Kentucky First Federal Bancorp 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 to Kentucky 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 trends and conditions, including inflation and its impacts, 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), the impacts related to or resulting from Russia’s military action in Ukraine, including the broader impacts to financial markets, and the other matters mentioned in Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2021. 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. 26 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 nine month periods ended March 31, 2022 and 2021, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. Nine Months Ended March 31, 2022 2021 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 287,377 $ 8,190 3.80 % $ 294,765 $ 8,835 4.00 % Mortgage-backed securities 445 8 2.40 586 11 2.50 Other securities – – – 132 3 3.03 Other interest-earning assets 40,067 118 0.39 21,646 122 0.75 Total interest-earning assets 327,889 8,316 3.38 317,129 8,971 3.77 Less: Allowance for loan losses (1,607 ) (1,552 ) Non-interest-earning assets 12,124 12,234 Total assets $ 338,406 $ 327,811 Interest-bearing liabilities: Demand deposits $ 19,398 $ 29 0.20 % $ 17,871 $ 23 0.17 % Savings 72,729 203 0.37 62,674 194 0.41 Certificates of deposit 126,614 823 0.87 128,343 1,110 1.15 Total deposits 218,741 1,055 0.64 208,888 1,327 0.85 Borrowings 49,934 285 0.76 55,160 333 0.81 Total interest-bearing liabilities 268,675 1,340 0.67 264,048 1,660 0.84 Noninterest-bearing demand deposits 15,155 9,817 Noninterest-bearing liabilities 2,246 2,035 Total liabilities 268,076 275,900 Shareholders’ equity 52,330 51,911 Total liabilities and shareholders’ equity $ 338,406 $ 327,811 Net interest spread $ 6,976 2.71 % $ 7,311 2.93 % Net interest margin 2.84 % 3.07 % Average interest-earning assets to average interest-bearing liabilities 122.04 % 120.10 % 1 Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. Also includes loans on nonaccrual status. 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 three month periods ended March 31, 2022 and 2021, 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 March 31, 2022 2021 Average Balance Interest And Dividends Yield/ Cost Average Balance Interest And Dividends Yield/ Cost (Dollars in thousands) Interest-earning assets: Loans 1 $ 274,197 $ 2,513 3.67 % $ 298,828 $ 2,899 3.88 % Mortgage-backed securities 405 2 2.96 550 3 2.18 Other securities – – – – – – Other interest-earning assets 51,544 46 0.35 22,270 38 0.68 Total interest-earning assets 326,146 2,561 3.14 321,648 2,940 3.66 Less: Allowance for loan losses (1,599 ) (1,622 ) Non-interest-earning assets 12,094 11,619 Total assets $ 336,641 $ 331,645 Interest-bearing liabilities: Demand deposits $ 19,398 $ 10 0.21 % $ 18,567 $ 8 0.17 % Savings 75,004 68 0.36 67,532 69 0.41 Certificates of deposit 126,964 258 0.81 123,975 310 1.00 Total deposits 221,366 336 0.61 210,074 387 0.74 Borrowings 45,302 87 0.77 56,998 105 0.74 Total interest-bearing liabilities 266,668 423 0.63 267,072 492 0.74 Noninterest-bearing demand deposits 15,155 11,181 Noninterest-bearing liabilities 2,282 1,586 Total liabilities 284,105 279,839 Shareholders’ equity 52,536 51,806 Total liabilities and shareholders’ equity $ 336,641 $ 331,645 Net interest spread $ 2,138 2.51 % $ 2,448 2.92 % Net interest margin 2.62 % 3.04 % Average interest-earning assets to average interest-bearing liabilities 122.30 % 120.44 % 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) Discussion of Financial Condition Changes from June 30, 2021 to March 31, 2022 Risks and Uncertainties Related to COVID-19 - In March 2020 the World 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 on March 27, 2020, and other more recent legislative and regulatory relief efforts including the Consolidated Appropriations Act, 2021. 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 at March 31, 2022, totaled $7.5 million compared to $8.5 million at March 31, 2021. Management attributes some of this improved performance to the overall strengthening in the residential real estate market. Nearly 95% of the Company’s loans are secured by residential real estate. Business Continuity, Processes and Controls In response to the COVID-19 pandemic the Banks are considered essential businesses and have remained open for business. We implemented our pandemic preparedness plan and generally maintained regular business hours through drive-thru facilities, automated teller machines, remote deposit capture and online and mobile banking applications. We offer 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. 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. 29 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Discussion of Financial Condition Changes from June 30, 2021 to March 31, 2022 (continued) 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. At March 31, 2022 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 of March 31, 2022, 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. One borrower with outstanding principal of $859,000 had been granted an additional extension and returned to regular paying status in April 2021. All other borrowers granted a deferral, composed of 100 loans totaling $17.5 million in principal had resumed regular payments. The CARES Act and subsequent Consolidated Appropriations Act, 2021, includes a Paycheck Protection Program (“PPP”), which is administered by the Small 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 of Kentucky qualified as an SBA lender to assist the small business community in securing this important funding. As of March 31, 2022, First Federal of Kentucky had approved and closed with the SBA 75 PPP loans representing $2.6 million in funding. Of those loans a total of 51 loans aggregating $2.2 million had been repaid at the end of the period. It is our understanding that loans funded through the PPP are fully guaranteed by the 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. 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. 30 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Discussion of Financial Condition Changes from June 30, 2021 to March 31, 2022 (continued) Assets: At March 31, 2022, the Company’s assets totaled $333.9 million, a decrease of $4.2 million, or 1.2%, from total assets at June 30, 2021. This increase was attributed primarily to an increase in cash and cash equivalents. Cash and cash equivalents: Cash and cash equivalents increased $24.4 million or 112.8% to $46.1 million at March 31, 2022, and was primarily due to increased deposits and loan repayments. Investment securities: At March 31, 2022, our securities portfolio consisted of mortgage-backed securities. Investment securities decreased $108,000 or 21.8% to $387,000 at March 31, 2022. Loans : Loans receivable, net, decreased by $28.5 million or 9.6% to $269.4 million at March 31, 2022. There are multiple reasons for the decline in loan balances. Some borrowers have decided to take advantage of high prices and sell all or part of their real estate holdings. Some borrowers have sold their properties due to age or death and some loans have been lost to competing financial institutions who offered terms that our Banks did not believe were prudent to match. Non-Performing and Classified Loans: At March 31, 2022, the Company had non-performing loans (loans 90 or more days past due or on nonaccrual status) of approximately $5.7 million, or 2.1% of total loans (including acquired loans), compared to $6.7 million or 2.2%, of total loans at June 30, 2021. The Company’s allowance for loan losses totaled $1.5 million and $1.6 million at March 31, 2022 and June 30, 2021, respectively. The allowance for loan losses at March 31, 2022, represented 25.9% of nonperforming loans and 0.5% of total loans (including acquired loans), while at June 30, 2021, the allowance represented 24.4% of nonperforming loans and 0.5% of total loans. The Company had $7.5 million in assets classified as substandard for regulatory purposes at March 31, 2022, including loans ($7.5 million), loans acquired in the CKF Bancorp transaction and real estate owned (“REO”) ($61,000.) Classified loans as a percentage of total loans (including loans acquired) was 2.8% and 3.0% at March 31, 2022 and June 30, 2021, 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: (dollars in thousands) March 31, 2022 June 30, 2021 Substandard assets $ 7,540 $ 8,925 Doubtful assets – – Loss assets – – Total classified assets $ 7,540 $ 8,925 At March 31, 2022, the Company’s real estate acquired through foreclosure represented 0.8% of substandard assets compared to 0.9% at June 30, 2021. During the periods presented the Company made one loan totaling $32,000 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 $0 and $43,000 at March 31, 2022 and June 30, 2021, respectively. 31 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Discussion of Financial Condition Changes from June 30, 2021 to March 31, 2022 (continued) The following table presents the aggregate carrying value of REO at the dates indicated: March 31, 2022 June 30, 2021 Number of Properties Net Carrying Value Number of Properties Net Carrying Value One- to four-family 2 $ 61 2 $ 82 Building lot – – 1 – Total REO 2 $ 61 3 $ 82 At March 31, 2022 and June 30, 2021, the Company had $906,000 and $1.6 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 decreased $4.5 million, or 1.6% to $281.3 million at March 31, 2022, primarily as a result of a decrease in borrowings and was somewhat offset by an increase in deposits. FHLB advances decreased $16.1 million or 28.3% to $40.8 million at March 31, 2022, while deposits increased $11.8 million or 5.2% to $238.6 million. Shareholders’ Equity: At March 31, 2022, the Company’s shareholders’ equity totaled $52.6 million, an increase of $350,000 or 0.7% from the June 30, 2021 total. The change in shareholders’ equity was primarily associated with net profits for the period less dividends paid on common stock. The Company paid dividends of $1.0 million or 75.5% of net income for the nine-month period just ended. On July 8, 2021, 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 2022. 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, 2021 for additional discussion regarding dividends. 32 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Comparison of Operating Results for the Nine-month Periods Ended March 31, 2022 and 2021 General Net earnings were $1.4 million or $0.17 diluted earnings per share for the nine months ended March 31, 2022, compared to net earnings of $1.1 million or $0.14 diluted earnings per share for the nine months ended March 31, 2021, an increase of $256,000 or 22.7%. The increase in net earnings on a nine-month basis was primarily attributable to lower non-interest expense and decreased provision for loan losses, which were partially offset by decreased net interest income, increased provision for income tax and decreased non-interest income. Net Interest Income Net interest income before provision for loan losses decreased $335,000 or 4.6% and totaled $7.0 million for the nine months ended March 31, 2022, as interest income decreased more than interest expense decreased. Interest income decreased $655,000 or 7.3% and totaled $8.3 million for the nine months just ended primarily due to a decrease in the average rate earned on the assets, although the average volume of assets also decreased period to period. Interest expense decreased $320,000 or 19.3% and totaled $1.3 million for the nine months just ended, primarily due to a decrease in the average rate paid on funding sources. 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 earned decreased 39 basis points to 3.38% for the recently-ended nine-month period compared to the prior year period, while the average balance of interest-earning assets increased $10.8 million or 3.4% to $327.9 million for the nine months ended March 31, 2022. Interest income on loans decreased $645,000 or 7.3% to $8.2 million, due primarily to a decrease in the average rate earned on the loan portfolio, which decreased 20 basis points to 3.80%, while the average balance of loans, net decreased $7.4 million or 2.5% to $287.4 million for the nine-month period ended March 31, 2022. As the average balance of loans decreased, the funds were invested in short-term deposits, which have provided much lower yields. Management is working diligently to effectively manage excess liquidity and to build back the Company’s loan balances, which will replace lower-yielding assets with higher-yielding loans. The decrease in interest expense was due primarily to a decrease of 17 basis points on the average rate paid on funding sources, which totaled 0.67% for the nine months ended March 31, 2022. Interest expense on deposits decreased $272,000 or 20.5% to $1.1 million for the nine months ended March 31, 2022, while interest expense on borrowings decreased $48,000 or 14.4% to $285,000 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 21 basis points to 0.64% for the recently ended period, while the average balance of interest-bearing deposits increased $9.9 million or 4.7% to $218.7 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 $5.2 million or 9.5% to $49.9 million for the recently ended nine-month period, while the average rate paid on borrowings decreased 5 basis points to 0.76% for the most recent period. Net interest spread decreased from 2.93% for the prior year nine month period to 2.71% for the nine-month period ended March 31, 2022. Provision for Losses on Loans The Company recorded a negative provision for loan losses of $106,000 for the nine-month period ended March 31, 2022, compared to a provision of $192,000 recorded for the prior year period. Management’s determination of the appropriate level of allowance for loan losses was impacted by an overall lower level of loans in the loan portfolio, as well as changes within the portfolio, and strong real estate values existing in the Banks’ lending areas. 33 Kentucky First Federal Bancorp MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Comparison of Operating Results for the Nine-month Periods Ended March 31, 2022 and 2021 (continued) Non-interest Income Non-interest income decreased $11,000 or 2.5% to $422,000 for the nine months ended March 31, 2022 compared to the prior year period, primarily because of a decrease in net gains on sales of loans. Net gain on sales of loans decreased $49,000 to $231,000 for the recently-ended nine-month period. Non-interest Expense Non-interest expense decreased $385,000 or 6.3% and totaled $5.7 million for the nine months ended March 31, 2022. Employee compensation and benefits decreased $289,000 or 7.3% to $3.7 million primarily due to a decrease in the required contribution to its defined benefit (“DB”) pension plan for the current fiscal year. The Company’s DB plan administrator estimates contributions for the fiscal year ending June 30, 2022 to be approximately $376,000, compared to $955,000 in contributions for the fiscal year ended June 30, 2021. FDIC insurance decreased $80,000 or 62.0% to $49,000 for the nine months just ended. FDIC insurance premiums increased in the prior year due primarily to a goodwill impairment charge recognized at one of the Company’s Banks in the three month period ended June 30, 2020. Occupancy and equipment expense decreased $28,000 or 5.7% to $460,000 for the nine months ended March 31, 2022, primarily due to lower general computer and software expenses, depreciation expenses and utilities. Franchise and other taxes decreased $16,000 or 12.3% period to period as the Banks became subject to Kentucky income taxes rather than the Kentucky Savings & Loan Deposits tax effective January 1, 2021. Income Tax Expense Income tax expense increased $81,000 or 27.6% to $374,000 for the nine months ended March 31, 2022, compared to the prior year period. The effective tax rates for the nine-month periods ended March 31, 2022 and 2021, were 21.3% and 20.6%, respectively. 34 Kentucky 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 March 31, 2022 and 2021 (continued) General Net income totaled $334,000 or $0.04 diluted earnings per share for the three months ended March 31, 2022, a decrease of $139,000 or 29.4% from net income of $473,000 or $0.06 diluted earnings per share for the same period in 2021. The decrease in net earnings for the quarter ended March 31, 2022 was primarily attributable to lower net interest income and lower non-interest income, which were partially offset by decreased non-interest expense and negative provision for losses on loans. Net Interest Income Net interest income before provision for loan losses decreased $310,000 or 12.7% to $2.1 million for the three-month period just ended, primarily because interest income decreased more than interest expense decreased. Interest income decreased $379,000 or 12.9% and totaled $2.6 million for the recently-ended quarterly period due primarily to decreased average balance of interest-earning assets period to period as well as a lower average interest rate earned on those assets. Interest expense decreased $69,000 or 14.0% and totaled $423,000 for the three months just ended primarily due to lower average interest rates paid on funding sources. Interest income on loans decreased $386,000 or 13.3% to $2.5 million, due to both decreases in the average balance of the loan portfolio as well as the average rate earned on the loan portfolio. The average balance of the loan portfolio decreased $24.6 million or 8.2% to $274.2 million for the three-month period ended March 31, 2022, while the average rate earned on the loan portfolio decreased 21 basis points to 3.67%. Interest income from interest-bearing deposits and other increased $8,000 or 21.17% to $46,000 for the three months just ended due to an increase in the average balance, which increased $29.3 million or 131.5% to $51.5 million for the recently-ended period compared to the period a year ago. Interest expense on deposits decreased $51,000 or 13.2% to $336,000 for the three months ended March 31, 2022, while interest expense on borrowings decreased $18,000 or 17.1% to $87,000 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 13 basis points to 0.61% for the recently ended period, while the average balance of interest-bearing deposits increased $11.3 million or 5.4% to $221.4 million for the most recent period. The decrease in interest expense on borrowings was attributed primarily to a lower average balance of borrowings period to period. The average balance of borrowings outstanding decreased $11.7 million or 20.5% to $45.3 million for the recently ended three-month period. The average rate paid on borrowings increased three basis points to 0.77% for the most recent period. Net interest spread decreased 41 basis points from 2.92% for the prior year quarterly period to 2.51% for the three-month period ended March 31, 2022. Provision for Losses on Loans The Company recorded a negative provision for loan losses of $106,000 for the three-month period ended March 31, 2022, compared to no provision for the prior year period. The negative provision was due in part to continued strong repayment performance of the Company’s loan portfolio. In calculating the allowance for loan and lease losses, management considers historical losses which have been reduced considerably due to a strong real estate market. Further, the volume in the overall portfolio has declined over the most recent three quarters, particularly in certain areas for which management weight heavier in its loss analysis, such as multi-family loans. 35 Kentucky 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 March 31, 2022 and 2021 (continued) Non-interest Income Non-interest income decreased $88,000 or 48.4% to $94,000 for the three months ended March 31, 2022, compared to the prior year period, primarily because of a decrease in net gains on sales of loans. Net gain on sales of loans decreased $102,000 to $23,000 for the recently-ended three-month period over the prior year amount. Non-interest Expense Non-interest expense decreased $148,000 or 7.3% and totaled $1.9 million for the three months ended March 31, 2022, due primarily to a decrease in employee compensation and benefits. Employee compensation and benefits decreased $125,000 or 9.2% to $1.2 million primarily due to a decrease in the required contribution to its DB pension plan referenced above. Data processing expenses decreased $29,000 or 21.0% and totaled $109,000 for the period just ended primarily due to upgraded data processing operations conducted by the Company. FDIC insurance decreased $18,000 or 43.9% to $23,000 for the three months just ended, while advertising expense decreased $18,000 or 47.4% period to period. Franchise and other taxes increased $23,000 or 100.0% for the three months ended March 31, 2022, as the Banks became subject to local deposits tax rather than being subject to the Kentucky Savings and Loan tax effective January 1, 2021. Income Tax Expense Income tax expense decreased $5,000 or 3.6% to $133,000 for the three months ended March 31, 2022, compared to the prior year period. The effective tax rates for the three-month periods ended March 31, 2022 and 2021, were 28.5% and 22.6%, respectively. 36 Kentucky First Federal Bancorp ITEM 3: Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the Company is a smaller reporting company.