Kentucky First Federal Bancorp (KFFB) stock intrinsic value fair value estimate & owner earnings analysis

Kentucky First Federal Bancorp is the holding company for two small savings institutions. First Federal Savings and Loan Association of Hazard serves Perry County and the surrounding eastern Kentucky counties of Letcher, Knott, Breathitt, Leslie and Clay, an area the company describes as economically distressed by the decline of coal. First Federal Savings Bank of Kentucky lends mainly in Franklin County (Frankfort) and in Boyle and Garrard Counties (Danville and Lancaster), where it holds 8.2%, 8.2% and 17.5% of deposits respectively. At March 31, 2026 total assets were about $374.5 million, deposits about $273.7 million and shareholders' equity about $49.7 million, or roughly $6.14 per share. This is plain thrift lending: nearly all loans are one-to-four family home mortgages, and 93.8% of the residential portfolio is adjustable-rate, funded by local savings and certificate deposits plus Federal Home Loan Bank advances ($42.8 million at June 30, 2025). The company is majority-owned by First Federal MHC, a mutual holding company, so outside shareholders cannot force a sale, and the board suspended the dividend indefinitely in January 2024. How we measured earnings. We measured the cash the business generates for its owners: operating cash flow with short-term timing swings removed (accrued interest, other assets and liabilities, and the build-up or run-off of mortgages held for sale), less ESOP share compensation, less the capital spending needed to maintain the branches, and less the loans the banks actually lost after recoveries. That last deduction is new. Operating cash flow adds back the accounting provision for loan losses, so our earlier figures deducted no credit losses at all; we now subtract each year's realized net charge-offs, which ranged from $224,000 in fiscal 2017 to a small net recovery in fiscal 2025. Reserve changes that were not actual losses, including the $497,000 one-time increase when the company adopted a new loss-reserving standard in fiscal 2024, are not deducted. Goodwill write-offs of $13.6 million in fiscal 2020 and $0.9 million in fiscal 2024 were non-cash and are excluded; that goodwill came from past acquisitions and is now fully written off. On this basis, owner earnings per share over the ten fiscal years to June 2025 were $0.07, $0.13, $0.10, $0.11, $0.15, $0.19, $0.21, $0.10, -$0.13 and $0.00. That decade covers a full interest-rate cycle: cheap deposits and a refinancing boom in 2021-2022, then a severe squeeze in fiscal 2024-2025 when certificate and borrowing costs rose faster than mortgage yields could adjust. The median year earned about 0.27% of assets. Applied to today's larger balance sheet, that gives a through-cycle level of about $0.125 per share. What has changed recently. The nine months to March 31, 2026 show the squeeze unwinding: net interest income rose to $8.03 million from $6.04 million a year earlier, and the March quarter alone produced $2.87 million against $2.13 million. Lower borrowing costs (interest on borrowings fell to $1.48 million from $2.19 million) and adjustable mortgages resetting upward did the work. Nine-month net income was $1.23 million, about $0.20 per share annualized, and the March quarter alone annualizes to about $0.29. Loan charge-offs in the period were only $4,000. Offsetting that, operating expenses rose 7% year on year. Fiscal 2025 owner earnings were essentially zero, so the base case's first year sits well above the last completed year; that is justified only by these three reported quarters and the loan repricing already under way. Growth needs capital. Loans grew from $238.5 million in June 2016 to $327.2 million in June 2025, about 3.6% a year, although they fell 1.7% in fiscal 2025. Every dollar of new loans must be backed by equity, and at the company's current ratio of about 13.3% equity to assets, growth consumes a large share of what the bank earns. In each case below we hold back that capital before counting anything as available to owners. Because this bank earns only about 2% a year on its equity, growth at the current capital ratio adds little value: the retained capital earns less than our 6% required return. Base case, about $1.87 per share. Owner earnings of about $0.21 per share in the first year, $0.18 in the second and $0.15 in the third as the repricing benefit fades, then the through-cycle 0.27% return on assets. Loans grow 1.5% a year for ten years, between the recent flat balance sheet and the decade's pace, and earnings grow with them; about $0.08 to $0.09 per share a year is retained to fund that growth. After year ten the balance sheet and earnings are held flat with nothing retained, because these deposit franchises have lasted for decades, but its history shows no ability to earn much more than 0.3% on assets over a full cycle. Bear case, about $0.95 per share. The recovery lasts roughly a year. A second rate squeeze like fiscal 2024-2025, with adjustable loans resetting only once a year after their initial fixed period while deposit and borrowing costs reprice faster, produces two years of small losses. After that the bank earns only the weaker half of its history, about 0.19% of assets or $0.09 per share, while loans still grow 1% a year and absorb about $0.05 to $0.06 per share of capital annually, as they did even during the fiscal 2024 losses. The distressed Hazard economy and reliance on advances make this plausible. Credit losses have been small throughout the decade, and nonperforming assets were 1.04% of assets at June 2025; the weaker years this case draws on already include the worst charge-off years. The bank remains a going concern that can roll its borrowings, so no debt is subtracted in this case either. Bull case, about $4.58 per share. The March 2026 quarter's earning power of about $0.28 per share holds as the rest of the adjustable portfolio reprices, and loans grow 2% a year, below the decade's pace. That is roughly a 0.6% return on assets, still below a typical community bank but twice this company's own average. About $0.11 to $0.13 per share a year is retained to fund growth, and after year ten earnings hold flat. Left out of every case: a second-step conversion of the mutual holding company, a sale of the bank, or a return of excess capital. Equity is about 13% of assets, well above what regulators require, and book value of about $6.14 per share is more than three times our base value. But none of these steps has been announced, and the controlling mutual holding company has not signaled any of them. At the returns this bank has actually earned, that capital is worth much less than its stated amount to outside owners. We did not subtract borrowings in any case, because the owner-earnings figures are already after interest and the business continues in every case. What changed from our earlier estimate. Our earlier estimate did not deduct loan losses and did not set aside the capital needed to fund loan growth. Correcting both lowers the base value from about $2.47 to about $1.87 per share, with smaller reductions in the bear and bull cases. What would make this wrong: another sharp rise in deposit and borrowing costs would bring back the fiscal 2024 losses, and faster loan growth at today's thin returns would tie up more capital. A lasting move to a 0.6% or better return on assets, or a conversion or sale, would put value well above our base case.