10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
For the transition period from            to

Commission File No.  0-51176

KENTUCKY FIRST FEDERAL BANCORP

(Exact Name of Registrant as Specified in Its Charter)

United States	61-1484858
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
479 Main Street, Hazard, Kentucky	41702
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:  (502) 223-1638

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

Title of each class	Name of each exchange on which registered
Common Stock (par value $.01 per share)	NASDAQ Global Market

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

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   o No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes   o No   x

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 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   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes   o No   x

The aggregate market value of the common stock held by nonaffiliates was $32.9 million as of June 30, 2006.

Number of shares of common stock outstanding as of September 19, 2006:  8,507,864

DOCUMENTS INCORPORATED BY REFERENCE

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

1.	Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 2006. (Parts II and IV)
2.	Portions of Proxy Statement for the 2006 Annual Meeting of Stockholders.  (Part III)

INDEX

		PAGE
PART I
Item 1.	Business	1
Item 1A	Risk Factors	18
Item 1B	Unresolved Staff Comments	20
Item 2.	Properties	21
Item 3.	Legal Proceedings	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22
Item 9A.	Control and Procedures	23
Item 9B.	Other Information	23
PART III
Item 10.	Directors and Executive Officers of the Registrant	24
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions	25
Item 14.	Principal Accountant Fees and Services	25
PART IV
Item 15.	Exhibits and Financial Statement Schedules	25
SIGNATURES

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PART I

Item 1.  Business 

Forward-looking Statements

          This report contains certain “forward-looking statements” within the meaning of the federal securities laws.  These statements are not historical facts, rather statements based on Kentucky First Federal Bancorp’s current expectations regarding its business strategies, intended results and future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. 

          Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.  Factors which could affect actual results include the following:  interest rate trends; the general economic climate in the market areas in which Kentucky First Federal Bancorp operates, as well as nationwide; Kentucky First Federal Bancorp’s ability to control costs and expenses; competitive products and pricing; loan delinquency rates; and changes in federal and state legislation and regulation.  These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.  Kentucky First Federal Bancorp assumes no obligation to update any forward-looking statements.

General

          References in this Annual Report on Form 10-K to “we,” “us” and “our” refer to Kentucky First, and where appropriate, collectively to Kentucky First, First Federal of Hazard and First Federal of Frankfort.

          Kentucky First Federal Bancorp.  Kentucky First Federal Bancorp (“Kentucky First” or the “Company”) was incorporated as a mid-tier holding company under the laws of the United States on March 2, 2005 upon the completion of the reorganization of First Federal Savings and Loan Association of Hazard (“First Federal of Hazard”) into a federal mutual holding company form of organization (the “Reorganization”).  On that date, Kentucky First completed its minority stock offering and issued a total of 8,596,064 shares of common stock, of which 4,727,938 shares, or 55%, were issued to First Federal MHC, a federally chartered mutual holding company formed in connection with the Reorganization, in exchange for the transfer of all of First Federal of Hazard’s capital stock, and 2,127,572 shares were sold at a cash price of $10.00 per share.  Also on March 2, 2005, Kentucky First completed its acquisition of Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its wholly owned subsidiary First Federal Savings Bank of Frankfort, Frankfort, Kentucky (“First Federal of Frankfort”) (the “Merger”).  Under the terms of the agreement of merger, shareholders of Frankfort First Bancorp received approximately 1,740,554 shares of Kentucky First’s common stock and approximately $13.7 million in cash (including payments to holders of Frankfort First stock options).  Following the Reorganization and Merger, the Company retained Frankfort First Bancorp as a wholly owned subsidiary and holds all of the capital stock of  First Federal of Hazard and First Federal of Frankfort.  The Company is operating First Federal of Hazard and First Federal of Frankfort as two independent, community-oriented savings institutions.

          Kentucky First’s and First Federal of Hazard’s executive offices are located at Main & Lovern Streets, Hazard, Kentucky, 41702 and their main telephone number is (606) 436-3860.

          Our results for the year ended June 30, 2006 were significantly affected by our increased asset size due to the Reorganization and the Merger.  At June 30, 2006, Kentucky First had total assets of $261.9 million, deposits of $141.2 million and stockholders’ equity of $63.9 million.   The discussion in this Annual Report on Form 10-K relates primarily to the businesses of First Federal of Hazard and First Federal of Frankfort (collectively, the “Banks”), as Kentucky First’s operations consist primarily of operating the Banks and investing funds retained in the Reorganization. 

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          First Federal of Hazard and First Federal of Frankfort are subject to examination and comprehensive regulation by the Office of Thrift Supervision and their savings deposits are insured up to applicable limits by the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation.  Both of the Banks are members of the Federal Home Loan Bank of Cincinnati, which is one of the 12 regional banks in the FHLB System.  See “Regulation and Supervision.”

          First Federal Savings and Loan Association of Hazard.   First Federal of Hazard was formed as a federally chartered mutual savings and loan association in 1960.  First Federal of Hazard operates from a single office in Hazard, Kentucky as a community-oriented savings and loan association offering traditional financial services to consumers in Perry and surrounding counties in eastern Kentucky.  It engages primarily in the business of attracting deposits from the general public and using such funds to originate, when available, loans secured by first mortgages on owner-occupied, residential real estate.  To the extent there is insufficient loan demand in its market area, and where appropriate under its investment policies, it purchases mortgage-backed and investment securities.  During the recent low interest rate environment, investments were made in shorter term liquid mortgage-backed and investment securities.  At June 30, 2006, First Federal of Hazard had total assets of $119.4 million, net loans receivable of $33.6 million, total mortgage-backed and investment securities of $76.4 million, deposits of $81.9 million and total capital of $25.7 million.

          First Federal Savings Bank of Frankfort.  First Federal of Frankfort is a federally chartered savings association conducting its business through three banking offices located in Frankfort, Kentucky.  First Federal of Frankfort is primarily engaged in the business of attracting deposits from the general public and using such funds to originate loans secured by first mortgages on owner-occupied, residential real estate.  First Federal of Frankfort also originates, to a lesser extent, church loans, home equity loans and other loans.  At June 30, 2006, First Federal of Frankfort had total assets of $145.2 million, net loans receivable of $118.8 million, deposits of $64.6 million and total capital of $32.5 million.

          First Federal of Frankfort’s main office is located at 216 W. Main Street, Frankfort, Kentucky 40602 and its main telephone number is (502) 223-1638.

Market Areas

          First Federal of Hazard and First Federal of Frankfort operate in two distinct market areas. 

          First Federal of Hazard’s market area consists of Perry County, where the business office is located, as well as the surrounding counties of Letcher, Knott, Breathitt, Leslie and Clay Counties in eastern Kentucky.  The economy in its market area has been distressed in recent years due to the decline in the coal industry on which the local economy has been historically dependent.   However, recent price increases in the petroleum market have improved the prospects of the coal industry at least temporarily.  Management cannot determine whether or not this will have a long-range positive impact on the local economy.  The local economy has also improved recently from the influx of other industries, such as health care and manufacturing.  Still, the economy in First Federal of Hazard’s market area continues to lag behind the economies of Kentucky and the United States.  In the most recent available data, using information from the State of Kentucky Economic Development Information System (www.thinkkentucky.com), per capita personal income in Perry County averaged $22,622 in 2004, compared to personal income of $27,265 in Kentucky and $33,050 in the United States.  Total population in Perry County has remained stable over the last five years at approximately 29,000.  However, as a regional economic center, Hazard tends to draw consumers and workers who commute from surrounding counties. The primary employers in the market area, particularly in Perry County, consist of the coal industry, health care providers, state industrial parks and the wood products manufacturing and logging industry.   During the last five years, the unemployment rate has exceeded 6% and in June 2006, was 7.9%, compared to 6.1% in Kentucky and 4.6% in the United States.

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          First Federal of Frankfort’s primary lending area includes the Kentucky counties of Franklin, Anderson, Scott, Shelby and Woodford, with the majority of lending originated on properties located in Franklin County.  Franklin County has a population of approximately 48,000, of which approximately 27,000 live within the city of Frankfort, which serves as the capital of Kentucky.  The primary employer in the area is the state government, which employs about 39% of the work force.  In addition, there are several large industrial, financial and government employers in the community.  Due to this large, relatively stable source of employment, there has been little fluctuation in the unemployment rate which has ranged from 3 to 5% in recent years and was 5.3% in June 2006.

Lending Activities

          General.  Our loan portfolio consists primarily of one- to four-family residential mortgage loans.  As opportunities arise, we also offer loans secured by churches, commercial real estate, and multi-family real estate, although there is little demand for such loans in our market areas.  We also offer loans secured by deposit accounts and, through First Federal of Frankfort, home equity loans.  Substantially all of our loans are made within the Banks’ respective market areas.

          Residential Mortgage Loans.  Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes in the Banks’ respective market areas.  At June 30, 2006, residential mortgage loans totaled $139.4 million or 88.5% of our total loan portfolio.  We offer a mix of adjustable rate and fixed rate mortgage loans with terms up to 30 years.  Adjustable-rate loans have an initial fixed term of one, three, or five years.  After the initial term, the rate adjustments on First Federal of Frankfort’s adjustable-rate loans are indexed to the National Average Contract Interest Rate for Major Lenders on the Purchase of Previously Occupied Homes.  The interest rates on these mortgages are adjusted once a year, with limitations on adjustments of one percentage point per adjustment period, and a lifetime cap of five percentage points. We determine loan fees charged, interest rates and other provisions of mortgage loans on the basis of our own pricing criteria and competitive market conditions.

          As part of First Federal of Hazard’s one- to four-family residential lending program, as a customer retention tool we offer existing borrowers who have built up equity in their residences the opportunity to receive an advance of additional funds without refinancing their existing loans with us.  The additional funds are advanced at our then prevailing interest rate, and the rate on the loan is adjusted to a blended rate based on the weighted average rate on the different advances obtained by that borrower.

          At June 30, 2006, the Company’s loan portfolio included $78.8 million in adjustable-rate one- to four-family residential mortgage loans, or 56.8% of the Company’s one- to four-family residential mortgage loan portfolio.

          The retention of adjustable-rate loans in the portfolio helps reduce our exposure to increases in prevailing market interest rates.  However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans.  It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers.  However, despite their popularity in some parts of the country, neither bank offers adjustable-rate loans that contractually allow for negative amortization.  Such loans, under some circumstances, can cause the balance of a closed-end loan to exceed the original balance and perhaps surpass the value of the collateral.  Further, although adjustable-rate loans allow us to increase the sensitivity of our interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the periodic and lifetime interest rate adjustment limitations.  Accordingly, there can be no assurance that yields on our adjustable-rate loans will fully adjust to compensate for increases in our cost of funds.  Finally, adjustable-rate loans may decrease at a pace faster than decreases in our cost of funds, resulting in reduced net income.

          While one- to four-family residential real estate loans are normally originated with up to 30-year terms, (with terms up to 40 years available for some products) such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the mortgaged property or upon refinancing the original loan.  Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.  As interest rates declined and remained low over the past few years, we have experienced high levels of loan repayments and refinancings.

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          The Banks offer various programs for the purchase and refinance of 1-4 family loans.  Most of these loans have loan-to-value ratios of 80% or less, based on an appraisal provided by a state licensed or certified appraiser.  For owner-occupied properties, the borrower may be able to borrow up to 100% of the value if they secure and pay for private mortgage insurance or they may be able to obtain a second mortgage (at a higher interest rate) in which they borrow up to 90% of the value.  On a rare case-by-case basis, the Boards of Directors of the Banks may approve a loan above the 80% loan-to-value ratio without such enhancements. 

          Construction Loans.  We originate loans to individuals to finance the construction of residential dwellings for personal use.  On limited occasions we have made construction loans to builders for the construction of a single-family residence for subsequent sale.  At June 30, 2006, construction loans totaled $2.7 million, or 1.7% of our total loan portfolio.  Our construction loans generally provide for the payment of interest only during the construction phase, which is usually less than one year.  At the end of the construction phase, the loan converts to a permanent mortgage loan.  Loans generally can be made with a maximum loan to value ratio of 80% of the appraised value.  Funds are disbursed as progress is made toward completion of the construction.

          Construction financing is generally 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 depends 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, we 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, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment.  As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest.  If we are forced to foreclose on a project before or at completion due to a default, there can be no assurance that we will be able to recover the unpaid balance and accrued interest on the loan, as well as related foreclosure and holding costs. 

          Multi-Family and Nonresidential Loans.  As opportunities arise, we offer mortgage loans secured by multi-family (residential property comprised of 5 or more units) or nonresidential real estate, which is generally secured by commercial office buildings, churches, condominiums and properties used for other purposes.  At June 30, 2006, multi-family and nonresidential loans totaled $296,000 and $6.4 million, respectively, or 0.5% and 4.1%, respectively, of our total loan portfolio.  We originate multi-family and nonresidential real estate loans for terms of generally 5 years or less.  Loan amounts generally do not exceed 80% of the appraised value unless approved in advance by the board of directors.

          Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans.  Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Payments on loans secured by income properties often depend on successful operation and management of the properties.  As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy.  To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on larger multi-family and commercial real estate loans.  In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. 

          Consumer Lending.  Our consumer loans include home equity lines of credit and loans secured by savings deposits.  At June 30, 2006, our consumer loan balance totaled $8.6 million, or 5.5% of our total loan portfolio.  Of the consumer loan balance at June 30, 2006, $5.2 million were home equity loans and $3.4 million were loans secured by savings deposits.

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          Our home equity loans are made at First Federal of Frankfort and are made on the security of residential real estate which have terms of up to 10 years.  Most of First Federal of Frankfort’s home equity loans do not exceed 80% of the estimated value of the property, less the outstanding principal of the first mortgage.  First Federal of Frankfort does offer home equity loans up to 90% of the value less the balance of the first mortgage at a premium rate to qualified borrowers.  These loans are not secured by private mortgage insurance.  First Federal of Frankfort’s home equity loans require the monthly payment of 2% of the unpaid principal until maturity, when the remaining unpaid principal, if any, is due.  First Federal of Frankfort’s home equity loans bear variable rates of interest indexed to the prime rate for loans with 80% or less loan-to-value ratio, and 2% above the prime rate for loans with a loan-to-value ratio in excess of 80%.  Interest rates on these loans can be adjusted monthly.  At June 30, 2006, the total outstanding home equity loans amounted to 3.3% of the Company’s total loan portfolio.

          Loans secured by savings are originated for up to 90% of the depositor’s savings account balance.  The interest rate is normally two percentage points above the rate paid on the savings account, and the account must be pledged as collateral to secure the loan.  At June 30, 2006, loans on savings accounts totaled 2.2% of the Company’s total loan portfolio.

          Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets. However, these risks are considerably reduced in our case, since all of our consumer loans are secured loans.

          Loan Originations, Purchases and Sales.  Loan originations come from a number of sources.  The primary source of loan originations are our in-house loan originators, and to a lesser extent, advertising and referrals from customers and real estate agents.  We currently do not purchase loans.  First Federal of Frankfort began selling fixed rate loans in April 2004 to the Federal Home Loan Bank of Cincinnati (“FHLB-Cincinnati”).  Loan servicing rights are retained on such loans.  At June 30, 2006, $6.1 million in loans were being serviced by First Federal of Frankfort for the FHLB-Cincinnati.

          Loan Approval Procedures and Authority.  Our lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by each Bank’s Board of Directors and management.  First Federal of Hazard’s loan committee, consisting of its three senior officers, has authority to approve loans of up to $250,000.  Loans above this amount and loans with non-standard terms such as longer repayment terms or high loan-to-value ratios, must be approved by our Board of Directors.  First Federal of Frankfort’s loan committee, comprised of at least two directors, who are usually also senior bank officers, analyzes a completed application and may approve or deny the loan if the loan is $275,000 or less and the property is a one- to four-family dwelling, the loan is $150,000 or less and the property is a church, or a home equity line of credit of $100,000 or less.  Loans that do not conform to these criteria must be submitted to the board of directors, or to an augmented loan committee made up of at least four directors, for approval.

          It is the Company’s practice to record a lien on the real estate securing a loan.  First Federal of Frankfort generally does not require title insurance, although it may be required for loans made in certain programs.  First Federal of Frankfort requires fire and casualty insurance on all security properties and flood insurance when the collateral property is located in a designated flood hazard area.  First Federal of Frankfort also requires an earthquake provision in all policies for new loans.  Employees are designated to constantly review and update insurance files.

          Loans to One Borrower.  The maximum amount that either Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of that Bank’s stated capital and the allowance for loan losses.  At June 30, 2006, the regulatory limit on loans to one borrower was $4.0 million for First Federal of Hazard and $2.6 million for First Federal of Frankfort.  Neither of the banks had lending relationships in excess of their respective lending limits. 

          Loan Commitments.  The Banks issue commitments for the funding of mortgage loans.  Generally, these commitments exist from the time the underwriting of the loan is completed and the closing of the loan.  Generally, these commitments are for a maximum of 30 or 60 days but management routinely extends the commitment if circumstances delay the closing.  Management reserves the right to verify or re-evaluate the borrower’s qualifications and to change the rates and terms of the loan at that time. 

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          If conditions exist whereby either bank experiences a significant increase in loans outstanding or commits to originate loans that are riskier than a typical 1-4 family mortgage, management and the boards will consider increasing the allowance for loan losses so that loss exposure on these commitments are reflected.  As residential loans are approved in the normal course of business, and those loans are underwritten to the standards of the Banks.  As a result, management does not believe alteration of the allowance for loan losses is warranted.  At June 30, 2006, no commitment losses were reflected in the allowance for loan losses.

          First Federal of Frankfort offers construction loans in which the borrower obtains the construction loan for a short term, less than one year, and simultaneously extends a commitment for permanent financing.  First Federal of Hazard offers a construction loan that is convertible to permanent financing, thus no additional commitment is made.         

          Interest Rates and Loan Fees.  Interest rates charged on mortgage loans are primarily determined by competitive loan rates offered in our market areas and our yield objectives.  Mortgage loan rates reflect factors such as prevailing market 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 general supply of money in the economy, tax policies and governmental budget matters.

          We receive fees in connection with late payments on our loans.  Depending on the type of loan and the competitive environment for mortgage loans, we may charge an origination fee on all or some of the loans we originate.  We may also offer a menu of loans whereby the borrower may pay a higher fee to receive a lower rate or to pay a smaller or no fee for a higher rate.

          Delinquencies.  When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status.  We make initial contact with the borrower when the loan becomes 15 days past due.  Subsequently, bank staff under the direct supervision of senior management and with consultation by the Banks’ attorneys, attempt to contact the borrower and determine their status and plans for resolving the delinquency.  However, once a delinquency reaches 90 days, management considers foreclosure and, if the borrower has not provided a reasonable plan (such as selling the collateral, a commitment from another lender to refinance the loan or a plan to repay the delinquent principal, interest, escrow, and late charges) the foreclosure suit is initiated.   If a foreclosure action is initiated and the loan is not brought current, paid in full, or refinanced with another lender before the foreclosure sale, the real property securing the loan is sold at foreclosure.  The Banks are represented at the foreclosure sale and in most cases will bid an amount equal to the Banks’ investment (including interest, advances for taxes and insurance, foreclosure costs, and attorney’s fees).  If another bidder outbids the bank, the bank’s investment is received in full.  If another bidder does not outbid the Banks, the Banks acquire the property and attempt to sell it to recover their investment.

          A borrower’s filing for bankruptcy can alter the methods available to the Banks to seek collection.  In such cases, the Banks work closely with legal counsel to resolve the delinquency as quickly as possible.

          We may consider loan workout arrangements with certain borrowers under certain conditions.  Management of each bank provides a report to its board of directors on a monthly basis of all loans more than 60 days delinquent, including loans in foreclosure, and all property acquired through foreclosure.              

Investment Activities

          We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions.  We also are required to maintain an investment in Federal Home Loan Bank of Cincinnati stock. 

          At June 30, 2006, our investment portfolio consisted primarily of U.S. Government agency securities with maturities of five years or less and mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less.

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          Our investment objectives are to provide an alternate source of low-risk investments when loan demand is insufficient, to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, and to generate a favorable return.  The Banks’ Board of Directors has the overall responsibility for each institution’s investment portfolio, including approval of investment policies.  The management of each bank may authorize investments as prescribed in each of the bank’s investment policies.

Bank Owned Life Insurance

          First Federal of Frankfort owns several Bank Owned Life Insurance Policies totaling $2.2 million at June 30, 2006.  The purpose of these policies is to offset future escalation of the costs of non-salary employee benefit plans such as First Federal of Frankfort’s defined benefit retirement plan and First Federal of Frankfort’s health insurance plan.  The lives of certain key bank employees are insured, and First Federal of Frankfort is the sole beneficiary and will receive any benefits upon the employee’s death.  The policies were purchased from four highly-rated life insurance companies.  The design of the plan allows for the cash value of the policy to be designated as an asset of First Federal of Frankfort.  The asset’s value will increase by the crediting rate, which is a rate set by each insurance company and is subject to change on an annual basis.  The growth of the value of the asset will be recorded as other operating income.  Management does not foresee any expense associated with the plan.  Because this is a life insurance product, current federal tax laws exempt the income from federal income taxes.

          Bank owned life insurance is not secured by any government agency nor are the policies’ asset values or death benefits secured specifically by tangible property.  Although great care was taken in selecting the insurance companies, the bond ratings and financial condition of these companies are monitored on a quarterly basis.  The failure of one of these companies could result in a significant loss to First Federal of Frankfort.  Other risks include the possibility that the favorable tax treatment of the income could change, that the crediting rate will not be increased in a manner comparable to market interest rates, or that this type of plan will no longer be permitted by First Federal of Frankfort’s regulators.  This asset is considered illiquid because, although First Federal of Frankfort may terminate the policies and receive the original premium plus all earnings, such an action would require the payment of federal income taxes on all earnings since the policies’ inception.

Deposit Activities and Other Sources of Funds

          General.  Deposits, loan repayments and maturities, redemptions, sales and repayments of investment and mortgage-backed securities are the major sources of our funds for lending and other investment purposes.  Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

          Deposit Accounts.  The vast majority of our depositors are residents of the Banks’ respective market areas.  Deposits are attracted from within our market areas through the offering of passbook savings and certificate accounts, and, at First Federal of Frankfort, checking accounts and individual retirement accounts (“IRAs”).  We do not utilize brokered funds.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, asset liability management and customer preferences and concerns.  We review our deposit mix and pricing on an ongoing basis as needed.  

          Borrowings.  First Federal of Hazard and First Federal of Frankfort borrow from the FHLB-Cincinnati to supplement their supplies of investable funds and to meet deposit withdrawal requirements.  The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions.  As members, each Bank is required to own capital stock in the FHLB-Cincinnati and is authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met.  Advances are made under several different programs, each having its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.

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Subsidiary Activities

          The Company has no other wholly owned subsidiaries other than First Federal of Hazard and Frankfort First Bancorp.  Frankfort First Bancorp has one subsidiary, First Federal of Frankfort.  First Federal of Frankfort has one wholly owned subsidiary, Main Street Financial Services, Inc.  Main Street Financial Services, Inc., is currently inactive.

          As federally chartered savings institutions, the Banks are permitted to invest an amount equal to 2% of 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, 2006, First Federal of Hazard and First Federal of Frankfort were authorized to invest up to $3.6 million and $4.4 million, respectively, in the stock of or loans to subsidiaries, including the additional 1% investment for community, inner-city and community development purposes.

Competition

          We face significant competition for the attraction of deposits and origination of loans.  Our most direct competition for deposits has historically come from the banks and credit unions operating in our market areas and, to a lesser extent, from other financial services companies, such as investment brokerage firms.  We also face competition for depositors’ funds from money market funds and other corporate and government securities.  Several of our competitors are significantly larger than us and, therefore, have significantly greater resources.  We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.  Technological advances, for example, have lowered the barriers to enter new market areas, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks.  Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry.  Competition for deposits and the origination of loans could limit our growth in the future.

          According to the Federal Deposit Insurance Corporation, at June 30, 2005, First Federal of Hazard had a deposit market share of 23.0% in Perry County.  Its largest competitors, Peoples Bank & Trust Company of Hazard (approximately $240 million in assets), Community Trust Bank, Inc. (approximately $2.4 billion in assets) and Whitaker Bank (approximately $940 million in assets), have Perry County deposit market shares of 51.1%, 21.4% and 4.5%, respectively.  First Federal of Hazard’s competition for loans comes primarily from financial institutions in its market area and, to a lesser extent, from other financial services providers, such as mortgage companies and mortgage brokers.  Competition for loans also comes from the increasing number of non-depository financial services companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

          First Federal of Frankfort’s principal competitors for deposits in its market area are other banking institutions, such as commercial banks and credit unions, as well as mutual funds and other investments.  First Federal of Frankfort principally competes for deposits by offering a variety of deposit accounts, convenient business hours and branch locations, customer service and a well-trained staff.  First Federal of Frankfort competes for loans with other depository institutions, as well as specialty mortgage lenders and brokers and consumer finance companies.  First Federal of Frankfort principally competes for loans on the basis of interest rates and the loan fees it charges, the types of loans it originates and the convenience and service it provides to borrowers.  In addition, First Federal of Frankfort believes it has developed strong relationships with the businesses, real estate agents, builders and general public in its market area.  Despite First Federal of Frankfort’s small size relative to the many and various other depository and lending institutions in its market area, First Federal of Frankfort usually ranks first with respect to the origination of single-family purchase mortgages made on properties located in Franklin County.  Nevertheless, the level of competition in First Federal of Frankfort’s market area has been limited to a certain extent the lending opportunities in its market area.

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Personnel

          At June 30, 2006, we had 40 full-time employees and no part-time employees, none of whom is represented by a collective bargaining unit.  We believe our relationship with our employees is good.

Regulation and Supervision

          General.  First Federal of Hazard and First Federal of Frankfort are subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as their primary federal regulator, and the Federal Deposit Insurance Corporation, as insurer of deposits.  First Federal of Hazard and First Federal of Frankfort are each members of the Federal Home Loan Bank System and their deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation.  First Federal of Hazard and First Federal of Frankfort must each file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning their activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions.  There are periodic examinations by the Office of Thrift Supervision and, under certain circumstances, the Federal Deposit Insurance Corporation to evaluate First Federal of Hazard’s and First Federal of Frankfort’s safety and soundness and compliance with various regulatory requirements.  This regulatory structure is intended primarily for the protection of the insurance fund and depositors.

          Kentucky First and First Federal MHC, as savings and loan holding companies, are required to file certain reports with, and are subject to examination by, and otherwise are required to comply with the rules and regulations of the Office of Thrift Supervision.  Certain of the regulatory requirements that are applicable to First Federal of Hazard, First Federal of Frankfort, Kentucky First and First Federal MHC are described below. 

          Sarbanes-Oxley Act of 2002.  On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002, which implemented legislative reforms intended to address corporate and accounting fraud.  The Sarbanes-Oxley Act restricts the scope of services that may be provided by accounting firms to their public company audit clients and any non-audit services being provided to a public company audit client will require preapproval by the company’s audit committee.  In addition, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement.

          Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerates the time frame for disclosures by public companies and changes in ownership in a company’s securities by directors and executive officers.

          The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm.” Among other requirements, companies must disclose whether at least one member of the committee qualifies as an” audit committee financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not.

          Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management cannot currently quantify the impact on our results of operations or financial condition.

          Privacy Requirements of the Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States.  Among other provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties.  Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.

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          Anti-Money Laundering.  In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”) was signed into law.  The USA PATRIOT Act significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities.  Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime.  Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering.  Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations.  We have established policies and procedures to ensure compliance with the USA PATRIOT Act’s provisions, and the impact of the USA PATRIOT Act on our operations has not been material.

Regulation of Federal Savings Institutions

          Business Activities.  Federal law and regulations, primarily the Home Owners’ Loan Act and the regulations of the Office of Thrift Supervision, govern the activities of federal savings institutions, such as First Federal of Hazard and First Federal of Frankfort.  These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage.  In particular, certain lending authority for federal savings institutions, e.g., commercial, nonresidential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

          Branching.  Federal savings institutions are authorized to establish branch offices in any state or states of the United States and its territories, subject to the approval of the Office of Thrift Supervision.

          Capital Requirements.  The Office of Thrift Supervision’s capital regulations require federal savings institutions to meet three minimum capital standards:  a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest examination rating under the Office of Thrift Supervision’s examination rating system) and an 8% risk-based capital ratio.  In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest examination rating) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.  The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. 

          The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset.  Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships.  The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

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          The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances.  At June 30, 2006, First Federal of Hazard and First Federal of Frankfort each met each of these capital requirements.

          Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization.  Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “under-capitalized.”  A savings institution that has a total risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”  Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.”  An institution must file a capital restoration plan with the Office of Thrift Supervision within 45 days of the date it receives notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.”  Compliance with the plan must be guaranteed by any parent holding company.  In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion.  “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions.  The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

          Loans to One Borrower.  Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks.  A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

          Standards for Safety and Soundness.  As required by statute, the federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  If the Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.

          Limitation on Capital Distributions.   Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger.  Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision.  If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like First Federal of Hazard and First Federal of Frankfort, it is a subsidiary of a holding company.  If First Federal of Hazard’s or First Federal of Frankfort’s capital were ever to fall below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted.  In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.

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          Qualified Thrift Lender Test.  Federal law requires savings institutions to meet a qualified thrift lender test.  Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12-month period.

          A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter.  Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”  At June 30, 2006, First Federal of Hazard and First Federal of Frankfort each met the qualified thrift lender test.

          Transactions with Related Parties.  Federal law limits the authority of First Federal of Hazard and First Federal of Frankfort to lend to, and engage in certain other transactions with (collectively, “covered transactions”), “affiliates” (e.g., any company that controls or is under common control with an institution, including Kentucky First, First Federal MHC and their non-savings institution subsidiaries).  The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution.  The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus.  Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law.  The purchase of low quality assets from affiliates from making loans is generally prohibited.  Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.  In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.  Transactions between sister depository institutions that are 80% or more owned by the same holding company are exempt from the quantitative limits and collateral requirements.

          The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors.  However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws.  Under such laws, First Federal of Hazard’s and First Federal of Frankfort’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited.  The law restricts both the individual and aggregate amount of loans First Federal of Hazard and First Federal of Frankfort may make to insiders based, in part, on First Federal of Hazard’s and First Federal of Frankfort’s respective capital positions and requires certain board approval procedures to be followed.  Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment.  There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.  There are additional restrictions applicable to loans to executive officers.

          Enforcement.  The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.  Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to appointment of a receiver or conservator or termination of deposit insurance.  Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases.  The Federal Deposit Insurance Corporation has authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular savings institution.  If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances.  Federal law also establishes criminal penalties for certain violations.

          Assessments.  Federal savings banks are required to pay assessments to the Office of Thrift Supervision to fund its operations.  The general assessments, paid on a semi-annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report.

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          Insurance of Deposit Accounts.  The deposits of First Federal of Hazard and First Federal of Frankfort are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the “DIF”).  The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information.  An institution’s assessment rate depends upon the categories to which it is assigned.  Assessment rates are determined semi-annually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.

          In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.

          The Banks’ total assessment paid for fiscal 2006 (including the Financing Corporation assessment) was $21,000.  The Federal Deposit Insurance Corporation has authority to increase insurance assessments.  A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.  Management cannot predict what insurance assessment rates will be in the future.

          Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision.  The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

          Federal Deposit Insurance Reform Act of 2005.  The Federal Deposit Insurance Reform Act of 2005 (the “Act”), signed by the President on February 8, 2006, revised the laws governing the federal deposit insurance system.  The Act provided for the consolidation of the Bank and Savings Association Insurance Funds into a combined “Deposit Insurance Fund.”

          Under the Act, insurance premiums are to be determined by the Federal Deposit Insurance Corporation based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. The legislation eliminates the current minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio falls below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%.  The Act provides the Federal Deposit Insurance Corporation with flexibility to adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year, and allows for dividends to insured institutions when the reserve ratio exceeds specified levels.

          The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k) plans and other retirement savings accounts.  While it preserved the $100,000 coverage limit for individual accounts and municipal deposits, the Federal Deposit Insurance Corporation was furnished with the discretion to adjust all coverage levels to keep pace with inflation beginning in 2010.  Also, institutions that become undercapitalized will be prohibited from accepting certain employee benefit plan deposits.  The Act also enacted a $4.7 billion one-time assessment credit to be allocated by the FDIC among institutions that were in existence as of December 31, 1996.

          The consolidation of the Bank and Savings Association Insurance Funds into the Deposit Insurance Fund pursuant to the Act occurred on March 31, 2006.  The Act also states that the Federal Deposit Insurance Corporation must promulgate final regulations implementing the remainder of its provisions not later than 270 days after its enactment.

          At this time, management cannot predict the effect, if any, that the Act will have on insurance premiums paid by the Bank

          Federal Home Loan Bank System.  First Federal of Hazard and First Federal of Frankfort are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank provides a central credit facility primarily for member institutions.  As members of the Federal Home

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Loan Bank of Cincinnati, First Federal of Hazard and First Federal of Frankfort are each required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of their unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of their advances (borrowings) from the Federal Home Loan Bank, whichever is greater.  First Federal of Hazard and First Federal of Frankfort were in compliance with this requirement with an investment in Federal Home Loan Bank of Cincinnati stock at June 30, 2006, of $2.0 million and $3.3 million, respectively.

          Community Reinvestment Act.  Under the Community Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act.  The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with its examination of a savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

          The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the Office of Thrift Supervision to provide a written evaluation of an institution’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system.  First Federal of Hazard and First Federal of Frankfort each received a “Satisfactory” rating as a result of their most recent Community Reinvestment Act assessments.

          Other Regulations.  Interest and other charges collected or contracted for by First Federal of Hazard and First Federal of Frankfort are subject to state usury laws and federal laws concerning interest rates.  First Federal of Hazard’s and First Federal of Frankfort’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

	(1)	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	(2)	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	(3)	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
	(4)	Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
	(5)	rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The deposit operations of First Federal of Hazard and First Federal of Frankfort also are subject to the:
	(1)	Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
	(2)	Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
	(3)	Check Clearing for the 21st Century Act (also known as “Check 21”), which, effective October 28, 2004, gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

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Holding Company Regulation

          General.  Kentucky First and First Federal MHC are savings and loan holding companies within the meaning of federal law.  As such, they are registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities.  In addition, the Office of Thrift Supervision has enforcement authority over Kentucky First and First Federal MHC and their non-savings institution subsidiaries.  Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to First Federal of Hazard and/or First Federal of Frankfort.

          Restrictions Applicable to Mutual Holding Companies.  According to federal law and Office of Thrift Supervision regulations, a mutual holding company, such as First Federal MHC, may generally engage in the following activities:  (1) investing in the stock of insured depository institutions and acquiring them by means of a merger or acquisition; (2) investing in a corporation the capital stock of which may be lawfully purchased by a savings association under federal law; (3) furnishing or performing management services for a savings association subsidiary of a savings and loan holding company; (4) conducting an insurance agency or escrow business; (5) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of the savings and loan holding company; (6) holding or managing properties used or occupied by a savings association subsidiary of the savings and loan holding company; (7) acting as trustee under deed or trust; (8) any activity permitted for multiple savings and loan holding companies by Office of Thrift Supervision regulations; (9) any activity permitted by the Board of Governors of the Federal Reserve System for bank holding companies and financial holding companies; and (10) any activity permissible for service corporations.  Recent legislation, which authorized mutual holding companies to engage in activities permitted for financial holding companies, expanded the authorized activities.  Financial holding companies may engage in a broad array of financial services activities, including insurance and securities.

          Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval of the Office of Thrift Supervision.  Federal law also prohibits a savings and loan holding company from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation.  In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

          The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except:  (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.  The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

          If a savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test set, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution’s failure to so qualify.

          Stock Holding Company Subsidiary Regulation.  The Office of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies.  Kentucky First is the stock holding company subsidiary of First Federal MHC.  Kentucky First is only permitted to engage in activities that are permitted for First Federal MHC subject to the same restrictions and conditions.

          Waivers of Dividends by First Federal MHC.  Office of Thrift Supervision regulations require First Federal MHC to notify the Office of Thrift Supervision if it proposes to waive receipt of our dividends from Kentucky First.  The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and sound operation of the savings association; and (ii) the mutual holding company’s board of directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members.

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The Office of Thrift Supervision will not consider the amount of dividends waived by the mutual holding company in determining an appropriate exchange ratio in the event of a full conversion to stock form.  Kentucky First has been granted such a waiver.  Dividends paid to shareholders on November 21, 2005, February 17, May 22 and August 21, 2006 were waived by First Federal MHC.

          Conversion of First Federal MHC to Stock Form.  Office of Thrift Supervision regulations permit First Federal MHC to convert from the mutual form of organization to the capital stock form of organization.  In a conversion transaction, a new holding company would be formed as our successor, First Federal MHC’s corporate existence would end, and certain depositors of First Federal of Hazard would receive the right to subscribe for additional shares of the new holding company. In a conversion transaction, each share of common stock held by stockholders other than First Federal MHC would be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio determined at the time of conversion that ensures that stockholders other than First Federal MHC own the same percentage of common stock in the new holding company as they owned in us immediately before conversion. Under Office of Thrift Supervision regulations, stockholders other than First Federal MHC would not be diluted because of any dividends waived by First Federal MHC (and waived dividends would not be considered in determining an appropriate exchange ratio), in the event First Federal MHC converts to stock form. The total number of shares held by stockholders other than First Federal MHC after a conversion transaction also would be increased by any purchases by stockholders other than First Federal MHC in the stock offering conducted as part of the conversion transaction.

          Acquisition of Control.  Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association.  An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision.  Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition.  Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

          Remutualization Transactions.  Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction.  However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and as raising issues concerning the effect on the mutual members of the acquiring entity.  Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision’s concerns are not warranted in the particular case.

Federal and State Taxation

          General.  We report our income on a fiscal year basis using the accrual method of accounting.

          Federal Taxation.  The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly the reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us.  Each of our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2002. For the 2006 fiscal year, First Federal of Hazard’s and Frankfort First’s maximum federal income tax rate was 34%.

          For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method.  Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.  First Federal of Hazard did not qualify for such favorable tax treatment for any years through 1996.

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Approximately $5.4 million of First Federal of Frankfort First’s accumulated bad debt reserves would not be recaptured into taxable income unless Frankfort First makes a “non-dividend distribution” to Kentucky First as described below.

          If First Federal of Hazard or First Federal of Frankfort makes “non-dividend distributions” to us, the distributions will be considered to have been made from First Federal of Hazard’s and First Federal of Frankfort’s unrecaptured tax bad debt reserves, including the balance of their reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from First Federal of Frankfort’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in First Federal of Frankfort’s taxable income.  Non-dividend distributions include distributions in excess of First Federal of Frankfort’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation.  Dividends paid out of First Federal of Frankfort’s current or accumulated earnings and profits will not be so included in First Federal of Frankfort’s taxable income.

          The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if First Federal of Frankfort makes a non-dividend distribution to us, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. First Federal of Frankfort does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

          State Taxation. Although First Federal MHC and Kentucky First are subject to the Kentucky corporation income tax and state corporation license tax (franchise tax), the corporation license tax is repealed effective for tax periods ending on or after December 31, 2005.  Gross income of corporations subject to Kentucky income tax is similar to income reported for federal income tax purposes except that dividend income, among other income items, is exempt from taxation.  For First Federal MHC and Kentucky First tax years beginning July 1, 2005, the corporations are subject to an alternative minimum income tax.  Corporations must pay the greater of the income tax, the alternative tax or $175.  The corporations can choose between two methods to calculate the alternative minimum; 9.5 cents per $100 of the corporation’s gross receipts, or 75 cents per $100 of the corporation’s Kentucky gross profits.  Kentucky gross profits means Kentucky gross receipts reduced by returns and allowances attributable to Kentucky gross receipts, less Kentucky cost of goods sold.  The corporations, in their capacity as holding companies for financial institutions, do not have a material amount of cost of good sold.  Although the corporate license tax rate is 0.21% of total capital employed in Kentucky, a bank holding company, as defined in Kentucky Revised Statutes 287.900, is allowed to deduct from its taxable capital, the book value of its investment in the stock or securities of subsidiaries that are subject to the bank franchise tax.

          First Federal of Hazard and First Federal of Frankfort are exempt from both the Kentucky corporation income tax and corporation license tax.  However, both institutions are instead subject to the bank franchise tax, an annual tax imposed on federally or state chartered savings and loan associations, savings banks and other similar institutions operating in Kentucky.  The tax is 0.1% of taxable capital stock held as of January 1 each year.  Taxable capital stock includes an institution’s undivided profits, surplus and general reserves plus savings accounts and paid-up stock less deductible items.  Deductible items include certain exempt federal obligations and Kentucky municipal bonds.  Financial institutions which are subject to tax both within and without Kentucky must apportion their net capital.

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Item 1A.  Risk Factors

A significant percentage of the Banks’ assets is invested in lower yielding liquid investments.  Our inability to reinvest these assets into higher yielding assets such as loans will continue to hinder our ability to be more profitable.

          We have been unable to invest as much of First Federal of Hazard’s liquidity into loans due to insufficient loan demand in the market area.  At June 30, 2006, $3.7 million, or 3.1% of its assets were invested in cash or cash equivalents, and $76.2 million, or 63.9% of assets, were invested in U.S. Government agency obligations and mortgage-backed securities.  These investments yield substantially less than would be obtained if such funds were invested in loans.  As a result, our interest income has suffered.

We may not be able to achieve sufficient growth in our retail franchise to allow us to achieve the anticipated benefits of our merger with Frankfort First Bancorp.

          We believe that First Federal of Hazard’s lending activity and loans receivable will continue to increase in a profitable manner by utilizing various loan products currently offered by First Federal of Frankfort, such as adjustable-rate mortgages.  However, it is possible that local market factors, including competition from other lenders and continuing increases in interest rates may preclude significant growth from an increased product line.  We also believe that over time First Federal of Hazard can develop additional deposit products such as those offered by First Federal of Frankfort (such as individual retirement accounts or checking accounts), but we have not yet fully explored their cost effectiveness nor their viability in First Federal of Hazard’s market.

          We intend to efficiently utilize excess liquidity at either Bank or Kentucky First by buying and selling whole loans or participations in loans between First Federal of Hazard and First Federal of Frankfort, with the originating bank retaining servicing of any loans sold, or by making deposits into accounts at either bank, subject to regulatory limitations, in order to maximize the potential earnings of each bank.  This strategy will not succeed if we do not maintain sufficient loan demand at First Federal of Frankfort or sufficient deposit growth at First Federal of Hazard.  At June 30, 2006, Frankfort First had total real estate loans of $118.8 million, compared to $114.8 million at June 30, 2005, an increase of approximately $4.0 million, or 3.5%.  At June 30, 2006, Federal of Hazard had total deposits of $81.9 million, compared to total deposits of $86.6 million at June 30, 2005, a decrease of $4.7 million, or 5.4%.  There can be no assurance as to if or when this strategy can be accomplished.  In an attempt to increase the overall interest rate spread of the combined company, management may adopt strategies that result in decreases in the assets and/or liabilities of either or both Banks.

Rising interest rates may hurt our profits and asset values.

          If interest rates continue to rise, our net interest income would likely decline in the short term since, due to the generally shorter terms of interest-bearing liabilities, interest expense paid on interest-bearing liabilities,  increases more quickly than interest income earned on interest-earning assets, such as loans and investments.   In addition, a continuation of rising interest rates may hurt our income because of reduced demand for new loans, the demand for refinancing loans and the interest and fee income earned on new loans and refinancings.  At June 30, 2006, in the event of an instantaneous and permanent 200 basis point increase in interest rates, our net portfolio value, which represents the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities, would be expected to decrease by approximately 16%.  While we believe that modest interest rate increases will not significantly hurt our interest rate spread over the long term due to our high level of liquidity and the presence of a significant amount of adjustable-rate mortgage loans in our loan portfolio, interest rate increases may initially reduce our interest rate spread until such time as our loans and investments reprice to higher levels.

          Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio.  Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates.  Unrealized gains and losses on securities available for sale are reported as separate components of equity.  Decreases in the fair value of securities available for sale resulting from increases in interest rates therefore could have an adverse effect on shareholders’ equity.

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Strong competition within our market area could hurt our profits and slow growth.

          Although we consider ourselves competitive in our market areas, we face intense competition both in making loans and attracting deposits.  Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income.  Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide.  We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.  Our profitability will depend upon our continued ability to compete successfully in our market areas.

The distressed economy in First Federal of Hazard’s market area could hurt our profits and slow our growth.

          First Federal of Hazard’s market area consists of Perry and surrounding counties in eastern Kentucky.  The economy in this market area has been distressed in recent years due to the decline in the coal industry on which the economy has been dependent.  While there has been improvement in the economy from the influx of other industries, such as health care and manufacturing, and there may be signs that the coal industry is improving with the rising costs of petroleum, the economy in First Federal of Hazard’s market area continues to lag behind the economies of Kentucky and the United States.  As a result, First Federal of Hazard has experienced insufficient loan demand in its market area.  While First Federal of Hazard will seek to use excess funds to purchase loans from First Federal of Frankfort, we expect the redeployment of funds from securities into loans to take several years.  Moreover, the slow economy in First Federal of Hazard’s market area will limit our ability to grow our asset base in that market.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

          We are subject to extensive government regulation, supervision and examination.  Such regulation, supervision and examination govern the activities in which we may engage, and is intended primarily for the protection of the deposit insurance fund and our depositors.  Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

We expect that our return on equity will be low compared to other companies as a result of our recently completed public offering.

          Return on average equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. For the year ended June 30, 2006, our return on average equity was 2.68%.  Over time, we intend to deploy our excess capital into higher-yielding assets, such as loans, with the goal of increasing earnings per share and book value per share, without assuming undue risk, and achieving a return on average equity that is competitive with other publicly held subsidiaries of mutual holding companies.  This goal could take a number of years to achieve, and we cannot assure you that it will be attained.  Consequently, you should not expect a competitive return on average equity in the near future.  Failure to achieve a competitive return on average equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on average equity.

Additional annual employee compensation and benefit expenses will reduce our profitability and stockholders’ equity.

          We will recognize additional annual material employee compensation and benefit expenses stemming from the shares granted to employees and executives under new benefit plans.  We cannot predict the actual amount of these new expenses because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.  We would recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and would recognize expenses

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for restricted stock awards and options over the vesting periods of the awards.  These annual after-tax expenses have been estimated to be approximately $393,000.  Actual expenses, however, may be higher or lower, depending on the then-prevailing price of our common stock.  Employees of both subsidiary Banks participate in a defined-benefit plan through Pentegra.  In recent years, the cost of this plan has increased dramatically and costs could continue to increase.  It is also possible that legislation will be enacted that would increase the Banks’ obligations under the plan or change the methods the Banks use in accounting for the plans that could affect personnel expense and the Company’s balance sheet.  In 2006, the total contribution of both Banks was $508,000.

First Federal MHC owns a majority of our common stock and is able to exercise voting control over most matters put to a vote of stockholders, including preventing sale or merger transactions you may like or a second-step conversion by First Federal MHC.

          First Federal MHC owns a majority of our common stock and, through its board of directors, is able to exercise voting control over most matters put to a vote of stockholders.  As a federally chartered mutual holding company, the board of directors of First Federal MHC must ensure that the interests of depositors of First Federal of Hazard are represented and considered in matters put to a vote of stockholders of Kentucky First.  Therefore, the votes cast by First Federal MHC may not be in your personal best interests as a stockholder.  For example, First Federal MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares, prevent a second-step conversion transaction by First Federal MHC or defeat a stockholder nominee for election to the board of directors of Kentucky First.  However, implementation of a stock-based incentive plan will require approval of Kentucky First’s stockholders other than First Federal MHC.  In addition, Office of Thrift Supervision regulations prohibit, for three years following the completion of our public offering, the acquisition of more than 10% of any class of equity security of the company without the prior approval of the Office of Thrift Supervision.  Even after this three-year period, Office of Thrift Supervision regulations would likely prevent an acquisition of Kentucky First other than by another mutual holding company or a mutual institution.

There may be a limited market for our common stock which may lower our stock price.

          Although our shares of common stock are listed on the Nasdaq Global Market, there is no guarantee that the shares will be regularly traded.  If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice and the sale of a large number of shares at one time could temporarily depress the market price.

Item 1B.  Unresolved Staff Comments

None.

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Item 2.  Properties

          We conduct our business through four offices.  The following table sets forth certain information relating to our offices at June 30, 2006.

	Year Opened/Acquired		Owned or Leased		Net Book Value at June 30, 2006		Approximate Square Footage
	(Dollars in thousands)
First Federal of Hazard Main Office: 479 Main Street Hazard, Kentucky 41701		1960		Owned	$	—		15,000
First Federal of Frankfort Main Office: 216 West Main Street Frankfort, Kentucky 40601		2005		Owned	$	1,456		14,000
East Branch 1980 Versailles Road Frankfort, Kentucky 40601		2005		Owned	$	565		1,800
West Branch 1220 US 127 South Frankfort, Kentucky 40601		2005		Owned	$	546		2,480

          The net book value of our investment in premises and equipment was $2.9 million at June 30, 2006.  See Note E of Notes to Consolidated Financial Statements.

Item 3.  Legal Proceedings

          From time to time, we may be defendants in claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  We are not a party to any pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4.  Submission of Matters to a Vote of Security Holders

          Not applicable.

PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

          (a)     The information contained under the sections captioned “Market Information” in the Company’s Annual Report to Stockholders for the Fiscal Year Ended June 30, 2006 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference.

          (b)     Not applicable.

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          (c)     The Company repurchased the following equity securities registered under the Securities Exchange Act of 1934, as amended, during the fourth quarter of the fiscal year ended June 30, 2006.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1)
April 2006 Beginning date: April 1 Ending date:  April 30		9,692	$	10.672		9,692		17,848
May 2006 Beginning date: May 1 Ending date:  May 31		13,554	$	10.666		13,554		4,294
June 2006 Beginning date: June 1 Ending date: June 30		36,883	$	10.858		36,883		156,117
Total		60,129	$	10.784		60,129		156,117

(1)  On December 14, 2005, the Company announced a program to repurchase up to 168,486 shares of its Common Stock.  This program was completed on June 1, 2006 when the Company completed the repurchase of substantially all shares authorized under this program, and announced another program to repurchase up to 193,000 shares of its Common Stock.

Item 6.  Selected Financial Data

          The information contained in the table captioned “Selected Consolidated Financial and Other Data” in the Annual Report is incorporated herein by reference.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report is incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

          The information contained under the sections captioned “Market Risk” in the Annual Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

          The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditor’s Report and Selected Financial Data, which are listed under Item 15 herein, are included in the Annual Report and are incorporated herein by reference.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

          None.

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Item 9A.  Controls and Procedures

          As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

          There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.  Other Information

          Not Applicable.

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PART III

Item 10.  Directors and Executive Officers of the Registrant

          The information contained under the sections captioned “Proposal I -- Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the Company’s 2005 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

          Kentucky First has adopted a Code of Ethics and Business Conduct that applies to all of its directors, officers and employees.  To obtain a copy of this document at no charge, please write to Kentucky First Federal Bancorp, P.O. Box 535, Frankfort, KY 40602-0535, or call toll-free (888) 818-3372  and ask for Investor Relations.

Item 11.  Executive Compensation

          The information contained under the section captioned “Proposal I -- Election of Directors -- Executive Compensation,” in the Proxy Statement is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)	Security Ownership of Certain Beneficial Owners.  Information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Security Ownership” in the Proxy Statement.
(b)	Security Ownership of Management.  Information required by this item is incorporated herein by reference to the sections captioned “Voting Securities and Security Ownership” and “Proposal I -- Election of Directors” in the Proxy Statement.
(c)	Changes in Control.  Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
(d)	Equity Compensation Plans.  The following table sets forth certain information with respect to the Company’s equity compensation plans as of June 30, 2006.

	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		347,600	$	10.10		73,616
Equity compensation plans not approved by security holders		—		—		—
Total		347,600	$	10.10		73,616

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Item 13.  Certain Relationships and Related Transactions

          The information required by this item is incorporated herein by reference to the section captioned “Proposal I -- Election of Directors -- Transactions with Management” in the Proxy Statement.

Item 14.  Principal Accountant Fees and Services

          The information required by this item is incorporated herein by reference to the section captioned “Audit and Other Fees Paid to Independent Registered Public Accountants” in the Proxy Statement.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)     List of Documents Filed as Part of This Report

(1)	Financial Statements.  The following consolidated financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13):
		Report of Independent Registered Public Accounting Firm
		Consolidated Statements of Financial Condition as of June 30, 2006 and 2005
		Consolidated Statements of Earnings for the Years Ended June 30, 2006, 2005 and 2004
		Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended June 30, 2006, 2005 and 2004
		Consolidated Statements of Cash Flows for the Years Ended June 30, 2006, 2005 and 2004
		Notes to Consolidated Financial Statements
(2)	Financial Statement Schedules.  All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.
(3)	Exhibits.  The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index.

No.	Description
3.1	Charter of Kentucky First Federal Bancorp*
3.2	Bylaws of Kentucky First Federal Bancorp*
4.1	Specimen Stock Certificate of Kentucky First Federal Bancorp*
10.1	Form of First Federal Savings and Loan Association of Hazard Employee Stock Ownership Plan and Trust Agreement*†
10.2	Form of ESOP Loan Documents*†
10.3	Form of Employment Agreement between Kentucky First Federal Bancorp, First Federal Savings Bank of Frankfort and Don D. Jennings*†
10.4	Form of Employment Agreement between Kentucky First Federal Bancorp, First Federal Savings Bank of Frankfort and R. Clay Hulette*†
10.5	Form of Employment Agreement between First Federal Savings Bank of Frankfort and Danny A. Garland*†
10.6	Form of Employment Agreement between First Federal Savings Bank of Frankfort and Teresa Kuhl*†
10.7	Form of Employment Agreement between Kentucky First Federal Bancorp, First Federal Savings and Loan Association of Hazard and Tony D. Whitaker*†
10.8	Form of First Federal Savings and Loan Association of Hazard Supplemental Executive Retirement Plan*†

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10.9	Form of First Federal Savings and Loan Association of Hazard Change in Control Severance Compensation Plan*†
10.10	Form of First Federal Savings Bank of Frankfort Change in Control Severance Compensation Plan*†
13	Annual Report to Stockholders
21	Subsidiaries
23	Consent of Grant Thornton LLP
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32	Section 1350 Certifications

†	Management contract or compensation plan or arrangement.
*	Incorporated herein by reference to the Company’s Registration Statement on Form S-1 (File No. 333-119041).

(b)	Exhibits.  The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein.
(c)	Financial Statements and Schedules Excluded from Annual Report.  There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein.

26

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 FEDERAL BANCORP
September 28, 2006	By:	/s/ Tony D. Whitaker
		Tony D. Whitaker
		Chief Executive Officer

          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.

/s/ Tony D. Whitaker
	September 28, 2006
Tony D. Whitaker
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ R. Clay Hulette
	September 28, 2006
R. Clay Hulette
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Don D. Jennings
	September 28, 2006
Don D. Jennings
Director
/s/ Stephen G. Barker
	September 28, 2006
Stephen G. Barker
Director
/s/ William D. Gorman
	September 28, 2006
William D. Gorman
Director
/s/ Walter G. Ecton, Jr.
	September 28, 2006
Walter G. Ecton, Jr.
Director
/s/ David R. Harrod
	September 28, 2006
David R. Harrod
Director
/s/ Herman D. Regan, Jr.
	September 28, 2006
Herman D. Regan, Jr.
Director

EX-13

Exhibit 13

Parent company of
First Federal Savings and Loan Association of Hazard
and
First Federal Savings Bank of Frankfort

2006
Annual Report

KENTUCKY FIRST FEDERAL BANCORP

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

          On March 2, 2005, First Federal of Hazard completed its reorganizaton into the mutual holding company form of ownership with the incorporation of the Company as parent of First Federal of Hazard.  Coincident with the Reorganization, First Federal of Hazard converted to the stock form of ownership and issued all of its common stock to the Company.  In addition, on March 2, 2005, the Company issued 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, and issued 2,127,572 common shares, or 24.8% of its shares at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”).  The Company received net cash proceeds of $12.7 million from the public sale of its common shares.  The Company’s remaining 1,740,554 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First Bancorp (“Frankfort First”) and its wholly owned subsidiary, First Federal of Frankfort.

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

          First Federal of Frankfort is a federally chartered savings bank which is primarily engaged in the business of attracting deposits from the general public and the origination of fixed-rate and adjustable-rate loans secured by first mortgages on owner-occupied one-to four-family residences in its market area of Franklin, Anderson, Scott, Shelby and Woodford Counties, Kentucky.  First Federal of Frankfort also originates, to a lesser extent, church loans, home equity loans and other loans. 

MARKET INFORMATION

          The Company’s common stock began trading under the symbol “KFFB” on the Nasdaq National Market on March 3, 2005.  There are currently 8,563,475 shares of common stock outstanding and approximately 821 holders of record of the common stock.  Following are the high and low closing prices, by fiscal quarter, as reported on the Nasdaq National Market during the periods indicated, as well as dividends declared on the common stock during each quarter.

Fiscal 2006	High		Low		Dividends Per Share
First quarter	$	11.60	$	9.95	$	0.10
Second quarter		10.74		9.30		0.10
Third quarter		11.25		10.10		0.10
Fourth quarter		10.95		9.80		0.10

Fiscal 2005	High		Low		Dividends Per Share
Third quarter (1)	$	11.84	$	10.20		N/A
Fourth quarter		11.80		10.71	$	0.10

(1) From commencement of trade on March 3, 2005 through March 31, 2005

ii

TABLE OF CONTENTS
Kentucky First Federal Bancorp	ii
Market Information	ii
Letter to Shareholders	1
Selected Consolidated Financial and Other Data	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Consolidated Financial Statements	28
Corporate Information	60

iii

Dear Shareholder:

We are pleased to present the 2006 Annual Report for Kentucky First Federal Bancorp, the first full year of operations for the Company.  We encourage you to read both the Annual Report and Proxy Statement, and we encourage you to vote and, if possible, to attend our annual meeting on November 14.

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

However, our community banking activity is currently somewhat less profitable than in recent years.   As with much of our industry, we are dealing with increases in market interest rates and costs of deposits that rise faster than returns on loans and investments.  While we believe over time our assets can be repriced or redeployed into other types of assets, in the short term we expect lower margins to hamper our earnings.

Still, we will continue to develop financial synergies between our sister banks and to develop new product opportunities.   We also continue to use various strategies for a more robust implementation of the Company’s high level of capital.  Very early in our existence we announced one of the stronger dividend policies among publicly traded thrifts in the country and we continue to pay a very attractive dividend.   In the past year, we have also begun a stock repurchase program designed to utilize excess capital and enhance the value of your investment.    

As a shareholder, we invite you to choose First Federal of Hazard or First Federal of Frankfort for your banking needs.  We also encourage you to give us a call any time you have any questions or concerns.

Sincerely,
Tony Whitaker	Don D. Jennings
Chairman and C.E.O.	President and C.O.O.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Selected Financial Condition Data (1)

	At June 30,
	2006		2005		2004		2003		2002
	(In thousands)
Total assets	$	261,941	$	273,915	$	139,823	$	136,097	$	133,182
Cash and cash equivalents		2,294		8,358		16,862		30,349		26,734
Investment securities held to maturity		45,944		50,942		50,840		48,841		51,286
Investment securities available for sale		12,211		12,686		12,391		12,997		—
Mortgage-backed securities held to maturity		18,185		21,347		22,983		389		713
Mortgage-backed securities available for sale		1,079		1,861		—		—		—
Loans receivable, net		155,386		151,712		33,568		40,586		51,413
Deposits		141,238		155,044		98,751		104,784		102,704
Federal Home Loan Bank advances		54,849		50,985		9,000		—		—
Shareholders’ equity – restricted (1)		63,881		65,939		31,043		30,682		29,632
Allowance for loan losses		724		708		665		720		735
Nonperforming loans		1,427		1,747		1,154		1,296		1,541

Selected Operating Data (1)

	Year Ended June 30,
	2006		2005		2004			2003		2002
	(Dollars in thousands, except per share data)
Total interest income	$	12,709	$	8,153	$	5,601		$	6,313	$	7,671
Total interest expense		6,227		3,353		2,220			3,399		4,548
Net interest income		6,482		4,800		3,381			2,914		3,123
Provision for losses on loans		32		53		10			66		123
Net interest income after provision for losses on loans		6,450		4,747		3,371			2,848		3,000
Total other income (loss)		216		263		(35	)		297		414
Total general, administrative and other expenses		4,355		2,509		2,183			1,554		1,973
Income before federal income taxes		2,311		2,501		1,153			1,591		1,441
Federal income taxes		723		872		392			541		490
Net income	$	1,588	$	1,629	$	761		$	1,050	$	951
Net earnings per share – basic	$	0.19	$	N/A	$	N/A		$	N/A	$	N/A
Net earnings per share – diluted	$	0.19	$	N/A	$	N/A		$	N/A	$	N/A

(1)

Consists of only retained earnings at June 30, 2002 through June 30, 2004, inclusive.

(2)

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

2

Selected Financial Ratios and Other Data (1)

	Year Ended June 30,
	2006			2005			2004			2003			2002
Performance Ratios:
Return on average assets (net income divided by average total assets)		0.59	%		0.88	%		0.56	%		0.77	%		0.72	%
Return on average equity (net income divided by average equity)		2.68			4.46			2.44			3.46			3.23
Interest rate spread (combined weighted average interest rate earned less combined weighted average interest rate cost)		2.15			2.30			2.04			1.45			1.39
Net interest margin (net interest income divided by average interest-earning assets)		2.63			2.69			2.54			2.18			2.40
Ratio of average interest-earning assets to average interest-bearing liabilities		118.77			120.74			129.55			128.39			128.88
Ratio of total general administrative and other expenses to average total assets		1.62			1.35			1.62			1.15			1.50
Efficiency ratio (2)		65.02			49.56			65.24			48.40			55.78
Dividend payout ratio (3)		97.36			N/A			N/A			N/A			N/A
Asset Quality Ratios:
Nonperforming loans as a percent of total loans at end of period (4)		0.92			1.15			3.44			3.19			3.00
Nonperforming assets as a percent of total assets at end of period		0.54			0.66			0.83			1.04			1.17
Allowance for loan losses as a percent of total loans at end of period		0.46			0.47			1.98			1.77			1.43
Allowance for loan losses as a percent of nonperforming loans at end of period		50.74			40.53			57.63			55.56			47.70
Provision for loan losses to total loans		0.02			0.03			0.03			0.16			0.24
Net charge-offs to average loans outstanding		0.01			0.20			0.17			0.17			0.10
Capital Ratios:
Average equity to average assets		21.95			19.68			23.14			22.38			22.38
Shareholders’ equity or capital to total assets at end of period		24.39			24.07			22.20			22.54			22.25
Regulatory Capital Ratios:
Tangible capital		17.42			17.18			22.42			22.54			22.25
Core capital		17.42			17.18			22.42			22.54			22.25
Risk-based capital		41.92			43.83			82.40			76.81			68.37
Number of banking offices		4			4			1			1			1

(1)	The incorporation of the Company, the issuance of its stock and the acquisition of Frankfort First were completed on March 2, 2005.  Information as of dates and for periods prior to March 2, 2005 are for First Federal of Hazard in mutual form.  In accordance with the purchase method of accounting, the Company’s results of operations for the year ended June 30, 2005 only reflect Frankfort First’s operating results for the four-month period ended June 30, 2005.
(2)	Efficiency ratio represents the ratio of general, administrative and other expenses divided by the sum of net interest income and total other income.
(3)	Represents dividends paid to minority shareholders only as a percent of net earnings.  Does not include dividends waived by First Federal MHC.
(4)	Nonperforming loans consist of nonaccrual loans and accruing loans greater than 90 days delinquent, while nonperforming assets consist of nonperforming loans and real estate acquired through foreclosure.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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

Forward-Looking Statements

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

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

General

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

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

          Our results for the years ended June 30, 2006 and 2005 were significantly affected by our increased asset size due to the Reorganization and the Merger.  Comparisons of current periods to past periods may be less meaningful than most readers would expect, given the radical size difference between Kentucky First and First Federal of Hazard prior to the Reorganization and Merger.

4

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

          As expected, general, administrative and other expense increased following completion of the Reorganization, due primarily to the increased costs associated with operating as a public company and the increased compensation expense associated with adopting and funding our employee stock ownership plan and an equity-based compensation plan, approved by stockholders at the 2005 Annual Meeting of Shareholders. 

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

5

          The Company’s management and the Boards of First Federal of Hazard and First Federal of Frankfort review the allowance for loan losses on a periodic basis.  Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews, volume and mix of the loan portfolio and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to change.  Management considers the economic climate in the Banks’ respective lending areas to be among the factors most likely to have an impact on the level of the required allowance for loan losses.  However, in view of the fact that the local economies are diverse, without significant dependence on a single industry or employer, the economic climate is considered to be stable at June 30, 2006.            

          Nevertheless, management continues to monitor and evaluate factors which could have an impact on the required level of the allowance.  Management watches for national issues that may negatively affect a significant percentage of homeowners in the Banks’ lending areas.  These may include significant increases in unemployment or significant depreciation in home prices.  Management reviews employment statistics periodically when determining the allowance for loan losses and generally finds the unemployment rates in both lending areas to be acceptable in relation to historical trends.  Given the aforementioned indicators of economic stability at June 30, 2006, management does not foresee in the near term, any significant increases in the required allowance for loan losses related to economic factors.  Finally, management has no current plans to alter the type of lending or collateral currently offered, but if such plans change or market conditions result in large concentrations of certain types of loans, such as commercial real estate or high loan-to-value ratio residential loans, management would respond with an increase in the overall allowance for loan losses.

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

Our Operating Strategy

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

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

• broadening and diversifying First Federal of Hazard’s lending activities by providing access to First Federal of Frankfort’s expertise in certain lending products, such as adjustable-rate mortgage loans and home equity loans;

• increasing the yield on First Federal of Hazard’s assets by decreasing its reliance on low yielding government securities and reinvesting these assets into whole loans originated by First Federal of Frankfort, with First Federal of Frankfort retaining servicing on any loans sold.  The Banks have begun such sales and at June 30, 2006, First Federal of Hazard had purchased approximately $8.9 million in loans from First Federal of Frankfort;

6

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

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

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

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

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

Market Risk Analysis

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

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

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

7

          The following table sets forth the interest rate sensitivity of our NPV as of June 30, 2006 in the event of instantaneous and permanent increases and decreases in market interest rates, respectively.  Due to the abnormally low prevailing interest rate environment at June 30, 2006 and 2005, NPV estimates are not made for decreases in interest rates greater than 200 basis points.  All market risk-sensitive instruments presented in this table at June 30, 2006, are held to maturity or available-for-sale.  We have no trading securities.

	June 30, 2006
	Net Portfolio Value (1)										NPV as% of Portfolio Value of Assets (2)
	Change in Rates			Amount		$ Change		% Change			NPV Ratio (3)			Basis Point Changes
	(Dollars in thousands)
First Federal of Hazard		+300	bp	$	21,788		-6,472		-23	%		19.30	%		-402	bp
		+200	bp		24,082		-4,178		-15	%		20.80	%		-252	bp
		+100	bp		26,231		-2,029		-7	%		22.13	%		-119	bp
		0	bp		28,260							23.32	%
		-100	bp		29,824		1,564		6	%		24.17	%		85	bp
		-200	bp		30,701		2,441		9	%		24.57	%		125	bp
First Federal of Frankfort		+300	bp	$	13,163		-5,827		-31	%		10.84	%		-379	bp
		+200	bp		15,597		-3,393		-18	%		12.54	%		-210	bp
		+100	bp		17,627		-1,363		-7	%		13.85	%		-7	bp
		0	bp		18,990							14.64	%
		-100	bp		19,698		708		4	%		14.93	%		30	bp
		-200	bp		19,594		604		3	%		14.68	%		4	bp
Consolidated		+300	bp	$	34,951		-12,299		-26	%		14.92	%		-391	bp
		+200	bp		39,679		-7,571		-16	%		16.52	%		-231	bp
		+100	bp		43,858		-3,392		-7	%		17.85	%		-98	bp
		0	bp		47,250							18.83	%
		-100	bp		49,522		2,272		5	%		19.40	%		57	bp
		-200	bp		50,295		3,045		6	%		19.46	%		63	bp

8

	June 30, 2005
	Net Portfolio Value (1)										NPV as% of Portfolio Value of Assets (2)
	Change in Rates			Amount		$ Change		% Change			NPV Ratio (3)			Basis Point Changes
	(Dollars in thousands)
First Federal of Hazard		+300	bp	$	25,628		-6,955		-21	%		21.01	%		-388	bp
		+200	bp		28,201		-4,382		-13	%		22.53	%		-236	bp
		+100	bp		30,552		-2,031		-6	%		23.83	%		-106	bp
		0	bp		32,583							24.89	%
		-100	bp		33,606		1,023		3	%		25.33	%		45	bp
		-200	bp		33,306		723		2	%		25.03	%		14	bp
First Federal of Frankfort		+300	bp	$	14,968		-7,066		-32	%		11.71	%		-438	bp
		+200	bp		17,792		-4,242		-19	%		13.55	%		-254	bp
		+100	bp		20,211		-1,823		-8	%		15.04	%		-105	bp
		0	bp		22,034							16.09	%
		-100	bp		22,928		894		4	%		16.55	%		46	bp
		-200	bp		23,152		1,118		5	%		16.59	%		50	bp
Consolidated		+300	bp	$	40,596		-14,021		-26	%		16.25	%		-414	bp
		+200	bp		45,993		-8,624		-16	%		17.93	%		-246	bp
		+100	bp		50,763		-3,854		-7	%		19.33	%		-106	bp
		0	bp		54,617							20.39	%
		-100	bp		56,534		1,917		4	%		20.85	%		45	bp
		-200	bp		56,458		1,841		3	%		20.71	%		32	bp

(1)	Net portfolio value represents the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities.
(2)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(3)	NPV Ratio represents the net portfolio value divided by the present value of assets.

          The preceding tables indicate that at June 30, 2006 and 2005, in the event of a sudden and sustained increase in prevailing market interest rates, our NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing interest rates, our NPV would be expected to increase.  The projected decreases in NPV in the event of sudden and sustained increases in prevailing interest rates are within the parameters established by each subsidiary Bank’s Board of Directors.  At all levels represented in the table, the Banks’ NPVs after the rate increase or decrease would be above the “well-capitalized” level based on the current level of assets.

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

9

Statement of Financial Condition

          General.  At June 30, 2006, total assets were $261.9 million, a decrease of $12.0 million, or 4.4%, from the $273.9 million total at June 30, 2005.  The decrease in total assets was comprised primarily of a decrease in cash and cash equivalents and investment and mortgage-backed securities.  At June 30, 2006, total liabilities were $198.1 million, a decrease of $9.9 million, or 4.8% from the $208.0 million total at June 30, 2005.  The decrease in total liabilities was comprised of a decrease in deposits offset by an increase in FHLB Advances.

          Loans.  Our primary lending activity is the origination of loans for the purchase or construction of one- to four-family residential real estate located in our market areas.  As opportunities arise, we also originate church loans, commercial real estate loans, and multi-family and nonresidential real estate loans.  At June 30, 2006, residential real estate loans totaled $139.4 million, or 88.5% of total loans, compared to $134.1 million, or 87.3% of total loans, at June 30, 2005.  We had $2.7 million, or 1.7% of total loans, in construction real estate loans at June 30, 2006, compared to $1.9 million, or 1.3% of total loans at June 30, 2005.  At June 30, 2006, multi-family real estate loans totaled $296,000 or 0.2% of total loans, compared to $321,000, or 0.2% of total loans at June 30, 2005, and nonresidential real estate and other loans totaled $6.4 million, or 4.1% of total loans at June 30, 2006, compared to $7.2 million, or 4.7% of total loans, at June 30, 2005.  We also originate home equity lines of credit and loans secured by deposit accounts, which totaled $8.6 million, or 5.5% of total loans at June 30, 2006, compared to home equity lines of credit and loans secured by deposit accounts of $10.1 million, or 6.5% of total loans at June 30, 2005. 

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

	At June 30,
	2006						2005						2004						2003						2002
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	139,356			88.5	%	$	134,117			87.3	%	$	29,760			86.4	%	$	37,046			88.6	%	$	45,309			86.5	%
Construction		2,703			1.7	%		1,925			1.3	%		130			0.4	%		435			1.0	%		863			1.6	%
Multi-family		296			0.5	%		321			0.2	%		280			0.8	%		297			0.7	%		1,077			2.1	%
Nonresidential and other		6,412			4.1	%		7,202			4.7	%		757			2.2	%		1,141			2.7	%		2,091			4.0	%
Consumer:
Consumer and other		5,211			3.3	%		6,024			3.9	%		0			0.0	%		0			0.0	%		0			0.0	%
Loans on deposits		3,432			2.2	%		4,027			2.6	%		3,523			10.2	%		2,902			7.0	%		3,056			5.8	%
Total loans		157,410			100	%		153,616			100	%		34,450			100	%		41,821			100	%		52,396			100	%
Allowance for loan losses		(724	)					(708	)					(665	)					(720	)					(735	)
Undisbursed construction loans		(1,169	)					(1,016	)					(36	)					(278	)					(-	)
Deferred loan origination fees		(131	)					(180	)					(181	)					(237	)					(248	)
Loans receivable, net	$	155,386					$	151,712					$	33,568					$	40,586					$	51,413

10

          The following table sets forth certain information at June 30, 2006 regarding the dollar amount of loans repricing or maturing during the periods indicated.  The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.  Demand loans having no stated maturity are reported as due in one year or less.

	Real Estate Loans		Consumer Loans		Total Loans
	(In thousands)
One year or less	$	27,617	$	8,643	$	36,260
More than one year to five years		60,249		—		60,249
More than five years		60,901		—		60,901
Total	$	148,767	$	8,643	$	157,410

          As of June 30, 2006, there were $25.6 million fixed-rate and $95.5 million adjustable-rate loans maturing in more than a year.

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

	Year Ended June 30,
	2006			2005			2004
	(In thousands)
Total loans at beginning of year	$	151,712		$	33,568		$	40,586
Loans originated:
Real estate loans:
Residential		28,739			9,295			2,732
Construction		2,197			562			251
Multi-family		—			—			200
Nonresidential and other		973			615			—
Consumer loans		4,962			2,321			1,775
Total loans originated		36,871			12,793			4,958
Loans acquired – Frankfort First		—			119,526			—
Deduct:
Real estate loan principal repayments		(30,374	)		(13,450	)		(11,882	)
Loan sales		(2,712	)		(520	)		—
Transfer to real estate acquired through foreclosure		(101	)		(206	)		(171	)
Other		(10	)		1			77
Net loan activity		3,674			118,144			(7,018	)
Total loans at end of period	$	155,386		$	151,712		$	33,568

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

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

11

          At June 30, 2006, the allowance for loans losses totaled $724,000, or 0.46% of total loans, compared to $708,000, or 0.47% of total loans at June 30, 2005.  Nonperforming loans, which consist of all loans 90 days or more past due, totaled $1.4 million at June 30, 2006 and $1.7 million at June 30, 2005.  At June 30, 2006, all of these loans consisted of loans secured by single-family residences.  The allowance for loans losses totaled 50.7% and 40.5% of nonperforming loans at June 30, 2006 and 2005, respectively.  In determining the allowance for loan losses at any point in time, management and the boards of directors of the subsidiary Banks apply a systematic process focusing on the risk of loss in the portfolio.  First, the loan portfolio is segregated by loan types to be evaluated collectively and loan types to be evaluated individually.  Delinquent multi-family and nonresidential loans are evaluated individually for potential impairment.  Second, the allowance for loan losses is evaluated using historic loss experience adjusted for significant factors by applying these loss percentages to the loan types to be evaluated collectively in the portfolio.  To the best of management’s knowledge, all known and probable incurred losses that can be reasonably estimated have been recorded at June 30, 2006.  Although management believes that its allowance for loan losses conforms with generally accepted accounting principles based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which would adversely affect our results of operations.

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

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

	Year Ended June 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Allowance at beginning of period	$	708		$	665		$	720		$	735		$	665
Allowance acquired – Frankfort First		—			133			—			—			—
Provision for loan losses		32			53			10			66			123
Charge-offs:
Real estate loans		(16	)		(145	)		(65	)		(81	)		(53	)
Consumer loans		—			—			—			—			—
Total charge-offs		(16	)		(145	)		(65	)		(81	)		(53	)
Recoveries:
Real estate loans		—			2			—			—			—
Consumer loans		—			—			—			—			—
Total recoveries		—			2			—			—			—
Net charge-offs	$	(16	)	$	(143	)	$	(65	)	$	(81	)	$	(53	)
Allowance at end of period	$	724		$	708		$	665		$	720		$	735
Allowance to nonperforming loans		50.74	%		40.53	%		57.63	%		55.56	%		47.70	%
Allowance to total loans outstanding at end of period		0.46	%		0.47	%		1.98	%		1.77	%		1.43	%
Net charge-offs to average loans outstanding during the period		0.01	%		0.20	%		0.17	%		0.17	%		0.10	%

12

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

	At June 30,
	2006								2005								2004
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Real Estate Loans:
Residential	$	633		87.4	%		88.5	%	$	626		88.3	%		87.5	%	$	574		86.4	%		86.4	%
Construction		12		1.7			1.7			7		1.1			1.1			3		0.4			0.4
Multi-family		9		1.3			0.2			1		0.2			0.2			5		0.8			0.8
Nonresidential & other		30		4.1			4.1			31		4.4			4.7			15		2.2			2.2
Consumer Loans:
Consumer and other		24		3.3			3.3			26		3.6			3.9			0		0.0			0.0
Loans secured by deposits		16		2.2			2.2			17		2.4			2.6			68		10.2			10.2
Total allowance for loan losses	$	724		100.0	%		100.0	%	$	708		100.0	%		100.0	%	$	665		100.0	%		100.0	%

	At June 30,
	2003								2002
	Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category To Total Loans
	(Dollars in thousands)
Real Estate Loans:
Residential	$	638		88.6	%		88.6	%	$	636		86.5	%		86.5	%
Construction		7		1.1			1.1			12		1.7			1.7
Multi-family		5		0.7			0.7			15		2.1			2.1
Nonresidential & other		20		2.7			2.7			29		2.9			3.9
Consumer Loans:
Consumer and other		0		0.0			0.0			0		0.0			0.0
Loans secured by deposits		50		6.9			6.9			43		5.8			5.8
Total allowance for loan losses	$	720		100.0	%		100.0	%	$	735		100.0	%		100.0	%

13

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

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

          Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.  We consider one- to four-family mortgage loans and deposit loans to be homogeneous and collectively evaluate them for impairment.  Other loans are evaluated for impairment on an individual basis.  At June 30, 2006, no loans were considered impaired.

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

	Year Ended June 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans	$	819		$	874		$	989		$	1,176		$	1,417
Deposit loans		—			—			—			—			—
Total		819			874			989			1,176			1,417
Accruing loans past due 90 days or more:
Real estate loans		608			873			165			120			124
Deposit loans		—			—			—			—			—
Total of accruing loans past due 90 days or more		608			873			165			120			124
Total nonperforming loans		1,427			1,747			1,154			1,296			1,541
Real estate acquired through foreclosure		51			60			—			114			20
Total nonperforming assets	$	1,478		$	1,807		$	1,154		$	1,410		$	1,561
Total nonperforming loans to total loans		0.92	%		1.15	%		3.44	%		3.19	%		3.00	%
Total nonperforming loans to total assets		0.54	%		0.64	%		0.83	%		0.95	%		1.16	%
Total nonperforming assets to total assets		0.56	%		0.66	%		0.83	%		1.04	%		1.17	%

          Interest income that would have been recorded for the years ended June 30, 2006, 2005 and 2004, had nonaccrual loans been current according to their original terms amounted to $82,000, $71,000 and $76,000, respectively.  Income related to nonaccrual loans included in interest income for the years ended June 30, 2006, 2005 and 2004 amounted to $74,000, $49,000 and $96,000, respectively.

          At June 30, 2006, nonaccrual loans consisted of 24 single-family residential real estate loans, the largest of which had an outstanding balance of $176,000.  Management believes all nonperforming loans are adequately collateralized; however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future.

14

          Federal regulations require us to regularly review and classify our assets.  In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention.  Special mention assets totaled $772,000 and $220,000 at June 30, 2006 and 2005, respectively.

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

	At June 30,
	2006		2005		2004
	(In thousands)
Substandard assets	$	1,698	$	1,933	$	1,158
Doubtful assets		—		—		—
Loss assets		—		—		—
Total classified assets	$	2,470	$	2,153	$	1,158

          Substandard assets at June 30, 2006, consisted of $819,000 of nonaccrual loans, $828,000 of other loans and $51,000 of real estate owned.  Substandard assets at June 30, 2005 consisted of $874,000 of nonaccrual loans, $999,000 of other loans and $60,000 of real estate owned, while substandard assets at 2004 consisted almost entirely of nonaccrual loans. 

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

	At June 30,
	2006				2005
	30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due
	(In thousands)
Real estate loans	$	2,183	$	1,796	$	2,146	$	1,090
Deposit loans		—		—		—		—
Total	$	2,183	$	1,796	$	2,146	$	1,090

          Other than disclosed above, there are no other loans at June 30, 2006 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

15

          Securities.  Our securities portfolio consists primarily of U.S. Government agency obligations as well as mortgage-backed securities with maturities of 30 years or less.  Investment and mortgage-backed securities totaled $77.4 million at June 30, 2006, a decrease of $9.4 million, or 10.8%, compared to the $86.8 million total at June 30, 2005.  The reduction in these securities resulted from maturities, calls and prepayments of investments and mortgage-backed securities totaling $9.0 million.  All of our mortgage-backed securities were issued by  Ginnie Mae, Fannie Mae or Freddie Mac.

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

	At June 30,
	2006				2005				2004
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Available for sale securities:
U.S. Government agency obligations	$	12,999	$	12,211	$	12,998	$	12,686	$	12,998	$	12,391
Mortgage-backed securities		1,104		1,079		1,867		1,861		—		—
Total	$	14,103	$	13,290	$	14,865	$	14,547	$	12,998	$	12,391
Held to maturity securities:
U.S. Government agency obligations	$	45,844	$	43,919	$	50,842	$	49,844	$	50,840	$	49,401
Certificates of deposit		100		100		100		100		—		—
Mortgage-backed securities		18,185		17,028		21,347		21,168		22,983		22,103
Total	$	64,129	$	61,047	$	72,289	$	71,112	$	73,823	$	71,504

          At June 30, 2006 and 2005, we did not own any securities, other than U.S. Government agency securities, that had an aggregate book value in excess of 10% of our equity at that date.

16

          The following table sets forth the maturities and weighted average yields of securities at June 30, 2006.  At June 30, 2006, U.S. Government agency securities with adjustable rates totaled $9.0 million.

	One Year or Less					More Than One Year to Five Years					More Than Five Years to Ten Years
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Available for sale securities:
U.S. Government agency obligations	$	—		—	%	$	12,999		3.44	%	$	—		—	%
Mortgage-backed securities		22		4.35			145		4.35			210		4.35
Total  available for sale securities	$	22				$	13,144				$	210
Held to maturity securities:
Certificates of deposit	$	100		4.04	%	$	—		—	%	$	—		—	%
U.S. Government agency obligations		2,000		2.25			34,847		3.28			4,998		4.00
Mortgage-backed securities		913		4.21			4,048		4.21			6,084		4.21
Total held-to-maturity securities	$	3,013				$	38,895				$	11,082

	More Than Ten Years					Total Investment Portfolio
	Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
		(Dollars in thousands)
Available for sale securities:
U.S. Government agency obligations	$	—		—	%	$	12,999	$	12,211		3.44	%
Mortgage-backed securities		727		4.35			1,104		1,079		4.35
Total  available for sale securities	$	727				$	14,103	$	13,290
Held to maturity securities:
Certificates of deposit	$	—		—	%	$	100	$	100		4.04	%
U.S. Government agency obligations		3,999		2.86			45,844		43,919		3.28
Mortgage-backed securities		7,140		5.50			18,185		17,028		4.30
Total held-to-maturity securities	$	11,139				$	64,129	$	61,047

17

          Other Assets.  Other assets at June 30, 2006 include goodwill and other intangible assets of $15.3 million, which was a sole result of the Company’s acquisition of Frankfort First and bank owned life insurance policies with a carrying value of  $2.2 million and $2.1 million at June 30, 2006 and 2005, respectively, both of which First Federal of Frankfort is the owner and beneficiary.  Previously, the company had no such policies.  Both subsidiary Banks are members and stockholders of the Federal Home Loan Bank of Cincinnati (“FHLB”).  FHLB stock, at cost, totaled $5.3 million and $5.0 million at June 30, 2006 and 2005, respectively. 

          Deposits.  Our primary source of funds is retail deposit accounts held primarily by individuals within our market areas.  Deposits totaled $141.2 million at June 30, 2006, a decrease of $13.8 million or 8.9%, compared to the $155.0 million total at June 30, 2005.  Although management generally strives to maintain a moderate rate of growth in deposits, primarily through marketing and pricing strategies, market conditions and competition may curtail growth opportunities.  Rather than striving to offer the highest interest rate on deposit products in our market area, management of the Banks offer deposit products that fit the Banks’ funding strategies.

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

	At June 30,
	2006		2005		2004
	(In thousands)
Certificate of deposit accounts	$	90,782	$	96,771	$	55,230
Demand, transaction and passbook savings accounts		50,456		58,273		43,521
Total	$	141,238	$	155,044	$	98,751

          The following table indicates the amount of certificate of deposit accounts with balances equal to or greater than $100,000, by time remaining until maturity at June 30, 2006.

Maturity Period	Certificates of Deposit
		(In thousands)
Three months or less	$	3,693
Over three months through six months		5,148
Over six months through twelve months		9,081
Over twelve months		8,453
Total	$	26,375

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

	At June 30,
Rate	2006		2005		2004
	(In thousands)
1.00 -  1.99%	$	3,192	$	12,939	$	13,756
2.00 -  2.99		9,350		41,977		24,745
3.00 -  3.99		39,763		29,884		10,499
4.00 -  4.99		30,690		9,771		1,548
5.00 -  5.99		7,783		1,838		2,296
6.00 -  6.99		4		75		483
7.00 -  7.99		—		287		1,903
Total	$	90,782	$	96,771	$	55,230

18

          The following table sets forth the amount and maturities of certificate accounts at June 30, 2006.

	Amount Due								Total		Percentage of Total Certificate Accounts
	Less Than One Year		More Than One Year to Two Years		More Than Two Years to Three Years		More Than Three Years
	(Dollars in thousands)
1.00 –1.99%	$	3,170	$	1	$	13	$	8	$	3,192		3.52	%
2.00 – 2.99		7,959		503		778		110		9,350		10.30
3.00 – 3.99		22,597		7,057		8,124		1,985		39,763		43.80
4.00 – 4.99		24,345		4,923		1,319		103		30,690		33.81
5.00 – 5.99		3,396		1,849		111		2,427		7,783		8.57
6.00 – 6.99		4		—		—		—		4		0.00
7.00 – 7.99		—		—		—		—		—		—
Total	$	61,471	$	14,333	$	10,345	$	4,633	$	90,782		100.00	%

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

	Year Ended June 30,
	2006					2005					2004
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
	(Dollars in thousands)
Noninterest-bearing demand	$	742		0.00	%	$	217		0.00	%	$	—		0.00	%
Interest-bearing demand		13,377		2.13	%		3,976		1.47	%		—		0.00	%
Passbook		44,549		1.18	%		50,076		1.23	%		43,696		1.27	%
Time		94,440		3.41	%		69,880		2.53	%		57,292		2.81	%

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

	Year Ended June 30,
	2006			2005		2004
	(In thousands)
Beginning balance	$	155,044		$	98,751	$	104,784
Increase (decrease) before interest credited		(17,834	)		53,843		(8,199	)
Interest credited		4,028			2,450		2,166
Net increase (decrease) in deposits		(13,806	)		56,293		(6,033	)
Ending balance	$	141,238		$	155,044	$	98,751

          Borrowings.  Advances from the Federal Home Loan Bank of Cincinnati amounted to $54.8 million and $51.0 million at June 30, 2006 and 2005, respectively.

19

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

	Year Ended June 30,
	2006			2005			2004
	(Dollars in thousands)
Balance outstanding at end of period	$	54,849		$	50,985		$	9,000
Maximum amount of advances outstanding at any month end during the period	$	54,849		$	52,291		$	9,000
Average advances outstanding during the period	$	54,696		$	23,631		$	1,940
Weighted average interest rate during the period		4.02	%		3.82	%		2.78	%
Weighted average interest rate at end of period		6.04	%		5.58	%		2.96	%

          Shareholders’ Equity.  Shareholders’ equity totaled $63.9 million at June 30, 2006, a $2.1 million or 3.1%, decrease compared to June 30, 2005.  The reduction resulted primarily from previously announced repurchases of the Company’s common stock.

          The Banks are required to maintain minimum regulatory capital pursuant to federal regulations.  At June 30, 2006, both First Federal of Hazard’s and First Federal of Frankfort’s regulatory capital substantially exceeded all minimum regulatory capital requirements.  Management is not aware of any recent event that would cause this classification to change.

Results of Operations for the Years Ended June 30, 2006 and 2005

          General.  Our net earnings totaled $1.6 million for the fiscal year ended June 30, 2006, a decrease of $41,000, or 2.5%, from the net earnings recorded for the fiscal year ended June 30, 2005.  The decline resulted primarily from a post-merger increase in general, administrative and other expense, partially offset by increases in net interest income.  Earnings in fiscal 2005 also reflect a non-recurring reversal of a previously pledged charitable donation of $200,000.  Since acquiring Frankfort First on March 2, 2005, the Company has experienced large increases in interest income, interest expense and general, administrative, and other expense.

          Interest Income.  Total interest income for the fiscal year ended June 30, 2006 totaled $12.7 million, an increase of $4.6 million, or 55.9%, compared to the fiscal year ended June 30, 2005.  The increase in interest income primarily reflects the impact of the acquisition of Frankfort First. Also contributing to the growth in interest income was an increase of 58 basis points in the average yield on interest-earning assets, from 4.57% for fiscal 2005 to 5.15% for fiscal 2006. 

          Interest income on loans increased by $4.6 million, or 100.3%, for the fiscal year ended June 30, 2006, compared to fiscal 2005, due primarily to a $80.7 million, or 111.8%, increase in the average balance of loans outstanding, which was partially offset by a decline of 34 basis points in the average yield on loans to 6.02% for fiscal 2006.  Interest income on mortgage-backed securities decreased by $92,000 during the fiscal year ended June 30, 2006, due primarily to a $2.1 million decrease in the average balance outstanding.  Interest income on investment securities decreased by $45,000, or 2.1%, during the fiscal year ended June 30, 2006, due primarily to a $3.7 million, or 5.7%, decrease in the average balance outstanding, while the average yield increased by 13 basis points from fiscal 2005.  Interest income on other interest-earning assets increased by $86,000, or 18.9%, during the fiscal year ended June 30, 2006, due primarily to a 202 basis point increase in the average yield year to year, although the average balance outstanding decreased by $6.5 million, or 34.8%.

          Interest Expense.  Interest expense totaled $6.2 million for the fiscal year ended June 30, 2006, an increase of $2.9 million, or 85.7%, from interest expense of $3.4 million for fiscal 2005.  The increase resulted from a 73 basis point increase in the average cost of funds, from 2.27% for fiscal 2005 to 3.00% for fiscal 2006, and a $60.0 million, or 40.6%, increase in the average balance of deposits and borrowings outstanding for the fiscal year ended June 30, 2006.  Interest expense on deposits totaled $4.0 million for the fiscal year ended June 30, 2006, an increase of $1.6 million, or 64.4%, from fiscal 2005.  This increase was a result of an increase in the average balance of deposits outstanding of $29.0 million or 23.3% for fiscal 2006 and a 66 basis point increase in the average cost of deposits to 2.63% for fiscal 2006.  Interest expense on borrowings totaled $2.2 million for the fiscal year ended June 30, 2006, an increase of $1.3 million over fiscal 2005.  Average borrowings increased during the fiscal year ended June 30, 2006, by $31.1 million primarily as a result of the acquisition of Frankfort First.  The average rate paid on borrowings increased 20 basis points to 4.02% for fiscal 2006. 

20

          Net Interest Income.  As a result of the aforementioned changes in interest income and interest expense, net interest income increased by $1.7 million, or 35.0%, during the fiscal year ended June 30, 2006, compared to fiscal 2005.  The average interest rate spread decreased from 2.30% for the fiscal year ended June 30, 2005 to 2.15% for fiscal 2006.  The net interest margin decreased to 2.63% for the fiscal year ended June 30, 2006 from 2.69% for fiscal 2005.

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

	Year Ended June 30,
	2006							2005
	Average Balance		Interest And Dividends		Yield/ Cost			Average Balance		Interest And Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	152,832	$	9,199		6.02	%	$	72,154	$	4,592		6.36	%
Mortgage-backed securities		21,150		890		4.21			23,289		982		4.22
Investment securities		60,751		2,078		3.42			64,441		2,123		3.29
Other interest-earning assets		12,086		542		4.48			18,544		456		2.46
Total interest-earning assets		246,819		12,709		5.15			178,428		8,153		4.57
Noninterest-earning assets		22,727							7,067
Total assets	$	269,546						$	185,495
Interest-bearing liabilities:
Demand deposits	$	13,377		285		2.13		$	3,976		35		0.88
Noninterest-Bearing demand deposits		742		—		0.00			217		—		0.00
Savings		44,549		527		1.18			50,076		271		0.54
Certificates of deposit		94,440		3,216		3.41			69,880		2,144		3.07
Total deposits		153,108		4,028		2.63			124,149		2,450		1.97
Borrowings		54,696		2,199		4.02			23,631		903		3.82
Total interest-bearing liabilities		207,804		6,227		3.00			147,780		3,353		2.27
Noninterest-bearing liabilities		2,577							1,207
Total liabilities		210,381							148,987
Shareholders’ equity		59,165							36,508
Total liabilities and shareholders’ equity	$	269,546						$	185,495
Net interest income/average yield			$	6,482		2.15	%			$	4,800		2.30	%
Net interest margin						2.63	%						2.69	%
Average interest-earning assets to average interest-bearing liabilities						118.78	%						120.74	%

21

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

	Year Ended June 30, 2006 Compared To Year Ended June 30, 2005
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	$	4,842		$	(235	)	$	4,607
Mortgage-backed securities		(90	)		(2	)		(92	)
Investment securities		(138	)		93			(45	)
Interest-bearing deposits and other		(63	)		149			86
Total interest income		4,551			5			4,556
Interest expense:
Deposits		762			816			1,578
Borrowings		1,247			49			1,296
Total interest expense		2,009			865			2,874
Increase in net interest income	$	2,542		$	(860	)	$	1,682

          Provision for Losses on Loans.  A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments and other factors related to the collectibility of the loan portfolio.  Based upon an analysis of these factors, management recorded a provision for losses on loans totaling $32,000 for the fiscal year ended June 30, 2006, a decrease of $21,000 compared to fiscal 2005.  The provision recorded during the fiscal year ended June 30, 2006 generally reflects management’s perception of the risk prevalent in the economy integrated, with the overall decline in the level of nonperforming loans year over year.  Management believes all nonperforming loans are adequately collateralized; however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. 

          Other  Income.  Other operating income decreased $47,000, to $216,000 for the fiscal year ended June 30, 2006, due primarily to the cancellation of a charitable contribution pledge of $200,000 in fiscal 2005.  The reversal of expense in the previous year was unusual and is not expected to recur.  Other operating income is generally comprised of service charges and fees charged on loan and deposit accounts. 

          General, Administrative and Other Expense.  General, administrative and other expense increased $1.8 million or 73.6% to $4.4 million for the fiscal year ended June 30, 2006 compared to fiscal 2005.  The increase in general, administrative and other expense is primarily attributed to a complete fiscal year of operations including Frankfort First and the costs of operating a public company as well as expenses associated with the ESOP and the Equity Incentive Plan, which was approved at the 2005 Annual Meeting.

          Federal Income Taxes. The provision for federal income tax decreased $149,000 or 17.1% from $872,000 for the fiscal year ended June 30, 2005 to $723,000 for the fiscal year ended June 30, 2006, as a result of lower earnings before income taxes of $190,000, or 7.6%.  Effective tax rates for the years ended June 30, 2006 and 2005 were 31.3% and 34.9%, respectively.

22

Results of Operations for the Years Ended June 30, 2005 and 2004

          General.  Our net earnings totaled $1.6 million for the fiscal year ended June 30, 2005, an increase of $868,000, or 114.1%, from the $761,000 of net earnings recorded for the fiscal year ended June 30, 2004.  The increase in net earnings was primarily attributable to an increase in net interest income of $1.4 million and an increase in other income of $298,000, which were partially offset by increases in general, administrative and other expense of $326,000, an increase in the provision for losses on loans of $43,000 and an increase in the provision for federal income taxes of $480,000.

          Interest Income.  Total interest income for the fiscal year ended June 30, 2005 totaled $8.2 million, an increase of $2.6 million, or 45.6%, compared to the fiscal year ended June 30, 2004.  The increase in interest income primarily reflects the impact of the acquisition of Frankfort First, which resulted in an increase of $45.1 million in average interest-earning assets for fiscal 2005 compared to fiscal 2004. Also contributing to the growth in interest income was an increase of 37 basis points in the average yield on interest-earning assets, from 4.20% for fiscal 2004 to 4.57% for fiscal 2005. 

          Interest income on loans increased by $1.8 million, or 64.4%, for the fiscal year ended June 30, 2005, compared to fiscal 2004, due primarily to a $34.5 million, or 91.7%, increase in the average balance of loans outstanding, which was partially offset by a decline of 106 basis points in the average yield on loans to 6.36% for fiscal 2005.  Interest income on mortgage-backed securities increased by $586,000 during the fiscal year ended June 30, 2005, due primarily to a $14.7 million increase in the average balance outstanding despite a decrease in the average yield of 37 basis points from fiscal 2004.  Interest income on investment securities decreased by $69,000, or 3.1%, during the fiscal year ended June 30, 2005, due primarily to a $3.6 million, or 5.3%, decrease in the average balance outstanding, while the average yield increased by 7 basis points from fiscal 2004.  Interest income on other interest-earning assets increased by $237,000, or 108.2%, during the fiscal year ended June 30, 2005.  The increase was due primarily to a 131 basis point increase in the average yield year to year, although the average balance outstanding decreased by $476,000, or 2.5%.

          Interest Expense.  Interest expense totaled $3.4 million for the fiscal year ended June 30, 2005, an increase of $1.1 million, or 51.0%, from interest expense of $2.2 million for fiscal 2004.  The increase resulted from an 11 basis point increase in the average cost of funds, to 2.27% for fiscal 2005, and a $44.9 million, or 43.6%, increase in the average balance of deposits and borrowings outstanding for the fiscal year ended June 30, 2005.  Interest expense on deposits totaled $2.5 million for the fiscal year ended June 30, 2005, an increase of $284,000, or 13.1%, from fiscal 2004.  This increase was a result of an increase in the average balance of deposits outstanding of $23.2 million or 22.9% for fiscal 2005 despite a 17 basis point decrease in the average cost of deposits to 1.97% for fiscal 2005.  Interest expense on borrowings totaled $903,000 for the fiscal year ended June 30, 2005, an increase of $849,000 over fiscal 2004.  Average borrowings increased during the fiscal year ended June 30, 2005, by $21.7 million primarily as a result of the acquisition of Frankfort First.  The average rate paid on borrowings increased 104 basis points to 3.82% for fiscal 2005. 

          Net Interest Income.  As a result of the aforementioned changes in interest income and interest expense, net interest income increased by $1.4 million, or 42.0%, during the fiscal year ended June 30, 2005, compared to fiscal 2004.  The average interest rate spread increased to 2.30% for the fiscal year ended June 30, 2005 from 2.04% for fiscal 2004.  The net interest margin increased to 2.69% for the fiscal year ended June 30, 2005 from 2.54% for fiscal 2004.

23

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

	Year Ended June 30,
	2005							2004
	Average Balance		Interest And Dividends		Yield/ Cost			Average Balance		Interest And Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	72,154	$	4,592		6.36	%	$	37,647	$	2,794		7.42	%
Mortgage-backed securities		23,289		982		4.22			8,625		396		4.59
Investment securities		64,441		2,123		3.29			68,048		2,192		3.22
Other interest-earning assets		18,544		456		2.46			19,020		219		1.15
Total interest-earning assets		178,428		8,153		4.57			133,340		5,601		4.20
Noninterest-earning assets		7,067							1,591
Total assets	$	185,495						$	134,931
Interest-bearing liabilities:
Deposits	$	124,149		2,450		1.97		$	100,988		2,166		2.14
Borrowings		23,631		903		3.82			1,940		54		2.78
Total interest-bearing liabilities		147,780		3,353		2.27			102,928		2,220		2.16
Noninterest-bearing liabilities		1,207							785
Total liabilities		148,987							103,713
Shareholders’ equity		36,508							31,218
Total liabilities and shareholders’ equity	$	185,495						$	134,931
Net interest income/average yield			$	4,800		2.30	%			$	3,381		2.04	%
Net interest margin						2.69	%						2.54	%
Average interest-earning assets to average interest-bearing liabilities						120.74	%						129.55	%

(1) Consists only of retained earnings at June 30, 2004.

24

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

	Year Ended June 30, 2005 Compared To Year Ended June 30, 2004
	Increase (Decrease) Due to
	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	$	2,128		$	(330	)	$	1,798
Mortgage-backed securities		615			(29	)		586
Investment securities		(122	)		53			(69	)
Interest-bearing deposits and other		(5	)		242			237
Total interest income		2,616			(64	)		2,552
Interest expense:
Deposits		437			(153	)		284
Borrowings		821			28			849
Total interest expense		1,258			(125	)		1,133
Increase in net interest income	$	1,358		$	61		$	1,419

          Provision for Losses on Loans.  A provision for losses on loans is charged to earnings to maintain the total allowance for loan losses at a level calculated by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments and other factors related to the collectibility of the loan portfolio.  Based upon an analysis of these factors, management recorded a provision for losses on loans totaling $53,000 for the fiscal year ended June 30, 2005, an increase of $43,000 compared to fiscal 2004.  The provision recorded during the fiscal year ended June 30, 2005 generally reflects management’s perception of the risk prevalent in the economy integrated with the overall decline in the level of the loan portfolio and the level of charge-off’s recorded in fiscal 2005.  Management believes all nonperforming loans are adequately collateralized; however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. 

          Other Income (Loss).  Total other income increased $298,000, to $263,000 for the fiscal year ended June 30, 2005, due primarily to the cancellation of a charitable contribution pledge of $200,000, previously charged to expense in the fiscal year ended June 30, 2004.  Other operating income is generally comprised of service charges and fees charged on loan and deposit accounts.

          General, Administrative and Other Expense.  General, administrative and other expense increased $326,000 or 14.9% to $2.5 million for the fiscal year ended June 30, 2005 compared to fiscal 2004.  The increase in general, administrative and other expense is primarily attributed to an increase in other operating expenses which increased $151,000 or 55.1% to $425,000 for fiscal year 2005 compared to fiscal 2004.  The increase is primarily related to the normal operating expenses of Frankfort First and four months additional recurring expenses for the Company.

          Federal Income Taxes.  The provision for federal income tax increased $480,000 or 122.4% from $392,000 for the fiscal year ended June 30, 2004 to $872,000 for the fiscal year ended June 30, 2005, as a result of higher earnings before income taxes of $1.3 million, or 116.9%.  Effective tax rates for the years ended June 30, 2005 and 2004 were 34.9% and 34.0%, respectively.

25

Liquidity and Capital Resources

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

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

          Our most liquid assets are cash, federal funds sold and interest-bearing deposits.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At June 30, 2006 and June 30, 2005, cash and cash equivalents totaled $2.3 million and $8.4 million respectively.  Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $12.2 million and $12.7 million at June 30, 2006 and 2005, respectively.  At June 30, 2006, we had the ability to borrow a total $95.4 million from the FHLB, of which $52.8 million (net of premium) was outstanding.

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

          Our primary investing activities are the origination of loans and the purchase of investment securities.  In fiscal 2006, we originated $34.2 million of loans.  In fiscal 2005, we originated $12.2 million of loans.  In fiscal 2004, we originated $5.0 million of loans and purchased $111.6 million of investment and mortgage-backed securities.  During fiscal 2006, these activities were funded primarily by proceeds from the principal repayments on loans of $30.4 million and maturities of investment securities and mortgage-backed securities of $9.0 million.  During fiscal 2005, these activities were funded primarily by the proceeds from the principal repayments on loans of $13.5 million and maturities of securities of $1.9 million.

          Financing activities consist primarily of activity in deposit accounts and in FHLB advances.  In fiscal 2005, the net proceeds from the issuance of common stock contributed $12.7 million to the Company.  We experienced a net decrease in total deposits of $13.8 million, $15.2 million and $6.0 million for the years ended June 30, 2006, 2005 and 2004, respectively.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.  While we generally manage the pricing of our deposits to be competitive and to increase core deposit relationships, during fiscal 2006, management chose to emphasize maintaining existing deposits over attracting new deposits.

26

Commitments and Contractual Obligations

          At June 30, 2006, we had $1.0 million in mortgage commitments.  Certificates of deposit due within one year of June 30, 2006 totaled $61.5 million, or 43.5% of total deposits.  If these deposits do not remain with us, we might be required to seek other sources of funds, including FHLB advances or other certificates of deposit.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2006.  We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

          The following table sets forth our contractual obligations and loan commitments as of June 30, 2006.

	Total Amounts Committed		Less Than One Year		One to Three Years		Four to Six Years
	(In thousands)
Federal Home Loan Bank advances (1)	$	52,823	$	18,649	$	4,040	$	30,134
One to four family residential real estate		1,045		1,045		—		—
Unused lines of credit		9,111		9,111		—		—
Undisbursed loans		1,169		1,169		—		—
Total commitments	$	64,148	$	29,974	$	4,040	$	30,134

(1) Net of premium on FHLB borrowings

          For the year ended June 30, 2006, other than loan commitments, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Impact of Inflation and Changing Prices

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

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Kentucky First Federal Bancorp

We have audited the accompanying consolidated statements of financial condition of Kentucky First Federal Bancorp as of June 30, 2006 and 2005, and the related consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2006.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kentucky First Federal Bancorp as of June 30, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Cincinnati, Ohio

September 1, 2006

28

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

June 30, 2006 and 2005
(In thousands, except share data)

	2006			2005
ASSETS
Cash and due from banks	$	832		$	1,060
Interest-bearing deposits in other financial institutions		1,462			7,298
Cash and cash equivalents		2,294			8,358
Investment securities available for sale – at market		12,211			12,686
Investment securities held to maturity, at amortized cost-approximate fair value of $44,019 and $49,944 at  June 30, 2006 and 2005, respectively		45,944			50,942
Mortgage-backed securities available for sale - at market		1,079			1,861
Mortgage-backed securities held to maturity, at amortized cost-approximate fair value of $17,028 and $21,168 at June 30, 2006 and 2005, respectively		18,185			21,347
Loans receivable – net		155,386			151,712
Real estate acquired through foreclosure - net		51			60
Office premises and equipment - at depreciated cost		2,857			2,977
Federal Home Loan Bank stock - at cost		5,264			4,981
Accrued interest receivable		868			916
Bank-owned life insurance		2,175			2,095
Goodwill and other intangible assets - net		15,250			15,398
Prepaid expenses and other assets		252			211
Prepaid federal income taxes		125			371
Total assets	$	261,941		$	273,915
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	141,238		$	155,044
Advances from the Federal Home Loan Bank		54,849			50,985
Advances by borrowers for taxes and insurance		369			332
Accrued interest payable		253			177
Deferred federal income taxes		484			384
Other liabilities		867			1,054
Total liabilities		198,060			207,976
Commitments		—			—
Shareholders’ equity
Preferred stock, 500,000 shares authorized, $.01 par value; no shares issued		—			—
Common stock, 20,000,000 shares authorized, $.01 par value; 8,596,064 shares issued		86			86
Additional paid-in capital		36,769			36,714
Retained earnings - restricted		32,761			32,719
Shares acquired by stock benefit plans		(4,845	)		(3,370	)
Treasury shares at cost, 32,589 shares at June 30, 2006		(354	)		—
Accumulated comprehensive loss, unrealized losses on securities designated as available for sale - net of related tax benefits		(536	)		(210	)
Total shareholders’ equity		63,881			65,939
Total liabilities and shareholders’ equity	$	261,941		$	273,915

The accompanying notes are an integral part of these statements.

29

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF EARNINGS

For the years ended June 30, 2006, 2005 and 2004
(In thousands, except share data)

	2006		2005			2004
Interest income
Loans	$	9,199	$	4,592		$	2,794
Mortgage-backed securities		890		982			396
Investment securities		2,078		2,123			2,192
Interest-bearing deposits and other		542		456			219
Total interest income		12,709		8,153			5,601
Interest expense
Deposits		4,028		2,450			2,166
Borrowings		2,199		903			54
Total interest expense		6,227		3,353			2,220
Net interest income		6,482		4,800			3,381
Provision for losses on loans		32		53			10
Net interest income after provision for losses on loans		6,450		4,747			3,371
Other income (loss)
Earnings on bank-owned life insurance		80		25			—
Gain on sale of loans		24		31			—
Gain (loss) on sale of investment securities		—		—			5
Gain (loss) on sale of real estate acquired through foreclosure		5		(9	)		(61	)
Gain on sale of office premises and equipment		13		—			—
Other operating		94		216			21
Total other income (loss)		216		263			(35	)
General, administrative and other expense
Employee compensation and benefits		3,014		1,688			1,620
Occupancy and equipment		364		210			132
Franchise and other taxes		186		104			83
Data processing		125		67			32
Other operating		666		440			316
Total general, administrative and other expense		4,355		2,509			2,183
Earnings before income taxes		2,311		2,501			1,153
Federal income taxes
Current		455		309			364
Deferred		268		563			28
Total federal income taxes		723		872			392
NET EARNINGS	$	1,588	$	1,629		$	761
EARNINGS PER SHARE
Basic	$	0.19		N/A			N/A
Diluted	$	0.19		N/A			N/A

The accompanying notes are an integral part of these statements.

30

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended June 30, 2006, 2005 and 2004
(In thousands)

	2006			2005			2004
Net earnings	$	1,588		$	1,629		$	761
Other comprehensive income (loss), net of tax-related effects:
Unrealized holding gains (losses) on securities during the year, net of taxes (benefits) of $(168), $98, and $(204) in 2006, 2005 and 2004, respectively		(326	)		190			(397	)
Reclassification adjustment for realized gains included in earnings, net of taxes of $2		—			—			(3	)
Comprehensive income	$	1,262		$	1,819		$	361
Accumulated comprehensive loss	$	(536	)	$	(210	)	$	(400	)

The accompanying notes are an integral part of these statements.

31

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended June 30, 2006, 2005 and 2004
(In thousands, except share data)

	Common stock		Additional paid-in capital		Retained earnings			Shares acquired by stock benefit plans			Treasury shares			Unrealized gains (losses) on securities designated as available for sale			Total
Balance at July 1, 2003	$	—	$	—	$	30,682		$	—		$	—		$	—		$	30,682
Net earnings for the year ended June 30, 2004		—		—		761			—			—			—			761
Unrealized losses on securities designated as available for sale, net of related tax effects		—		—		—			—			—			(400	)		(400	)
Balance at July 1, 2004		—		—		31,443			—			—			(400	)		31,043
Conversion to stock form of ownership and issuance of shares in connection with Frankfort First Federal Bancorp acquisition		86		36,714		—			(3,370	)		—			—			33,430
Net earnings for the year ended June 30, 2005		—		—		1,629			—			—			—			1,629
Unrealized gains on securities designated as available for sale, net of related tax effects		—		—		—			—			—			190			190
Cash dividends of $0.10 per common share		—		—		(353	)		—			—			—			(353	)
Balance at June 30, 2005		86		36,714		32,719			(3,370	)		—			(210	)		65,939
Net earnings for the year ended June 30, 2006		—		—		1,588			—			—			—			1,588
Amortization expense of stock benefit plans		—		55		—			178			—			—			233
Acquisition of shares for:
Stock Benefit Plans		—		—		—			(1,653	)		—			—			(1,653	)
Treasury		—		—		—			—			(354	)		—			(354	)
Unrealized losses on securities designated as available for sale, net of related tax effects		—		—		—			—			—			(326	)		(326	)
Cash dividends of $0.40 per common share		—		—		(1,546	)		—			—			—			(1,546	)
Balance at June 30, 2006	$	86	$	36,769	$	32,761		$	(4,845	)	$	(354	)	$	(536	)	$	63,881

The accompanying notes are an integral part of these statements.

32

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended June 30, 2006, 2005 and 2004
(In thousands)

	2006			2005			2004
Cash flows from operating activities:
Net earnings for the year	$	1,588		$	1,629		$	761
Adjustments to reconcile net earnings to net cash provided by operating activities:
Amortization of premiums and discounts on investment securities - net		9			4			(6	)
Depreciation		173			106			81
Amortization of deferred loan origination (fees) costs		2			(34	)		(87	)
Amortization of purchase accounting adjustments - net		(403	)		(139	)		—
Gain on sale of loans		(24	)		(31	)		—
Gain on sale of investment securities		—			—			(5	)
(Gain) loss on sale of real estate acquired through foreclosure		(5	)		9			61
Gain on sale of office premises and equipment		(13	)		—			—
Amortization of stock benefit plans		233			—			—
Federal Home Loan Bank stock dividends		(283	)		(151	)		(71	)
Bank-owned life insurance earnings		(80	)		(25	)		—
Provision for losses on loans		32			53			10
Mortgage loans originated for sale		(2,711	)		(520	)		—
Proceeds from sale of mortgage loans		2,712			519			—
Increase (decrease) in cash due, net of acquisition of Frankfort First Federal Bancorp:
Accrued interest receivable		48			18			(98	)
Prepaid expenses and other assets		(42	)		125			32
Accrued interest payable		76			(190	)		—
Accounts payable and other liabilities		(187	)		(544	)		398
Federal income taxes
Current		246			(313	)		(84	)
Deferred		268			563			28
Net cash provided by operating activities		1,639			1,079			1,020
Cash flows provided by (used in) investing activities:
Investment securities available for sale:
Sales		—			—			7,002
Purchases		—			—			(5,997	)
Investment securities held to maturity:
Maturities, prepayments and calls		5,100			—			56,981
Purchases		(100	)		—			(59,973	)
Mortgage-backed securities available for sale:
Sales		—			—			22,352
Maturities, prepayments and calls		758			307			—
Purchases		—			—			(22,352	)
Mortgage-backed securities held to maturity:
Maturities, prepayments and calls		3,160			1,633			727
Purchases		—			—			(23,323	)
Loan disbursements		(34,160	)		(12,242	)		(4,958	)
Principal repayments on loans		30,374			13,450			11,882
Proceeds from sale of real estate acquired through foreclosure		115			118			224
Proceeds from sale of office premises and equipment		13			—			—
Purchase of office premises and equipment		(53	)		(65	)		(39	)
Purchase of Frankfort First Federal Bancorp, net of cash received		—			(8,923	)		—
Net cash provided by (used in) investing activities		5,207			(5,753	)		(17,474	)
Cash flows provided by (used in) financing activities:
Net decrease in deposits		(13,806	)		(15,220	)		(6,033	)
Advances by borrowers for taxes and insurance		37			215			—
Proceeds from Federal Home Loan Bank advances		23,850			—			9,000
Repayments on Federal Home Loan Bank advances		(19,438	)		(1,223	)		—
Cash proceeds from issuance of common stock, net		—			12,720			—
Purchase of shares for stock benefit plans		(1,653	)		—			—
Treasury stock repurchases		(354	)		—			—
Dividends paid on common stock		(1,546	)		(353	)		—
Net cash used in financing activities		(12,910	)		(3,861	)		2,967
Net decrease in cash and cash equivalents		(6,064	)		(8,504	)		(13,487	)
Cash and cash equivalents at beginning of year		8,358			16,862			30,349
Cash and cash equivalents at end of year	$	2,294		$	8,358		$	16,862

33

KENTUCKY FIRST FEDERAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the years ended June 30, 2006, 2005 and 2004
(In thousands)

	2006			2005		2004
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes	$	510		$	460	$	450
Interest on deposits and borrowings	$	6,182		$	3,319	$	2,270
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	101		$	206	$	171
Loans disbursed upon sales of real estate acquired through foreclosure	$	—		$	19	$	70
Unrealized gains (losses) on securities designated as available for sale, net of related tax effects	$	(326	)	$	190	$	(397	)
Recognition of mortgage servicing rights in accordance with SFAS No. 140	$	21		$	31	$	—
Acquisition of Frankfort First Federal Bancorp, Inc.
Cash and stock consideration and liabilities assumed:
Deposits	$	—		$	71,513	$	—
Advances from the Federal Home Loan Bank		—			43,390		—
Other liabilities		—			1,175		—
Cash and stock consideration – net		—			29,625		—
		—			145,703		—
Less net assets acquired:
Loans		—			119,526		—
Investments		—			2,141		—
Other assets		—			8,593		—
		—			130,260		—
Amounts assigned to goodwill and other intangible assets	$	—		$	15,443	$	—

The accompanying notes are an integral part of these statements.

34

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

1.  Principles of Consolidation

The consolidated financial statements include the accounts of the Company, First Federal of Hazard, Frankfort First and First Federal of Frankfort.

2.  Investment and Mortgage-backed Securities

The Company 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 Company 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 resulting unrealized gains or losses recorded to operations or shareholders’ equity, respectively.

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

35

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

3.  Loans Receivable

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

Loans held for sale are carried at the lower of cost (less principal payments received) or fair value (market value), calculated on an aggregate basis.  At June 30, 2006 and 2005, the Company had not identified any loans held for sale.

In selling loans, the Company utilizes a program with the Federal Home Loan Bank, retaining servicing on loans sold.  The Company accounts for mortgage servicing rights in accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires that the Company recognize, as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired.  An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights.  SFAS No. 140 requires that capitalized servicing rights be amortized in proportion to and over the estimated period of servicing income.

The Company recorded amortization related to mortgage servicing rights totaling $3,000 and $1,000 during the years ended June 30, 2006 and 2005, respectively.  For the year ended June  30, 2004, there was no amortization.  The carrying value of the Company’s mortgage servicing rights, which approximated fair value, totaled approximately $49,000 and $30,000 at June 30, 2006 and 2005, respectively.

The Company was servicing mortgage loans of approximately $6.1 million and $3.8 million that had been sold to the Federal Home Loan Bank at June 30, 2006 and 2005, respectively.

4.  Loan Origination Fees

The Banks account 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 Cost 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 Banks’ experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method.  Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis.

36

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

5.  Allowance for Loan Losses

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

The Banks account for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which 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 Banks’ current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value.

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 Banks consider investments in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment.  With respect to the Banks’ investment in multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value.

Collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time.

At June 30, 2006 and 2005, the Banks had no loans that would be defined as impaired under SFAS No. 114.

6.  Real Estate Acquired through Foreclosure

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

37

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

7.  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.

8.  Federal Income Taxes

The Company 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 Company’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 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 Company’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 and deferred compensation.  Additional temporary differences result from depreciation computed using accelerated methods for tax purposes.

9.  Retirement and Employee Benefit Plans

The Banks each participate in a noncontributory, multi-employer defined benefit pension fund covering all employees who qualify as to length of service.  Contributions are based upon covered employees’ ages and salaries and are dependent upon the ultimate prescribed benefits of the participants and the funded status of the plan. The Company recognized expense related to the plans totaling approximately $411,000, $190,000 and $590,000 for the fiscal years ended June 30, 2006, 2005 and 2004.

The Company also maintains nonqualified deferred unfunded compensation plans for the benefit of certain directors.  For the fiscal year ended June 30, 2006, the Company recognized expense related to these plans in the amount of $15,000.  No expense was recognized by the Company for the fiscal years ended June 30, 2005 and 2004.

38

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

9.  Retirement and Employee Benefit Plans (continued)

In connection with the Reorganization, First Federal of Hazard implemented an Employee Stock Ownership Plan (“ESOP”) which provides retirement benefits for substantially all full-time employees who have completed one year of service and have attained the age of 21.  The Company accounts for the ESOP in accordance with Statement of Position (“SOP”) 93-6, “Employers Accounting for Employee Stock Ownership Plans.”  SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given year.  Allocation of shares to the ESOP participants is contingent upon the repayment of a loan to Kentucky First Federal Bancorp totaling $3.2 million and $3.4 million at June 30, 2006 and 2005, respectively.  The Company recorded expense for the ESOP of approximately $185,000 and $93,000 for the years ended June 30, 2006 and 2005, respectively.

In fiscal 2006, the Company initiated the 2005 Equity Incentive Plan (“EIP” or the “Plan”) which provides for the purchase of 168,486 shares of common stock and the issuance of such shares in the form of restricted stock awards to members of the board of directors, management and certain employees.  Common shares awarded under the restricted stock plan vest over a five year period, commencing with the date of the grant.  Expense recognized under the restricted stock plan totaled $157,000 for the year ended June 30, 2006.  As of June 30, 2006, 134,500 shares under the Company’s restricted stock plan have been awarded.

10.  Earnings Per Share

Basic earnings per share is computed based upon the weighted-average shares outstanding during the year less shares in the ESOP that are unallocated and not committed to be released.  Weighted-average common shares deemed outstanding gives effect to a reduction for 319,152 unallocated shares held by the ESOP for the fiscal year ended June 30, 2006.  Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Company’s stock option plan.  The Company’s weighted average common shares were 8,198,621 and 8,212,886 on a basic and diluted basis, respectively for the fiscal year ended June 30, 2006.  The dilutive effect of assumed exercise of stock options in fiscal 2006 was 14,265 shares.  For the years ended June 30, 2005 and 2004, basic and diluted earnings per share are not presented as the Company did not convert to the stock form of ownership until March 2, 2005.

11.  Stock Option Plan

The Company has a stock option plan that provides for grants of up to 421,216 stock options.  The Company accounts for its stock option plan in accordance with SFAS No. 123, “Accounting for Stock-based Compensation,” which contains a fair value based method for valuing stock-based compensation that entities may use, measuring compensation cost at the grant date based on the fair value of the award.  Compensation is then recognized over the service period, which is usually the vesting period.  Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro-forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied.

39

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

11.  Stock Option Plan (continued)

The Company presently applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan.  Accordingly, no compensation cost has been recognized for the plan.  Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro-forma amounts indicated below for the year ended June 30:

		Year ended June 30, 2006
Net earnings (In thousands)	As reported	$	1,588
	Stock-based compensation, net of tax		40
	Pro-forma	$	1,548
Earnings per share
Basic	As reported	$	.19
	Stock-based compensation, net of tax		—
	Pro-forma	$	.19
Diluted	As reported	$	.19
	Stock-based compensation, net of tax		—
	Pro-forma	$	.19

The fair value of each option granted is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following weighted-average assumptions used for grants:  dividend yield of 3.96%; expected volatility of 20.0%; risk-free interest rates of 4.49%; and expected lives of 7 years.

A summary of the status of the Company’s stock option plan as of June 30, 2006, and changes during the year then ended is presented below:

	Shares		Weighted- average exercise price
Outstanding at beginning of year		—	$	—
Granted		347,600		10.10
Exercised		—		—
Forfeited		—		—
Outstanding at end of year		347,600	$	10.10
Options exercisable at year-end		—	$	—
Fair value of options granted			$	1.75
Cumulative option compensation cost over service period			$	547,000
Remaining service period				54 months

40

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

11.  Stock Option Plan (continued)

The following information applies to options outstanding at June 30, 2006:

Number outstanding		347,600
Exercise price	$	10.10
Weighted-average exercise price	$	10.10
Weighted-average remaining contractual life		9.5 years

12.  Fair Value of Financial Instruments

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

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 Company in estimating its fair value disclosures for financial instruments at June 30, 2006 and 2005:

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

Investment securities:  For investment 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.

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

41

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

12.  Fair Value of Financial Instruments (continued)

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

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

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

Commitments to extend credit:  For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates.  The fair value of outstanding loan commitments at June 30, 2006 and 2005, was not material.  Based on the foregoing methods and assumptions, the carrying value and fair value of the Company’s financial instruments at June 30 are as follows:

	2006				2005
	Carrying value		Fair value		Carrying value		Fair value
	(In Thousands)
Financial assets
Cash and cash equivalents	$	2,294	$	2,294	$	8,358	$	8,358
Investment securities available for sale		12,211		12,211		12,686		12,686
Investment securities held to maturity		45,944		44,019		50,942		49,944
Mortgage-backed securities available for sale		1,079		1,079		1,861		1,861
Mortgage-backed securities held to maturity		18,185		17,028		21,347		21,168
Loans receivable - net		155,386		152,680		151,712		154,189
Federal Home Loan Bank stock		5,264		5,264		4,981		4,981
Accrued interest receivable		868		868		916		916
	$	241,231	$	235,443	$	252,803	$	254,103
Financial liabilities
Deposits	$	141,238	$	142,900	$	155,044	$	154,602
Advances from the Federal Home Loan Bank		54,849		53,382		50,984		48,550
Advances by borrowers for taxes and insurance		369		369		332		332
Accrued interest payable		253		253		177		177
	$	195,971	$	196,904	$	206,537	$	203,661

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 in other financial institutions with original maturities of less than ninety days.

42

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

14.  Goodwill and Other Intangible Assets

Goodwill and other intangible assets arising from the Frankfort First acquisition are accounted for in accordance with SFAS No. 142, “Goodwill and Intangible Assets.”  Pursuant to SFAS No. 142, acquired goodwill is not amortized but is tested for impairment at the reporting unit annually or whenever an impairment indicator arises.  The Company evaluated the goodwill in March 2006 via independent third-party appraisal.  The evaluation showed no indication of impairment.  Goodwill and other intangible assets consist of the following at June 30, 2006 and 2005:

	2006		2005
	(In thousands)
Goodwill	$	14,507	$	14,507
Core deposit intangible, net		743		891
	$	15,250	$	15,398

Amortization of the Company’s core deposit intangible totaled $131,000 and $44,000 for the years ended June 30, 2006 and 2005, respectively.

15.  Cash Surrender Value of Life Insurance

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

16.  Effects of Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued a revision to Statement of Financial Accounting Standards (“SFAS”) No. 123 which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based transactions.  This Statement, SFAS No. 123(R), requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with limited exceptions.  That cost will be recognized over the period during which an employee is required to provide services in exchange for the award – the requisite service period.  No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met.

Initially, the cost of employee services received in exchange for an award of equity instruments will be measured based on current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date.  Changes in fair value during the requisite service period will be recognized as compensation cost over that period.  The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available).  If an equity award is modified after the grant date, incremental compensation cost will be

43

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

16.  Effects of Recent Accounting Pronouncements  (continued)

recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately  before the modification.  Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as an addition to additional paid in capital.  Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows.  The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in additional paid in capital against which it can be offset.

Compensation cost is required to be recognized in the beginning of the annual period that begins after December 31, 2005, or July 1, 2006 as to the Company.  Management believes the annual after-tax compensation expense for 2007 will approximate $80,000 based on the current vesting schedule of shares granted in fiscal 2006.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of SFAS No. 140,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. Specifically, SFAS No. 156 amends SFAS No. 140 to require an entity to take the following steps:

• Separately recognize financial assets as servicing assets or servicing liabilities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts;

• Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable; and

• Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial condition and additional disclosures for all separately recognized servicing assets and servicing liabilities.

Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 also permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or July 1, 2007 as to the Company, with earlier application permitted.  The Company is currently evaluating SFAS No. 156, but does not expect it to have a material effect on the Company’s financial condition or results of operations.

In July 2006, the FASB issued FIN 48, Accounting for Uncertainly in Income Taxes. This Interpretation of FASB Statement No. 109, Accounting for Income Taxes, contains guidance on the recognition and measurement of uncertain tax positions. The Company will be required to recognize the impact of a tax position if it is more likely than not that it will be sustained upon examination, based upon the technical merits of the position. The effective date for application of this interpretation is for periods beginning after December 15, 2006. The cumulative effect of applying the provisions of this Interpretation must be reported as an adjustment to the opening balance of retained earnings for that fiscal period. Management is currently evaluating the impact this Interpretation will have on its consolidated financial statements.

17.  Reclassifications

Certain prior year amounts have been reclassified to conform to the 2006 consolidated financial statement presentation.

44

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at June 30, 2006 and 2005 are summarized as follows:

	2006
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
	(In thousands)
Investment securities available for sale
U.S. Government agency securities	$	12,999	$	—	$	(788	)	$	12,211
Investment securities held to maturity
U.S. Government agency securities	$	45,844	$	—	$	(1,925	)	$	43,919
Certificates of deposit		100		—		—			100
Total investment securities held to maturity	$	45,944	$	—	$	(1,925	)	$	44,019

	2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
	(In thousands)
Investment securities available for sale
U.S. Government agency securities	$	12,998	$	—	$	(312	)	$	12,686
Investment securities held to maturity
U.S. Government agency securities	$	50,842	$	6	$	(1,004	)	$	49,844
Certificates of deposit		100		—		—			100
Total investment securities held to maturity	$	50,942	$	6	$	(1,004	)	$	49,944

The amortized cost and estimated fair value of investment securities as of June 30, 2006 and 2005, by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	2006				2005
	Estimated fair value		Amortized cost		Estimated fair value		Amortized cost
	(In thousands)
Investments available for sale
Due within five years	$	12,211	$	12,999	$	12,686	$	12,998
Investments held to maturity
Due within five years	$	35,235	$	36,947	$	40,990	$	41,945
Due five years through ten years		4,791		4,998		4,955		4,998
Due in more than ten years		3,993		3,999		3,999		3,999
Total	$	44,019	$	45,944	$	49,944	$	50,942

45

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

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

Proceeds from sales of investment securities during the fiscal year ended June 30, 2004 totaled $7.0 million resulting in a gross realized gain of $5,000 for the year.  There were no sales of investment securities during the fiscal years ended June 30, 2006 or 2005.

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of mortgage-backed securities are as follows:

	2006
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
	(In thousands)
Available for sale
FNMA	$	548	$	—	$	(11	)	$	537
GNMA		556		—		(14	)		542
Total mortgage-backed securities available for sale	$	1,104	$	—	$	(25	)	$	1,079
Held to maturity
FNMA	$	15,386	$	—	$	(1,023	)	$	14,363
FHLMC		2,702		—		(138	)		2,564
GNMA		97		4		—			101
Total investment securities held to maturity	$	18,185	$	4	$	(1,161	)	$	17,028

	2005
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
	(In thousands)
Available for sale
FNMA	$	819	$	3	$	—		$	822
GNMA		1,048		—		(9	)		1,039
Total mortgage-backed securities available for sale	$	1,867	$	3	$	(9	)	$	1,861
Held to maturity
FNMA	$	18,049	$	—	$	(224	)	$	17,825
FHLMC		3,147		42		(7	)		3,182
GNMA		151		10		—			161
Total investment securities held to maturity	$	21,347	$	52	$	(231	)	$	21,168

46

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

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

The amortized cost of mortgage-backed securities as of June 30, 2006 and 2005, by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities, because borrowers may have the right to prepay obligations without prepayment penalties.

	2006		2005
	(In thousands)
Available for sale
Due within five years	$	167	$	233
Due five years through ten years		210		282
Due after ten years		727		1,352
Total mortgage-backed securities available for sale	$	1,104	$	1,867
Held to maturity
Due within five years	$	4,961	$	5,840
Due five years through ten years		6,084		7,141
Due after ten years		7,140		8,366
Total mortgage-backed securities held to maturity	$	18,185	$	21,347

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2006 and 2005:

	June 30, 2006
	Less than 12 months						12 months or longer						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
	(Dollars in thousands)
U.S. Government agency securities		—	$	—	$	—		15	$	56,130	$	2,713		15	$	56,130	$	2,713
Mortgage-backed securities		10		2,069		81		7		16,432		1,105		17		18,501		1,186
Total temporarily impaired securities		10	$	2,069	$	81		22	$	72,562	$	3,818		32	$	74,631	$	3,899

	June 30, 2005
	Less than 12 months						12 months or longer						Total
Description of securities	Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses		Number of investments		Fair value		Unrealized losses
	(Dollars in thousands)
U.S. Government agency securities		3	$	10,997	$	37		15	$	51,533	$	1,279		18	$	62,530	$	1,316
Mortgage-backed securities		12		8,086		51		4		14,358		189		16		22,444		240
Total temporarily impaired securities		15	$	19,083	$	88		19	$	65,891	$	1,468		34	$	84,974	$	1,556

47

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

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

Management has the intent and ability to hold these securities for the foreseeable future.  The decline in the fair value is primarily due to an increase in market interest rates.  The fair values are expected to recover as securities approach maturity dates.

NOTE C - LOANS RECEIVABLE

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

	2006		2005
	(In thousands)
Residential real estate
One- to four-family	$	139,356	$	134,117
Multi-family		296		321
Construction		2,703		1,925
Nonresidential real estate and land		6,412		7,202
Loans on deposits		3,432		4,027
Consumer and other		5,211		6,024
		157,410		153,616
Less:
Undisbursed portion of loans in process		1,169		1,016
Deferred loan origination fees		131		180
Allowance for loan losses		724		708
	$	155,386	$	151,712

The Banks’ lending efforts have historically focused on one- to four-family and multi-family residential real estate loans, which comprise approximately $139.7 million, or 89.9%, of the total loan portfolio at June 30, 2006, and $134.4 million, or 88.6%, of the total loan portfolio at June 30, 2005.  Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Banks with adequate collateral coverage in the event of default.  Nevertheless, the Banks, as with any lending institution, are subject to the risk that real estate values could deteriorate in their primary lending areas of southeastern and central Kentucky, thereby impairing collateral values.  However, management is of the belief that residential real estate values in the Banks’ primary lending areas are presently stable.

In the normal course of business, the Banks have made loans to some of the 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 $659,000 and $1.2 million at June 30, 2006 and 2005, respectively.

48

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE D - ALLOWANCE FOR LOAN LOSSES

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

	2006			2005			2004
	(In thousands )
Balance at beginning of year	$	708		$	665		$	720
Allowance of Frankfort First at acquisition		—			133			—
Provision for losses on loans		32			53			10
Charge-offs		(16	)		(143	)		(65	)
Balance at end of year	$	724		$	708		$	665

As of June 30, 2006, the allowance for loan losses is primarily general in nature, and, for the most part, is includible as a component of the Banks’ regulatory risk-based capital.

Nonperforming loans (loans delinquent greater than 90 days and non-accrual loans) totaled approximately $1.4 million, $1.7 million and $1.2 million at June 30, 2006, 2005 and 2004, respectively.

NOTE E - OFFICE PREMISES AND EQUIPMENT

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

	2006		2005
	(In thousands)
Land	$	860	$	860
Buildings and improvements		3,421		3,418
Furniture and equipment		1,145		1,120
Automobiles		27		51
		5,453		5,449
Less accumulated depreciation and amortization		2,596		2,472
	$	2,857	$	2,977

49

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE F - DEPOSITS

Deposits consist of the following major classifications at June 30:

Deposit type and weighted- average interest rate	2006		2005
	(In thousands)
NOW accounts
2006 - 1.43%	$	7,345
2005 - 1.29%			$	7,203
Passbook
2006 - 1.33%		39,459
2005 - 1.20%				46,753
Money market deposit accounts
2006 - 3.28%		3,652
2005 - 2.05%				4,317
Total demand, transaction and passbook deposits		50,456		58,273
Certificates of deposit
Original maturities of:
Less than 12 months:
2006 - 2.09%		6,378
2005 - 1.82%				10,351
12 months to 24 months
2006 - 3.80%		58,931
2005 - 2.76%				62,937
30 months to 36 months
2006 - 3.99%		16,159
2005 - 3.61%				15,978
Over 36 months
2006 - 4.45%		9,314
2005 - 4.34%				7,505
Total certificates of deposit		90,782		96,771
Total deposit accounts	$	141,238	$	155,044

At June 30, 2006 and 2005, the Banks had certificate of deposit accounts with balances in excess of $100,000 totaling approximately $15.8 million and $18.0 million, respectively.

50

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE F - DEPOSITS (continued)

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

Maturing in fiscal year ending

	2006		2005
	(In thousands)
2006	$	—	$	69,966
2007		61,471		16,324
2008		14,333		7,328
2009		10,345		1,436
2010		3,347		1,717
2010 and thereafter		1,286		—
	$	90,782	$	96,771

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

	2006		2005		2004
NOW and money market demand	$	285	$	143	$	—
Certificates of deposit		3,216		1,765		1,612
Passbook		527		542		554
	$	4,028	$	2,450	$	2,166

Deposits from directors and executive officers were $1.2 million and $1.1 million at June 30, 2006 and 2005, respectively.  Such deposits were accepted in the normal course of business on substantially the same terms as those prevailing at the time for comparable transactions with other customers.

51

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank, collateralized at June 30, 2006 and 2005 by pledges of certain residential mortgage loans totaling $66.9 million and $60.5 million, respectively, and the Banks’ investment in Federal Home Loan Bank stock, are summarized as follows:

Interest rate	Maturing year ending June 30,		2006			2005
			(Dollars in thousands)
2.52%		2006	$	—		$	2,800
3.17% - 6.75%		2007		18,649			2,828
3.68% - 6.35%		2008		2,925			3,261
5.02% - 7.35%		2009		1,115			9,205
5.96% - 6.86%		2010		21,000			21,000
5.80% - 6.22%		2011		8,000			8,000
6.90%		2012		251			286
5.75%		2013		91			128
6.15% - 6.95%		2016		584			626
6.30% - 6.35%		2017		90			120
6.20%		2018		118			157
				52,823			48,411
Premium assigned to borrowings in Frankfort First acquisition, net of amortization				2,026			2,574
			$	54,849		$	50,985
Weighted-average interest rate				6.04	%		5.58	%

NOTE H - FEDERAL INCOME TAXES

Federal income taxes on earnings differs from that computed at the statutory corporate tax rate for the years ended June 30, 2006, 2005 and 2004, as follows:

	2006			2005			2004
	(In thousands)
Federal income taxes at the statutory rate	$	786		$	850		$	392
Increase (decrease) resulting primarily from:
Cash surrender value of life insurance		(27	)		(9	)		—
Other		(36	)		31			—
	$	723		$	872		$	392

52

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE H - FEDERAL INCOME TAXES  (continued)

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

	2006			2005
	(In thousands)
Taxes (payable) refundable on temporary differences at estimated corporate tax rate:
Deferred tax assets:
General loan loss allowance	$	246		$	241
Deferred loan origination fees		47			65
Deferred compensation		40			86
Charitable contributions		14			63
Purchase price adjustments		202			164
Unrealized losses on securities available for sale		276			116
Total deferred tax assets		825			735
Deferred tax liabilities:
Federal Home Loan Bank stock dividends		(1,143	)		(1,047	)
Book/tax depreciation		(166	)		(72	)
Total deferred tax liabilities		(1,309	)		(1,119	)
Net deferred tax liability	$	(484	)	$	(384	)

Prior to 1997, the Banks were allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year.  If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate.  Retained earnings at June 30, 2006, include approximately $5.4 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$1.8 million at June 30, 2006.

NOTE I - LOAN COMMITMENTS

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

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

53

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE I - LOAN COMMITMENTS (continued)

At June 30, 2006, the Banks had outstanding commitments of approximately $1.0 million to originate loans.  Additionally, First Federal of Frankfort was obligated under unused lines of credit for equity loans totaling $9.8 million.  In the opinion of the Banks’ management, all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 2006, and will be funded from normal cash flow from operations.

NOTE J – REORGANIZATION AND BUSINESS COMBINATION

On July 14, 2004, the Board of Directors of First Federal of Hazard (the “Association”) adopted a Plan of Reorganization (the “Plan” or the “Reorganization”) pursuant to which the Association would reorganize into the mutual holding company form of ownership with the incorporation of a stock holding company, Kentucky First Federal Bancorp (the “Company”) as parent of the Association.  Coincident with the Reorganization, the Association would convert to the stock form of ownership, followed by the issuance of all the Association’s outstanding stock to Kentucky First Federal Bancorp.  On March 2, 2005, the Plan of Reorganization was completed with Kentucky First Federal Bancorp issuing 4,727,938 common shares, or 55% of its common shares, to First Federal Mutual Holding Company (“First Federal MHC”), a federally chartered mutual holding company, with 2,127,842 common shares, or 24.8% of its shares offered for sale at $10.00 per share to the public and a newly formed Employee Stock Ownership Plan (“ESOP”).  The Company received net cash proceeds of $12.7 million from the public sale of its common shares.  The Company’s remaining 1,740,740 common shares were issued as part of the $31.4 million cash and stock consideration paid for 100% of the common shares of Frankfort First and its wholly-owned subsidiary, First Federal of Frankfort (“Frankfort First Federal”).  The acquisition was accounted for using the purchase method of accounting and resulted in the recordation of goodwill and other intangible assets totaling $15.4 million.  In accordance with the purchase method of accounting, the Company’s results of operations and cash flows for the fiscal year ended June 30, 2005 only reflect Frankfort First’s results for the four month period ended June 30, 2005.

Presented below are the Company’s pro-forma condensed consolidated statements of earnings which have been prepared as if the acquisition had been consummated as of the beginning of each of the years ended June 30, 2005 and 2004.

	2005		2004
Total interest income	$	12,784	$	13,072
Total interest expense		5,731		6,010
Net interest income		7,053		7,062
Provision for losses on loans		105		10
Other income		802		34
General, administrative and other expense		3,884		4,184
Earnings before income taxes		3,866		2,902
Federal income taxes		1,150		980
Net earnings	$	2,716	$	1,922

54

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE K - REGULATORY CAPITAL

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

The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement.  The tangible capital requirement provides for minimum tangible capital (defined as shareholders’ equity less all intangible assets) equal to 1.5% of adjusted total assets.  The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets, except for those associations with the highest examination rating and acceptable levels of risk.  The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets.  In computing risk-weighted assets, the Banks multiply the value of each asset on their respective statements of financial condition by a defined risk-weighting factor, e.g., one- to four-family residential loans carry a risk-weighted factor of 50%.

During fiscal 2006, the Banks were notified by the OTS that each was categorized as “well-capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “well-capitalized” the Banks must maintain minimum capital ratios as set forth in the following tables:

	As of June 30, 2006
	Actual					For capital adequacy purposes					To be “well- capitalized” under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands )
Tangible capital
First Federal of Hazard	$	26,232		21.9	%	$	³1,799		³1.5	%	$	³5,996		³  5.0	%
First Federal of Frankfort	$	17,283		13.3	%	$	³1,949		³1.5	%	$	³6,497		³  5.0	%
Core capital
First Federal of Hazard	$	26,232		21.9	%	$	³4,797		³4.0	%	$	³7,196		³  6.0	%
First Federal of Frankfort	$	17,283		13.3	%	$	³5,197		³4.0	%	$	³7,796		³  6.0	%
Risk-based capital
First Federal of Hazard	$	26,675		75.4	%	$	³2,831		³8.0	%	$	³3,539		³10.0	%
First Federal of Frankfort	$	17,416		25.0	%	$	³5,583		³8.0	%	$	³6,979		³10.0	%

55

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE K - REGULATORY CAPITAL (continued)

	As of June 30, 2005
	Actual					For capital adequacy purposes					To be “well- capitalized” under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands )
Tangible capital
First Federal of Hazard	$	28,322		22.3	%	$	³1,902		³1.5	%	$	³6,341		³  5.0	%
First Federal of Frankfort	$	16,129		12.1	%	$	³2,006		³1.5	%	$	³6,686		³  5.0	%
Core capital
First Federal of Hazard	$	28,322		22.3	%	$	³5,073		³4.0	%	$	³7,609		³  6.0	%
First Federal of Frankfort	$	16,129		12.1	%	$	³5,348		³4.0	%	$	³8,023		³  6.0	%
Risk-based capital
First Federal of Hazard	$	28,762		81.8	%	$	³2,815		³8.0	%	$	³3,518		³10.0	%
First Federal of Frankfort	$	16,262		23.1	%	$	³5,636		³8.0	%	$	³7,045		³10.0	%

As of June 30, 2006 and 2005, management believes that First Federal of Hazard and First Federal of Frankfort met all capital adequacy requirements to which the Banks were subject.

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

56

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

NOTE L - CONDENSED FINANCIAL STATEMENTS OF KENTUCKY FIRST FEDERAL BANCORP

The following condensed financial statements summarize the financial position of Kentucky First Federal Bancorp as of June 30, 2006 and 2005, and the results of its operations and its cash flows for the fiscal years ended June 30, 2006 and 2005.

KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF FINANCIAL CONDITION
June 30, 2006 and 2005
(In thousands)

	2006			2005
ASSETS
Interest-bearing deposits in First Federal of Hazard	$	1,758		$	2,356
Interest-bearing deposits in First Federal of Frankfort		41			100
Investment in First Federal of Hazard		28,940			31,489
Investment in Frankfort First		32,481			31,785
Prepaid expenses and other assets		704			531
Total assets	$	63,924		$	66,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and other liabilities	$	43		$	322
Shareholders’ equity
Common stock		86			86
Additional paid-in capital		36,769			36,714
Retained earnings		32,761			32,719
Shares acquired by stock benefit plans		(4,739	)		(3,370	)
Shares acquired for treasury – at cost		(460	)		—
Accumulated other comprehensive loss		(536	)		(210	)
Total shareholders’ equity		63,881			65,939
Total liabilities and shareholders’ equity	$	63,924		$	66,261

KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF EARNINGS
Years ended June 30, 2006 and 2005
(In thousands)

	2006			2005
Revenue
Interest income	$	210		$	71
Equity in earnings of First Federal of Hazard		771			1,352
Equity in earnings of Frankfort First		989			369
Total revenue		1,970			1,792
General and administrative expenses		492			155
Earnings before income tax credits		1,478			1,637
Federal income taxes (credits)		(110	)		8
NET EARNINGS	$	1,588		$	1,629

57

KENTUCKY FIRST FEDERAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

June 30, 2006, 2005 and 2004

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

KENTUCKY FIRST FEDERAL BANCORP
STATEMENTS OF CASH FLOWS
Years ended June 30, 2006 and 2005
(In thousands)

	2006			2005
Cash flows from operating activities:
Net earnings for the year	$	1,588		$	1,629
Adjustments to reconcile net earnings to net cash provided by operating activities:
Excess distributions from consolidated subsidiary		1,354			871
Noncash compensation expense		269			—
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets		(173	)		(531	)
Other liabilities		(142	)		322
Net cash provided by operating activities		2,896			2,291
Cash flows used in investing activities:
Shares acquired by ESOP		—			(3,370	)
Cash flows provided by (used in) financing activities:
Dividends paid on common stock		(1,546	)		(353	)
Purchase of shares for benefit plans		(1,547	)		—
Repurchase of treasury shares		(460	)		—
Cash proceeds from issuance of common stock		—			16,090
Net cash paid in the acquisition of Frankfort First Bancorp, Inc.		—			(12,202	)
Net cash provided by financing activities		(3,553	)		3,535
Net increase (decrease) in cash and cash equivalents		(657	)		2,456
Cash and cash equivalents at beginning of year		2,456			—
Cash and cash equivalents at end of year	$	1,799		$	2,456

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

58

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

First Federal Savings & Loan of Hazard	First Federal Savings Bank of Frankfort
Deborah Bersaglia, Assistant	Mindy Abbott, Customer Service
Vice President/Lending/Collection	Brenda Baldwin, Branch Manager
Phyllis Campbell, Customer Service	Stan Betsworth, Lending
Sandy Craft, Customer Service	Phyllis Bowman, Loan Servicing
Donna Davis, Data Processing	Lisa Brinley, Customer Service
Lou Ella R. Farler, Assistant Vice	Carolyn Eades, Customer Service
President/Data Processing	Diana Eads, Customer Service
Deloris S. Justice, Accounting Assistant	Danny A. Garland, President
Velma Kelly, Customer Service	Stacey Greenawalt, Lending
Kaye C. Lewis, Treasurer	Barry Holder, Customer Service
Brenda Lovelace, Customer Service	Clay Hulette, Vice President/Treasurer
Roy L. Pulliam, Jr., Vice	Don D. Jennings, Executive Vice President
President/Lending/Secretary	Teresa A. Kuhl, Vice President/
Fred Skaggs, Vice President/Lending	Operations/Human Resources
Peggy Hopper Steele, Receptionist/Loan	Janet Lewis, Branch Manager
Processing	Patty Luttrell, Loan Processing/Compliance
Molly Ann E. Toler, Asst. Vice President	Carla McMillen, Customer Service
Teller Operations	Kim Moore, Head Teller
Tony Whitaker, President	Carolyn Mulcahy, Accounting
	Jeannie Murphy, Customer Service
	Danny Prather, Accounting
	David Semones, Loan Processing
	Sandy Stover, Receptionist
	Melissa Thompson, Administrative Assistant
	Yvonne Thornberry, Loan Processing/
	Servicing
	Nancy Watts, Customer Service/Insurance
	Processing

59

Kentucky First Federal Bancorp	First Federal Savings and Loan Association of Hazard	First Federal Savings Bank of Frankfort
Board of Directors	Board of Directors	Board of Directors
Stephen G. Barker	Stephen G. Barker	Charles A. Cotton, III
Walter G. Ecton, Jr.	Walter G. Ecton, Jr.	C. Michael Davenport
William D. Gorman	William D. Gorman	Danny A. Garland
David R. Harrod	Lewis A. Hopper, Chairman	David R. Harrod
Don D. Jennings	Tony Whitaker	William C. Jennings, Chairman
Herman D. Regan, Jr.		William M. Johnson
Tony Whitaker, Chairman		Frank McGrath
		Herman D. Regan, Jr.
	Office Locations
		First Federal of Frankfort
		East Branch
First Federal of Hazard	First Federal of Frankfort	1980 Versailles Road
Main Office	Main Office	Frankfort, KY 40601
479 Main Street	216 West Main Street
P.O. Box 1069	P.O. Box 535	First Federal of Frankfort
Hazard, KY 41702-1069	Frankfort, KY 40602-0535	West Branch
		1220 US 127 South
		Frankfort, KY 40601
Chairman and CEO		Shareholder Inquiries and
Tony Whitaker	Special Counsel	Availability of 10-K Report: A
(606) 436-3860	Muldoon, Murphy and	COPY OF THE COMPANY’S
firstfederal@windstream.net	Aguggia LLP	ANNUAL REPORT ON FORM
	5101 Wisconsin Ave, NW	10-K FOR THE YEAR ENDED
	Washington, DC 20016	JUNE 30, 2006, AS FILED
Investor Relations		WITH THE SECURITIES AND
Don Jennings	Transfer Agent and Registrar	EXCHANGE COMMISSION
Djenni7474@aol.com	Illinois Stock Transfer Company	WILL BE FURNISHED
	209 W Jackson Blvd, Ste 903	WITHOUT CHARGE TO
Clay Hulette	Chicago, IL 60606-6905	SHAREHOLDERS AS OF THE
rchulette@hotmail.com	(312) 427-2953	RECORD DATE FOR THE
		NOVEMBER 14, 2006
(502) 223-1638	Annual Meeting	ANNUAL MEETING UPON
P.O. Box 535	The Annual Meeting of Share-	WRITTEN REQUEST TO
Frankfort, KY 40602	holders will be held on
	November 14, 2006 at	INVESTOR RELATIONS
Independent Auditors	3:30 p.m., Eastern Time, at	KENTUCKY FIRST
Grant Thornton LLP	the First Federal Center on the	FEDERAL BANCORP
4000 Smith Road, Suite 500	campus of Hazard Community	P.O. BOX 535
Cincinnati, OH 45209	and Technical College, One	FRANKFORT, KY 40602
	Community College Blvd,
	Hazard, KY

60

EX-31.1

Exhibit 31.1

Certification

          I, Tony D. Whitaker, certify that:

          1.          I have reviewed this Annual Report on Form 10-K of Kentucky First Federal Bancorp;

          2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

          3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

          4.          The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          (a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          (b)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          (c)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

          5.          The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

          (a)         All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          (b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 28, 2006
	/s/ Tony D. Whitaker
	Tony D. Whitaker
	Chief Executive Officer and Chairman

EX-31.2

Exhibit 31.2

Certification

          I, R. Clay Hulette, certify that:

          1.          I have reviewed this Annual Report on Form 10-K of Kentucky First Federal Bancorp;

          2.          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

          3.          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

          4.          The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          (a)         Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          (b)         Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          (c)         Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

          5.          The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

          (a)         All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          (b)         Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 28, 2006
	/s/ R. Clay Hulette
	R. Clay Hulette
	Vice President, Chief Financial Officer and Treasurer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

          The undersigned executive officers of Kentucky First Federal Bancorp (the “Registrant”) hereby certify that this Annual Report on Form 10-K for the year ended June 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	By:	/s/ Tony D. Whitaker
	Name:	Tony D. Whitaker
	Title:	Chief Executive Officer and Chairman
	By:	/s/ R. Clay Hulette
	Name:	R. Clay Hulette
	Title:	Vice President, Chief Financial Officer and Treasurer
Date: September 28, 2006