quarter ended September 30, 1996.

         The FDIC has adopted a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings has been reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however,
SAIF-insured institutions, will be required to pay assessments to the FDIC at
the rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.

         SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF and an entrance fee to BIF. A savings institution is not prohibited
from adopting a commercial bank or savings bank charter if the resulting bank
remains a SAIF member.

                                       31
<PAGE>
 
         The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state
non-member banks of 4% of total assets.

         LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily and short-term liquidity ratios of the Bank for
the month of June 1997, were 5.07% and 7.88%, respectively.

         FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Cincinnati, the Bank is required to acquire and hold shares of capital
stock in the FHLB of Cincinnati in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 1/20 of its advances
from the FHLB of Cincinnati, whichever is greater. The Bank was in compliance
with this requirement with investment in FHLB of Cincinnati stock at June 30,
1997, of $1.1 million. The FHLB of Cincinnati is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Cincinnati. As of June 30,
1997, the Bank had $18.0 million in advances and other borrowings from the FHLB
of Cincinnati. See "Deposit Activity and Other Sources of Funds -- Borrowings."

         FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1997, the Bank met its reserve
requirements.

TAXATION

         The Company and First Federal file separate federal income tax returns.

         Thrift institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. Prior to recent legislation, institutions such as First
Federal which met certain definitional tests and other conditions prescribed by
the Code benefitted from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad

                                       32
<PAGE>
 
debt reserve deduction, loans were separated into "qualifying real property
loans," which generally are loans secured by interests in certain real property,
and nonqualifying loans, which are all other loans. The bad debt reserve
deduction with respect to nonqualifying loans was based on actual loss
experience, however, the amount of the bad debt reserve deduction with respect
to qualifying real property loans could be based upon actual loss experience
(the "experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method").

         First Federal historically elected to use the percentage of taxable
income method. Under such method, the bad debt reserve deduction for qualifying
real property loans was computed as a percentage of taxable income, with certain
adjustments, effective for taxable years beginning after 1986. The allowable
deduction under the percentage of taxable income method (the "percentage bad
debt deduction") for taxable years beginning before 1987 was scaled downward in
the event that less than 82% of the total dollar amount of the assets of an
association were within certain designated categories. When the percentage
method bad debt deduction was lowered to 8%, the 82% qualifying assets
requirement was lowered to 60%. For all taxable years, no deduction was
permitted in the event that less than 60% of the total dollar amount of the
assets of an association fell within such categories.

         Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.

         Legislation signed by the President in 1996 repealed the percentage of
taxable income method of calculating the bad debt reserve. Savings associations,
like the Bank, which have previously used that method are required to recapture
into taxable income post-1987 reserves in excess of the reserves calculated
under the experience method over a six-year period beginning with the first
taxable year beginning after December 31, 1995. The start of such recapture may
be delayed until the third taxable year beginning after December 31, 1995 if the
dollar amount of the institution's residential loan originations in each year is
not less than the average dollar amount of residential loan originated in each
of the six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. Under such
legislation, the Bank is required to recapture approximately $70,000 of its tax
bad debt reserve. The Bank has provided deferred taxes for the amount of the
recapture.

         Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.

         Neither the Company nor First Federal's federal corporate income tax
returns have been audited in the last five years.

         Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as taxable gains
or losses. The IRS has indicated that financial institutions which originate and
sell loans will be subject to the rule.

                                       33
<PAGE>
 
STATE INCOME TAXATION

         The Commonwealth of Kentucky imposes an annual franchise tax on
financial institutions regularly engaged in business in Kentucky at any time
during the calendar year. This tax is 1.1% of First Federal's net capital. For
purposes of this tax, net capital is defined as the aggregate of the Bank's
capital stock, paid-in capital, retained earnings and net unrealized gains or
losses on securities designated as available for sale less an amount equal to
the five year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without Kentucky
must apportion on their net capital. For the year ended June 30, 1997, the
amount of such expense for First Federal was $47,000.

         Shareholders of the Company who are residents of the Commonwealth of
Kentucky may be subject to a Kentucky tax on intangible property, defined for
this purpose to include shares of stock in a corporation. The tax is an ad
valorem tax based upon the fair market value of the shares held by the
individual, and is assessed at a rate of $.25 per $100 in value.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

         The following table sets forth the location and certain additional
information regarding the Bank's two offices at June 30, 1997.

<TABLE> 
<CAPTION> 

                                                            Book Value
                                  Year        Owned or      at June 30,      Approximate
                                 Opened        Leased          1997        Square Footage
                                 ------        ------          ----        --------------
<S>                              <C>           <C>           <C>           <C> 
306 North Main Street             1975          Owned        $  246,000         4,278
Cynthiana, Kentucky

100 Ladish Road
Cynthiana, Kentucky               1994          Owned           902,000         2,500
</TABLE> 

ITEM 3. LEGAL PROCEEDINGS.
-------------------------

         Although First Federal, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Company or First Federal is a party or to which any of
its property is subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

         There were no matters submitted to a vote of the security holders
during the fourth quarter of fiscal year 1997.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
---------------------------------------------------------------------------
         MATTERS
         -------

         The Common Stock began trading under the symbol "KYF" on the American
Stock Exchange on August 29, 1996. There are currently 1,302,694 shares of the
Common Stock outstanding. The number of registered holders of Common Stock on
September 19, 1997 was 376.

                                       34
<PAGE>
 
         The following table shows the high and low stock prices for the Common
Stock and dividends declared on a quarterly basis since it began trading on the
American Stock Exchange through June 30, 1997.

<TABLE> 
<CAPTION> 

         Quarter                                               Dividends
         Ended                      High         Low           Declared
         -----                      ----         ---           --------
         <S>                       <C>           <C>           <C> 
         September 30, 1995        $13.000       $12.000       $  --
         December 31, 1995         $12.750       $11.250       $  --
         March 31, 1996            $12.500       $11.375       $0.125
         June 30, 1996             $13.875       $12.000       $0.125

         September 30, 1996        $13.625       $13.625       $0.125
         December 31, 1996         $11.000       $10.875       $3.125  (1)
         March 31, 1996            $11.500       $11.500       $0.125
         June 30, 1997             $10.750       $10.625       $0.125
</TABLE> 

----------------
(1)      In November 1996, the Company paid a $3.00 per share return of capital 
         distribution.

         The income of the Company consists of interest on investment and
related securities and dividends which may periodically be declared and paid by
the Board of Directors of the Bank on the common shares of the Bank held by the
Company.

         In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings associations. Under OTS regulations applicable to
converted savings associations, the Bank is not permitted to pay a cash dividend
on its common shares if the Bank's regulatory capital would, as a result of the
payment of such dividend, be reduced below the amount required for the
liquidation account established in connection with the Conversion or applicable
regulatory capital requirements prescribed by the OTS.

         OTS regulations applicable to all savings associations provide that a
savings association which immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution (including a dividend) has
total capital (as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted without OTS
approval (but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
asset ratio exceeded its required capital to asset ratio at the beginning of the
calendar year, or (2) 75% of its net earnings for the most recent four-quarter
period. Savings associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends. A savings
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.

         The Bank currently meets all of its regulatory requirements and, unless
the OTS determines that the Bank is an institution requiring more than normal
supervision, the Bank may pay dividends in accordance with the foregoing
provisions of the OTS regulations.

                                       35
<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

         In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally.

         Some of the forward-looking statements included herein are the
statements regarding management's determination of the amount of loan losses and
the effect of certain accounting pronouncements.

GENERAL

         The Company's principal business since August 28, 1995 has been that of
the Bank. Therefore, this discussion relates primarily to the Bank.
Historically, the Bank has functioned as a financial intermediary, attracting
deposits from the general public and using such deposits to make and purchase
mortgage and other loans and, to a lesser extent, to purchase investment and
mortgage-backed securities. As such, its earnings have depended primarily on its
net interest income, or "spread", which is the difference between the amount it
receives from interest earned on loans and investments ("interest-earning
assets") and the amount it pays in interest on its deposits and borrowings
("interest-bearing liabilities"). Results of operations are also dependent upon
the level of the Bank's other income, including fee income and service charges
and by the level of its general, administrative and other expense, including
SAIF deposit insurance premiums, employee compensation and benefits, occupancy
and equipment expense and other operating expenses.

         The operations of the Bank are significantly affected by prevailing
economic conditions and the monetary, fiscal and regulatory policies of
governmental agencies. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the level of interest rates and
the availability of funds. Deposit flows and costs of funds are likewise heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Bank's market areas.

ASSET/LIABILITY MANAGEMENT

         Net interest income, the primary component of First Federal's net
earnings, is determined by the difference, or "spread", between the yield earned
on the Bank's interest-earning assets and the rates paid on its interest-bearing
liabilities and the relative amounts of such assets and liabilities. Key
components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. First Federal has employed various
strategies intended to minimize the adverse affect of interest rate risk on
future operations by providing a better match between the interest rate
sensitivity of its assets and liabilities. Such strategies include the
origination and purchase of adjustable-rate mortgage loans secured by one- to
four-family residential real estate, multi-family and commercial real estate
loans. The Bank's loan pricing strategies are designed to encourage customers to
choose adjustable rate, rather than fixed rate, mortgage loans, however the
fixed rates offered have been reduced recently to become more competitive with
the rates offered by competitors in the Bank's lending areas.

INTEREST RATE SENSITIVITY ANALYSIS AND NET PORTFOLIO VALUE

         In recent years, the Bank has measured its interest rate sensitivity by
computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain periods, based on assumptions regarding loan
prepayment and deposit decay rates formerly provided by the OTS. However, the
OTS now requires the computation

                                      36
<PAGE>
 
of amounts by which the net present value of an institution's cash flows from
assets, liabilities and off balance sheet items (the institution's net portfolio
value, or "NPV") would change in the event of a range of assumed changes in
market interest rates. The OTS also requires the computation of estimated
changes in net interest income over a four-quarter period. These computations
estimate the effect on an institution's NPV and net interest income of an
instantaneous and permanent 1% to 4% increase and decrease in market interest
rates.

         The following table sets forth the interest rate sensitivity of the
Bank's net interest income and net portfolio value as of June 30, 1997 in the
event of 1%, 2%, 3% and 4% instantaneous and permanent increases and decreases
in market interest rates, respectively.

<TABLE> 
<CAPTION> 
                                     Net Portfolio Value            NPV as % of Portfolio Value of Assets
          Change           -------------------------------------    -------------------------------------
         in Rates          Amount        $ Change       % Change    NPV Ratio         Basis Point Changes
         --------          ------        --------       --------    ---------         -------------------
                                                 (Dollars in thousands)

         <S>              <C>           <C>               <C>         <C>                    <C> 
         +400 bp          $ 6,993       $  (7,154)         (51)%       8.65%                 (718)
         +300 bp            8,774          (5,372)         (38)       10.58                  (525)
         +200 bp           10,607          (3,540)         (25)       12.46                  (337)
         +100 bp           12,443          (1,703)         (12)       14.26                  (158)
            0 bp           14,146              --           --        15.83                    --
         -100 bp           15,511           1,365           10        17.02                   119
         -200 bp           16,283           2,137           15        17.64                   181
         -300 bp           16,973           2,827           20        18.16                   233
         -400 bp           18,068           3,922           28        19.01                   318
</TABLE> 

         Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. 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. Additionally, certain assets, such as adjustable rate
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In addition, the proportion of adjustable
rate loans in the Bank's portfolios could decrease in future periods if market
interest rates remain at or decrease below current levels due to refinance
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the tables. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of an interest rate increase.

         The retention of adjustable-rate mortgage and commercial loans in the
Bank's portfolio helps reduce the Bank's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to borrowers as a result of repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower.

                                      37
<PAGE>
 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

         Net interest income is affected by (i) the difference between rates of
interest earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Savings
institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indication of an institution's net interest income is
its "net yield on interest-earning assets" which is net interest income divided
by average interest-earning assets. The following table sets forth certain
information relating to the Bank's average interest-earning assets and
interest-bearing liabilities and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of assets
or liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.

<TABLE> 
<CAPTION> 
                                                                           Year Ended June 30,
                                               ---------------------------------------------------------------------------
                                                             1997                                   1996
                                               ---------------------------------       -----------------------------------
                                                                         Average                                   Average
                                                                         Yield/                                    Yield/
                                               Balance      Interest      Cost         Balance       Interest       Cost
                                               -------      --------      ----         -------       --------       ----
                                                                        (Dollars in thousands)

<S>                                          <C>           <C>            <C>        <C>            <C>             <C> 
Interest-earning assets:
 Loans receivable, net (1).................  $   49,693    $    3,837     7.72%      $   42,544     $   3,265       7.67%
 Mortgage-backed securities................      21,161         1,438     6.80           12,094           864       7.14
 Investment securities.....................      12,970           927     7.15           12,421           962       7.74
 Other interest-earning assets.............       1,547            97     6.27            4,827           266       5.51
                                             ----------    ----------                ----------     ---------          
  Total interest-earning assets............      85,371         6,299     7.38           71,886         5,357       7.45
Non-interest-earning assets................       3,286                                   3,003  
                                             ----------                              ----------  
  Total assets.............................  $   88,657                              $   74,889  
                                             ==========                              ==========  

Interest-bearing liabilities:
 Deposits..................................  $   55,027         2,280     4.14       $   51,547     $   2,305       4.47%
 Borrowings................................      18,043           951     5.27            6,234           316       5.07
                                             ----------                              ----------     ---------
  Total interest-bearing liabilities.......      73,070         3,231     4.42           57,781         2,621       4.54
                                                           ----------                               ---------     ------
Non-interest-bearing liabilities...........         777                                     478
                                             ----------                              ----------
  Total liabilities........................      73,847                                  58,259
Shareholders' equity.......................      14,810                                  16,630
                                             ----------                              ----------
  Total liabilities and   
   shareholders' equity....................  $   88,657                              $   74,889
                                             ==========                              ==========
Net interest income........................                $    3,068                               $   2,736
                                                           ==========                               =========
Interest rate spread (2)...................                               2.96%                                     2.91%
                                                                        ======                                    ======
Net yield on interest-earning assets (3)...                               3.59%                                     3.81%
                                                                        ======                                    ======
Ratio of average interest-earning assets to
 average interest-bearing liabilities......                             116.83%                                   124.41%
                                                                        ======                                    ======
</TABLE> 

------------
(1)     Includes non-accrual loans.
(2)     Represents the difference between the average yield on interest-earning
        assets and the average cost of interest-bearing liabilities. 
(3)     Represents net interest income as a percentage of the average balance of
        interest-earning assets for the same period.

                                      38
<PAGE>
 
RATE/VOLUME ANALYSIS

         The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated proportionately between
changes in rate and changes in volume.

<TABLE> 
<CAPTION> 
                                                                      Year Ended June 30,
                                               -----------------------------------------------------------------
                                                1997        vs.        1996        1996         vs.       1995
                                               -----------------------------      ------------------------------
                                                    Increase (Decrease)                Increase (Decrease)
                                                          Due to                              Due to
                                               -----------------------------      ------------------------------

                                               Rate        Volume      Total      Rate        Volume       Total
                                               ----        ------      -----      ----        ------       -----
                                                                        (In thousands)

<S>                                           <C>          <C>        <C>         <C>        <C>          <C> 
Interest Income:
 Loans......................................  $    21      $ 551      $   572     $    6     $   239      $  245
 Investment securities(1)...................      (76)        41          (35)       214         348         562
 Mortgage-backed securities(1)..............      (44)       618          574         39          20          59
 Other interest-earning assets..............       33       (202)        (169)        88         140         228
                                              -------      -----      -------     ------     -------      ------
  Total interest-earning assets                   (66)     1,008          942        347         747       1,094
                                              -------      -----      -------     ------     -------      ------

Interest expense:
 Deposits....................................    (176)       151          (25)       264         (83)        181
 Borrowings..................................      12        623          635         (6)        273         267
                                              -------      -----      -------     ------     -------      ------
  Total interest-bearing
   liabilities...............................    (164)       774          610        258         190         448
                                              -------      -----      -------     ------     -------      ------

Increase in net interest  income.............                         $   332                             $  646
                                                                      =======                             ======
</TABLE> 

-----------
(1)     Includes securities designated as available for sale.


COMPARISON OF FINANCIAL CONDITION AS OF JUNE 30, 1997 AND 1996 AND OPERATING
RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996

FINANCIAL CONDITION

         The Company's total assets at June 30, 1997 amounted to $88.9 million,
an increase of $2.6 million, or 3.0%, over the $86.3 million total at June 30,
1996. The increase in assets was funded primarily by a $3.7 million increase in
deposits and a $3.4 million increase in advances from the Federal Home Loan
Bank, which were partially offset by a $4.2 million, or $3.00 per share, return
of capital distribution.

         Cash and cash equivalents and investment securities totaled $15.2
million at June 30, 1997, a decrease of $1.9 million, or 10.9%, from June 30,
1996 levels. During fiscal 1997, $801,000 of investment securities were
purchased, while $2.4 million of securities matured.

         Mortgage-backed securities totaled $21.2 million at June 30, 1997, a
decrease of $2.0 million, or 8.7%, from fiscal 1996 levels. The decrease
resulted from principal repayments of $2.0 million. There were no purchases of
mortgage-backed securities in fiscal 1997.

                                      39
<PAGE>
 
         Proceeds from the maturity of investment securities and repayment of
mortgage-backed securities were primarily utilized to fund the $3.00 per share
return of capital distribution paid in December 1996.

         Loans receivable totaled $48.9 million at June 30, 1997, an increase of
$5.9 million, or 13.7%, over the $43.0 million total at June 30, 1996. During
fiscal 1997, loan disbursements and purchases amounted to $17.0 million, which
were partially offset by principal repayments of $11.1 million. Loan origination
volume during fiscal 1997 exceeded that of fiscal 1996 by $5.9 million, or
53.7%. The growth in loans was comprised of $3.2 million in loans secured by
residential real estate, $1.1 million in loans secured by nonresidential real
estate and $1.7 million in consumer loans. During fiscal 1997, as consumer
preference has shifted to fixed-rate loan products, management elected to pursue
growth in the portfolio by meeting the demand. At June 30, 1997, approximately
55.6% of the Bank's loan portfolio consisted of fixed rate loans.

         The Bank's allowance for loan losses totaled $372,000 at June 30, 1997,
which represented 0.8% of total loans and 630.5% of nonperforming loans. At 
June 30, 1996, the allowance for loan losses totaled $367,000, which represented
0.8% of total loans and 300.8% of nonperforming loans. Nonperforming loans
amounted to $59,000 and $122,000 at June 30, 1997 and 1996, respectively, and
represented 0.07% and 0.14% of total assets at those dates. Although management
believes that its allowance for loan losses at June 30, 1997 was adequate based
on the available facts and circumstances, there can be no assurance that
additions to such allowance will not be necessary in future periods, which could
adversely affect the Company's results of operations.

         Deposits totaled $55.4 million at June 30, 1997, an increase of $3.7
million, or 7.1%, over 1996 levels. During fiscal 1997 management elected to
pursue growth in the deposit portfolio through marketing and pricing strategies.
The increase in deposits consisted of a $1.8 million, or 10.0% increase in
passbook and demand deposits and a $1.9 million, or 5.5%, increase in
certificates of deposit.

         Advances from the Federal Home Loan Bank totaled $18.0 million, an
increase of $3.4 million, or 23.7%, over fiscal 1996 levels. Funds received from
growth in deposits and Federal Home Loan Bank advances were primarily deployed
to fund the growth in the loan portfolio.

         Stockholders' equity totaled $14.7 million at June 30, 1997, a decrease
of $4.5 million, or 23.5% from June 30, 1996 levels. The decrease resulted
primarily from the $4.2 million return of capital distribution paid in December
1996, coupled with regular quarterly dividends totaling $626,000 and purchases
of treasury shares totaling $818,000, which were partially offset by net
earnings of $762,000.

COMPARISON OF RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 
AND 1996

         GENERAL. Net earnings for the year ended June 30, 1997, totaled
$762,000, a decrease of $87,000, or 10.2%, from the $849,000 in net earnings
recorded for the year ended June 30, 1996. This net decrease was attributable to
an increase in general, administrative and other expenses of $507,000, which was
attributable primarily to a $301,000 increase in federal deposit insurance
premiums resulting from the one-time SAIF recapitalization assessment of
$351,000, as well as a $119,000, or 14.1%, increase in employee compensation and
benefits and a $75,000, or 18.4%, increase in other expense. This increase was
partially offset by an increase in net interest income of $332,000, an increase
in other income of $38,000 and a decrease in the provision for federal income
taxes of $50,000.

         NET INTEREST INCOME. Net interest income increased by $332,000, or
12.1%, for the year ended June 30, 1997, compared to fiscal 1996. Interest
income on loans increased by $572,000, or 17.5%, for the year ended June 30,
1997, due primarily to a $7.1 million, or 16.8%, increase in the
weighted-average balance outstanding. Interest income on mortgage-backed
securities increased by $574,000, or 66.4%, due primarily to a $9.1 million
increase in the weighted-average portfolio balance, which was partially offset
by a 34 basis point decline in yield, to 6.80% in fiscal 1997. Interest income
on investment securities and interest-bearing deposits declined by $204,000, or
16.6%, due primarily to a $2.7 million, or 15.8%, decline in the
weighted-average balance of such assets.

                                      40
<PAGE>
 
         Interest expense on deposits totaled $2.3 million for the fiscal year
ended June 30, 1997, a decrease of $25,000, or 1.1%, from fiscal 1996. The
decrease resulted primarily from a 33 basis point decline in the average cost of
deposits, to 4.14%, which was partially offset by a $3.5 million increase in the
weighted-average balance outstanding year to year. Interest expense on
borrowings increased by $635,000, or 200.9%, during fiscal 1997, as compared to
fiscal 1996, due primarily to an $11.8 million, or 189.4%, increase in the
weighted-average balance outstanding.

         As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $332,000, or 12.1%, to a total of $3.1
million in fiscal 1997. The interest rate spread increased by 5 basis points,
from 2.91% in fiscal 1996 to 2.96% in fiscal 1997, while the net interest margin
declined by 22 basis points, from 3.81% in fiscal 1996 to 3.59% in fiscal 1997.

         PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is
charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by the Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Bank's market area, and other factors related to the
collectibility of the Bank's loan portfolio. As a result of such analysis,
management recorded a $15,000 provision for losses on loans during each of the
fiscal years ended June 30, 1997 and 1996. There can be no assurance that the
loan loss allowance of the Bank will be adequate to cover losses on
nonperforming assets in the future.

         OTHER INCOME. Other income totaled $156,000 for the year ended June 30,
1997, an increase of $38,000, or 32.2%, over fiscal 1996. The increase in other
income was attributable primarily to an increase in service charges on deposit
accounts due to overall growth in the portfolio.

         GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $2.1 million for the year ended June 30, 1997, an increase
of $507,000, or 31.6%, over the $1.6 million recorded in fiscal 1996. The
increase in fiscal 1997 was attributable primarily to a $301,000 increase in
federal deposit insurance premiums resulting from the one-time SAIF
recapitalization assessment of $351,000, as well as a $119,000, or 14.1%,
increase in employee compensation and benefits and a $75,000, or 18.4%, increase
in other expense. The increase in employee compensation and benefits resulted
primarily from an increase in costs related to stock benefit plans, coupled with
normal merit increases year to year. The increase in other expenses included
increases in advertising, office supplies, telephone and postage costs and other
operating expenses due to the Company's overall growth year to year.

         FEDERAL INCOME TAXES. The provision for federal income taxes amounted
to $335,000 and $385,000 for the years ended June 30, 1997 and 1996,
respectively, a decrease of $50,000, or 13.0%. The decrease in income tax
expense was primarily due to the decline in earnings before income taxes. The
effective tax rate on earnings before income taxes was 30.5% and 31.2% for the
years ended June 30, 1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary source of liquidity is dividends paid by the
Bank. The Bank, as a stock savings institution, is subject to certain regulatory
limitations with respect to the payment of dividends to the Company.

         First Federal's capital ratios are substantially in excess of current
regulatory capital requirements. At June 30, 1997, the Bank's tangible and core
capital amounted to 14.7% of adjusted total assets, or 13.2% and 11.7%,
respectively, in excess of the Bank's current 1.5% tangible and 3.0% core
capital requirements. Additionally, the Bank's risk-based capital ratio was
27.8% at June 30, 1997, or 19.8% in excess of the Bank's 8.0% risk-based capital
requirement.

         First Federal's principal sources of funds for operations are deposits
from its primary market area, principal and interest payments on loans and
proceeds from maturing investment securities. In addition, as a member of the
FHLB of Cincinnati, the Bank is eligible to borrow funds from the FHLB of
Cincinnati in the form of advances.

                                      41
<PAGE>
 
         First Federal is required by OTS regulations to maintain minimum levels
of specified liquid assets which are currently equal to 5% of deposits and
borrowings. First Federal's liquidity ratio at June 30, 1997, was approximately
7.60%. Management seeks to maintain a liquidity ratio at or near the regulatory
minimum as a means of improving the return on the investment of the Bank's
assets.

         The Bank's liquid assets consist of cash and cash equivalents, which
are short-term, highly liquid investments with original maturities of less than
three months. The level of liquid assets is dependent on the Bank's operating,
financing and investing activities during any given period. At June 30, 1997 and
1996, cash and cash equivalents totalled approximately $1.3 million and $1.5
million, respectively.

IMPACT OF INFLATION AND CHANGING PRICES

         The consolidated financial statements, and notes thereto, presented
herein 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 changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

         Accounting for Stock-Based Compensation. In October 1994, the FASB
issued SFAS No. 123 entitled "Accounting for Stock Based Compensation." SFAS 
No. 123 establishes a fair value based method of accounting for stock-based
compensation. SFAS No. 123 recognizes the fair value of an award of stock or
stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings and,
if presented, earnings per share, as if SFAS No. 123 had been adopted.
Management has determined that the Company will continue to account for
stock-based compensation pursuant to Accounting Principles Board Opinion No. 25,
and therefore adoption of the disclosure provisions set forth in SFAS No. 123
will not have a material effect on the Company's consolidated financial
condition or results of operations.

         Accounting for Transfers of Financial Assets. In June 1996, the FASB
issued SFAS No. 125, "Accounting for Transfer of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.

         An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.

                                      42
<PAGE>
 
         SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligations for the liability or is legally released from being the primary
obligor. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997 and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management does not believe that adoption of SFAS No. 125 will have a
material adverse effect on the Company's consolidated financial position or
results of operations.

         Earnings Per Share. In February 1997, the FASB issued SFAS No. 128,
"Earnings per Share", which requires companies to present basic earnings per
share and, if applicable, diluted earnings per share, instead of primary and
fully diluted earnings per share, respectively. Basic earnings per share is
computed without including potential common shares, i.e., no dilutive effect.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares, including options, warrants,
convertible securities and contingent stock agreements. SFAS No. 128 is
effective for periods ending after December 15, 1997. Early application is not
permitted. Based upon the provisions of SFAS No. 128, the Company's basic and
diluted earnings per share for the fiscal year ended June 30, 1997 would have
each been $.60 and $.58, respectively.

         Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," which requires entities presenting a
complete set of financial statements to include details of comprehensive income
that arise in the reporting period. Comprehensive income consists of net
earnings or loss for the current period and other comprehensive income, expense,
gains and losses that bypass the statement of earnings and are reported as a
separate component of equity, i.e., unrealized gains and losses on certain
investment securities. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 130 relates solely to
disclosure provisions and therefore will not have a material adverse effect on
the Company's consolidated financial position or results of operations.

                                      43
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

KENTUCKY FIRST BANCORP, INC.

June 30, 1997, 1996 and 1995

                                      44 
<PAGE>
 
                                    CONTENTS

                                                                            Page

REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                          46


FINANCIAL STATEMENTS    

  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                             48

  CONSOLIDATED STATEMENTS OF EARNINGS                                        49

  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                            50

  CONSOLIDATED STATEMENTS OF CASH FLOWS                                      51

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 53


                                      45
<PAGE>
 
               Report of Independent Certified Public Accountants
               --------------------------------------------------

Board of Directors
Kentucky First Bancorp, Inc.

We have audited the accompanying consolidated statements of financial condition
of Kentucky First Bancorp, Inc. (the holding company for First Federal Savings
Bank) as of June 30, 1997 and 1996, and the related consolidated statements of
earnings, shareholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
for the year ended June 30, 1995, were audited by other auditors, whose report
thereon dated August 14, 1995, expressed an unqualified opinion on those
statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kentucky First
Bancorp, Inc. as of June 30, 1997 and 1996, and the consolidated results of its
operations and its consolidated cash flows for the years ended June 30, 1997 and
1996, in conformity with generally accepted accounting principles.



/s/ Grant Thornton LLP
----------------------
Grant Thornton LLP

Cincinnati, Ohio
August 8, 1997


                                      46
<PAGE>
 
                [LETTERHEAD OF ENGLAND & HENSLEY APPEARS HERE]

                         INDEPENDENT AUDITORS' REPORT

Board of Directors
First Federal Savings Bank
Cynthiana, Kentucky

We have audited the accompanying statements of financial condition of First 
Federal Savings Bank, Cynthiana, Kentucky, as of June 30, 1995 and 1994, and the
related statements of operations, retained earnings, and cash flows for each of 
the years ended June 30, 1995, 1994 and 1993. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an 
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement. 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 audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of First Federal Savings Bank as 
of June 30, 1995 and 1994, and the results of its operations and its cash flows 
for the years ended June 30, 1995, 1994 and 1993, in conformity with generally 
accepted accounting principles.

As discussed in Note 17, the accompanying financial statements have been 
restated.

/s/ England & Hensley
-------------------------
England & Hensley, CPA's
Lexington, Kentucky

August 14, 1995


                                      47
<PAGE>
 
                         Kentucky First Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                   June 30,
                       (In thousands, except share data)

<TABLE> 
<CAPTION> 

         ASSETS                                                                                1997                1996
<S>                                                                                       <C>                 <C> 
Cash and due from banks                                                                     $   505             $   883
Interest-bearing deposits in other financial institutions                                       762                 643
                                                                                             ------              ------
         Total cash and cash equivalents                                                      1,267               1,526

Investment securities available for sale - at market                                          2,202               3,069
Investment securities - at amortized cost, approximate
  market value of $11,589 and $12,069 as of
  June 30, 1997 and 1996                                                                     11,733              12,464
Mortgage-backed securities available for sale - at market                                     3,348               4,135
Mortgage-backed securities - at cost, approximate market
  value of $17,483 and $18,345 as of June 30, 1997 and 1996                                  17,822              19,042
Loans receivable - net                                                                       48,920              43,020
Office premises and equipment - at depreciated cost                                           1,397               1,361
Federal Home Loan Bank stock - at cost                                                        1,052                 738
Accrued interest receivable                                                                     574                 517
Prepaid expenses and other assets                                                               415                 346
Prepaid federal income taxes                                                                     32                  -
Deferred federal income taxes                                                                    94                  79
                                                                                             ------              ------

         Total assets                                                                       $88,856             $86,297
                                                                                             ======              ======


         LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits                                                                                    $55,443             $51,778
Advances from the Federal Home Loan Bank                                                     17,970              14,528
Accrued interest payable                                                                        148                  71
Other liabilities                                                                               568                 502
Accrued federal income taxes                                                                     -                  162
                                                                                             ------              ------
         Total liabilities                                                                   74,129              67,041

Commitments                                                                                      -                   -

Shareholders' equity
  Preferred stock - authorized 500,000 shares of $.01 par value;
    no shares issued                                                                             -                   -
  Common stock, authorized 3,000,000 shares of $.01 par value;
    1,388,625 shares issued                                                                      14                  14
  Additional paid-in capital                                                                  9,220              13,351
  Retained earnings - restricted                                                              7,825               7,689
  Less shares acquired by stock benefit plans                                                (1,509)             (1,748)
  Less 69,431 shares of treasury stock - at cost                                               (818)                 -
  Unrealized losses on securities designated as available for sale,
    net of related tax effects                                                                   (5)                (50)
                                                                                             ------              ------
         Total shareholders' equity                                                          14,727              19,256
                                                                                             ------              ------

         Total liabilities and shareholders' equity                                         $88,856             $86,297
                                                                                             ======              ======
</TABLE> 

The accompanying notes are an integral part of these statements.

                                      48

<PAGE>
 
                          Kentucky First Bancorp, Inc.

                       CONSOLIDATED STATEMENTS OF EARNINGS

                           For the year ended June 30,
                        (In thousands, except share data)

<TABLE> 
<CAPTION> 

                                                                                1997             1996              1995
<S>                                                                           <C>              <C>               <C> 
Interest income
  Loans                                                                       $3,837           $3,265            $3,020
  Mortgage-backed securities                                                   1,438              864               302
  Investment securities                                                          927              962               903
  Interest-bearing deposits and other                                             97              266                38
                                                                              ------           ------            ------
         Total interest income                                                 6,299            5,357             4,263

Interest expense
  Deposits                                                                     2,280            2,305             2,124
  Borrowings                                                                     951              316                49
                                                                              ------           ------            ------
         Total interest expense                                                3,231            2,621             2,173
                                                                              ------           ------            ------

         Net interest income                                                   3,068            2,736             2,090

Provision for losses on loans                                                     15               15               200
                                                                              ------           ------            ------

         Net interest income after provision
           for losses on loans                                                 3,053            2,721             1,890

Other income
  Service charges                                                                109               82                58
  Other operating                                                                 47               36                35
                                                                              ------           ------            ------
         Total other income                                                      156              118                93

General, administrative and other expense
  Employee compensation and benefits                                             960              841               647
  Occupancy and equipment                                                        142              138               103
  Federal deposit insurance premiums                                             420              119               125
  Data processing                                                                107               99                99
  Other operating                                                                483              408               287
                                                                              ------           ------            ------
         Total general, administrative and other expense                       2,112            1,605             1,261
                                                                              ------           ------            ------

         Earnings before income taxes                                          1,097            1,234               722

Federal income taxes
  Current                                                                        373              403               237
  Deferred                                                                       (38)             (18)                6
                                                                              ------           ------            ------
         Total federal income taxes                                              335              385               243
                                                                              ------           ------            ------

         NET EARNINGS                                                        $   762          $   849           $   479
                                                                              ======           ======            ======

         EARNINGS PER SHARE                                                     $.60             $.66               N/A
                                                                                 ===              ===               ===
</TABLE> 

The accompanying notes are an integral part of these statements.

                                      49

<PAGE>
                          Kentucky First Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                For the years ended June 30, 1997, 1996 and 1995
                       (In thousands, except share data)
<TABLE>
<CAPTION>
                                                                                                                     Shares        
                                                                             Additional                            acquired        
                                                                 Common         paid-in         Retained        by employee        
                                                                  stock         capital         earnings      benefit plans        
<S>                                                              <C>         <C>                <C>           <C>    
Balance at July 1, 1994                                             $ -         $     -            $6,680            $     - 

Net earnings for the year ended June 30, 1995                         -               -               479                  - 
                                                                    ---         -------            ------             ------        


Balance at June 30, 1995                                              -               -             7,159                  - 

Net proceeds from issuance of common stock                           14          13,316                 -             (1,111)       

Purchase of shares for management recognition plan                    -               -                 -               (730)       

Amortization expense of stock benefit plans                           -              35                 -                 93        

Net earnings for the year ended June 30, 1996                         -               -               849                  - 
Cash dividends paid of $.25 per share                                 -               -              (319)                 - 
Unrealized losses on securities designated as available
  for sale, net of related tax effects                                -               -                 -                  - 
                                                                    ---         -------            ------             ------        


Balance at June 30, 1996                                             14          13,351             7,689             (1,748)       


Purchase of treasury stock                                            -               -                 -                  - 
Amortization expense of stock benefit plans                           -              35                 -                239        

Net earnings for the year ended June 30, 1996                         -               -               762                  - 
Cash dividends paid of $.50 per share                                 -               -              (626)                 - 
Return of capital distribution of $3.00 per share                     -          (4,166)                -                  - 
Unrealized gains on securities designated as
  available for sale, net of related tax effects                      -               -                 -                  - 
                                                                    ---         -------            ------             ------        


Balance at June 30, 1997                                            $14        $  9,220           $ 7,825            $(1,509)       

                                                                    ===         =======            ======             ======        


<CAPTION>

                                                                           Unrealized losses
                                                                               on securities
                                                                                  designated
                                                                Treasury        as available
                                                                   stock            for sale        Total
<S>                                                             <C>        <C>                   <C>    
Balance at July 1, 1994                                             $  -              $    -      $  6,680

Net earnings for the year ended June 30, 1995                          -                   -           479
                                                                     ---               -----       ------- 

Balance at June 30, 1995                                               -                   -         7,159

Net proceeds from issuance of common stock                             -                   -        12,219
Purchase of shares for management recognition plan                     -                   -          (730)
Amortization expense of stock benefit plans                            -                   -           128
Net earnings for the year ended June 30, 1996                          -                   -           849
Cash dividends paid of $.25 per share                                  -                   -          (319)
Unrealized losses on securities designated as available
  for sale, net of related tax effects                                 -                 (50)          (50)
                                                                     ---               -----       ------- 

Balance at June 30, 1996                                               -                 (50)       19,256

Purchase of treasury stock                                          (818)                  -          (818)
Amortization expense of stock benefit plans                            -                   -           274
Net earnings for the year ended June 30, 1996                          -                   -           762
Cash dividends paid of $.50 per share                                  -                   -          (626)
Return of capital distribution of $3.00 per share                      -                   -        (4,166)
Unrealized gains on securities designated as
  available for sale, net of related tax effects                       -                  45            45
                                                                     ---               -----       ------- 

Balance at June 30, 1997                                           $(818)             $   (5)      $14,727
                                                                    ====               =====        ======
</TABLE>

The accompanying notes are an integral part of these statements.

                                      50
<PAGE>
 
                          Kentucky First Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                           For the year ended June 30,
                                 (In thousands)

<TABLE> 
<CAPTION> 

                                                                                    1997            1996           1995
<S>                                                                            <C>             <C>              <C> 
Cash flows from operating activities:
  Net earnings for the year                                                    $     762       $     849        $   479
  Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Amortization of discounts and premiums on loans,
      investments and mortgage-backed securities - net                               (19)             (8)           (33)
    Amortization of deferred loan origination fees                                   (44)            (14)           (11)
    Depreciation and amortization                                                     64              50             51
    Provision for losses on loans                                                     15              15            200
    Amortization of expense related to stock benefit plans                           274             128             -
    Federal Home Loan Bank stock dividends                                           (65)            (30)           (20)
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                                    (57)            (74)           (69)
      Prepaid expenses and other assets                                              (69)             56           (265)
      Accrued interest payable                                                        77             (12)            (2)
      Other liabilities                                                               66             253            (22)
      Federal income taxes
        Current                                                                     (194)            222            (43)
        Deferred                                                                     (38)            (18)             6
                                                                                --------        --------        ------- 
         Net cash provided by operating activities                                   772           1,417            271

Cash flows provided by (used in) investing activities:
  Proceeds from maturity of investment securities                                  2,440          10,628          1,075
  Purchase of investment securities designated as held to maturity                  (701)        (14,305)          (500)
  Purchase of investment securities designated as available for sale                (100)             -              -
  Purchase of mortgage-backed securities designated as available for sale             -           (3,088)            -
  Purchase of mortgage-backed securities designated as held to maturity               -          (15,253)          (510)
  Principal repayments on mortgage-backed securities                               2,053           1,189          1,426
  Purchase of loans                                                               (1,654)           (779)        (2,008)
  Loan principal repayments                                                       11,140           8,137          8,567
  Loan disbursements                                                             (15,357)        (10,288)        (8,854)
  Purchase of office premises and equipment                                         (100)            (43)          (290)
  Proceeds from sale of office equipment                                              -               10             -
  Purchase of Federal Home Loan Bank stock                                          (249)           (405)           (39)
                                                                                --------        --------        ------- 
         Net cash used in investing activities                                    (2,528)        (24,197)        (1,133)
                                                                                --------        --------        ------- 

         Net cash used in operating and investing
           activities (subtotal carried forward)                                  (1,756)        (22,780)          (862)
                                                                                --------        --------        ------- 
</TABLE> 

                                      51
<PAGE>
 
                          Kentucky First Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                           For the year ended June 30,

<TABLE> 
<CAPTION> 


                                                                                    1997            1996          1995
<S>                                                                             <C>             <C>            <C>  
         Net cash used in operating and investing
           activities (subtotal brought forward)                                $ (1,756)       $(22,780)      $   (862)

Cash flows provided by financing activities:
  Net increase (decrease) in deposits                                              3,665          (1,327)        (2,149)
  Proceeds from Federal Home Loan Bank advances                                   19,250          16,606          9,080
  Repayment of Federal Home Loan Bank advances                                   (15,808)         (4,157)        (7,001)
  Proceeds from note payable                                                       2,000              -              -
  Repayment of note payable                                                       (2,000)             -              -
  Net proceeds from the issuance of common stock                                      -           12,219             -
  Purchase of treasury stock                                                        (818)             -              -
  Shares acquired by the management recognition plan                                  -             (730)            -
  Dividends on common stock                                                       (4,792)           (319)            -
                                                                                 -------         -------        ------- 
         Net cash provided by (used in) financing activities                       1,497          22,292            (70)
                                                                                 -------         -------        ------- 

Net decrease in cash and cash equivalents                                           (259)           (488)          (932)

Cash and cash equivalents at beginning of year                                     1,526           2,014          2,946
                                                                                 -------         -------        ------- 

Cash and cash equivalents at end of year                                        $  1,267        $  1,526       $  2,014
                                                                                 =======         =======        =======


Supplemental disclosure of cash flow information: 
   Cash paid during the year for:
    Federal income taxes                                                        $    350        $    197       $    280
                                                                                 =======         =======        =======

    Interest on deposits and borrowings                                         $  3,154        $  2,633       $  2,160
                                                                                 =======         =======        =======

Supplemental disclosure of noncash investing activities:
  Transfers of investment and mortgage-backed securities
    to an available for sale classification                                     $     -         $  4,301       $     -
                                                                                 =======         =======        ====== 

  Unrealized gains (losses) on securities designated as available
    for sale, net of related tax effects                                        $     45        $    (50)      $     -
                                                                                 =======         =======        ====== 
</TABLE> 
The accompanying notes are an integral part of these statements.

                                      52
<PAGE>
 
                          Kentucky First Bancorp, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          June 30, 1997, 1996 and 1995



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    During fiscal 1995, the Board of Directors of First Federal Savings Bank
    (the "Savings Bank") adopted a plan of conversion (the "Plan") whereby the
    Savings Bank would convert to the stock form of ownership (the
    "Conversion"), followed by the issuance of all of the Savings Bank's
    outstanding stock to a newly formed holding company, Kentucky First Bancorp,
    Inc. (the "Corporation"), and the issuance of common shares of the
    Corporation to subscribing members of the Savings Bank. The conversion to
    the stock form of ownership was completed on August 28, 1995, culminating in
    the Corporation's issuance of 1,388,625 common shares. Condensed financial
    statements of the Corporation are presented in Note M. Future references are
    made to either the Corporation or the Savings Bank as applicable.

    The Corporation is a savings and loan holding company whose activities are
    primarily limited to holding the common stock of the Savings Bank. The
    Savings Bank conducts a general banking business in central Kentucky which
    consists of attracting deposits from the general public and applying those
    funds to the origination of loans for residential, consumer and
    nonresidential purposes. The Savings Bank's profitability is significantly
    dependent on its 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 Savings Bank 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 generally accepted accounting principles ("GAAP") and
    general accounting practices within the financial services industry. In
    preparing consolidated financial statements in accordance with 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 Corporation'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
    Corporation and the Savings Bank. All significant intercompany balances and
    transactions have been eliminated.

                                      53
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    2.  Investment Securities and Mortgage-Backed Securities
        ----------------------------------------------------

    The Corporation accounts for investment and mortgage-backed securities in
    accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
    "Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
    115 requires that investments in debt and equity securities be categorized
    as held-to-maturity, trading, or available for sale. Securities classified
    as held-to-maturity are to be carried at cost only if the Corporation has
    the positive intent and ability to hold these securities to maturity.
    Trading securities and securities designated as available for sale are
    carried at fair value with the resulting unrealized gains or losses recorded
    to operations or shareholders' equity, respectively.

    During September 1995, the FASB granted financial institutions the
    opportunity to reclassify investment portfolios without calling into
    question the Corporation's prior intent with respect to such securities
    under SFAS No. 115. The Corporation took advantage of this opportunity by
    reclassifying approximately $3.0 million of investment securities and $1.3
    million of mortgage-backed securities from held-to-maturity to an available
    for sale classification. All reclassifications were made on a single day in
    conformity with the requirement. Management believes that such changes will
    allow more flexibility in managing interest rate risk within the investment
    and mortgage-backed securities portfolios. At June 30, 1997 and 1996, the
    Corporation's shareholders' equity reflected net unrealized losses on
    securities designated as available for sale totaling $5,000 and $50,000,
    respectively.

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

    3.  Loans Receivable
        ----------------

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

                                      54
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    4.  Loan Origination Fees
        ---------------------

    The Savings Bank accounts for loan origination fees in accordance with SFAS
    No. 91 "Accounting for Nonrefundable Fees and Costs Associated with
    Originating or Acquiring Loans and Initial Direct Costs of Leases". Pursuant
    to the provisions of SFAS No. 91, origination fees received from loans, net
    of direct origination costs, are deferred and amortized to interest income
    using the level-yield method, giving effect to actual loan prepayments.
    Additionally, SFAS No. 91 generally limits the definition of loan
    origination costs to the direct costs attributable to originating a loan,
    i.e., principally actual personnel costs. Fees received for loan commitments
    that are expected to be drawn upon, based on the Savings Bank's experience
    with similar commitments, are deferred and amortized over the life of the
    loan using the level-yield method. Fees for other loan commitments are
    deferred and amortized over the loan commitment period on a straight-line
    basis.

    5.  Allowance for Losses on Loans
        -----------------------------

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

    In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
    Impairment of a Loan". SFAS No. 114, which was amended by SFAS No. 118 as to
    certain income recognition and disclosure provisions, requires that impaired
    loans be measured based upon the present value of expected future cash flows
    discounted at the loan's effective interest rate or, as an alternative, at
    the loan's observable market price or fair value of the collateral. The
    Savings Bank's current procedures for evaluating impaired loans result in
    carrying such loans at the lower of cost or fair value.

    On July 1, 1995, the Savings Bank adopted SFAS No. 114 without material
    effect on consolidated financial condition or results of operations.

    A loan is defined under SFAS No. 114 as impaired when, based on current
    information and events, it is probable that a creditor will be unable to
    collect all amounts due according to the contractual terms of the loan
    agreement. In applying the provisions of SFAS No. 114, the Savings Bank
    considers its investment in one-to-four family residential loans and
    consumer installment loans to be homogeneous and therefore excluded from
    separate identification for evaluation of impairment. With respect to the
    Savings Bank's investment in multi-family and nonresidential loans, and its
    evaluation of impairment thereof, such loans are collateral dependent and as
    a result are carried as a practical expedient at the lower of cost or fair
    value.

                                      55
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    5.  Allowance for Losses on Loans (continued)
        -----------------------------

    It is the Savings Bank's general policy to charge off unsecured credits that
    are more than ninety days delinquent. Similarly, 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
    SFAS No. 114 at that time.

    At June 30, 1997 and 1996, the Savings Bank had no loans that would be
    defined as impaired under SFAS No. 114.

    6.  Office Premises and Equipment
        -----------------------------

    Office premises and equipment are carried at cost and include expenditures
    which extend the useful lives of existing assets. Maintenance, repairs and
    minor renewals are expensed as incurred. For financial reporting,
    depreciation and amortization are provided on the straight-line and
    accelerated methods 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. An accelerated method is used
    for tax reporting purposes.

    7.  Real Estate Acquired Through Foreclosure
        ----------------------------------------

    Real estate acquired through foreclosure is carried at the lower of the
    loan's unpaid principal balance (cost) or fair value less estimated selling
    expenses at the date of acquisition. Real estate loss provisions are
    recorded if the properties' fair value subsequently declines below the
    amount determined at the recording date. In determining the lower of cost or
    fair value at acquisition, costs relating to development and improvement of
    property are capitalized. Costs relating to holding real estate acquired
    through foreclosure, net of rental income, are charged against earnings as
    incurred.

    8.  Federal Income Taxes
        --------------------

    The Corporation accounts for federal income taxes in accordance with the
    provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
    established financial accounting and reporting standards for the effects of
    income taxes that result from the Corporation's activities within the
    current and previous years. Pursuant to the provisions of SFAS No. 109, a
    deferred tax liability or deferred tax asset is computed by applying the
    current statutory tax rates to net taxable or deductible differences between
    the tax basis of an asset or liability and its reported amount in the
    financial statements that will result in taxable or deductible amounts in
    future periods. Deferred tax assets are recorded only to the extent that the
    amount of net deductible temporary differences or carryforward attributes
    may be utilized against current period earnings, carried back against prior
    years earnings, offset against taxable temporary

                                      56
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    8.  Federal Income Taxes (continued)
        --------------------

    differences reversing in future periods, or utilized to the extent of
    management's estimate of future taxable income. A valuation allowance is
    provided for deferred tax assets to the extent that the value of net
    deductible temporary differences and carryforward attributes exceeds
    management's estimates of taxes payable on future taxable income. Deferred
    tax liabilities are provided on the total amount of net temporary
    differences taxable in the future.

    The Corporation's principal temporary differences between pretax financial
    income and taxable income result from different methods of accounting for
    deferred loan origination fees and costs, Federal Home Loan Bank stock
    dividends, the general loan loss allowance, deferred compensation, certain
    components of benefit plans and percentage of earnings bad debt deductions.
    Additional temporary differences result from depreciation computed using
    accelerated methods for tax purposes.

    9.  Retirement Plans and Stock Option Plans
        ---------------------------------------

    In conjunction with the common stock offering, the Corporation implemented
    the Kentucky First Bancorp, Inc. Employee Stock Ownership Plan ("ESOP"). The
    ESOP provides retirement benefits for substantially all employees who have
    completed one year of service and have attained the age of 21. The
    Corporation accounts for ESOP expense in accordance with Statement of
    Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership
    Plans". SOP 93-6 requires ESOP compensation expense to equal the fair value
    of ESOP shares allocated to participants during a fiscal year. Expense
    recognized related to the ESOP totaled approximately $128,000 for each of
    the years ended June 30, 1997 and 1996.

    The Corporation also implemented the Kentucky First Bancorp, Inc. Management
    Recognition Plan ("MRP"). Subsequent to the Conversion, the MRP purchased
    55,545 shares of common stock in the open market. All of the shares
    available under the MRP were granted to executive officers, directors and
    employees of the Savings Bank upon receipt of shareholder approval of the
    MRP. The MRP provides that common stock granted under the MRP vests ratably
    over a five year period. A provision of $146,000 and $29,000 related to the
    MRP was charged to expense for the years ended June 30, 1997 and 1996.

                                      57
<PAGE>
 
                         Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    9.  Retirement Plans and Stock Option Plans (continued)
        ---------------------------------------

    Also, the Board of Directors adopted the Kentucky First Bancorp, Inc. Stock
    Option and Incentive Plan (the "Option Plan") that provides for the issuance
    of 173,579 shares (as adjusted for the subsequent return of capital) of
    common stock at fair market value at the date of grant. During fiscal 1996,
    the Corporation granted options to purchase all of these shares at a fair
    value of $9.7375 per share. The Plan provides for one-fifth of the shares
    granted to be exercisable on each of the first five anniversaries of the
    date of the option grant. As of June 30, 1997, none of the stock options
    granted had been exercised.

    Additionally, the Savings Bank had a defined contribution plan, which is
    designated to qualify under Sections 401(a) and 401(k) of the Code (the
    "Thrift Plan"). An employee was eligible to participate in the Thrift Plan
    after having worked a minimum of six months from the date of hire (or during
    a calendar year). The Thrift Plan allowed each participant to make
    before-tax contributions in an amount equal to 3% of gross salary. The
    Savings Bank was required to match the elective contributions made on behalf
    of the participant, and, in addition was able to make discretionary
    contributions up to a maximum of 15% of compensation. The contributions were
    allocated to the participant's account as of the anniversary date. The
    Thrift Plan was intended to comply with all the rights and protection
    afforded employees pursuant to the Employee Retirement Income Security Act
    of 1974, as amended.

    The Savings Bank's contributions to the Thrift Plan were $1,000 and $10,000
    for the years ended June 30, 1996 and 1995, respectively. There were no
    contributions for the year ended June 30, 1997. The Thrift Plan was frozen
    as to future contributions in fiscal 1996.

    10.  Earnings and Dividends Per Share
         --------------------------------

    Earnings per share for the years ended June 30, 1997 and 1996 is based upon
    the weighted-average shares outstanding during the period plus those stock
    options that are dilutive, less shares in the ESOP that are unallocated and
    not committed to be released. Weighted-average common shares deemed
    outstanding, which gives effect to 92,574 and 101,832 unallocated ESOP
    shares, totaled 1,274,090 and 1,286,793 for the years ended June 30, 1997
    and 1996, respectively. There is no dilutive effect associated with the
    Corporation's stock option plan.

    The provisions of Accounting Principles Board Opinion No. 15 "Earnings Per
    Share" are not applicable to the fiscal year ended June 30, 1995, as the
    Corporation had not issued any common stock prior to its initial offering in
    August 1995.

    During fiscal 1997, the Corporation paid cash distributions of $3.50 per
    share. Of this amount, management has initially allocated $3.00 per share as
    a return of capital. Accordingly, such amount was charged to additional
    paid-in capital in the 1997 consolidated financial statements.

                                      58
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    11.  Investment in Subsidiary
         ------------------------

    The Savings Bank has a wholly-owned subsidiary, Cynthiana Service
    Corporation, which was incorporated for the sole purpose of owning stock in
    the Savings Bank's data processor. The subsidiary's assets at June 30, 1997
    and 1996 are limited to a $15,000 investment in such stock. As a result, the
    subsidiary has not been consolidated based on materiality.

    12.  Fair Value of Financial Instruments
         -----------------------------------

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

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

    The following  methods and  assumptions  were used by the Corporation in 
    estimating its fair value  disclosures for financial  instruments at 
    June 30, 1997 and 1996:

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

                  Investment and mortgage-backed securities: For investments and
                  -----------------------------------------
                  mortgage-backed securities, fair value is deemed to equal the
                  quoted market price.

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

                                      59
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    12.  Fair Value of Financial Instruments (continued)
         -----------------------------------

                  Federal Home Loan Bank stock: The carrying amount presented in
                  ----------------------------
                  the consolidated statement of financial condition is deemed to
                  approximate fair value.

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

                  Advances from 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.

                  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 difference between the fair
                  value and notional amount of outstanding loan commitments at
                  June 30, 1997 and 1996 was not material.

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

<TABLE> 
<CAPTION> 

                                                                            1997                           1996
                                                               Carrying           Fair          Carrying           Fair
                                                                  value          value             value          value
                                                                                      (In thousands)
    <S>                                                        <C>            <C>               <C>            <C> 
    Financial assets
      Cash and cash equivalents                                 $ 1,267        $ 1,267           $ 1,526        $ 1,526
      Investment securities                                      13,935         13,791            15,533         15,138
      Mortgage-backed securities                                 21,170         20,831            23,177         22,480
      Loans receivable                                           48,920         50,615            43,020         43,782
      Stock in Federal Home Loan Bank                             1,052          1,052               738            738
                                                                 ------         ------            ------         ------

                                                                $86,344        $87,556           $83,994        $83,664
                                                                 ======         ======            ======         ======
    Financial liabilities
      Deposits                                                  $55,443        $55,455           $51,778        $52,233
      Advances from the Federal Home Loan Bank                   17,970         17,906            14,528         14,378
                                                                 ------         ------            ------         ------

                                                                $73,413        $73,361           $66,306        $66,611
                                                                 ======         ======            ======         ======
</TABLE> 

    13.  Cash and Cash Equivalents
         -------------------------

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

                                      60
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    14.  Reclassifications
         -----------------

    Certain prior year amounts have been reclassified to conform to the 1997
    consolidated financial statement presentation.


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

     Carrying values and estimated fair values of investment securities held to
     maturity at June 30 are summarized as follows:

<TABLE> 
<CAPTION> 

                                              1997                       1996
                                                  ESTIMATED                  ESTIMATED
                                     CARRYING          FAIR      CARRYING         FAIR
                                        VALUE         VALUE         VALUE        VALUE
                                                        (In thousands)
    <S>                              <C>          <C>            <C>         <C> 
    U. S. Government and
      agency obligations              $ 9,493       $ 9,319       $10,085     $  9,721
    Municipal obligations               2,240         2,270         2,379        2,348
                                      -------       -------       -------      -------

                                      $11,733       $11,589       $12,464      $12,069
                                       ======        ======        ======       ======

</TABLE> 

    At June 30, 1997, the carrying value of the Corporation's investment
    securities exceeded the market value of such securities by $144,000,
    consisting of $30,000 in gross unrealized gains and $174,000 in gross
    unrealized losses. At June 30, 1996, the carrying value of the Corporation's
    investment securities exceeded the market value of such securities by
    $395,000, consisting of $23,000 in gross unrealized gains and $418,000 in
    gross unrealized losses.

    The amortized cost and estimated fair value of U.S. Government and agency
    and municipal obligations designated as held to maturity, by contractual
    term to maturity at June 30 are shown below:

<TABLE> 
<CAPTION> 

                                                     1997                         1996
                                                        ESTIMATED                   ESTIMATED
                                           AMORTIZED         FAIR      AMORTIZED         FAIR
                                                COST        VALUE           COST        VALUE
                                                                (In thousands)
    <S>                                    <C>          <C>            <C>          <C> 

    Due in three years or less              $  2,792     $  2,795       $  3,850     $  3,665
    Due after three years through
      five years                                 160          170            194          219
    Due after five years                       8,781        8,624          8,420        8,185
                                             -------      -------        -------      -------

                                             $11,733      $11,589        $12,464      $12,069
                                              ======       ======         ======       ======

</TABLE> 

                                      61
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

    At June 30, 1997, investment securities totaling $2.0 million were pledged
    to secure deposits. The amortized cost, gross unrealized gains, gross
    unrealized losses, and estimated fair values of investment securities
    designated as available for sale at June 30, 1997 and 1996, are summarized
    as follows:

<TABLE> 
<CAPTION> 

                                                                                      JUNE 30, 1997
                                                                                  GROSS            GROSS      ESTIMATED
                                                              AMORTIZED      UNREALIZED       UNREALIZED           FAIR
                                                                   COST           GAINS           LOSSES          VALUE
                                                                                       (In thousands)
    <S>                                                       <C>            <C>              <C>             <C> 
    U.S. Government agency obligations:
      Due in three years or less                                 $1,984          $   -             $ (39)        $1,945
      Due after three years through five years                      149               4               -             153

    Municipal obligations:
      Due after five years                                          100               4               -             104
                                                                  -----           -----             ----          -----

                                                                 $2,233          $    8            $ (39)        $2,202
                                                                  =====           =====             ====          =====

<CAPTION> 

                                                                                      JUNE 30, 1996
                                                                                  GROSS            GROSS      ESTIMATED
                                                              AMORTIZED      UNREALIZED       UNREALIZED           FAIR
                                                                   COST           GAINS           LOSSES          VALUE
                                                                                       (In thousands)
    <S>                                                       <C>            <C>              <C>             <C> 
    U.S. Government agency obligations:
      Due in three years or less                                 $1,997          $   -             $ (46)        $1,951
      Due after three years through five years                      979              -               (13)           966
      Due after five years                                          149               3               -             152
                                                                  -----           -----             ----          -----

                                                                 $3,125          $    3            $ (59)        $3,069
                                                                  =====           =====             ====          =====

</TABLE> 

    The amortized cost, gross unrealized gains, gross unrealized losses and
    estimated fair values of mortgage-backed securities at June 30, 1997 and
    1996 (including those designated as available for sale) are summarized as
    follows:

<TABLE> 
<CAPTION> 

                                                                                          1997
                                                                                   GROSS             GROSS    ESTIMATED
                                                              AMORTIZED       UNREALIZED        UNREALIZED         FAIR
                                                                   COST            GAINS            LOSSES        VALUE
                                                                                      (In thousands)
    <S>                                                       <C>             <C>               <C>           <C> 
    HELD TO MATURITY:                                                                  
      Federal Home Loan Mortgage
        Corporation participation certificates                 $  2,104            $   6             $ (56)     $ 2,054
      Government National Mortgage
        Association participation certificates                    2,043               54                (9)       2,088
      Federal National Mortgage Association
        participation certificates                               13,675               -               (334)      13,341
                                                                 ------             ----              ----       ------
         Total mortgage-backed securities held to maturity       17,822               60              (399)      17,483

    AVAILABLE FOR SALE:
      Federal Home Loan Mortgage
        Corporation participation certificates                    3,325               23                -         3,348
                                                                 ------             ----              ----       ------

         Total mortgage-backed securities                       $21,147            $  83             $(399)     $20,831
                                                                 ======             ====              ====       ======

</TABLE> 

                                      62
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

<TABLE> 
<CAPTION> 
                                                                                 1996             
                                                                         GROSS           GROSS       ESTIMATED
                                                    AMORTIZED       UNREALIZED      UNREALIZED            FAIR
                                                         COST            GAINS          LOSSES           VALUE
    <S>                                             <C>             <C>             <C>             <C> 
    HELD TO MATURITY:                                                       (In thousands)       
      Federal Home Loan Mortgage                                                                 
        Corporation participation certificates        $ 1,988            $   3           $ (75)        $ 1,916
      Government National Mortgage                                                               
        Association participation certificates          2,377               27             (25)          2,379
      Federal National Mortgage Association                                                      
        participation certificates                     14,677                1            (628)         14,050
                                                       ------             ----            ----          ------
         Total mortgage-backed                                                                   
           securities held to maturity                 19,042               31            (728)         18,345
                                                                                                 
    AVAILABLE FOR SALE:                                                                          
      Federal Home Loan Mortgage                                                                 
        Corporation participation certificates          4,155                -             (20)          4,135
                                                       ------             ----            ----          ------
                                                                                                 
         Total mortgage-backed                                                                   
           securities                                 $23,197            $  31           $(748)        $22,480
                                                       ======             ====            ====          ======
</TABLE> 
                                                                               
    The amortized cost of mortgage-backed securities, by contractual terms to
    maturity, are shown below. Based on materiality, contractual maturities of
    mortgage-backed securities designated as available for sale have been
    combined with those designated as held to maturity. Expected maturities will
    differ from contractual maturities because borrowers may generally prepay
    obligations without prepayment penalties.

<TABLE> 
<CAPTION> 
                                                                         JUNE 30,
                                                                1997                1996
    <S>                                                    <C>                  <C>       
    Due within three years                                   $   375             $ 1,184
    Due in three to five years                                     5                 934
    Due in five to ten years                                     539               2,959
    Due in ten to twenty years                                13,868              10,002
    Due after twenty years                                     6,360               8,118
                                                              ------              ------

                                                             $21,147             $23,197
                                                              ======              ======
</TABLE> 

                                      63
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE C - LOANS RECEIVABLE

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

<TABLE> 
<CAPTION> 
                                                          1997           1996
                                                             (In thousands)
    <S>                                                <C>            <C> 
    Residential real estate
      One-to-four family                               $26,922        $24,635
      Multi-family                                       5,972          4,477
      Construction                                         130            195
    Nonresidential real estate and land                 11,555         10,462
    Consumer and other                                   5,004          3,951
                                                       -------        -------
                                                        49,583         43,720
    Less:
      Undisbursed portion of loans in process              143            178
      Deferred loan origination fees                        94             78
      Unearned discount                                     54             77
      Allowance for loan losses                            372            367
                                                      --------       --------

                                                       $48,920        $43,020
                                                        ======         ======
</TABLE> 

    The Savings Bank's lending efforts have historically focused on one-to-four
    family and multi-family residential real estate loans, which comprise
    approximately $32.4 million, or 66%, of the total loan portfolio at June 30,
    1997 and $28.7 million, or 67%, of the total loan portfolio at June 30,
    1996. Generally, such loans have been underwritten on the basis of no more
    than an 80% loan-to-value ratio, which has historically provided the Savings
    Bank with adequate collateral coverage in the event of default.
    Nevertheless, the Savings Bank, as with any lending institution, is subject
    to the risk that real estate values could deteriorate in its primary lending
    area of central Kentucky, thereby impairing collateral values. However,
    management is of the belief that residential real estate values in the
    Savings Bank's primary lending area are presently stable.

    In the normal course of business, the Savings Bank has made loans to some of
    its directors, officers and employees. Related party loans are made on
    substantially the same terms, including interest rates and collateral, as
    those prevailing at the time for comparable transactions with unrelated
    persons and do not involve more than the normal risk of collectibility. The
    aggregate dollar amount of loans outstanding to directors and officers
    totaled approximately $212,000 and $303,000 at June 30, 1997 and 1996,
    respectively.

                                      64
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE D - ALLOWANCE FOR LOAN LOSSES

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

<TABLE> 
<CAPTION> 
                                              1997           1996           1995
                                                       (In thousands)
    <S>                                       <C>            <C>            <C> 
    Balance at beginning of year              $367           $352           $152
    Provision for loan losses                   15             15            200
    Charge-offs, net of recoveries             (10)            -              -
                                              ----            ---            ---

    Balance at end of year                    $372           $367           $352
                                               ===            ===            ===
</TABLE> 

    As of June 30, 1997, the Savings Bank's allowance for loan losses was solely
    general in nature, and is includible as a component of regulatory risk-based
    capital, subject to certain percentage limitations.

    Nonperforming and nonaccrual loans totaled approximately $59,000, $122,000
    and $362,000 at June 30, 1997, 1996 and 1995, respectively.

    During the years ended June 30, 1997, 1996 and 1995, interest income of
    approximately $3,000, $3,000 and $1,000, respectively, would have been
    recognized had such loans been performing in accordance with contractual
    terms.


NOTE E - OFFICE PREMISES AND EQUIPMENT

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

<TABLE> 
<CAPTION> 
                                                           1997           1996
                                                             (In thousands)

    <S>                                                  <C>            <C> 
    Land and improvements                                $  477         $  477
    Office buildings and improvements                       946            939
    Furniture, fixtures and equipment                       369            276
                                                         ------         ------
                                                          1,792          1,692
      Less accumulated depreciation and
        amortization                                        395            331
                                                         ------         ------

                                                         $1,397         $1,361
                                                          =====          =====
</TABLE> 

                                      65
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE F - DEPOSITS

Deposits consist of the following major classifications at June 30:

<TABLE> 
<CAPTION> 

DEPOSIT TYPE AND WEIGHTED-
AVERAGE INTEREST RATE                                     1997             1996
                                                             (In thousands)
<S>                                                    <C>             <C> 
NOW accounts
  1997 - 1.89%                                         $10,095
  1996 - 1.92%                                                         $  8,868
Passbook
  1997 - 2.97%                                           6,206
  1996 - 2.80%                                                            6,299
Money market deposit accounts
  1997 - 3.29%                                           3,525
  1996 - 3.02%                                                            2,858
                                                        ------           ------
Total demand, transaction and
  passbook deposits                                     19,826           18,025

Certificates of deposit
  Original maturities of:
    Less than 12 months
      1997 - 5.01%                                       5,871
      1996 - 4.75%                                                        6,106
    12 months to 24 months
      1997 - 5.49%                                      18,373
      1996 - 5.30%                                                       16,232
    30 months to 36 months
      1997 - 5.70%                                       3,809
      1996 - 5.27%                                                        4,368
    More than 36 months
      1997 - 5.46%                                       3,948
      1996 - 5.46%                                                        3,512
  Individual retirement accounts
    1997 - 5.42%                                         3,616
    1996 - 5.67%                                                          3,535
                                                        ------           ------
Total certificates of deposit                           35,617           33,753
                                                        ------           ------

Total deposit accounts                                 $55,443          $51,778
                                                        ======           ======
</TABLE> 

At June 30, 1997 and 1996, the Savings Bank had deposit accounts with balances
in excess of $100,000 totaling $3.8 million and $2.9 million, respectively.

                                      66
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE F - DEPOSITS (continued)

    Interest expense on deposits for the year ended June 30 is summarized as
    follows:

<TABLE> 
<CAPTION> 
                                                 1997        1996       1995
                                                       (In thousands)

    <S>                                        <C>         <C>        <C> 
    Passbook                                   $  180      $  185     $  180
    NOW and money market deposit
      accounts                                    267         264        308
    Certificates of deposit                     1,833       1,856      1,636
                                                -----       -----      -----

                                               $2,280      $2,305     $2,124
                                                =====       =====      =====
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                    1997           1996
                                                      (In thousands)

    <S>                                          <C>            <C> 
    Less than one year                           $24,126        $24,713
    One to three years                             9,955          8,262
    Over three years                               1,536            778
                                                 -------       --------

                                                 $35,617        $33,753
                                                  ======         ====== 
</TABLE> 

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

    Advances from the Federal Home Loan Bank, collateralized at June 30, 1997 by
    pledges of certain residential mortgage loans and securities totaling $35.4
    million and the Savings Bank's investment in Federal Home Loan Bank stock,
    are summarized as follows:

<TABLE> 
<CAPTION> 
                                     MATURING
                                     YEAR ENDING
    INTEREST RATE                    JUNE 30,              1997          1996
                                                             (In thousands)

    <S>                              <C>                <C>           <C> 
    5.40% - 6.65%                    1998               $14,450       $11,000
    5.50% - 5.74%                    2006                 3,100         3,100
    4.00%                            2025                   317           323
    4.00%                            2026                   103           105
                                                        -------       -------

                                                        $17,970       $14,528
                                                         ======        ======

           Weighted-average interest rate                  5.40%         5.46%
                                                           ====          ==== 
</TABLE> 

                                      67
<PAGE>
 
                         Kentucky First Bancorp, Inc.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         June 30, 1997, 1996 and 1995


NOTE H - FEDERAL INCOME TAXES

    Federal income taxes differ from the amounts computed at the statutory
    corporate tax rate as follows:
<TABLE> 
<CAPTION> 
                                                                         JUNE 30,
                                                            1997           1996           1995
                                                                      (In thousands)
    <S>                                                     <C>            <C>            <C> 
    Federal income taxes computed at
      statutory rate                                        $373           $420           $245
    Increase (decrease) in taxes resulting from:
      Non-taxable interest income                            (43)           (39)           (29)
      Other                                                    5              4             27
                                                           -----          -----           ----
    Federal income tax provision per consolidated
      statements of earnings                                $335           $385           $243
                                                             ===            ===            ===
</TABLE> 

    The composition of the Corporation's net deferred tax asset at June 30 is as
    follows:
<TABLE> 
<CAPTION> 
                                                                       1997           1996
                                                                         (In thousands)
     <S>                                                               <C>            <C> 
     Taxes (payable) refundable on temporary 
     differences at estimated corporate tax rate:
       Deferred tax assets:
         General loan loss allowance                                   $127           $125
         Deferred loan origination fees                                  13             26
         Deferred compensation                                           86             83
         Retirement plans                                                65             -
         Unrealized losses on securities designated as
           available for sale                                             3             26
                                                                        ---           ----
           Total deferred tax assets                                    294            260

       Deferred tax liabilities:
         Percentage of earnings bad debt deduction                      (24)           (91)
         Book/tax depreciation                                          (34)           (17)
         Federal Home Loan Bank stock dividends                         (43)           (20)
         Accrual vs. cash basis of accounting                           (99)           (28)
         Other                                                           -             (25)    
           Total deferred tax liabilities                              (200)          (181)
                                                                        ---           ----

           Net deferred tax asset                                     $  94          $  79
                                                                       ====           ====
</TABLE> 

                                      68
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE H - FEDERAL INCOME TAXES (continued)

    The Savings Bank was 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 qualify as deductions for federal income taxes are later
    used for purposes other than bad debt losses, including distributions in
    liquidation, such distributions will be subject to federal income taxes at
    the then current corporate income tax rate. Retained earnings at June 30,
    1997 include approximately $1.6 million 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 $520,000 at
    June 30, 1997. See Note K for additional information regarding the Savings
    Bank's future percentage of earnings bad debt deductions.


NOTE I - LOAN COMMITMENTS

    The Savings Bank is a party to financial instruments with off-balance-sheet
    risk in the normal course of business to meet the financing needs of its
    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 statement of financial condition.
    The contract or notional amounts of the commitments reflect the extent of
    the Savings Bank's involvement in such financial instruments.

    The Savings Bank's 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
    Savings Bank uses the same credit policies in making commitments and
    conditional obligations as those utilized for on-balance-sheet instruments.

    At June 30, 1997, the Savings Bank had outstanding commitments of
    approximately $1.6 million to originate loans. In the opinion of management
    all loan commitments equaled or exceeded prevailing market interest rates as
    of June 30, 1997, and will be funded from normal cash flow from operations.

                                      69
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


    NOTE J - REGULATORY CAPITAL

    The Savings Bank is 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 Savings Bank must meet specific capital guidelines
    that involve quantitative measures of the Savings Bank's assets,
    liabilities, and certain off-balance-sheet items as calculated under
    regulatory accounting practices. The Savings Bank's capital amounts and
    classifications 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) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
    in present form, would increase the core capital requirement to a range of
    4.0% - 5.0% of adjusted total assets for substantially all savings
    associations. Management anticipates no material change to the Savings
    Bank's excess regulatory capital position as a result of this proposed
    change in the regulatory capital requirement. The risk-based capital
    requirement currently 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 Savings Bank multiplies the value of each asset on
    its statement of financial condition by a defined risk-weighting factor,
    e.g., one- to four-family residential loans carry a risk-weighted factor of
    50%.

    As of June 30, 1997, management believes that the Savings Bank met all
    capital adequacy requirements to which it is subject.

<TABLE>
<CAPTION>

                                               AS OF JUNE 30, 1997
                                                                         FOR CAPITAL                               
                                ACTUAL                                 ADEQUACY PURPOSES                           
                            ---------------                   --------------------------------------
                            AMOUNT    RATIO                   AMOUNT                           RATIO               
                                                                          (In thousands)                           
    <S>                    <C>        <C>       <C>                                <C> 
    Tangible capital       $13,022    14.7%     greater than or equal to $1,326    greater than or equal to 1.5%   

    Core Capital           $13,022    14.7%     greater than or equal to $2,652    greater than or equal to 3.0%   

    Risk-based capital     $13,394    27.8%     greater than or equal to $3,849    greater than or equal to 8.0%   

<CAPTION>

                                                 AS OF JUNE 30, 1997

                                                     TO BE "WELL-    
                                                  CAPITALIZED" UNDER 
                                                   PROMPT CORRECTIVE
                                                   ACTION PROVISIONS
                                        ----------------------------------------
                                        AMOUNT                             RATIO
    <S>                    <C>                                 <C> 
    Tangible capital       greater than or equal to $4,420     greater than or equal to  5.0%

    Core Capital           greater than or equal to $5,304     greater than or equal to  6.0%

    Risk-based capital     greater than or equal to $4,811     greater than or equal to 10.0%

</TABLE>

                                      70
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE J - REGULATORY CAPITAL (continued)

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


NOTE K - LEGISLATIVE DEVELOPMENTS

    The deposit accounts of the Savings Bank and of other savings associations
    are insured by the Federal Deposit Insurance Corporation ("FDIC") through
    the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF
    were below the level required by law, because a significant portion of the
    assessments paid into the fund were used to pay the cost of prior thrift
    failures. The deposit accounts of commercial banks are insured by the FDIC
    through the Bank Insurance Fund ("BIF"), except to the extent such banks
    have acquired SAIF deposits. The reserves of the BIF met the level required
    by law in May 1995. As a result of the respective reserve levels of the
    funds, deposit insurance assessments paid by healthy savings associations
    exceeded those paid by healthy commercial banks by approximately $.19 per
    $100 in deposits in 1995. In fiscal 1996 and 1997, no BIF assessments were
    required for healthy commercial banks except for a $2,000 minimum fee.

    Legislation which was enacted during fiscal 1997 to recapitalize the SAIF
    provides for a special assessment totaling $.657 per $100 of SAIF deposits
    held at March 31, 1995, in order to increase SAIF reserves to the level
    required by law. The Savings Bank held $53.6 million in deposits at March
    31, 1995, resulting in an approximate $351,000, or $232,000 after-tax,
    charge to operations during the current fiscal year.

    A component of the recapitalization plan provided for the merger of the SAIF
    and BIF on January 1, 1999. However, the SAIF recapitalization legislation
    currently provides for an elimination of the thrift charter or of the
    separate federal regulation of thrifts prior to the merger of the deposit
    insurance funds. As a result, the Savings Bank would be regulated as a bank
    under federal laws which would subject it to the more restrictive activity
    limits imposed on national banks. In the opinion of management, such
    activity limit restrictions would not have a material effect on the
    Corporation's financial position or results of operations.

    Under separate legislation related to the recapitalization plan, the Savings
    Bank is required to recapture as taxable income approximately $70,000 of its
    tax bad debt reserve, which represents the post-1987 additions to the
    reserve, and will be unable to utilize the percentage of earnings method to
    compute its bad debt deduction in the future. The Savings Bank has provided
    deferred taxes for this amount and will be permitted to amortize the
    recapture of the bad debt reserve in taxable income over six years.

                                      71
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE L - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM

    During fiscal 1995, the Savings Bank's Board of Directors adopted a plan of
    conversion (the Plan) whereby the Savings Bank would convert to the stock
    form of ownership, followed by the issuance of all of the Savings Bank's
    outstanding stock to a newly formed holding company, Kentucky First Bancorp,
    Inc. Pursuant to the Plan, the Savings Bank offered for sale up to 1.4
    million common shares to its depositors. The stock offering was completed on
    August 28, 1995, culminating in the sale of 1,388,625 common shares and the
    receipt of $12.2 million of net equity capital after consideration of
    offering expenses and shares acquired by the ESOP.

    At the completion of the conversion to stock form, the Savings Bank
    established a liquidation account in an amount equal to retained earnings
    contained in the final offering circular. The liquidation account will be
    maintained for the benefit of eligible savings account holders who maintain
    deposit accounts in the Savings Bank after conversion.

    In the event of a complete liquidation (and only in such event), each
    eligible savings account holder will be entitled to receive a liquidation
    distribution from the liquidation account in the amount of the then current
    adjusted balance of deposit accounts held, before any liquidation
    distribution may be made with respect to common stock. Except for the
    repurchase of stock and payment of dividends by the Savings Bank, the
    existence of the liquidation account will not restrict the use or
    application of such retained earnings. The Savings Bank may not declare, pay
    a cash dividend on, or repurchase any of its common stock, if the effect
    thereof would cause retained earnings to be reduced below either the amount
    required for the liquidation account or the regulatory capital requirements
    for SAIF insured institutions.

                                      72
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


NOTE M - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST BANCORP, INC.

    The following condensed financial statements summarize the financial
    position of Kentucky First Bancorp, Inc. as of June 30, 1997 and 1996, and
    the results of its operations and its cash flows for the periods then
    ended.



                          KENTUCKY FIRST BANCORP, INC.
                        STATEMENTS OF FINANCIAL CONDITION
                                    JUNE 30,
                                 (In thousands)

<TABLE> 
<CAPTION> 

         ASSETS                                                                       1997            1996
    <S>                                                                            <C>             <C> 
    Deposits in First Federal Savings Bank of Cynthiana                            $    56         $    76
    Interest-bearing deposits in other financial institutions                          202             560
    Investment securities                                                              501           2,000
    Loan receivable from ESOP                                                          926           1,018
    Investment in First Federal Savings Bank of Cynthiana                           13,022          15,578
    Prepaid expenses and other assets                                                   14              24
    Prepaid federal income taxes                                                        31              -
                                                                                    ------          ------

         Total assets                                                              $14,752         $19,256
                                                                                    ======          ======

         LIABILITIES AND SHAREHOLDERS' EQUITY

    Liabilities
      Accounts payable and other liabilities                                       $    25         $    - 

    Shareholders' equity
      Common stock and additional paid-in capital                                    9,234          13,365
      Retained earnings                                                              7,825           7,689
      Less treasury stock                                                             (818)             -
      Less shares acquired by stock benefit plans                                   (1,509)         (1,748)
      Unrealized losses on securities designated as available for sale,
        net of related tax effects                                                      (5)            (50)
                                                                                    ------          ------
          Total shareholders' equity                                                14,727          19,256
                                                                                    ------          ------

          Total liabilities and shareholders' equity                               $14,752         $19,256
                                                                                    ======          ======

</TABLE> 

                          KENTUCKY FIRST BANCORP, INC.
                             STATEMENTS OF EARNINGS
                             PERIODS ENDED JUNE 30,
                                 (In thousands)

<TABLE> 
<CAPTION> 

                                                                                      1997            1996
    <S>                                                                               <C>             <C> 
    Revenue
      Interest income                                                                 $106            $171
      Equity in earnings of First Federal Savings Bank of Cynthiana                    822             780
                                                                                       ---             ---
          Total revenue                                                                928             951

    General and administrative expenses                                                197             173
                                                                                       ---             ---

    Earnings before income tax credits                                                 731             778

    Federal income tax credits                                                         (31)             -
                                                                                       ---             ---

          NET EARNINGS                                                                $762            $778
                                                                                       ===             ===

</TABLE> 

                                      73
<PAGE>
 
                          Kentucky First Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          June 30, 1997, 1996 and 1995


   NOTE M - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST BANCORP, INC. 
                                  (continued)

                          KENTUCKY FIRST BANCORP, INC.
                            STATEMENTS OF CASH FLOWS
                               YEAR ENDED JUNE 30,
                                 (In thousands)

<TABLE> 
<CAPTION> 

                                                                                                 1997              1996
    <S>                                                                                       <C>             <C> 
    Cash provided by (used in) operating activities:
      Net earnings for the year                                                               $   762         $     778
      Adjustments to reconcile net earnings to net cash provided by (used in)
      operating activities
        (Undistributed earnings of) excess of distributions from consolidated subsidiary        2,878              (780)
        Increase (decrease) in cash due to changes in:
          Prepaid expenses and other assets                                                         7               104
          Prepaid federal income taxes                                                            (31)               -
          Accounts payable and other liabilities                                                   25                -
                                                                                              -------           ------
          Net cash provided by operating activities                                             3,641               102

    Cash flows provided by (used in) investing activities:
      Purchase of investment in First Federal Savings Bank                                         -             (8,348)
      Proceeds from repayment of loan                                                              92                -
      Loan disbursements                                                                           -             (1,018)
      Proceeds from maturities of investment securities                                         2,200                -
      Purchase of investment securities                                                          (701)           (2,000)
                                                                                               ------           -------
          Net cash provided by (used in) investing activities                                   1,591           (11,366)

    Cash flows provided by (used in) financing activities:
      Net proceeds from issuance of common stock                                                   -             12,219
      Proceeds from note payable                                                                2,000                -
      Repayment of note payable                                                                (2,000)               -
      Payment of dividends on common stock                                                     (4,792)             (319)
      Purchase of treasury stock                                                                 (818)               -
                                                                                               ------           ------
          Net cash used in financing activities                                                (5,610)           11,900
                                                                                                -----            ------

    Net decrease in cash and cash equivalents                                                    (378)              636

    Cash and cash equivalents at beginning of year                                                636                -
                                                                                               ------           ------

    Cash and cash equivalents at end of year                                                  $   258         $     636
                                                                                               ======          ========

</TABLE> 

                                      74
<PAGE>
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

         The information required by this Item is incorporated by reference to
the Company's Current Report on Form 8-K dated May 9, 1996.

                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------         

         The information required by this item is incorporated by reference to
"Proposal I -- Election of Directors" in the Proxy Statement.

         For certain information regarding the non-director executive officers 
of the Company, see "Item 1.  Description of Business -- Executive Officers."

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

         The information required by this item is incorporated by reference to
"Executive Compensation" in the Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

         The information required by this item is incorporated by reference to
"Voting Securities and Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
         
         The information required by this item is incorporated by reference to 
the section captioned "Transactions with Management" in the Proxy Statement.

                                    PART IV

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
--------------------------------------------------

         (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
             ----------------------------------------------

         (1) Financial Statements.  The following financial statements are 
             incorporated by reference from Item 7:

                  Independent Auditors' Reports
                  Consolidated Statements of Financial Condition as of June 30,
                    1997, 1996 and 1995 
                  Consolidated Statements of Earnings for Each of the Years in
                    the Three-Year Period Ended June 30, 1997
                  Consolidated Statements of Shareholders' Equity for Each of 
                    the Years in the Three-Year Period Ended June 30, 1997
                  Consolidated Statements of Cash Flows for Each of the Years 
                    in the Three-Year Period Ended June 30, 1997
                  Notes to Consolidated Financial Statements
 

                                      75
<PAGE>
 
         (2) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB and is also the Exhibit Index.

<TABLE> 
<CAPTION> 
                                                                                                     Page in
                                                                                                   Sequentially
       No.     Description                                                                         Numbered Copy
       ---     -----------                                                                         -------------

      <S>      <C>                                                                                 <C> 
       3.1     Certificate of Incorporation of Kentucky First Bancorp, Inc.                               *
       3.2     Bylaws of Kentucky First Bancorp, Inc.                                                     *
       4       Form of Common Stock Certificate of Kentucky First Bancorp, Inc.                           *
      10.1     First Federal Savings Bank Incentive Compensation Plan                                     *+
      10.2     Kentucky First Bancorp, Inc. Stock Option and Incentive Plan
      10.3     Kentucky First Bancorp, Inc. Management Recognition Plans                                  *+
      10.4     Deferred Compensation Agreements, as amended
      10.5     First Federal Savings Bank Retirement Plan for Non-Employee Directors                      *+
      10.6     Supplemental Executive Retirement Agreement between First Federal
                 Savings Bank and Betty J. Long                                                           *+
      10.7     Employment Agreements between First Federal Savings Bank and Betty J.
                 Long and Kevin R. Tolle                                                                  *+
      10.8     Employment Agreements between Kentucky First Bancorp, Inc. and Betty
                 J. Long and Kevin R. Tolle                                                               *
      21       Subsidiaries of the Registrant
      23.1     Consent of Grant Thornton L.L.P.
      23.2     Consent of England & Hensley
      27       Financial Data Schedule (EDGAR only)
</TABLE> 

-----------
(*)    Incorporated herein by reference from Registration Statement on Form S-1
       filed (File No. 33-91134).
(+)    Management contract or compensatory plan or arrangement.

         (B) REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K
             -------------------
filed by the Company during the fourth quarter of fiscal year 1997.

                                      76
<PAGE>
 
                                  SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       KENTUCKY FIRST BANCORP, INC.

September 23, 1997                     By: /s/ Betty J. Long
                                           -------------------------------------
                                           Betty J. Long
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE> 
<S>                                                       <C> 
/s/ Betty J. Long                                         September 23, 1997
------------------------------------------
Betty J. Long
President and Chief Executive Officer
(Director and Principal Executive Officer)

/s/ William D. Morris                                     September 23, 1997
------------------------------------------
William D. Morris
Chairman of the Board
(Director)

/s/ Luther O. Beckett                                     September 23, 1997
------------------------------------------
Luther O. Beckett
Vice Chairman of the Board
(Director)

/s/ G. Bernard Midden, Jr.                                September 23, 1997
------------------------------------------
G. Bernard Midden, Jr.
(Director)

/s/ Milton G. Rees                                        September 23, 1997
------------------------------------------
Milton G. Rees
(Director)

/s Diane Ritchie                                          September 23, 1997
------------------------------------------
Diane Ritchie
Vice President
(Director)

/s/ John Swinford                                         September 23, 1997
------------------------------------------
John Swinford
(Director)

/s/ Wilbur H. Wilson                                      September 23, 1997
------------------------------------------
Wilbur H. Wilson
(Director)

/s/ Robbie Cox                                            September 23, 1997
------------------------------------------
Robbie G. Cox
Vice President
(Principal Accounting and Financial Officer)
</TABLE>