Kentucky First Federal Bancorp 10K 2006 Annual report | KFFB Filing

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

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.

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.

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.

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.

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;

	•	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.

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

	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.

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

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.

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	%

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	%

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.

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.

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.

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

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

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.

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.

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	%

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.

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.

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.

	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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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

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

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

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.

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

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.

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.

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

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.

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

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	%

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.

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

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.

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

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

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Kentucky First Federal Bancorp (KFFB) 10-K2006 FY Annual report

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