KENTUCKY FIRST FEDERAL BANCORP Forward-Looking Statements
Certain statements contained in this 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 toKentucky First Federal Bancorp or its management are intended to identify such forward-looking statements.Kentucky First Federal Bancorp's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, prices for real estate in the Company's market areas, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, rapidly changing technology affecting financial services, the potential effects of the COVID-19 pandemic on the local and national economic environment, on our customers and on our operations (as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic), and the other matters mentioned in Item 1A of the Company's Annual Report on Form 10-K for the year endedJune 30, 2020 . Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. 27 Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Average Balance Sheets The following table represents the average balance sheets for the six month periods endedDecember 31, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Six Months Ended December 31, 2020 2019 Interest Interest Average And Yield/ Average And Yield/ Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Interest-earning assets: Loans 1$ 292,778 $ 5,936 4.06 %$ 282,210 $ 6,297 4.46 %
Mortgage-backed securities 604 8 2.65
749 11 2.94 Other securities 196 3 3.06 835 11 2.64 Other interest-earning assets 21,341 84 0.79 21,705 272 2.51 Total interest-earning assets 314,919 6,031 3.83 305,499 6,591 4.32 Less: Allowance for loan losses (1,518 ) (1,443 )
Non-interest-earning assets 12,555
26,110 Total assets$ 325,956 $ 330,166 Interest-bearing liabilities: Demand deposits$ 17,675 $ 15 0.17 %$ 14,302 $ 11 0.15 % Savings 60,298 125 0.42 50,484 103 0.41 Certificates of deposit 130,479 800 1.23 128,156 1,082 1.69 Total deposits 208,452 940 0.90 192,942 1,196 1.24 Borrowings 54,261 228 0.84 63,091 673 2.13 Total interest-bearing liabilities 262,713 1,168 0.89 256,033 1,869 1.46 Noninterest-bearing demand deposits 9,006 6,019 Noninterest-bearing liabilities 2,247 2,066 Total liabilities 273,966 264,118 Shareholders' equity 51,990 66,048 Total liabilities and shareholders' equity$ 325,956 $ 330,166 Net interest spread$ 4,863 2.94 %$ 4,722 2.85 % Net interest margin 3.09 % 3.09 % Average interest-earning assets to average interest-bearing liabilities 119.87 % 119.32 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
28
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Average Balance Sheets
The following table represents the average balance sheets for the three-month
periods ended December 31, 2020 and 2019, along with the related calculations of
tax-equivalent net interest income, net interest margin and net interest spread
for the related periods.
Three Months Ended December 31,
2020 2019
Interest Interest
Average And Yield/ Average And Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans 1 $ 296,294 $ 2,960 4.00 % $ 282,774 $ 3,125 4.42 %Mortgage-backed securities 587 4 2.73
710 5 2.82 Other securities -- -- -- 668 5 2.99 Other interest-earning assets 20,859 38 0.73 22,043 128 2.32 Total interest-earning assets 317,740 3,002 3.78 306,195 3,263 4.26 Less: Allowance for loan losses (1,544 ) (1,450 )
Non-interest-earning assets 12,579
26,113 Total assets$ 328,775 $ 330,858 Interest-bearing liabilities: Demand deposits$ 18,358 $ 8 0.17 %$ 14,202 $ 6 0.17 % Savings 63,112 66 0.42 49,854 51 0.41 Certificates of deposit 127,215 352 1.11 129,375 551 1.70 Total deposits 208,685 426 0.82 193,431 608 1.26 Borrowings 56,730 103 0.73 63,386 314 1.98 Total interest-bearing liabilities 265,415 529 0.80 256,817 922 1.44 Noninterest-bearing demand deposits 9,380 6,262 Noninterest-bearing liabilities 2,158 1,929 Total liabilities 276,953 265,008 Shareholders' equity 51,822 65,850 Total liabilities and shareholders' equity$ 328,775 $ 330,858 Net interest spread$ 2,473 2.98 %$ 2,341 2.83 % Net interest margin 3.11 % 3.06 % Average interest-earning assets to average interest-bearing liabilities 119.71 % 119.23 %
1 Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans. Also includes loans on nonaccrual status.
29
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Risks and Uncertainties Related to COVID-19- InMarch 2020 theWorld Health Organization determined that the spread of a new coronavirus, COVID-19, had risen to such a level as to constitute a worldwide pandemic. The spread of this virus has created a global public health crisis. Uncertainty related to the effects of the virus have disrupted financial markets, activity in all aspects of life including governmental, business and consumer routines and the markets in which the Company operates. In response to the crisis governmental authorities closed or limited the operations of many non-essential businesses and required various responses from individuals including stay-at-home restrictions and social distancing. These governmental restrictions, along with a fear of contracting the virus, have resulted in severe reduction of commercial and consumer activity, which is resulting in loss of revenues by businesses, a dramatic spike in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains and market volatility. Management continues to monitor the general impact of COVID-19, as well as certain provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, enacted onMarch 27, 2020 , and other more recent legislative and regulatory relief efforts. Because the impact is contingent upon the duration and severity of the economic downturn, management cannot determine or estimate the magnitude of the impact at this time. While the pandemic has affected the physical operations of the Banks, the business has been mostly unchanged with consistent levels of consumer transactions and loan originations. The potential for a deterioration in asset quality remains, but actual asset quality has improved. Classified assets atMarch 31, 2020 , totaled$10.5 million compared to$8.7 million atDecember 31, 2020 . Management attributes some of this improved performance to the overall strengthening in the residential real estate market. Approximately 95% of the Company's loans are secured by residential real estate.
Business Continuity, Processes and Controls
As a financial institution, the Banks are considered essential businesses and have remained open for business. We have implemented our pandemic preparedness plan and have maintained regular business hours except for closing for business on Fridays at4:30 p.m. We continue to offer customer service through drive-thru facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We are offering by-appointment options for transactions requiring in-person contact while maintaining social distancing mandates and surface cleaning protocols. Our staff is practicing recommended personal hygiene protocols and social distancing while working on premises. A small number of employees are working remotely. We do not face current material resource constraints through the implementation of our pandemic preparedness plan and do not anticipate incurring any material cost related to its implementation. We have not identified any material operational or internal control challenges or risks, nor do we anticipate any significant challenges to our ability to maintain our systems and controls, related to operational changes resulting from implementation of the pandemic preparedness plan. 30Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Financial Position and Results of Operations
Bank regulators have issued guidance and are encouraging banks to work with customers affected by COVID-19. Accordingly, we have been actively working with borrowers affected by COVID-19 by offering a payment deferral program providing for either a three-month interest-only period or a full payment deferral for three months. While interest and fees will continue to accrue to income, under normal GAAP accounting if eventual credit losses on these deferred payments emerge, interest and/or fee income accrued may need to be reversed. As a result, interest income in future periods could be negatively impacted. At this time management anticipates that the deferral program will have an immaterial impact to the Company's financial condition and results of operation, while recognizing that a sustained negative economic impact from COVID-19 could change this assessment, as borrowers' ability to repay is impacted in future periods. AtDecember 31, 2020 the Company and the Banks were considered well-capitalized with capital ratios in excess of regulatory requirements. However, an extended economic recession resulting from the COVID-19 pandemic could adversely impact the Company's and the Banks' capital position and regulatory capital ratios due to a potential increase in credit losses.
Lending Operations and Credit Risk
As noted herein the Company is working with its borrowers who are negatively impacted by COVID-19 by offering a payment deferral program. As ofDecember 31, 2020 , we had borrowers with 101 loans avail themselves of our payment deferral program with a total principal balance of$18.4 million in loans modified. Of those modified loans five loans totaling$293,000 in principal had not yet completed the initial three-month deferral period. One borrower with outstanding principal of$859,000 had been granted an additional extension. All other borrowers granted a deferral, composed of 95 loans totaling$17.2 million in principal had resumed regular payments. The CARES Act includes a Paycheck Protection Program ("PPP"), which is administered by theSmall Business Administration ("SBA") and is designed to aid small- and medium-sized businesses through federally-guaranteed loans disbursed through banks. These loans are intended to provide eight weeks of payroll and other costs to assist those businesses to either remain open or to re-open quickly and allow their workers to pay their bills. First Federal ofKentucky qualified as an SBA lender to assist the small business community in securing this important funding. As ofDecember 31, 2020 , First Federal ofKentucky had approved and closed with the SBA 45 PPP loans representing$1.5 million in funding. Of those loans a total of 13 loans aggregating$931,000 had been repaid at the end of the period. It is our understanding that loans funded through the PPP are fully guaranteed bythe United States government. Should those circumstances change, the bank could be required to increase its allowance for loan and lease losses related to these loans resulting in an increase in the provision for loan and lease losses. OnDecember 21, 2020 ,Congress passed a second Coronavirus Relief Bill, which provides for a second round of PPP loans, in which the Company plans to participate. The Banks are prepared to continue to offer short-term assistance in accordance with regulatory guidelines. Management continues to identify and monitor weaknesses in the loan portfolio resulting from fallout from the pandemic. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments such as residential rental properties for changes in asset quality and payment performance. Management also monitors unfunded commitments such as lines of credit and overdraft protection to determine liquidity and funding issues that may arise with our customers. If economic conditions worsen, the Company could need to increase its required allowance for loan losses through additional provisions for loan losses. It is possible that the Company's asset quality metrics could be materially and adversely impacted in future periods, if the effects of COVID-19 are prolonged. 31Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
Assets: At
Cash and cash equivalents: Cash and cash equivalents increased$1.0 million or 7.5% to$14.7 million atDecember 31, 2020 . Most of the Company's cash and cash equivalents are held in interest-bearing demand deposits. Time deposits in other financial institutions: Time deposits in other financial institutions decreased by$1.5 million or 66.6% to$745,000 atDecember 31, 2020 . As short-term time deposits matured the funds were used to repay FHLB advances, reinvested at the highest earning level possible or simply carried as interest-bearing demand deposits. Investment securities: AtDecember 31, 2020 , our securities portfolio consisted of mortgage-backed securities. Investment securities decreased$569,000 or 50.0% to$570,000 atDecember 31, 2020 . Loans: Loans receivable, net, increased by$10.4 million or 3.6% to$296.3 million atDecember 31, 2020 . Management continues to look for high-quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable, prudent and consistent with our interest rate risk strategies.
Non-Performing and Classified Loans: AtDecember 31, 2020 , the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately$6.5 million , or 2.2% of total loans (including acquired loans), compared to$7.4 million or 2.6%, of total loans atJune 30, 2020 . The Company's allowance for loan losses totaled$1.6 million and$1.5 million atDecember 31, 2020 andJune 30, 2020 , respectively. The allowance for loan losses atDecember 31, 2020 , represented 24.8% of nonperforming loans and 0.5% of total loans (including acquired loans), while atJune 30, 2020 , the allowance represented 20.1% of nonperforming loans and 0.5% of total loans. The Company had$8.7 million in assets classified as substandard for regulatory purposes atDecember 31, 2020 , including loans ($8.5 million ), loans acquired in theCKF Bancorp transaction and real estate owned ("REO") ($164,000 .) Classified loans as a percentage of total loans (including loans acquired) was 2.9% and 3.1% atDecember 31, 2020 andJune 30, 2020 , respectively. Of substandard loans, 100.0% were secured by real estate on which the Banks have priority lien position.
The table below shows the aggregate amounts of our assets classified for regulatory purposes at the dates indicated:
December 31, June 30,
(dollars in thousands) 2020 2020
Substandard assets $ 8,696 $ 9,587
Doubtful assets - -
Loss assets - -
Total classified assets $ 8,696 $ 9,587
At December 31, 2020 , the Company's real estate acquired through foreclosure
represented 1.9% of substandard assets compared to 6.7% at June 30, 2020 . During
the periods presented the Company made one loan totaling $37,000 to facilitate
the purchase of its other real estate owned by qualified buyers. Loans to
facilitate the sale of other real estate owned, which were included in
substandard loans, totaled $45,000 and $23,000 at December 31, 2020 and June 30,
2020 , respectively.
32
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Discussion of Financial Condition Changes from
The following table presents the aggregate carrying value of REO at the dates
indicated:
December 31, 2020 June 30, 2020
Number Net Number Net
of Carrying of Carrying
Properties Value Properties Value
One- to four-family 3 $ 164 5 $ 640
Building lot 1 - 1 -
Total REO 4 $ 164 6 $ 640
At December 31, 2020 and June 30, 2020 , the Company had $1.7 million and $1.7
million of loans classified as special mention, respectively (including loans
acquired in the CKF Bancorp transaction on December 31, 2012 ). This category
includes 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.
Liabilities: Total liabilities increased $9.6 million , or 3.6% to $278.8 million
at December 31, 2020 , primarily as a result of increases in advances and
deposits. Advances increased $6.3 million or 11.6% to $61.0 million at December
31, 2020 , while deposits increased $4.0 million or 1.9% to $216.3 million at
December 31, 2020 . Advances were used to fund loan growth.
Shareholders' Equity: At December 31, 2020 , the Company's shareholders' equity
totaled $51.8 million , a decrease of $79,000 or 0.2% from the June 30, 2020
total. The change in shareholders' equity was primarily associated with common
shares purchased by the Company to hold as treasury shares, and net profits for
the period less dividends paid on common stock.
The Company paid dividends of $691,000 or 105.5% of net income for the six-month
period just ended. On July 7, 2020 , the members of First Federal MHC again
approved a dividend waiver on annual dividends of up to $0.40 per share of
Kentucky First Federal Bancorp common stock. The Board of Directors of First
Federal MHC applied for approval of another waiver. The Federal Reserve Bank of
Cleveland has notified the Company that it did not object to the waiver of
dividends paid by the Company to First Federal MHC , and, as a result, First
Federal MHC will be permitted to waive the receipt of dividends for quarterly
dividends up to $0.10 per common share through the third calendar quarter of
2021. Management believes that the Company has sufficient capital to continue
the current dividend policy without affecting the well-capitalized status of
either subsidiary bank. Management cannot speculate on future dividend levels,
because various factors, including capital levels, income levels, liquidity
levels, regulatory requirements and overall financial condition of the Company
are considered before dividends are declared. However, management continues to
believe that a strong dividend is consistent with the Company's long-term
capital management strategy. See "Risk Factors" in Part II, Item 1A, of the
Company's Annual Report on Form 10-K for the year ended June 30, 2020 for
additional discussion regarding dividends.
33
Kentucky First Federal Bancorp
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-month Periods Ended
General
Net income totaled$655,000 or$0.08 diluted earnings per share for the six months endedDecember 31, 2020 , an increase of$173,000 or 35.9% from net income of$482,000 or$0.06 diluted earnings per share for the same period in 2019. The increase in net income on a six-month basis was primarily attributable to higher net interest income, higher non-interest income and lower non-interest expense, which were partially offset by increased provision for loan losses and increased provision for income tax. Net Interest Income
Net interest income before provision for loan losses increased$141,000 or 3.0% to$4.9 million for the six-month period just ended. Interest income decreased by$560,000 , or 8.5%, to$6.0 million , while interest expense decreased$701,000 or 37.5% to$1.2 million for the six months endedDecember 31, 2020 . The decrease in interest income period-to-period was due primarily to a decrease in the average rate earned on interest-earning assets, as the average volume of interest-earning assets increased period-to-period. The average rate decreased 49 basis points to 3.83% for the recently-ended six-month period compared to the prior year period, while the average balance of interest-earning assets increased$9.4 million or 3.1% to$314.9 million for the six months endedDecember 31, 2020 . Interest income on loans decreased$361,000 or 5.7% to$5.9 million , due primarily to a decrease in the average rate earned on the loan portfolio, which decreased 40 basis points to 4.06%, while the average balance increased$10.6 million or 3.7% to$292.8 million for the six-month period endedDecember 31, 2020 . Interest income from interest-bearing deposits and other decreased$188,000 or 69.13% to$84,000 for the six months just ended due to a decrease in the average rate earned, which decreased 172 basis points to 0.79% for the recently-ended period compared to the period a year ago. The decrease in interest expense was due primarily to a decrease of 57 basis points on the average rate paid on funding sources, which totaled 0.89% for the six months endedDecember 31, 2020 . The Company's interest-bearing liabilities have repriced quickly as we are able to take advantage of the low interest rate environment that currently exists. Interest expense on deposits decreased$256,000 or 21.4% to$940,000 for the six months endedDecember 31, 2020 , while interest expense on borrowings decreased$445,000 or 66.1% to$228,000 for the same period. The decrease in interest expense on deposits was attributed primarily to a decrease in the average rate paid on interest-bearing deposits, which decreased 34 basis points to 0.90% for the recently ended period, while the average balance of interest-bearing deposits increased$15.5 million or 8.0% to$208.5 million for the most recent period. The decrease in interest expense on borrowings was attributed to both to a lower average rate paid on the borrowings and a lower average balance of borrowings period to period. The average balance of borrowings outstanding decreased$8.8 million or 14.0% to$54.3 million for the recently ended six-month period, while the average rate paid on borrowings decreased 129 basis points to 0.84% for the most recent period.
Net interest spread increased from 2.85% for the prior year semiannual period to
2.94% for the six-month period ended
Provision for Losses on Loans
Provision for loan losses increased$128,000 for the six-month period endedDecember 31, 2020 , and totaled$192,000 compared to$64,000 for the prior year semi-annual period. The higher provision was primarily in response to the higher level of loans maintained in the portfolio as well as increased levels of multi-family and commercial real estate loans, which carry somewhat more risk. While management continues to consider the potential impact of COVID-19 on asset quality, no adjustment to the allowance for loan losses has been made for that specific reason. Near the onset of the pandemic, the Company granted deferrals to borrowers representing$18.1 million in loans, but the overwhelming majority of those borrowers have resumed regular payments. Further, 95% of the Company's loan portfolio is secured by residential real estate, which has performed well during the pandemic. 34Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Six-month Periods Ended
Non-interest Income Non-interest income increased$99,000 or 65.1% to$251,000 for the six months endedDecember 31, 2020 , compared to the prior year period, primarily because of an increase in net gains on sales of loans. Net gain on sales of loans increased$115,000 to$155,000 for the recently-ended six-month period. In the current interest rate environment, many borrowers are choosing long-term, fixed rate loans, which the bank usually sells to theFederal Home Loan Bank of Cincinnati ("FHLB"). An increase in volume of these loans sold was responsible for the increase in gain on sale of loans. Non-interest Expense
Non-interest expense decreased
Employee compensation and benefits decreased$124,000 or 4.5% to$2.6 million primarily due to lower employee compensation. The Banks were operating with two fewer full-time equivalent employees in the recently-ended semi-annual period compared to the prior year period, which resulted in lower compensation cost, lower fringe benefit cost and lower payroll taxes period to period. Also contributing to lower compensation cost was an increase in the number of loans originated in the recently-ended period compared to the prior year. The Banks are required to defer a portion of the costs associated with loan originations and those costs are primarily related to personnel costs. Somewhat offsetting the decreases in other employee compensation and benefits expense was an increase in contributions to the Company's Defined Benefit ("DB") pension plan. DB pension contributions increased$56,000 or 12.9% to$486,000 for the six-month period recently ended compared to the prior year period. Higher DB pension contributions were a result of higher administrative fees andPension Benefit Guarantee Corporation premiums, as the Company's DB plan was frozen effectiveApril 1, 2019 . Other non-interest expense decreased$47,000 or 12.7% to$323,000 for the six months endedDecember 31, 2020 , primarily due to lower general insurance expenses, discretionary employee and meeting expenses, regulatory assessments and general loan expenses. Voice and data communications expense decreased$43,000 or 43.0% to$57,000 for the six-month period just ended as upgraded technology savings were realized. Somewhat offsetting the decreases in various non-interest expense items were increases inFDIC insurance premiums and data processing expenses.FDIC insurance premiums increased to$88,000 for the six months endedDecember 31, 2020 . In the prior year semi-annual period the Banks were able to utilize their Small Bank Assessment Credits ("SBAC"). The SBAC were depleted in the quarterly period endedJune 30, 2020 . Data processing increased$53,000 or 22.2% to$292,000 for the period just ended as core processing costs increased and the Company expanded its technology infrastructure. Income Tax Expense Income tax expense increased$37,000 or 31.4% to$155,000 for the six months endedDecember 31, 2020 , compared to the prior year period. The effective tax rates for the six-month periods endedDecember 31, 2020 and 2019, were 19.1% and 19.7%, respectively. 35Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Three-month Periods Ended
General Net income totaled$370,000 or$0.04 diluted earnings per share for the three months endedDecember 31, 2020 , an increase of$122,000 or 49.2% from net income of$248,000 or$0.03 diluted earnings per share for the same period in 2019. Net Interest Income
Net interest income before provision for loan losses increased$132,000 or 5.6% to$2.5 million for the three-month period just ended, as interest expense decreased at a faster pace than interest income decreased for the quarter just ended. Interest income decreased by$261,000 , or 8.0%, to$3.0 million , while interest expense decreased$393,000 or 42.6% to$529,000 for the three months endedDecember 31, 2020 . Interest income on loans decreased$165,000 or 5.3% to$3.0 million , due primarily to a decrease in the average rate earned on the loan portfolio. The average rate earned on the loan portfolio decreased 42 basis points to 4.00%, while the average balance increased$13.5 million or 4.8% to$296.3 million for the three-month period endedDecember 31, 2020 . Interest income from interest-bearing deposits and other decreased$90,000 or 70.3% to$38,000 for the three months just ended due to a decrease in the average rate earned, which decreased 159 basis points to 0.73% for the recently-ended period compared
to the period a year ago. Interest expense on deposits decreased$182,000 or 29.9% to$426,000 for the three months endedDecember 31, 2020 , while interest expense on borrowings decreased$211,000 or 67.2% to$103,000 for the same period. The decrease in interest expense on deposits was attributed primarily to a decrease in the average rate paid on interest-bearing deposits, which decreased 44 basis points to 0.82% for the recently ended period, while the average balance of interest-bearing deposits increased$15.3 million or 7.9% to$208.7 million for the most recent period. The decrease in interest expense on borrowings was attributed to both to a lower average rate paid on the borrowings and a lower average balance of borrowings period to period. The average balance of borrowings outstanding decreased$6.7 million or 10.5% to$56.7 million for the recently ended three-month period, while the average rate paid on borrowings decreased 125 basis points to 0.73% for the most recent period.
Net interest spread increased 15 basis points from 2.83% for the prior year
quarterly period to 2.98% for the three-month period ended
Provision for Losses on Loans
Provision for loan losses totaled$108,000 for the three-month period endedDecember 31, 2020 , an increase of$103,000 over the$5,000 provision recorded for the prior year quarter. The higher provision was primarily in response to the higher level of loans maintained in the portfolio as well as increased levels of multi-family and commercial real estate loans, which carry somewhat more risk. 36Kentucky First Federal Bancorp MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Comparison of Operating Results for the Three-month Periods Ended
Non-interest Income Non-interest income increased$45,000 or 57.7% to$123,000 for the three months endedDecember 31, 2020 , compared to the prior year period, primarily because of an increase in net gains on sales of loans. Net gain on sales of loans increased$63,000 to$97,000 for the recently-ended three-month period over the prior year amount. In the current interest rate environment, many borrowers are choosing long-term, fixed rate loans, which the Banks usually sell to the FHLB. An increase in volume of these loans sold was responsible for the increase in
gain on sale of loans. Non-interest Expense
Non-interest expense decreased
Employee compensation and benefits decreased$107,000 or 7.6% to$1.3 million primarily due to lower employee and director compensation. Also contributing to lower compensation cost was an increase in the number of loans originated during the period, which increases the expense deferred for those loans. The Company's DB pension contributions decreased$18,000 or 7.1% to$234,000 for the three-month period recently ended compared to the prior year period. Lower DB pension contributions for the quarter were a result of lower total costs than originally anticipated. Other non-interest expense decreased$14,000 or 7.7% to$168,000 for the three months endedDecember 31, 2020 , primarily due to lower general insurance expenses, discretionary employee and meeting expenses, and regulatory assessments. Auditing and accounting expenses decreased$13,000 or 25.0% to$39,000 for the quarter just ended. Somewhat offsetting the decreases in various non-interest expense items were increases inFDIC insurance premiums, foreclosure and OREO expenses, and data processing expenses.FDIC insurance premiums totaled$31,000 for the three months endedDecember 31, 2020 , compared to zero for the prior year period due to a lack of SBAC credits for the current year. Foreclosure and OREO expenses, net, increased$24,000 to$30,000 for the period just ended as the Company resolved various substandard loans and incurred losses on the existing OREO. Data processing expenses increased$11,000 or 8.2% to$145,000 for the quarter endedDecember 31, 2020 , primarily due to higher costs associated with enhanced voice and data capabilities. Income Tax Expense Income tax expense increased$31,000 or 53.4% to$89,000 for the three months endedDecember 31, 2020 , compared to the prior year period. The effective tax rates for the three-month periods endedDecember 31, 2020 and 2019, were 19.4% and 19.0%, respectively. 37Kentucky First Federal Bancorp
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