UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended March 31, 20222023

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from              to             

Commission File Number 001-35033

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

   

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)  

Federal32-0330122

(State of Other Jurisdiction

of Incorporation)

(I.R.S Employer

Identification Number)

201 East North Second Street, Seneca, South Carolina29678
(Address of Principal Executive Officers)(Zip Code)

(864) 882-2765

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)  

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered
Common Stock, par value $0.01 per shareOFEDOFEDThe NASDAQ Stock Market, LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Smaller reporting company
Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Act.    ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 9, 2022,5, 2023, the registrant had 5,609,4445,609,268 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

Form 10-Q Quarterly Report

Table of Contents

 

PART I. 1
ITEM 1.FINANCIAL STATEMENTS1
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS3331
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK4241
ITEM 4.CONTROLS AND PROCEDURES4241
PART II. 4342
ITEM 1.LEGAL PROCEEDINGS4342
ITEM 1A.RISK FACTORS4342
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS4342
ITEM 3.DEFAULTS UPON SENIOR SECURITIES4342
ITEM 4.MINE SAFETY DISCLOSURES4342
ITEM 5.OTHER INFORMATION4342
ITEM 6.INDEX TO EXHIBITS4443
SIGNATURES4443
EXHIBITS45

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

PART I  

 

ITEM 1. FINANCIAL STATEMENTS

ITEM 1.FINANCIAL STATEMENTS

 March 31, 2022
(unaudited)
  June 30, 2021  March 31, 2023
(unaudited)
  June 30, 
2022
 
ASSETS             
Cash and due from banks $4,567  $9,026  $6,174  $2,327 
Interest-earning deposits  6,897   21,575   1,392   7,406 
Fed funds sold  6   48   102    
Total cash and cash equivalents  11,470   30,649   7,668   9,733 
Securities available-for-sale  155,935   139,061   138,013   151,299 
Loans  336,122   339,089   401,727   345,112 
Allowance for loan losses  (1,339)  (1,339)  (1,489)  (1,339)
Net loans  334,783   337,750   400,238   343,773 
Loans held for sale, at fair value     164      152 
Premises and equipment, net  8,657   8,972   8,272   8,579 
Accrued interest receivable                
Loans  905   939   1,083   944 
Investments  417   437   363   468 
Restricted equity securities, at cost  1,039   1,408   2,651   1,189 
Bank owned life insurance  20,285   19,937   20,754   20,398 
Goodwill  2,593   2,593   2,593   2,593 
Core deposit intangible  87   134   35   74 
Loan servicing rights  344   305   386   345 
Deferred tax assets  3,297   787   5,546   4,678 
Other assets  456   580   544   567 
Total assets $540,268  $543,716  $588,146  $544,792 
                
LIABILITIES                
Deposits                
Noninterest - bearing $55,870  $53,250  $56,803  $60,697 
Interest - bearing  398,578   386,680   414,152   398,985 
Total deposits  454,448   439,930   470,955   459,682 
Federal Home Loan Bank advances  5,000   15,000   42,000   9,000 
Accrued interest payable and other liabilities  800   686   1,584   853 
Total liabilities  460,248   455,616   514,539   469,535 
                
SHAREHOLDERS’ EQUITY                
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,605,109 and 6,563,409 shares outstanding, respectively  66   66 
Treasury stock, at par, 994,746 and 970,274 shares, respectively  (10)  (10)
Common stock, $0.01 par value, 100,000,000 shares authorized;
6,606,648 and 6,605,109 shares outstanding, respectively
 
 
 
 
 
66
 
 
 
 
 
 
 
66
 
 
Treasury stock, at par, 997,380 and 997,380 shares, respectively  (10)  (10)
Additional paid-in capital  6,058   6,400   6,105   6,055 
Retained earnings  82,303   80,915   84,173   82,790 
Accumulated other comprehensive (loss)/income  (8,314)  941 
Accumulated other comprehensive loss  (16,727)  (13,588)
Unearned ESOP shares  (83)  (212)     (56)
Total shareholders’ equity  80,020   88,100   73,607   75,257 
Total liabilities and shareholders’ equity $540,268  $543,716  $588,146  $544,792 

See accompanying notes to the consolidated financial statements


 1

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME/(LOSS)/INCOME

(Unaudited)

(Amounts in thousands, except share and per share data)

               
  Three Months Ended  Nine Months Ended 
  March 31,
2023
  March 31,
2022
  March 31,
2023
  March 31,
2022
 
Interest and dividend income:                
Loans, including fees $4,069  $3,392  $11,521  $10,560 
Securities, taxable  762   543   2,290   1,336 
Securities, tax-exempt  38   86   117   257 
Other interest-earning assets  81   7   132   38 
Total interest income  4,950   4,028   14,060   12,191 
                 
Interest expense:                
Deposits  1,184   228   1,805   802 
Other borrowings  372   19   685   61 
Total interest expense  1,556   247   2,490   863 
                 
Net interest income  3,394   3,781   11,570   11,328 
                 
Provision for loan losses  50      150    
Net interest income after provision for loan losses  3,344   3,781   11,420   11,328 
                 
Noninterest income:                
Service charges on deposit accounts  106   101   329   304 
Income on bank owned life insurance  127   121   356   348 
Mortgage servicing income  22   27   66   85 
Gain on sale of mortgage loans     33   12   182 
ATM & debit card income  116   106   341   329 
Change in fair value of equity securities, net  4      (1)  (49)
Loss on sale of securities, net        (84)   
Gain on payoff of purchase credit impaired loans  51   70   240   70 
Other  7   6   15   11 
Total noninterest income  433   464   1,274   1,280 
                 
Noninterest expense:                
Salaries and employee benefits  1,730   1,689   4,980   5,101 
Occupancy and equipment  460   468   1,427   1,443 
Data processing  297   266   836   768 
ATM & debit card expense  101   86   260   256 
Professional and supervisory fees  121   113   355   349 
Office expense  42   39   156   131 
Advertising  59   61   190   196 
FDIC deposit insurance  38   36   108   105 
Foreclosed assets, net  (37)     (36)  (1)
Change in loan servicing asset  (22)  (42)  (41)  (39)
Other  191   181   587   579 
Total noninterest expense  2,980   2,897   8,822   8,888 
                 
Income before income taxes  797   1,348   3,872   3,720 
Income tax expense  169   304   809   669 
                 
         Net income $628  $1,044  $3,063  $3,051 
                 
Other comprehensive income/(loss)                
Unrealized gains/(losses) on securities available-for-sale $2,378  $(9,871) $(4,056) $(11,715)
Tax effect  (501)  2,073   851   2,460 
Reclassification adjustment for losses realized in net income        84    
Tax effect        (18)   
Total other comprehensive income/(loss)  1,877   (7,798)  (3,139)  (9,255)
Comprehensive income/(loss) $2,505  $(6,754) $(76) $(6,204)
                 
Basic net income per share: (Note 3) $0.11  $0.19  $0.55  $0.55 
Diluted net income per share: (Note 3) $0.11  $0.19  $0.55  $0.55 
Dividends declared per share: $0.10  $0.10  $0.30  $0.30 

See accompanying notes to the consolidated financial statements

 2

OCONEE FEDERAL FINANCIAL CORP. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(Unaudited) 

(Amounts in thousands, except share and per share data)

 

                 
  Three Months Ended  Nine Months Ended 
  March 31,
2022
  March 31,
2021
  March 31,
2022
  March 31,
2021
 
Interest and dividend income:                
Loans, including fees $3,392  $3,612  $10,560  $11,456 
Securities, taxable  543   294   1,336   868 
Securities, tax-exempt  86   86   257   268 
Other interest-earning assets  7   25   38   84 
Total interest income  4,028   4,017   12,191   12,676 
Interest expense:                
Deposits  228   399   802   1,408 
Other borrowings  19   19   61   57 
Total interest expense  247   418   863   1,465 
                 
Net interest income  3,781   3,599   11,328   11,211 
                 
Provision for loan losses            
Net interest income after provision for loan losses  3,781   3,599   11,328   11,211 
                 
Noninterest income:                
Service charges on deposit accounts  101   85   304   260 
Income on bank owned life insurance  121   120   347   344 
Mortgage servicing income  27   36   85   114 
Gain on sale of mortgage loans  33   76   182   177 
ATM & debit card income  106   107   329   303 
Change in fair value of equity securities, net     (20)  (49)  (11)
Gain on sale of securities, net           109 
Gain on payoff of purchase credit impaired loans  70      70   195 
Other  6   3   12   7 
Total noninterest income  464   407   1,280   1,498 
                 
Noninterest expense:                
Salaries and employee benefits  1,689   1,706   5,101   4,999 
Occupancy and equipment  468   444   1,443   1,313 
Data processing  266   244   768   728 
ATM & debit card expense  86   82   256   227 
Professional and supervisory fees  113   124   349   388 
Office expense  39   55   131   165 
Advertising  61   48   196   160 
FDIC deposit insurance  36   30   105   93 
Foreclosed assets, net     (26)  (1)  5 
Change in loan servicing asset  (42)     (39)  72 
Other  181   174   579   524 
Total noninterest expense  2,897   2,881   8,888   8,674 
                 
Income before income taxes  1,348   1,125   3,720   4,035 
Income tax expense  304   255   669   821 
                 
         Net income $1,044  $870  $3,051  $3,214 
                 
Other comprehensive (loss)/income                
Unrealized losses on securities available-for-sale $(9,871) $(2,064) $(11,715) $(2,152)
Tax effect  2,073   435   2,460   453 
Reclassification adjustment for gains realized in net income           (109)
Tax effect           23 
Total other comprehensive loss  (7,798)  (1,629)  (9,255)  (1,785)
Comprehensive (loss)/income $(6,754) $(759) $(6,204) $1,429 
                 
Basic net income per share: (Note 3) $0.19  $0.16  $0.55  $0.58 
Diluted net income per share: (Note 3) $0.18  $0.15  $0.54  $0.57 
Dividends declared per share: $0.10  $0.10  $0.30  $0.30 

See accompanying notes to the consolidated financial statements


OCONEE FEDERAL FINANCIAL CORP. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited) 

(Amounts in thousands, except share and per share data)

For the three months ended March 31, 20222023 and March 31, 20212022

 

                              Accumulated     
 Common
Stock
  Treasury
Stock
  Additional
Paid-In
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (loss)
  Unearned
ESOP
Shares
  Total      Additional   Other Unearned   
Balance at December 31, 2020 $65  $(9) $7,272  $80,315  $2,087  $(314) $89,416 
Net income           870         870 
Other comprehensive loss              (1,629)     (1,629)
Purchase of 17,447 shares of treasury stock(1)     (1)  (523)           (524)
Stock-based compensation expense        17            17 
Common Stock Issued  1                  1 
Dividends           (561)        (561)
ESOP shares earned        37         52   89 
Balance at March 31, 2021 $66  $(10) $6,803  $80,624  $458  $(262) $87,679 
 Common Treasury Paid-In Retained Comprehensive ESOP   
                             Stock  Stock  Capital  Earnings  Income (loss)  Shares  Total 
Balance at December 31, 2021 $66  $(10) $6,410  $81,816  $(516) $(109) $87,657  $66  $(10) $6,410  $81,816  $(516) $(109) $87,657 
Net income           1,044         1,044           1,044         1,044 
Other comprehensive loss              (7,798)     (7,798)             (7,798)     (7,798)
Purchase of 16,582 shares of treasury stock(2)        (410)           (410)
Purchase of 16,582 shares of treasury stock(1)       (410)           (410)
Stock-based compensation expense        22            22        22            22 
Dividends        12   (557)        (545)       12   (557)        (545)
ESOP shares earned        24         26   50         24         26   50 
Balance at March 31, 2022 $66  $(10) $6,058  $82,303  $(8,314) $(83) $80,020  $66  $(10) $6,058  $82,303  $(8,314) $(83) $80,020 
                           
Balance at December 31, 2022 $66  $(10) $6,087  $84,105  $(18,604) $  $71,644 
Net income          628         628 
Other comprehensive income             1,877      1,877 
Stock-based compensation expense       18            18 
Dividends           (560)        (560)
Balance at March 31, 2023 $66  $(10) $6,105  $84,173  $(16,727) $  $73,607 

(1)The weighted average cost of treasury shares purchased during the three months ended March 31, 2021 was $26.69 per share. Treasury stock repurchases were accounted for using the par value method.

(2)The weighted average cost of treasury shares purchased during the three months ended March 31, 2022 was $23.17 per share. Treasury stock repurchases were accounted for using the par value method.

 

See accompanying notes to the consolidated financial statements

 


OCONEE FEDERAL FINANCIAL CORP. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 

(Unaudited)


(Amounts in thousands, except share and per share data)

 

For the nine months ended March 31, 20222023 and March 31, 20212022

 

              Accumulated       
        Additional     Other  Unearned    
  Common  Treasury  Paid-In  Retained  Comprehensive  ESOP    
  Stock  Stock  Capital  Earnings  Income (loss)  Shares  Total 
Balance at June 30, 2021 $66  $(10) $6,400  $80,915  $941  $(212) $88,100 
Net income           3,051         3,051 
Other comprehensive loss              (9,255)     (9,255)
Purchase of 24,472 shares of treasury stock(1)        (598)           (598)
Stock-based compensation expense        83            83 
Dividends(2)        12   (1,663)        (1,651)
ESOP shares earned        161         129   290 
Balance at March 31, 2022 $66  $(10) $6,058  $82,303  $(8,314) $(83) $80,020 
                             
Balance at June 30, 2022 $66  $(10) $6,055  $82,790  $(13,588) $(56) $75,257 
Net income           3,063         3,063 
Other comprehensive loss              (3,139)     (3,139)
Stock-based compensation expense        59            59 
Dividends(3)        2   (1,680)        (1,678)
ESOP shares earned        (11)        56   45 
Balance at March 31, 2023 $66  $(10) $6,105  $84,173  $(16,727) $  $73,607 

                      
  Common
Stock
  Treasury
Stock
  Additional
Paid-In
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (loss)
  Unearned
ESOP
Shares
  Total 
Balance at June 30, 2020 $65  $(9) $7,342  $79,071  $2,243  $(407) $88,305 
Net income           3,214         3,214 
Other comprehensive loss              (1,785)     (1,785)
Purchase of 27,314 shares of treasury stock(1)     (1)  (771)           (772)
Stock-based compensation expense        58            58 
Common Stock Issued  1      5            6 
Dividends(2)        21   (1,661)        (1,640)
ESOP shares earned        148         145   293 
Balance at March 31, 2021 $66  $(10) $6,803  $80,624  $458  $(262) $87,679 
                             
Balance at June 30, 2021 $66  $(10) $6,400  $80,915  $941  $(212) $88,100 
Net income           3,051         3,051 
Other comprehensive loss              (9,255)     (9,255)
Purchase of 24,472 shares of treasury stock(3)        (598)           (598)
Stock-based compensation expense        83            83 
Dividends(4)        12   (1,663)        (1,651)
ESOP shares earned        161         129   290 
Balance at March 31, 2022 $66  $(10) $6,058  $82,303  $(8,314) $(83) $80,020 

(1)The weighted average cost of treasury shares purchased during the nine months ended March 31, 2021 was $25.59 per share. Treasury stock repurchases were accounted for using the par value method.

(2)Approximately $77 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,000 additional shares. The portion of the dividend paid on allocated shares of approximately $56 and resulting release of approximately 5,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $21 and resulting release of approximately 1,700 shares was accounted for as additional compensation expense for the nine months ended March 31, 2021.

(3)The weighted average cost of treasury shares purchased during the nine months ended March 31, 2022 was $23.39 per share. Treasury stock repurchases were accounted for using the par value method.

(4)(2)Approximately $75 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 6,900 additional shares. The portion of the dividend paid on allocated shares of approximately $63 and resulting release of approximately 6,400 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $12 and resulting release of approximately 500 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2022.

(3)Upon the final payment on the ESOP debt, approximately $113 was principal reduction resulting in the release of approximately 10,700 additional shares. The portion of the payment on allocated shares of approximately $110 and resulting release of approximately 10,600 shares was treated as a dividend. The portion of the payment on unallocated shares of approximately $3 and resulting release of approximately 100 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2023.

 

See accompanying notes to the consolidated financial statements


OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

         
  Nine Months Ended 
  March 31,
2022
  March 31,
2021
 
Cash Flows From Operating Activities        
Net income $3,051  $3,214 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for real estate owned     21 
Depreciation and amortization, net  1,345   1,367 
Net accretion of purchase accounting adjustments  (83)  (160)
Deferred income tax benefit  (51)  (54)
Net gain on sale of real estate owned     (26)
Change in loan servicing asset  (39)  72 
Net gain on sales of securities     (109)
Mortgage loans originated for sale  (8,770)  (11,431)
Mortgage loans sold  9,116   11,348 
Gain on sales of mortgage loans  (182)  (177)
Change in fair value of equity securities  49   11 
Increase in cash surrender value of bank owned life insurance  (348)  (344)
Gain on payoff of purchased credit impaired loans  (70)  (195)
ESOP compensation expense  290   293 
Stock based compensation expense  83   58 
Net change in operating assets and liabilities:        
Accrued interest receivable and other assets  178   111 
Accrued interest payable and other liabilities  114   (583)
Net cash provided by operating activities  4,683   3,416 
         
Cash Flows From Investing Activities        
Purchases of premises and equipment  (145)  (217)
Purchases of securities available-for-sale  (53,282)  (64,054)
Proceeds from maturities, paydowns and calls of securities available-for-sale  23,807   18,706 
Proceeds from sales of securities available-for-sale     7,923 
Sales of restricted equity securities  375   191 
Purchases of restricted equity securities  (6)   
Proceeds from sale of real estate owned     216 
Loan originations and repayments, net  3,120   16,425 
Net cash used in investing activities  (26,131)  (20,810)
         
Cash Flows from Financing Activities        
Net change in deposits  14,518   20,099 
Repayment of notes payable to FHLB  (10,000)   
Dividends paid  (1,651)  (1,640)
Purchase of treasury stock  (598)  (772)
Proceeds from sale of common stock, net of issuance costs     6 
Net cash provided by financing activities  2,269   17,693 
         
Change in cash and cash equivalents  (19,179)  299 
         
Cash and cash equivalents, beginning of period  30,649   34,582 
Cash and cash equivalents, end of period $11,470  $34,881 

        
  Nine Months Ended 
  March 31,
2023
  March 31,
2022
 
Cash Flows From Operating Activities        
Net income $3,063  $3,051 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  150    
Depreciation and amortization, net  738   1,345 
Net amortization/(accretion) of purchase accounting adjustments  104   (83)
Deferred income tax benefit  (119)  (51)
Net gain on sale of real estate owned  (39)   
Change in loan servicing asset  (41)  (39)
Net loss on sales of securities  84    
Mortgage loans originated for sale  (859)  (8,770)
Mortgage loans sold  1,023   9,116 
Gain on sales of mortgage loans  (12)  (182)
Change in fair value of equity securities  1   49 
Increase in cash surrender value of bank owned life insurance  (356)  (348)
Gain on payoff of purchased credit impaired loans  (240)  (70)
ESOP shares earned  56   290 
Stock based compensation expense  59   83 
Net change in operating assets and liabilities:        
Accrued interest receivable and other assets  (22)  178 
Accrued interest payable and other liabilities  731   114 
Net cash provided by operating activities  4,321   4,683 
Cash Flows From Investing Activities        
Purchases of premises and equipment  (102)  (145)
Purchases of securities available-for-sale  (11,150)  (53,282)
Proceeds from maturities, paydowns and calls of securities available-for-sale  9,124   23,807 
Proceeds from sales of securities available-for-sale  11,049    
Sales of restricted equity securities  851   375 
Purchases of restricted equity securities  (2,313)  (6)
Proceeds from sale of real estate owned  145    
Loan originations and repayments, net  (56,585)  3,120 
Net cash used in investing activities  (48,981)  (26,131)
Cash Flows from Financing Activities        
Net change in deposits  11,273   14,518 
Proceeds from notes payable to FHLB  53,500    
Repayment of notes payable to FHLB  (20,500)  (10,000)
Dividends paid  (1,678)  (1,651)
Purchase of treasury stock     (598)
Net cash provided by financing activities  42,595   2,269 
Change in cash and cash equivalents  (2,065)  (19,179)
Cash and cash equivalents, beginning of period  9,733   30,649 
Cash and cash equivalents, end of period $7,668  $11,470 

 

See accompanying notes to the consolidated financial statements


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

  

(1)BASIS OF PRESENTATION, RISKS AND UNCERTAINTIES

 

Basis of Presentation:

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (74.2374.24%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 20222023 and June 30, 20212022 and the results of operations and cash flows for the interim periods ended March 31, 20222023 and 2021.2022. All interim amounts are unaudited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 20222023 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021.2022.

 

Reclassifications:

 

Certain amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

Cash Flows:

 

Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-earning deposits and amounts due from other depository institutions.

 

Use of Estimates:

 

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.

 

Risks and Uncertainties:

The COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company, its clients and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down.

 


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(2)NEW ACCOUNTING STANDARDS

 

Accounting Standards Update (“ASU”) 2023-01, “Leases (Topic 842): Common Control Arrangements”. Issued in March 2023, the FASB amended the Leases topic in the Accounting Standards Codification to provide a practical expedient for private companies and not-for-profit entities that are not conduit bond obligors to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease. The amendments also change the guidance for public and private companies to require that leasehold improvements be amortized over the useful life of those improvements to the common control group regardless of the lease term. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. Issued in December 2022, the FASB issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are effective immediately for all entities and applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. Issued in June 2022, ASU 2022-03 provides guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. Issued in March 2022, ASU 2022-02 provides guidance to improve the decision usefulness of information provided to investors about certain loan re-financings, restructurings, and write-offs. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”. Issued in November 2021, ASU 2021-10 requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company doesadopted this standard on July 1, 2022. This pronouncement did not expect these amendments to have a material effect on its financial statements.

ASU 2021-06, “Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946)”. Issued in August 2021, ASU 2021-06 amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments are effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

ASU 2020-04, “Reference Rate Reform (Topic 848)”. Issued in March 2020, ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information difficult for investors to understand. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted this standard on July 1, 2021. This pronouncement did not have a material effect on the financial statements.

 

ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13.

 

ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. Issued in November 2019, ASU 2019-10 provides guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies (such as the Company) applying standards on current expected credit losses (CECL), derivatives, hedging and leases. For the Company, the new effective date for Credit Losses (CECL) will be for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the Company, the effective dates for Derivatives, Hedging and Leases were not deferred under this guidance.

 

ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”. Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(2)NEW ACCOUNTING STANDARDS (continued)

 

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.statements by running a parallel loss model. In November 2019, the FASB issued guidance delaying the implementation schedule and allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.

 

There have been no accounting standards that have been issued or proposed by the FASB or other standards-setting bodies during the quarter ended March 31, 20222023 that are expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company continues to evaluate the impact of standards previously issued and not yet effective, and has no changes in its assessment since filing the Annual Report on Form 10-K.


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(3)EARNINGS PER SHARE (“EPS”)

 

Basic EPS is based on the weighted average number of common shares outstanding and is adjusted for ESOP shares not yet committed to be released. Unvested restricted stock awards, which contain rights to non-forfeitable dividends, are considered participating securities and the two-class method of computing basic and diluted EPS is applied. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive, using the treasury stock method. The factors used in the earnings per common share computation follow:

 

                 
  Three Months Ended  Nine Months Ended 
  March 31,
2022
  March 31,
2021
  March 31,
2022
  March 31,
2021
 
Earnings per share            
Net income $1,044  $870  $3,051  $3,214 
Less:  distributed earnings allocated to participating securities�� (1)     (4)  (1)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities  (1)     (3)  (1)
Net earnings available to common shareholders $1,042  $870  $3,044  $3,212 
                 
Weighted average common shares outstanding including participating securities  5,590,270   5,603,199   5,590,947   5,604,002 
Less:  participating securities  (12,000)  (2,800)  (12,000)  (2,800)
Less: average unearned ESOP shares  (9,362)  (25,927)  (9,824)  (32,181)
Weighted average common shares outstanding  5,568,908   5,574,472   5,569,123   5,569,021 
                 
Basic earnings per share $0.19  $0.16  $0.55  $0.58 
                 
Weighted average common shares outstanding  5,568,908   5,574,472   5,569,123   5,569,021 
Add:  dilutive effects of assumed exercises of stock options  68,413   71,769   68,002   71,593 
Average shares and dilutive potential common shares  5,637,321   5,646,241   5,637,125   5,640,614 
                 
Diluted earnings per share $0.18  $0.15  $0.54  $0.57 

               
  Three Months Ended  Nine Months Ended 
  March 31,
2023
  March 31,
2022
  March 31,
2023
  March 31,
2022
 
Earnings per share            
Net income $628  $1,044  $3,063  $3,051 
Less:  distributed earnings allocated to participating securities  (1)  (1)  (3)  (4)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities     (1)  (2)  (3)
Net earnings available to common shareholders $627  $1,042  $3,058  $3,044 
                 
Weighted average common shares outstanding including participating securities  5,609,268   5,590,270   5,608,953   5,590,947 
Less:  participating securities  (9,200)  (12,000)  (9,200)  (12,000)
Less: average unearned ESOP shares     (9,362)  (2,677)  (9,824)
Weighted average common shares outstanding  5,600,068   5,568,908   5,597,076   5,569,123 
Basic earnings per share $0.11  $0.19  $0.55  $0.55 
                 
Weighted average common shares outstanding  5,600,068   5,568,908   5,597,076   5,569,123 
Add:  dilutive effects of assumed exercises of stock options  3,163   4,862   3,721   4,701 
Average shares and dilutive potential common shares  5,603,231   5,573,770   5,600,797   5,573,824 
Diluted earnings per share $0.11  $0.19  $0.55  $0.55 

  

For the three and the nine months ended March 31, 2023 and 2022, 21,200 options were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and nine months ended March 31, 2021, 11,200 options were considered anti-dilutive as the exercise price was in excess of the average market price.


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(4)SECURITIES AVAILABLE-FOR-SALE

(4)       SECURITIES AVAILABLE-FOR-SALE

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at March 31, 20222023 and June 30, 20212022 are as follows:

March 31, 2023 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Change in
Fair Value
Equity Securities
  Fair
Value
 
Available-for-sale:               
FHLMC common stock $20  $  $  $13  $33 
Municipal securities  8,670      (338)     8,332 
CMOs  12,729      (1,655)     11,074 
U.S. Government agency mortgage-backed securities  125,366      (17,283)     108,083 
U.S. Treasury and Government agency bonds  12,388      (1,897)     10,491 
Total available-for-sale $159,173  $  $(21,173) $13  $138,013 

 

   Gross Gross Change in   
 Amortized Unrealized Unrealized Fair Value Fair 
March 31, 2022 Cost  Gains  Losses  Equity Securities  Value 
June 30, 2022 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Change in
Fair Value
Equity Securities
  Fair
Value
 
Available-for-sale:                      
FHLMC common stock $20  $  $  $48  $68  $20  $  $  $14  $34 
Certificates of deposit  1,247   10         1,257   1,247   2         1,249 
Municipal securities  18,148   54   (108)     18,094   16,991   3   (397)     16,597 
CMOs  14,800   2   (728)     14,074   14,145      (1,081)     13,064 
U.S. Government agency mortgage-backed securities  119,750   28   (8,629)     111,149   123,652      (14,048)     109,604 
U.S. Treasury and Government agency bonds  12,446      (1,153)     11,293   12,431      (1,680)     10,751 
Total available-for-sale $166,411  $94  $(10,618) $48  $155,935  $168,486  $5  $(17,206) $14  $151,299 

     Gross  Gross  Change in    
  Amortized  Unrealized  Unrealized  Fair Value  Fair 
June 30, 2021 Cost  Gains  Losses  Equity Securities  Value 
Available-for-sale:               
FHLMC common stock $20  $  $  $97  $117 
Certificates of deposit  2,244   53         2,297 
Municipal securities  18,737   794         19,531 
CMOs  7,468   262   (14)     7,716 
U.S. Government agency mortgage-backed securities  95,811   916   (614)     96,113 
U.S. Treasury and Government agency bonds  13,493   32   (238)     13,287 
Total available-for-sale $137,773  $2,057  $(866) $97  $139,061 

Securities pledged at March 31, 20222023 and June 30, 20212022 had fair values of $21,04255,427 and $22,72619,322, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

At March 31, 20222023 and June 30, 2021,2022, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.


10

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(4)(4)SECURITIES AVAILABLE-FOR-SALE (continued)

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at March 31, 20222023 and June 30, 2021.2022. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total 
 Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1)  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1)  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1) 
March 31, 2022                   
March 31, 2023                   
Available-for-sale:                                      
Municipal securities $9,032  $(108)  23  $  $     $9,032  $(108)  23  $3,367  $(41)  7  $4,965  $(297)  14  $8,332  $(338)  21 
CMOs  12,161   (642)  15   912   (86)  1   13,073   (728)  16            11,074   (1,655)  15   11,074   (1,655)  15 
U.S. Government agency mortgage-backed securities  85,033   (6,411)  60   21,968   (2,218)  17   107,001   (8,629)  77   12,662   (499)  8   95,421   (16,784)  81   108,083   (17,283)  89 
U.S. Treasury and Government agency bonds  3,963   (269)  2   7,331   (884)  5   11,294   (1,153)  7            10,491   (1,897)  7   10,491   (1,897)  7 
 $110,189  $(7,430)  100  $30,211  $(3,188)  23  $140,400  $(10,618)  123  $16,029  $(540)  15  $121,951  $(20,633)  117  $137,980  $(21,173)  132 

 

 

 Less than 12 Months  12 Months or More  Total  Less than 12 Months  12 Months or More  Total 
 Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in
Unrealized
Loss(1)
  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1)  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1)  Fair Value  Unrealized
Loss
  Number in Unrealized Loss(1) 
June 30, 2021                   
June 30, 2022                   
Available-for-sale:                                      
Municipal securities $15,027  $(397)  41  $  $     $15,027  $(397)  41 
CMOs $990  $(14)  1  $  $     $990  $(14)  1   12,174   (972)  17   889   (109)  1   13,063   (1,081)  18 
U.S. Government agency mortgage-backed securities  51,863   (606)  25   1,101   (8)  1   52,964   (614)  26   80,288   (9,197)  69   29,188   (4,851)  22   109,476   (14,048)  91 
U.S. Treasury and Government agency bonds  7,993   (238)  5            7,993   (238)  5   3,822   (403)  2   6,930   (1,277)  5   10,752   (1,680)  7 
 $60,846  $(858)  31  $1,101  $(8)  1  $61,947  $(866)  32  $111,311  $(10,969)  129  $37,007  $(6,237)  28  $148,318  $(17,206)  157 

 

 

(1)Actual amounts.

The Company evaluates securities for other-than-temporary impairments (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which the fair value has been less than amortized cost and the financial condition and near-term prospects of the issuer. Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

None of the unrealized losses at March 31, 20222023 were recognized into net income for the three or nine months ended March 31, 20222023 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 20212022 were recognized as having OTTI during the year ended June 30, 2021.2022.


11

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(4)(4)SECURITIES AVAILABLE-FOR-SALE (continued)

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at March 31, 20222023 and June 30, 20212022 by contractual maturity.

 March 31, 2022  June 30, 2021  March 31, 2023  June 30, 2022 
 Amortized Fair Amortized Fair  Amortized Fair Amortized Fair 
 Cost  Value  Cost  Value  Cost  Value  Cost  Value 
Less than one year $1,987  $1,997  $3,003  $3,034  $  $  $1,247  $1,249 
Due from one to five years  5,151   5,154   5,793   6,008   1,447   1,407   4,756   4,727 
Due after five years to ten years  22,278   21,123   22,258   22,459   18,584   16,556   22,244   20,391 
Due after ten years  2,425   2,370   3,420   3,614   1,027   860   2,422   2,230 
Mortgage-backed securities, CMOs and FHLMC stock (1)  134,570   125,291   103,299   103,946   138,115   119,190   137,817   122,702 
Total available for sale $166,411  $155,935  $137,773  $139,061  $159,173  $138,013  $168,486  $151,299 

 

 

(1)Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty. Federal Home Loan Mortgage Corporation (“FHLMC”) common stock is not scheduled because it has no contractual maturity date.

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended March 31, 20222023 and 2021:2022:

                        
 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended 
Available-for-sale: March 31,
2022
  March 31,
2021
  March 31,
2022
  March 31,
2021
  March 31,
2023
  March 31,
2022
  March 31,
2023
  March 31,
2022
 
Proceeds $  $  $  $7,923  $  $  $11,049  $ 
Gross gains           109             
Gross losses                    (84)   

The tax provisionbenefit related to the net realized gainloss for the nine months ended March 31, 20212023 was $2318.

12

 


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)LOANS

 

(5)   LOANS

The components of loans at March 31, 20222023 and June 30, 20212022 were as follows:

 

  March 31, 2022  June 30, 2021 
Real estate loans:        
One-to-four family $272,924  $268,889 
Multi-family  375   649 
Home equity  5,714   6,158 
Nonresidential  25,100   21,868 
Agricultural  2,601   2,683 
Construction and land  24,741   27,002 
Total real estate loans  331,455   327,249 
Commercial and industrial(1)  3,436   5,871 
Consumer and other loans  1,231   5,969 
Total loans $336,122  $339,089 

(1)Includes $954 and $2,677 of 100% Small Business Administration (“SBA”) guaranteed Paycheck Protection Program (“PPP”) loans as of March 31, 2022 and June 30, 2021, respectively.
  March 31,
2023
  June 30,
2022
 
Real estate loans:        
One-to-four family $310,347  $276,410 
Multi-family  341   368 
Home equity  7,978   4,803 
Nonresidential  25,783   24,629 
Agricultural  2,485   2,573 
Construction and land  50,261   32,836 
Total real estate loans  397,195   341,619 
Commercial and industrial  3,326   2,313 
Consumer and other loans  1,206   1,180 
Total loans $401,727  $345,112 

 

The table above includes net deferred loan fees of $2,0362,291 and $1,8192,157 at March 31, 20222023 and June 30, 2021,2022, respectively.


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)   LOANS (continued)

 

The following tables presenttable presents the activity in the allowance for loan losses for the three and nine months ended March 31, 20222023 by portfolio segment:

 

Three months ended March 31, 2022 Beginning
Balance
  Provision  Charge-offs  Recoveries  Ending
Balance
 
Real estate loans:                    
One-to-four family $989  $14  $  $  $1,003 
Multi-family  4            4 
Home equity  41   (2)        39 
Nonresidential  139   18         157 
Agricultural  15            15 
Construction and land  95   (2)        93 
Total real estate loans  1,283   28         1,311 
Commercial and industrial  26            26 
Consumer and other loans  30   (28)        2 
Total loans $1,339  $  $  $  $1,339 

Three months March 31, 2023 Beginning Balance  Provision  Charge-offs  Recoveries  Ending
 Balance
 
Real estate loans:                    
One-to-four family $1,016  $(15) $  $  $1,001 
Multi-family  3            3 
Home equity  49   8         57 
Nonresidential  152   16         168 
Agricultural  15            15 
Construction and land  172   32         204 
Total real estate loans  1,407   41         1,448 
Commercial and industrial  30   9         39 
Consumer and other loans  2            2 
Total loans $1,439  $50  $  $  $1,489 

 

 

Nine months ended March 31, 2022 Beginning
Balance
  Provision  Charge-offs  Recoveries  Ending
Balance
 
Nine months ended March 31, 2023 Beginning Balance  Provision  Charge-offs  Recoveries  Ending Balance 
Real estate loans:                                        
One-to-four family $992  $11  $  $  $1,003  $965  $36  $  $  $1,001 
Multi-family  4            4   9   (6)        3 
Home equity  41   (2)        39   34   23         57 
Nonresidential  133   24         157   158   10         168 
Agricultural  15            15   15            15 
Construction and land  103   (10)        93   132   72         204 
Total real estate loans  1,288   23         1,311   1,313   135         1,448 
Commercial and industrial  22   4         26   24   15         39 
Consumer and other loans  29   (27)        2   2            2 
Total loans $1,339  $  $  $  $1,339  $1,339  $150  $  $  $1,489 

 


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)LOANS (continued)

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2022:2023:

 

 Ending Allowance on Loans:  Loans:  Ending Allowance on Loans:  Loans: 
At March 31, 2022 Individually
Evaluated for Impairment
  Collectively Evaluated for Impairment  Individually Evaluated for Impairment  Collectively Evaluated for Impairment 
At March 31, 2023 Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Individually Evaluated for Impairment  Collectively Evaluated for Impairment 
Real estate loans:                                
One-to-four family $  $1,003  $964  $271,960  $  $1,001  $  $310,347 
Multi-family     4      375      3      341 
Home equity     39      5,714      57      7,978 
Nonresidential     157   488   24,612      168   445   25,338 
Agricultural     15      2,601      15      2,485 
Construction and land     93      24,741      204      50,261 
Total real estate loans     1,311   1,452   330,003      1,448   445   396,750 
Commercial and industrial (1)     26      3,436      39      3,326 
Consumer and other loans     2      1,231      2      1,206 
Total loans $  $1,339  $1,452  $334,670  $  $1,489  $445  $401,282 

 

(1)Includes $954 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2021 by portfolio segment:

Three months ended March 31, 2021 Beginning
Balance
  Provision  Charge-offs  Recoveries  Ending
Balance
 
Real estate loans:                    
One-to-four family $1,027  $(3) $  $  $1,024 
Multi-family  4            4 
Home equity  36   5         41 
Nonresidential  117   6         123 
Agricultural  4            4 
Construction and land  94   (3)        91 
Total real estate loans  1,282   5         1,287 
Commercial and industrial  28   (5)        23 
Consumer and other loans  29            29 
Total loans $1,339  $  $  $  $1,339 

Nine months ended March 31, 2021 Beginning
Balance
  Provision  Charge-offs  Recoveries  Ending
Balance
 
Real estate loans:                    
One-to-four family $1,032  $(6) $(2) $  $1,024 
Multi-family  4            4 
Home equity  34   12   (5)     41 
Nonresidential  75   48         123 
Agricultural  4            4 
Construction and land  105   (14)        91 
Total real estate loans  1,254   40   (7)     1,287 
Commercial and industrial  65   (42)        23 
Consumer and other loans  27   2         29 
Total loans $1,346  $  $(7) $  $1,339 


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)    LOANS (continued)

 

The following table presents the activity in the allowance for loan losses for the three and nine months ended March 31, 2022 by portfolio segment:

Three months ended March 31, 2022 Beginning Balance  Provision  Charge-offs  Recoveries  Ending Balance 
Real estate loans:                    
One-to-four family $989  $14  $  $  $1,003 
Multi-family  4            4 
Home equity  41   (2)        39 
Nonresidential  139   18         157 
Agricultural  15            15 
Construction and land  95   (2)        93 
Total real estate loans  1,283   28         1,311 
Commercial and industrial  26            26 
Consumer and other loans  30   (28)        2 
Total loans $1,339  $  $  $  $1,339 

Nine months ended March 31, 2022 Beginning Balance  Provision  Charge-offs  Recoveries  Ending Balance 
Real estate loans:                    
One-to-four family $992  $11  $  $  $1,003 
Multi-family  4            4 
Home equity  41   (2)        39 
Nonresidential  133   24         157 
Agricultural  15            15 
Construction and land  103   (10)        93 
Total real estate loans  1,288   23         1,311 
Commercial and industrial  22   4         26 
Consumer and other loans  29   (27)        2 
Total loans $1,339  $  $  $  $1,339 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2021:2022:

 

  Ending Allowance on Loans:  Loans: 
At June 30, 2021 Individually
Evaluated for Impairment
  Collectively Evaluated for Impairment  Individually Evaluated for Impairment  Collectively Evaluated for Impairment 
Real estate loans:                
One-to-four family $  $992  $1,711  $267,178 
Multi-family     4      649 
Home equity     41      6,158 
Nonresidential     133      21,868 
Agricultural     15      2,683 
Construction and land     103      27,002 
Total real estate loans     1,288   1,711   325,538 
Commercial and industrial (1)     22      5,871 
Consumer and other loans     29      5,969 
Total loans $  $1,339  $1,711  $337,378 

(1)Includes $2,677 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

  Ending Allowance on Loans:  Loans: 
At June 30, 2022 Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Individually Evaluated for Impairment  Collectively Evaluated for Impairment 
Real estate loans:                
One-to-four family $  $965  $948  $275,462 
Multi-family     9      368 
Home equity     34      4,803 
Nonresidential     158   478   24,151 
Agricultural     15      2,573 
Construction and land     132      32,836 
Total real estate loans     1,313   1,426   340,193 
Commercial and industrial     24      2,313 
Consumer and other loans     2      1,180 
Total loans $  $1,339  $1,426  $343,686 

16


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)       LOANS (continued)

 

The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 20222023 and June 30, 2021,2022, including the average recorded investment balance and interest earned for the nine months ended March 31, 20222023 and the year ended June 30, 2021:2022:

 

 March 31, 2022  March 31, 2023 
 Unpaid
Principal
Balance
  Recorded
Investment
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
  Unpaid
Principal
Balance
  Recorded Investment  Related Allowance  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no recorded allowance:                                        
Real estate loans:                                        
One-to-four family $969  $964  $  $1,338  $26  $  $  $  $474  $ 
Multi-family                              
Home equity                              
Nonresidential  518   488      244      472   445      462    
Agricultural                              
Construction and land                              
Total real estate loans  1,487   1,452      1,582   26   472   445      936    
Commercial and industrial                              
Consumer and other loans                              
Total $1,487  $1,452  $  $1,582  $26  $472  $445  $  $936  $ 
                                        
With recorded allowance:                                        
Real estate loans:                                        
One-to-four family $  $  $  $  $  $  $  $  $  $ 
Multi-family                              
Home equity                              
Nonresidential                              
Agricultural                              
Construction and land                              
Total real estate loans                              
Commercial and industrial                              
Consumer and other loans                              
Total $  $  $  $  $  $  $  $  $  $ 
                                        
Totals:                                        
Real estate loans $1,487  $1,452  $  $1,582  $26  $472  $445  $  $936  $ 
Consumer and other loans                              
Total $1,487  $1,452  $  $1,582  $26  $472  $445  $  $936  $ 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5)    LOANS (continued)

(5)LOANS (continued)

 

  June 30, 2021 
  Unpaid
Principal
Balance
  Recorded
Investment
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no recorded allowance:                    
Real estate loans:                    
One-to-four family $1,736  $1,711  $  $1,772  $34 
Multi-family               
Home equity               
Nonresidential           281    
Agricultural               
Construction and land               
Total real estate loans  1,736   1,711      2,053   34 
Commercial and industrial               
Consumer and other loans               
Total $1,736  $1,711  $  $2,053  $34 
                     
With recorded allowance:                    
Real estate loans:                    
One-to-four family $  $  $  $  $ 
Multi-family               
Home equity               
Nonresidential               
Agricultural               
Construction and land               
Total real estate loans               
Commercial and industrial               
Consumer and other loans               
Total $  $  $  $  $ 
                     
Totals:                    
Real estate loans $1,736  $1,711  $  $2,053  $34 
Consumer and other loans               
Total $1,736  $1,711  $  $2,053  $34 

  June 30, 2022 
  Unpaid
Principal
Balance
  Recorded
Investment
  Related Allowance  Average
Recorded
Investment
  Interest
Income
Recognized
 
With no recorded allowance:                    
Real estate loans:                    
One-to-four family $952  $948  $  $474  $38 
Multi-family               
Home equity               
Nonresidential  507   478      239    
Agricultural               
Construction and land               
Total real estate loans  1,459   1,426      713   38 
Commercial and industrial               
Consumer and other loans               
Total $1,459  $1,426  $  $713  $38 
                     
With recorded allowance:                    
Real estate loans:                    
One-to-four family $  $  $  $  $ 
Multi-family               
Home equity               
Nonresidential               
Agricultural               
Construction and land               
Total real estate loans               
Commercial and industrial               
Consumer and other loans               
Total $  $  $  $  $ 
                     
Totals:                    
Real estate loans $1,459  $1,426  $  $713  $38 
Consumer and other loans               
Total $1,459  $1,426  $  $713  $38 

18


OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)(5)LOANS (continued)

The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or, if over $250, individually for impairment.

Total past due loans and nonaccrual loans at March 31, 2022:

                       Accruing 
  30-59  60-89  90 Days              Loans 
  Days  Days  or More  Total     Total  Nonaccrual  Past Due 90 
  Past Due  Past Due  Past Due  Past Due  Current  Loans  Loans  Days or More 
Real estate loans:                                
One-to-four family $1,964  $530  $143  $2,637  $270,287  $272,924  $941  $ 
Multi-family     210      210   165   375       
Home equity              5,714   5,714       
Nonresidential  241         241   24,859   25,100   488    
Agricultural              2,601   2,601       
Construction and land              24,741   24,741       
Total real estate loans  2,205   740   143   3,088   328,367   331,455   1,429    
Commercial and industrial              3,436   3,436       
Consumer and other loans              1,231   1,231       
Total $2,205  $740  $143  $3,088  $333,034  $336,122  $1,429  $ 

2023:

 

COVID-19 Loan Modifications:

  30-59
Days
Past Due
  60-89
Days
Past Due
  90 Days
or More
Past Due
  Total
Past Due
  Current  Total
Loans
  Nonaccrual
Loans
  Accruing
Loans
Past Due 90
 Days or More
 
Real estate loans:                                
One-to-four family $2,372  $560  $173  $3,105  $307,242  $310,347  $416  $ 
Multi-family              341   341       
Home equity  42      46   88   7,890   7,978   46    
Nonresidential  320   78      398   25,385   25,783   523    
Agricultural              2,485   2,485       
Construction and land              50,261   50,261       
Total real estate loans  2,734   638   219   3,591   393,604   397,195   985    
Commercial and industrial              3,326   3,326       
Consumer and other loans              1,206   1,206       
Total $2,734  $638  $219  $3,591  $398,136  $401,727  $985  $ 

As a result of disruptions in economic conditions caused by COVID-19, the financial regulators issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provided that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” which was extended by the Consolidated Appropriations Act for the fiscal year ending September 30, 2021, provided banks the option to temporarily suspend certain requirements under ASC 340-10 troubled debt restructuring classifications for a limited period of time to account for the effects of COVID-19. The Federal Reserve and the other banking agencies and regulators also issued a joint statement encouraging banks to work prudently with borrowers and to describe the agencies’ interpretations of how accounting rules under ASC 310-40 apply to certain COVID-19 related modifications. We have not considered any of the COVID-19 related modifications we performed to be troubled debt restructurings. Included in the table above are $8,751 in loans still remaining that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. Of this amount, there were $6,074 in one-to-four family loans, $2,302 in non-residential loans and $375 in multi-family loans. As of March 31, 2022, $8,318 of such loans were current and $433 were 30 days or more past due. As of March 31, 2022, all of the COVID-19 related modifications had returned to regular payment status.

19

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Total past due and nonaccrual loans by portfolio segment at June 30, 2021:

                       Accruing 
  30-59  60-89  90 Days              Loans 
  Days  Days  or More  Total     Total  Nonaccrual  Past Due 90 
  Past Due  Past Due  Past Due  Past Due  Current  Loans  Loans  Days or More 
Real estate loans:                                
One-to-four family $2,302  $574  $434  $3,310  $265,579  $268,889  $2,260  $ 
Multi-family     217      217   432   649       
Home equity  61         61   6,097   6,158       
Nonresidential  374         374   21,494   21,868   521    
Agricultural              2,683   2,683       
Construction and land  6         6   26,996   27,002       
Total real estate loans  2,743   791   434   3,968   323,281   327,249   2,781    
Commercial and industrial              5,871   5,871       
Consumer and other loans              5,969   5,969       
Total $2,743  $791  $434  $3,968  $335,121  $339,089  $2,781  $ 

Included in the table above are $10,362 in loans still remaining that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. Of this amount, there were $7,084 in one-to-four family loans, $2,881 in non-residential loans and $397 in multi-family loans. As of June 30, 2021, $9,578 were current and $784 were 30 days or more past due.2022:

 

  30-59
Days
Past Due
  60-89
Days
Past Due
  90 Days
or More
Past Due
  Total
Past Due
  Current  Total
Loans
  Nonaccrual
Loans
  Accruing
Loans
Past Due 90
 Days or More
 
Real estate loans:                                
One-to-four family $2,632  $891  $696  $4,219  $272,191  $276,410  $1,401  $ 
Multi-family        208   208   160   368   208    
Home equity  17         17   4,786   4,803       
Nonresidential  82   156      238   24,391   24,629   478    
Agricultural              2,573   2,573       
Construction and land  436         436   32,400   32,836       
Total real estate loans  3,167   1,047   904   5,118   336,501   341,619   2,087    
Commercial and industrial              2,313   2,313       
Consumer and other loans              1,180   1,180       
Total $3,167  $1,047  $904  $5,118  $339,994  $345,112  $2,087  $ 

 18

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Troubled Debt Restructurings:

At March 31, 20222023 and June 30, 2021,2022, total loans that have been modified as troubled debt restructurings were $890472 and $1,661869, respectively, which consisted of 1one non-residential real estate loan and 2one one-to-four family first lien loansloan at March 31, 20222023 and 1one non-residential real estate loan and 3two one-to-four family first lien loans at June 30, 2021.2022. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. No loans have been modified as troubled debt restructurings during the three and nine months ended March 31, 2022.2023. No loans modified as troubled debt restructurings have defaulted since restructuring. All of these loans are on nonaccrual at March 31, 20222023 and June 30, 2021.2022. At March 31, 20222023 and June 30, 2021,2022, $859445 and $1,107839, respectively, were individually evaluated for impairment.

Allowance for Loan Loss:

There have been no changes to our allowance for loan loss methodology during the quarter ended March 31, 2022. We have assessed2023. Due to the impactincrease in the size of the COVID-19 pandemic on the allowance for loan loss using the information that is available. We believe that the recorded allowance is adequate at this time and asportfolio, a result no additional$50 provision for loan losses has beenwas recorded during the quarter ended March 31, 2022. However,2023. We believe the fluidityrecorded allowance is adequate as of this pandemic precludes any prediction as to its ultimate impact.March 31, 2023. We will continue to review and make adjustments as may be necessary. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three and nine months ended March 31, 20222023 and March 31, 2021.2022.

20

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Loan Grades:

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.

Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.

Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.

Special Mention: Loan assets of this grade have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loan assets of this grade are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 19

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Portfolio Segments:

One-to-four family: One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. The Company currently originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.

For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.

Multi-family:Multi-family real estate loans generally have a maximum term of five years with a 30 year amortization period and a final balloon payment and are secured by properties containing 5five or more units in the Company’s market area. These loans are generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio. The Company’s underwriting analysis includes considering the borrower’s expertise and requires verification of the borrower’s credit history, income and financial statements, banking relationships, independent appraisals, references and income projections for the property. The Company generally obtains personal guarantees on these loans.

Multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project.

21

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Home Equity: The Company offers home equity loans and lines of credit secured by first or second deeds of trust on primary residences in our market area. The Company’s home equity loans and lines of credit are limited to an 80% loan-to-value ratio (including all prior liens). Standard residential mortgage underwriting requirements are used to evaluate these loans. The Company offers adjustable-rate and fixed-rate options for these loans with a maximum term of 10 years. The repayment terms on lines of credit are interest only monthly with principle due at maturity. Home equity loans have a more traditional repayment structure with principal and interest due monthly. The maximum term on home equity loans is 10 years with an amortization schedule not exceed 20 years.

Nonresidential Real Estate: Nonresidential loans include those secured by real estate mortgages on churches, owner-occupied and non-owner-occupied commercial buildings of various types, retail and office buildings, hotels, and other business and industrial properties. The nonresidential real estate loans that the Company originates generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75%.

Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.

The Company considers a number of factors in originating nonresidential real estate loans. The Company evaluates the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions. In evaluating the property securing the loan, the factors the Company considers include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). The collateral underlying all nonresidential real estate loans is appraised by outside independent appraisers approved by our board of directors. Personal guarantees may be obtained from the principals of nonresidential real estate borrowers.

 

 20

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Agricultural:These loans are secured by farmland and related improvements in the Company’s market area. These loans generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of these loans is generally 75%. The Company is managing a small number of these loans in our portfolio. We continue to closely monitor our existing relationships.

Loans secured by agricultural real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Agricultural real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.

Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.

The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only 2two such loans at a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans is 85%.

22

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Commercial and Industrial Loans: Commercial and industrial loans are offered to businesses and professionals in the Company’s market area. These loans generally have short and medium terms on both a collateralized and uncollateralized basis. The structure of these loans are largely determined by the loan purpose and collateral. Sources of collateral can include a lien on furniture, fixtures, equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.

Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases.

Within this category for the nine months ended March 31, 2022 and the year ended June 30, 2021 are PPP loans that were authorized under the CARES Act. PPP loans are originated by the Association, are 100% guaranteed by the SBA and qualify to be forgiven based on certain criteria as determined by the SBA. The Association received a fee, with the percentage depending on the size of the loan, for originating these loans and earns 1% on the outstanding balance for the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA. For the nine months ended March 31, 2022 and March 31, 2021, $84 and $168 of PPP loan fees were recognized in income, respectively. As of March 31, 2022, $6,682 of the original $7,654 of PPP loans have been forgiven, with a remaining amount of $18 in deferred fees outstanding.

Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

 21

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Based on the most recent analysis performed, the risk grade of loans by portfolio segment are presented in the following tables.

Total loans by risk grade and portfolio segment at March 31, 2022:2023:

  Pass  Pass-Watch  Special
Mention
  Substandard  Doubtful  Total 
Real estate loans:                        
One-to-four family $264,907  $2,975  $2,710  $2,332  $  $272,924 
Multi-family  375               375 
Home equity  5,506   201      7      5,714 
Nonresidential  24,233      192   675      25,100 
Agricultural  2,601               2,601 
Construction and land  24,350   356      35      24,741 
Total real estate loans  321,972   3,532   2,902   3,049      331,455 
Commercial and industrial  3,436               3,436 
Consumer and other loans  1,231               1,231 
Total $326,639  $3,532  $2,902  $3,049  $  $336,122 

23

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  Pass  Pass-Watch  Special
Mention
  Substandard  Doubtful  Total 
Real estate loans:                        
One-to-four family $307,326  $1,567  $713  $741  $  $310,347 
Multi-family  341               341 
Home equity  7,871   61      46      7,978 
Nonresidential  25,213         570      25,783 
Agricultural  2,485               2,485 
Construction and land  50,069   162   30         50,261 
Total real estate loans  393,305   1,790   743   1,357      397,195 
Commercial and industrial  3,326               3,326 
Consumer and other loans  1,206               1,206 
Total $397,837  $1,790  $743  $1,357  $  $401,727 

 (Unaudited)

(Amounts in thousands, except share and per share data)

(5)LOANS (continued)

Total loans by risk grade and portfolio segment at June 30, 2021:2022:

 

  Pass  Pass-Watch  Special
Mention
  Substandard  Doubtful  Total 
Real estate loans:                        
One-to-four family $258,943  $3,335  $2,989  $3,622  $  $268,889 
Multi-family  649               649 
Home equity  5,929   221      8      6,158 
Nonresidential  20,991      727   150      21,868 
Agricultural  2,683               2,683 
Construction and land  26,581   382      39      27,002 
 Total real estate loans  315,776   3,938   3,716   3,819      327,249 
Commercial and industrial  5,871               5,871 
Consumer and other loans  5,969               5,969 
Total $327,616  $3,938  $3,716  $3,819  $  $339,089 

  Pass  Pass-Watch  Special
Mention
  Substandard  Doubtful  Total 
Real estate loans:                        
One-to-four family $268,631  $2,806  $2,412  $2,561  $  $276,410 
Multi-family  160         208      368 
Home equity  4,603   193      7      4,803 
Nonresidential  23,763      188   678      24,629 
Agricultural  2,573               2,573 
Construction and land  32,637   166      33      32,836 
Total real estate loans  332,367   3,165   2,600   3,487      341,619 
Commercial and industrial  2,313               2,313 
Consumer and other loans  1,180               1,180 
Total $335,860  $3,165  $2,600  $3,487  $  $345,112 

 22

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(6)BORROWINGS

At March 31, 2022, one loan for $45 was in formal foreclosure proceedings and is included in the one-to-four family loan category.

(6)BORROWINGS

At March 31, 20222023 and June 30, 2021,2022, advances from the Federal Home Loan Bank were as follows:

 

  March 31, 2022
  Balance  Stated Interest Rate
FHLB advances due February 2023 through January 2025 $5,000   1.40% - 1.59%
   Total $5,000   

  March 31, 2023
  Balance  Stated Interest Rate
FHLB advances due April 2023 through January 2025 $42,000   1.59% - 5.37%
Total $42,000   

 

 June 30, 2021 June 30, 2022
 Balance Stated Interest Rate Balance  Stated Interest Rate
FHLB advances due September 2021 through January 2025 $15,000   0.16% - 1.59% $9,000   1.40% - 2.05%
Total $15,000   $9,000   

Payments over the next five fiscal years are as follows:

2023$2,500   $39,500 
2025$2,500   $2,500 

 

The weighted average interest rate of all outstanding FHLB advances was 1.504.87% and 0.611.74% on March 31, 20222023 and June 30, 2021,2022, respectively.

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $16,09951,469 and $19,61314,779 of investment securities at March 31, 20222023 and June 30, 2021,2022, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $134,561141,640 at March 31, 2022.2023.

There were no overnight borrowings at March 31, 20222023 or June 30, 2021.2022.

24

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

(Amounts in thousands, except share and per share data)

(7)(7)FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities:

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). We invest in the common stock of the Federal Home Loan Bank of Atlanta and in preferred and common stock of First National Bankers Bancshares, Inc. The stock is classified as restricted equity securities and is carried at cost.

 

 23

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(7)FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Impaired Loans:

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. There were no impaired loans with specific allocations at March 31, 20222023 or June 30, 2021.2022.

Loans Held for Sale:

Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors and result in a Level 23 classification.

Loan Servicing Rights:

Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data and results in a Level 3 classification.

Real Estate Owned:

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

25

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(7)       FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

 

Deposits:

 

The fair values disclosed for demand deposit, money market and savings accounts are equal to the amount payable on demand at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

FHLB Advances:

 

The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 


Assets measured at fair value on a recurring basis at March 31, 2022 and June 30, 2021 are summarized below:

  Fair Value Measurements 
  March 31, 2022  June 30, 2021 
  (Level 2)  (Level 3)  (Level 2)  (Level 3) 
Financial assets:                
Securities available-for-sale:                
FHLMC common stock $68  $  $117  $ 
Certificates of deposit  1,257      2,297    
Municipal securities  18,094      19,531    
CMOs  14,074      7,716    
U.S. Government agency mortgage-backed securities  111,149      96,113    
U.S. Treasury and Government agency bonds  11,293      13,287    
Total securities available-for-sale  155,935      139,061    
Loan servicing rights     344      305 
Total financial assets $155,935  $344  $139,061  $305 

There are no liabilities measured at fair value on a recurring basis.

26

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(7)(7)       FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Assets measured at fair value on a recurring basis at March 31, 2023 and June 30, 2022 are summarized below:

  Fair Value Measurements 
  March 31, 2023  June 30, 2022 
  (Level 2)  (Level 3)  (Level 2)  (Level 3) 
Financial assets:                
Securities available-for-sale:                
FHLMC common stock $33  $  $34  $ 
Certificates of deposit        1,249    
Municipal securities  8,332      16,597    
CMOs  11,074      13,064    
U.S. Government agency mortgage-backed securities  108,083      109,604    
U.S. Treasury and Government agency bonds  10,491      10,751    
Total securities available-for-sale  138,013      151,299    
Loan servicing rights     386      345 
Total financial assets $138,013  $386  $151,299  $345 

There are no liabilities measured at fair value on a recurring basis.

 

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended March 31, 20222023 and 2021:2022:

 

  Fair Value Measurements 
  (Level 3) 
  Three Months Ended  Nine Months Ended 
  March 31,
2022
  March 31,
2021
  March 31,
2022
  March 31,
2021
 
   Loan Servicing Rights   Loan Servicing Rights   Loan Servicing Rights   Loan Servicing Rights 
Balance at beginning of period: $302  $386  $305  $458 
Unrealized net gains/(losses) included in net income  42      39   (72)
Balance at end of period: $344  $386  $344  $386 

There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2022 or June 30, 2021.

  Fair Value Measurements 
  (Level 3) 
  Three Months Ended  Nine Months Ended 
  March 31,
2023
  March 31,
2022
  March 31,
2023
  March 31,
2022
 
  Loan
Servicing
Rights
  Loan
Servicing
Rights
  Loan
Servicing
Rights
  Loan
Servicing
Rights
 
Balance at beginning of period: $364  $302  $345  $305 
Unrealized net gains included in net income  22   42   41   39 
Balance at end of period: $386  $344  $386  $344 

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value at March 31, 20222023 and June 30, 2021.2022.

 

   Level 3 Quantitative Information 
   March 31, 2022   June 30, 2021  Valuation      
   Fair Value   Fair Value  Technique Unobservable Inputs  Range 
Loan servicing rights $344  $305   Discounted cash
flows
 Discount rate, estimated
timing of cash flows
   8.50% to 9.75% 
  Level 3 Quantitative Information 
   March 31, 2023   June 30, 2022  Valuation Unobservable    
   Fair Value   Fair Value  Technique Inputs   Range 
Loan servicing rights $386  $345   Discounted cash
flows
 Discount rate, estimated
timing of cash flows
   10.88% to 11.38% 

There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2023 or June 30, 2022.

 

27 25

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(7)       FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

(7)FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheets approximate fair value. These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at March 31, 20222023 and June 30, 20212022 are summarized below:

 

 March 31, 2022  March 31, 2023 
 Carrying  Fair Value  Carrying  Fair Value 
 Amount  (Level 1)  (Level 2)  (Level 3)  Total  Amount  (Level 1)  (Level 2)  (Level 3)  Total 
Financial assets                                        
Securities available-for-sale $155,935  $  $155,935  $  $155,935  $138,013  $  $138,013  $  $138,013 
Loans, net(1)  334,783         325,598   325,598   400,238         376,420   376,420 
Loans held for sale(2)               
Loan servicing rights  344         344   344   386         386   386 
Restricted equity securities  1,039    N/A    N/A    N/A    N/A   2,651    N/A    N/A    N/A    N/A 
                                        
Financial liabilities                                        
Deposits $454,448  $  $451,007  $  $451,007  $470,955  $  $465,168  $  $465,168 
FHLB Advances  5,000      4,919      4,919   42,000      41,863      41,863 

  June 30, 2022 
  Carrying  Fair Value 
  Amount  (Level 1)  (Level 2)  (Level 3)  Total 
Financial assets                    
    Securities available-for-sale $151,299  $  $151,299  $  $151,299 
    Loans, net (1)  343,773         325,859   325,859 
    Loans held for sale(2)  152         152   152 
    Loan servicing rights  345         345   345 
    Restricted equity securities  1,189    N/A    N/A    N/A    N/A 
                     
Financial liabilities                    
    Deposits $459,682  $  $454,970  $  $454,970 
    FHLB Advances  9,000      8,868      8,868 

  June 30, 2021 
  Carrying  Fair Value 
  Amount  (Level 1)  (Level 2)  (Level 3)  Total 
Financial assets                    
    Securities available-for-sale $139,061  $  $139,061  $  $139,061 
    Loans, net(1)  337,750         339,762   339,762 
    Loans held for sale(2)  164         164   164 
    Loan servicing rights  305         305   305 
    Restricted equity securities  1,408    N/A    N/A    N/A    N/A 
                     
Financial liabilities                    
    Deposits $439,930  $  $438,491  $  $438,491 
    FHLB Advances  15,000      15,087      15,087 

 

(1)Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of March 31, 20222023 and June 30, 20212022 was measured using an exit price notion.

(2)Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors and result in a Level 3 classification.

 

(8)       EMPLOYEE STOCK OWNERSHIP PLAN

(8)EMPLOYEE STOCK OWNERSHIP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10.00 per share during 2011. The Company makes discretionary contributions to the ESOP and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

 

 26

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(8)EMPLOYEE STOCK OWNERSHIP PLAN (continued)

Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. There were no discretionary contributions made to the ESOP for debt retirement in 2022 or 2021. There was no ESOP compensation expense for the three months ended March 31, 2023. Total ESOP compensation expense for the nine months ended March 31, 2023 was $3. Total ESOP compensation for the three and nine months ended March 31, 2022 was $62 and $252, respectively, and for the three and nine months ended March 31, 2021respectively. The ESOP loan was $88 and $256, respectively.

28

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amountsrepaid in thousands, except share and per share data)

(8)       EMPLOYEE STOCK OWNERSHIP PLAN (continued)full in December 2022.

 

Shares held by the ESOP at March 31, 20222023 and June 30, 20212022 were as follows:

 

      
 March 31,
 2022
  June 30,
2021
  March 31,
 2023
  June 30,
 2022
 
Committed to be released to participants  2,677   10,202      5,355 
Allocated to participants  165,060   161,206   168,630   163,220 
Unearned  8,032   11,616      5,354 
Total ESOP shares  175,769   183,024   168,630   173,929 
                
Fair value of unearned shares $201  $272  $  $76 

 

(9)STOCK BASED COMPENSATION

 

(9)        STOCK BASED COMPENSATION

On April 5,In 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 435,472 shares of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan maycould not be less than the fair market value on the date the stock option iswas granted. The compensation committee of the board of directors hashad sole discretion to determine the amount and to whom equity incentive awards were granted. The Plan remains in effect as long as any awards or options are granted.

There have been no stockoutstanding. However, the ability to grant awards or options or restricted stock issued in fiscalceased as of April 5, 2022.

 

The following table summarizes stock option activity for the nine months ended March 31, 2023:

  Options  Weighted-
Average
Exercise
Price/Share
  Aggregate
Intrinsic

Value(1)
 
Outstanding - June 30, 2022  49,900  $22.48     
Granted          
Exercised  (6,000)  19.40     
Forfeited          
Outstanding - March 31, 2023  43,900  $22.90  $ 
Fully vested and exercisable at March 31, 2023  32,700  $22.20  $ 
Expected to vest in future periods  11,200         
Fully vested and expected to vest - March 31, 2023  43,900  $22.90  $ 

(1)The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based on the closing price of common stock of $18.50 per share on March 31, 2023.

 27

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(9)STOCK BASED COMPENSATION (continued)

The following table summarizes stock option activity for the nine months ended March 31, 2022:

 

 Options  Weighted-
Average
Exercise
Price/Share
  Aggregate Intrinsic
Value(1)
  Options  Weighted-
Average
Exercise
Price/Share
  Aggregate
Intrinsic
Value(1)
 
Outstanding - June 30, 2021  131,901  $15.70       131,901  $15.70     
Granted                    
Exercised  (82,001)  11.58       (82,001)  11.58     
Forfeited                    
Outstanding - March 31, 2022  49,900  $22.48  $126   49,900  $22.48  $126 
Fully vested and exercisable at March 31, 2022  34,100  $21.40  $123   34,100  $21.40  $123 
Expected to vest in future periods  15,800           15,800         
Fully vested and expected to vest - March 31, 2022  49,900  $22.48  $126   49,900  $22.48  $126 

 

(1)The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based on the closing price of common stock of $25.00 per share on March 31, 2022.

 

29

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(9)        STOCK BASED COMPENSATION (continued)

The following table summarizes stock option activity for the nine months ended March 31, 2021:

  Options  Weighted-
Average
Exercise
Price/Share
  Aggregate Intrinsic
Value (1)
 
Outstanding - June 30, 2020  164,319  $14.18     
Granted          
Exercised  (42,418)  11.58     
Forfeited          
Outstanding - March 31, 2021  121,901  $15.09  $1,340 
Fully vested and exercisable at March 31, 2021  112,401  $14.15  $1,340 
Expected to vest in future periods  9,500         
Fully vested and expected to vest - March 31, 2021  121,901  $15.09  $1,340 

(1)The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based on the closing price of common stock of $26.08 per share on March 31, 2021.

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. There were 4,0713,302 and 4,4534,071 options that were earned during the nine months ended March 31, 20222023 and 2021,2022, respectively. Stock-based compensation expense for stock options for the three and nine months ended March 31, 2023 was $4 and $13, respectively, and for the three and nine months ended March 31, 2022 was $5 and $15, respectively, and for the three and nine months ended March 31, 2021 was $5 and $16, respectively. Total unrecognized compensation cost related to stock options was $5437 at March 31, 20222023 and is expected to be recognized over a weighted-average period of 3.62.8 years.

 

The following table summarizes non-vested restricted stock activity for the nine months ended March 31, 20222023 and March 31, 2021:2022.

 

 March 31,
 2022
  March 31,
 2021
  March 31,
 2023
  March 31,
 2022
 
Balance - beginning of year  14,300   5,800   9,700   14,300 
Granted     250       
Forfeited            
Vested  (2,300)  (3,250)  (500)  (2,300)
Balance - end of period  12,000   2,800   9,200   12,000 
Weighted average grant date fair value $23.00  $19.79  $23.16  $23.00 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense for the three and nine months ended March 31, 20222023 was $1814 and $6746, respectively, and for the three and nine months ended March 31, 20212022 was $1218 and $4267, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $233172 at March 31, 20222023 and is expected to be recognized over a weighted-average period of 4.13.2 years.

 

30 28

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(10)       LOAN SERVICING RIGHTS

(10)LOAN SERVICING RIGHTS

 

Mortgage loans serviced for others are not reported as assets; however, the underlying mortgage servicing rights associated with servicing these mortgage loans serviced for others is recorded as an asset in the consolidated balance sheet.

 

The principal balances of those loans at March 31, 20222023 and June 30, 20212022 are as follows:

 

 March 31,
2022
  June 30,
2021
  March 31,
2023
  June 30,
2022
 
Mortgage loan portfolio serviced for:                
FHLMC $42,145  $52,199  $35,669  $39,476 

 

Custodial escrow balances maintained in connection with serviced loans were $373341 and $559453 at March 31, 20222023 and June 30, 2021.2022.

 

Activity for loan servicing rights for the three and nine months ended March 31, 20222023 and 20212022 is as follows:

 

                        
 Three Months Ended  Nine Months Ended  Three Months Ended  Nine Months Ended 
 March 31,
2022
  March 31,
2021
  March 31,
2022
  March 31,
2021
  March 31,
2023
  March 31,
2022
  March 31,
2023
  March 31,
2022
 
Loan servicing rights:                                
Beginning of period: $302  $386  $305  $458  $364  $302  $345  $305 
Change in fair value  42      39   (72)  22   42   41   39 
End of period: $344  $386  $344  $386  $386  $344  $386  $344 

Fair value at March 31, 2023 was determined using a discount rate of 11.38%, prepayment speed assumptions ranging from 3.57% to 12.49% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 3.0%.  Fair value at March 31, 2022 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 7.09% to 11.30% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.04%.  Fair value at March 31, 2021 was determined using a discount rate of 8.75%, prepayment speed assumptions ranging from 10.45% to 16.95% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.154.0%. 

 

(11)        SUPPLEMENTAL CASH FLOW INFORMATION

(11)SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the nine months ended March 31, 20222023 and 20212022 is as follows:

 

      
 March 31,
2022
  March 31,
2021
  March 31,
2023
  March 31,
2022
 
Cash paid during the period for:                
Interest paid $861  $1,463  $2,488  $861 
Income taxes paid $580  $1,082  $1,095  $580 
Supplemental noncash disclosures:                
Transfers from loans to real estate owned $  $52  $106  $ 
Change in unrealized gain/loss on securities available-for-sale $(11,715) $(2,261) $(4,056) $(11,715)

 

 

31 29

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

(12)        SUBSEQUENT EVENTS

(12)SUBSEQUENT EVENTS

 

Dividend Declared

 

On April 28, 2022,27, 2023, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of May 12, 202211, 2023, and will be paid on or about May 26, 202225, 2023.

 

32 30

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

 

statements of our goals, intentions and expectations;

statements regarding our business plans and prospects and growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits. 

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

our ability to manage our operations in response to changes in economic conditions (including real estate values, loan demand, inflation, commodity prices and employment levels) nationally and in our market areas;

the social and economic effects of the COVID-19 pandemic or any other pandemic;recent turmoil in the banking industry (including the failure of three financial institutions);

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

significant increases in our delinquencies and loan losses, including as a result of our inability to resolve classified assets, changes in the underlying cash flows of our borrowers, and management’s assumptions in determining the adequacy of the allowance for loan losses;

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance and provision for loan losses;

changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio;

use of estimates for determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

increased competition among depository and other financial institutions;

our ability to attract and maintain deposits, including introducing new deposit products;

inflation and changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

declines in the yield on our assets resulting from the current low interest rate environment;

our ability to successfully implement our business strategies, including attracting and maintaining deposits and introducing new financial products;

risks related to high concentration of loans secured by real estate located in our market areas;

changes in the level of government support of housing finance;

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

our ability to enter new markets successfully and capitalize on growth opportunities;

changes in laws or government regulations or policies affecting financial institutions, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

changes in the ability of third-party providers to perform their obligations to us;

technological changes that may be more difficult or expensive than expected;

cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems;

the effect of any global or national war, conflict or act of terrorism;

our reliance on a small executive staff;

 31

changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs to implement our strategic plan;

the social and economic effects of any pandemic;

changes in consumer spending, borrowing and savings habits;

33

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

our ability to control costs and expenses, particularly those related to operating as a publicly traded company;

the effects of actual government shutdowns;

the ability of the U.S. government to manage federal debt limits;

other changes in our financial condition or results of operations that reduce capital available to pay dividends;
the effects of global or national war, conflict or acts of terrorism;

other changes in the financial condition or future prospects of issuers of securities that we own, including our stock in the FHLB of Atlanta; and

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

 

Coronavirus Pandemic (COVID-19)

The COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company, its clients and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down.

Critical Accounting Policies

 

There were no material changes to the critical accounting policies as disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2021,2022, as filed with the Securities and Exchange Commission.

 

Comparison of Financial Condition at March 31, 20222023 and June 30, 20212022

 

Our total assets decreasedincreased by $3.4$43.4 million, or 0.6%8.0%, to $540.3$588.1 million at March 31, 20222023 from $543.7$544.8 million at June 30, 2021.2022.

 

Total cash and cash equivalents decreased $19.2$2.1 million, or 62.6%21.2%, to $11.5$7.7 million at March 31, 20222023 from $30.7$9.7 million at June 30, 2021.2022. The decrease in cash and cash equivalents was due to funds being used during the nine month period to reduce FHLB advances as well as invest in higher yielding assets.normal periodic fluctuations.

 

Our available-for-sale securities portfolio increaseddecreased by $16.9$13.3 million from $139.1$151.3 million at June 30, 20212022 to $155.9$138.0 million at March 31, 2022.2023. The increasedecrease in securities classified as available-for-sale was primarily a result of our continuing effortsunrealized losses in fiscal 2022the portfolio due to invest in higher yielding assets.the rising interest rate environment.

 

Gross loans decreased $3.0increased $56.6 million, or 0.9%16.4%, to $336.1$401.7 million at March 31, 20222023 from $339.1$345.1 million at June 30, 2021.2022. This decreaseincrease was primarily a result of loan originations generally not matchingoutpacing loan repayments during the nine months ended March 31, 2022.2023.

Restricted equity securities increased by $1.5 million from $1.2 million at June 30, 2022 to $2.7 million at March 31, 2023. The increase was a result of an increase in FHLB stock associated with increased FHLB borrowings.

Deferred tax assets increased by $868 thousand from $4.7 million at June 30, 2022 to $5.5 million at March 31, 2023. The increase was primarily a result of the unrealized losses in the securities portfolio due to the rising interest rate environment.

 

Deposits increased $14.5$11.3 million, or 3.3%2.5%, to $454.4$471.0 million at March 31, 20222023 from $439.9$459.7 million at June 30, 2021.2022. The increase in our deposits reflected increases of $10.8 million in interest bearing demand deposit accounts, $12.8 million in money market accounts, $5.8 million in savings deposits and $2.6 million in non-interest bearing deposits, offset by a decrease of $17.5 million in certificates of deposit.was due to normal periodic fluctuations. Oconee Federal, MHC’s cash is held on deposit with the Association. We generally do not accept brokered deposits and no brokered deposits were accepted during the nine months ended March 31, 2022.2023.

 

FHLB advances decreased $10.0increased $33.0 million, or 66.7%366.7%, to $5.0$42.0 million at March 31, 20222023 from $15.0$9.0 million at June 30, 2021.2022. The decreaseincrease was due to the repayment and non-renewal of short-term advances that no longer had advantageous rates.funding needs for loan growth. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of March 31, 2022,2023, or approximately $134.6$141.6 million. We had no federal funds purchased as of March 31, 20222023 or as of June 30, 2021.2022.

 

34

Total shareholders’ equity decreased $8.1$1.7 million, or 9.2%2.2%, to $80.0$73.6 million at March 31, 20222023 compared to $88.1$75.3 million at June 30, 2021.2022. The decrease was primarily the result of net income for the nine months ended March 31, 20222023 of $3.1 million and the increase of $290 thousand in ESOP shares earned being more than offset by $9.3$3.1 million in other comprehensive loss, $598 thousand of stock repurchases and $1.7 million in dividends distributed. The other comprehensive loss is attributed to unrecognized losses in the investment portfolio due to rising market rates. The Association exceeded all regulatory capital requirements at March 31, 20222023 and June 30, 2021.2022.

 32

 

Nonperforming Assets

The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

 March 31,
2022
  June 30,
 2021
  March 31,
2023
  June 30,
2022
 
 (Dollars in thousands)  (Dollars in thousands) 
Nonaccrual loans:                
Real estate loans:                
One-to-four family $941  $2,260  $416  $1,401 
Multi-family           208 
Home equity        46    
Nonresidential  488   521   523   478 
Agricultural            
Construction and land            
Total real estate loans  1,429   2,781   985   2,087 
Commercial and industrial            
Consumer and other loans            
Total nonaccrual loans(1) $1,429  $2,781  $985  $2,087 
Accruing loans past due 90 days or more:                
Real estate loans $  $  $  $ 
Commercial and industrial            
Consumer and other loans            
Total accruing loans past due 90 days or more            
Total of nonaccrual and 90 days or more past due loans(2) $1,429  $2,781  $985  $2,087 
Real estate owned, net:                
One-to-four family $  $  $  $ 
Nonresidential            
Construction and land            
Other nonperforming assets            
Total nonperforming assets $1,429  $2,781  $985  $2,087 
                
Accruing troubled debt restructurings $  $  $  $ 
Troubled debt restructurings and total nonperforming assets $1,429  $2,781  $985  $2,087 
                
Total nonperforming loans to total loans  0.43%  0.82%  0.25%  0.60%
Total nonperforming assets to total assets  0.26%  0.51%  0.17%  0.38%
Total nonperforming assets to loans and real estate owned  0.43%  0.82%  0.25%  0.60%

(1)Nonaccrual troubled debt restructurings included in the totals above were $890 thousand and $1.7 million, at March 31, 2022 and June 30, 2021, respectively.
(2)There were no loans past due 90 days or more and still accruing at March 31, 2022 or June 30, 2021.

All nonperforming loans in the table above were classified either as substandard or doubtful. There were no other loans that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

Nonperforming assets, which arewere comprised entirely of nonaccrual loans, only, decreased $1.35$1.1 million from $2.78$2.1 million as of June 30, 20212022 to $1.43$1.0 million as of March 31, 2022.2023. There were no accruing loans past due 90 days or more at either date. The decrease in nonaccrual loans primarily related to normal monthly fluctuations combined with payoffs. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.26%0.17% and 0.43%0.25%, respectively, at March 31, 20222023 compared to 0.51%0.38% and 0.82%0.60%, respectively at June 30, 2021.2022.


 33

Analysis of Net Interest Margin

 

The following table sets forth average balance sheets, average annualized yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to income.

 

 For the Three Months Ended  For the Three Months Ended March 31, 
 March 31, 2022  March 31, 2021  2023  2022 
 Average
Balance
  Interest and
Dividends
  Yield/
Cost
  Average
Balance
  Interest and
Dividends
  Yield/
Cost
  Average Balance  Interest and Dividends(1)  Yield/ Cost  Average Balance  Interest and Dividends(1)  Yield/ Cost 
 (Dollars in Thousands)  (Dollars in Thousands) 
Assets:                          
Interest-earning assets:                                                
Loans $336,536  $3,392   4.03% $344,551  $3,612   4.19% $386,825  $4,069   4.21% $336,536  $3,392   4.03%
Investment securities  145,151   543   1.50   96,824   294   1.21   154,063   762   1.98   145,151   543   1.50 
Investment securities, tax-free  15,000   86   2.29   15,189   86   2.26   6,651   38   2.29   15,000   86   2.29 
Interest bearing deposits in other banks  5,099   57   4.53   6,205   4   0.27 
Federal funds sold  147   2   4.43   31   0   0.17 
Other interest-earning assets  7,270   7   0.39   34,619   25   0.29   2,317   22   3.85   1,034   3   0.99 
Total interest-earning assets  503,957   4,028   3.20   491,183   4,017   3.27   555,102   4,950   3.57   503,957   4,028   3.20 
Noninterest-earning assets  35,946           40,712           20,557           35,946         
Total assets $539,903          $531,895          $575,659          $539,903         
                                                
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
NOW and demand deposits $83,264  $26   0.13% $72,015  $27   0.15% $84,750  $48   0.23% $83,264  $26   0.13%
Money market deposits  89,241   29   0.13   86,465   38   0.18   91,592   252   1.12   89,241   29   0.13 
Regular savings and other deposits  47,689   7   0.06   38,865   12   0.13 
Regular savings  44,460   6   0.05   47,689   7   0.06 
Certificates of deposit  174,026   166   0.39   193,300   322   0.68   191,101   878   1.86   174,026   166   0.39 
Total interest-bearing deposits  394,220   228   0.23   390,645   399   0.41   411,903   1,184   1.17   394,220   228   0.23 
Other Borrowings  5,002   19   1.54   5,000   19   1.54 
Federal funds purchased  76   1   5.40   2   0   0.26 
Short term FHLB borrowings  32,017   361   4.57   888   3   1.40 
Long term FHLB borrowings  2,413   10   1.65   4,112   16   1.54 
Total interest-bearing liabilities  399,222   247   0.25   395,645   418   0.43   446,409   1,556   1.41   399,222   247   0.25 
Noninterest bearing deposits  54,258           45,454           54,387           54,258         
Other noninterest-bearing liabilities  854           990           1,213           854         
Total liabilities  454,334           442,089           502,009           454,334         
Equity  85,569           89,806           73,650           85,569         
Total liabilities and equity $539,903          $531,895          $575,659          $539,903         
                                                
Net interest income     $3,781          $3,599          $3,394          $3,781     
Interest rate spread          2.95%          2.84%          2.16%          2.95%
Net interest margin          3.00%          2.93%          2.43%          3.00%
Average interest-earning assets to average interest-bearing liabilities  1.26x          1.24x          1.24x          1.26x        

(1) - Categories that show zero are below $1 thousand.


 For the Nine Months Ended  For the Nine Months Ended March 31, 
 March 31, 2022  March 31, 2021  2023  2022 
 Average Balance  Interest and Dividends  Yield/ Cost  Average Balance  Interest and Dividends  Yield/ Cost  Average Balance  Interest and Dividends(1)  Yield/ Cost  Average Balance  Interest and Dividends(1)  Yield/ Cost 
 (Dollars in Thousands)  (Dollars in Thousands) 
Assets:                          
Interest-earning assets:                                                
Loans $337,344  $10,560   4.17% $352,037  $11,456   4.34% $370,236  $11,521   4.15% $337,344  $10,560   4.17%
Investment securities  139,421   1,336   1.28   83,164   868   1.39   156,620   2,290   1.95   139,421   1,336   1.28 
Investment securities, tax-free  15,029   257   2.28   15,807   268   2.26   6,818   117   2.29   15,029   257   2.28 
Interest bearing deposits in other banks  2,908   79   3.62   11,357   15   0.17 
Federal funds sold  90   3   3.97   51   0   0.10 
Other interest-earning assets  12,556   38   0.40   32,905   84   0.34   1,852   50   3.60   1,148   23   2.67 
Total interest-earning assets  504,350   12,191   3.22   483,913   12,676   3.49   538,524   14,060   3.48   504,350   12,191   3.22 
Noninterest-earning assets  37,560           38,943           21,286           37,560         
Total assets $541,910          $522,856          $559,810          $541,910         
                                                
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
NOW and demand deposits $80,072  $78   0.13% $70,607  $89   0.17% $90,089  $132   0.20% $80,072  $78   0.13%
Money market deposits  85,655   92   0.14   83,354   123   0.20   92,506   384   0.55   85,655   92   0.14 
Regular savings and other deposits  46,392   27   0.08   36,833   40   0.14 
Regular savings  48,806   22   0.06   46,392   27   0.08 
Certificates of deposit  179,568   605   0.45   194,421   1,156   0.79   172,088   1,267   0.98   179,568   605   0.45 
Total interest-bearing deposits  391,687   802   0.27   385,215   1,408   0.49   403,489   1,805   0.60   391,687   802   0.27 
Other Borrowings  8,057   61   1.01   5,000   57   1.52 
Federal funds purchased  398   10   3.24   1   0   0.26 
Short term FHLB borrowings  22,130   645   3.88   3,348   7   0.27 
Long term FHLB borrowings  2,500   30   1.59   4,708   54   1.53 
Total interest-bearing liabilities  399,744   863   0.29   390,215   1,465   0.50   428,517   2,490   0.77   399,744   863   0.29 
Noninterest bearing deposits  54,010           43,909           56,650           54,010         
Other noninterest-bearing liabilities  891           1,364           1,128           891         
Total liabilities  454,645           435,488           486,295           454,645         
Equity  87,265           87,368           73,515           87,265         
Total liabilities and equity $541,910    ��     $522,856          $559,810          $541,910         
                                                
Net interest income     $11,328          $11,211          $11,570          $11,328     
Interest rate spread          2.93%          2.99%          2.71%          2.93%
Net interest margin          2.99%          3.09%          2.87%          2.99%
Average interest-earning assets to average interest-bearing liabilities  1.26x          1.24x          1.26x          1.26x        

(1) - Categories that show zero are below $1 thousand.


Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. There are no out-of-period items or adjustments to exclude from this table.

  Three Months Ended  Nine Months Ended 
  March 31, 2023 Compared to 2022  March 31, 2023 Compared to 2022 
  Volume  Rate  Net  Volume  Rate  Net 
  (Dollars in thousands)  (Dollars in thousands) 
Interest income:                        
Loans $524  $153  $677  $1,023  $(62) $961 
Investment securities  2   169   171   97   717   814 
Interest bearing deposits in other banks  (1)  54   53   (3)  67   64 
Federal funds sold     2   2      3   3 
Other interest-earning assets  6   13   19   17   10   27 
Total  531   391   922   1,134   735   1,869 
                         
Interest expense:                        
Deposits  11   945   956   25   978   1,003 
Federal Funds Purchased  1      1   10      10 
Short term FHLB borrowings  336   22   358   188   450   638 
Long term FHLB borrowings  (7)  1   (6)  (26)  2   (24)
Total  341   968   1,309   197   1,430   1,627 
Increase/(decrease) in net interest income $190  $(577) $(387) $937  $(695) $242 

Contractual Maturities and Interest Rate Sensitivity

The following table summarizes the scheduled repayments of our loan portfolio at March 31, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Loans are presented net of loans in process.

  Real Estate Loans          
  One-to-Four Family  Multi-family  Home Equity  Non-Residential  Agricultural  Construction and Land  Commercial and Industrial  Consumer and Other  Total 
  (Dollars in thousands) 
Amounts due in:                                    
One year or less $1,432  $  $58  $476  $  $4,152  $962  $487  $7,567 
More than one to five years  9,735      368   18,231   2,022   16,920   2,284   577   50,137 
More than five to fifteen years  42,003   144   7,273   6,969   463   3,002   80   80   60,014 
More than fifteen years  257,177   197   279   107      26,187      62   284,009 
Total $310,347  $341  $7,978  $25,783  $2,485  $50,261  $3,326  $1,206  $401,727 

Variable rate loans with greater than one year maturity $78,020 
Fixed rate loans with greater than one year maturity  316,140 
  $394,160 

Comparison of Operating Results for the Three Months Ended March 31, 20222023 and March 31, 20212022

 

General. We reported net income of $628 thousand for the three months ended March 31, 2023 as compared to net income of $1.0 million for the three months ended March 31, 2022 as compared to net2022. Interest income of $870increased $922 thousand for the three months ended March 31, 2021. Interest2023 compared to the three months ended March 31, 2022 and interest expense increased $1.3 million, resulting in a net decrease to net interest income increased $11of $387 thousand. Noninterest income decreased $31 thousand for the three months ended March 31, 20222023 compared to the three months ended March 31, 2021 and interest expense decreased $171 thousand, resulting in a net increase to net interest income of $182 thousand. Noninterest income increased $57 thousand for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.2022. Total noninterest expense increased $16$83 thousand. Tax expense increased $49decreased $135 thousand.

 

Interest Income. Interest income increased by $11$922 thousand to $4.0$5.0 million for the three months ended March 31, 2023. The yield on interest-earning assets increased 37 basis points from 3.20% for the three months ended March 31, 2022 to 3.57% for the three months ended March 31, 2023. Total average interest-earning assets increased by $51.1 million to $555.1 million for the three months ended March 31, 2023 from $504.0 million for the three months ended March 31, 2022.

Interest income on loans increased by $677 thousand to $4.1 million from $3.4 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The yield on loans increased 18 basis points from 4.03% for the three months ended March 31, 2022 to 4.21% for the three months ended March 31, 2023. The increase in yield is primarily due to an overall increase in market rates. The average balance of loans increased by $50.3 million, or 14.9%, to $386.8 million for the three months ended March 31, 2023 from $336.5 million for the three months ended March 31, 2022. The yield on interest-earning assets decreased seven basis points from 3.27% for the three months ended March 31, 2021 to 3.20% for the three months ended March 31, 2022. Total average interest-earning assets increased by $12.8 million to $504.0 million for the three months ended March 31, 2022 from $491.2 million for the three months ended March 31, 2021.

Interest income on loans decreased by $220 thousand to $3.4 million from $3.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The yield on loans decreased 16 basis points from 4.19% for the three months ended March 31, 2021 to 4.03% for the three months ended March 31, 2022. The average balance of loans decreased by $8.0 million, or 2.3%, to $336.5 million for the three months ended March 31, 2022 from $344.6 million for the three months ended March 31, 2021. The decreaseincrease in the average balance of our loans is reflective of reducedincreased originations andoffsetting normal loan repayments.

 

Interest income on investment securities increased $249$171 thousand, or 65.5%27.2%, to $800 thousand for the three months ended March 31, 2023 from $629 thousand for the three months ended March 31, 2022 from $380 thousand for2022. This was the three months ended March 31, 2021. This reflectedresult of an increase of $48.1 million,$563 thousand, or 43.0%0.4%, in the average balances of securities to $160.2$160.7 million from $112.0$160.2 million for the three months ended March 31, 20222023 and 2021,2022, respectively, combined with an increase in the total average yield of our investment securities of 2142 basis points to 1.57%1.99% from 1.36%1.57%. The increase in average balances of our investment securities is reflective of our efforts during the past twelve months to invest in higher yielding assets. Our increased yields are reflective of overall higher investment rates that were available on purchases made in during the prior twelve months.

 

Income on other interest earning assets decreasedincreased by $18$74 thousand, or 72.0%1,095.0%, to $81 thousand for the three months ended March 31, 2023 from $7 thousand for the three months ended March 31, 2022 from $252022. The average balance of other interest-earning assets increased $293 thousand to $7.6 million for the three months ended March 31, 2021. The average balance of other interest-earning assets decreased $27.3 million to2023 from $7.3 million for the three months ended March 31, 2022 from $34.6and the yield increased 389 basis points over the same period. The increase in average balance was reflective of normal fluctuation. The increase in yield was a result of an overall increase in market rates, primarily federal funds rates.

Interest Expense. Interest expense increased $1.3 million, or 530.0%, to $1.6 million for the three months ended March 31, 2021 and2023 from $247 thousand for the yieldthree months ended March 31, 2022. The average rate paid on interest bearing liabilities increased ten116 basis points overfrom 0.25% for the same period.three months ended March 31, 2022 to 1.41% for the three months ended March 31, 2023.

Interest expense on deposits increased $956 thousand, or 419.3%, to $1.2 million for the three months ended March 31, 2023 from $228 thousand for the three months ended March 31, 2022. The decrease inaverage rate paid on interest bearing deposits increased 94 basis points from 0.23% for the three months ended March 31, 2022 to 1.17% for the three months ended March 31, 2023. The average balance was primarily dueof interest bearing deposits increased $17.7 million, or 4.5%, to money market funds being used to reduce FHLB advances and purchase higher yielding assets during$411.9 million for the prior twelve months. The increase in yield was primarily a result of a shift in composition of earning assets in this category. Money market funds decreased resulting in a higher percentage of restricted equity securities which earned higher rates duringthree months ended March 31, 2023 from $394.2 million for the three months ended March 31, 2022.

 

Interest Expense. Interest expense decreased $171on certificates of deposit increased by $712 thousand, or 40.9%428.9%, to $247$878 thousand for the three months ended March 31, 20222023 from $418$166 thousand for the three months ended March 31, 2021. The average rate paid on interest bearing liabilities decreased 18 basis points from 0.43% for the three months ended March 31, 2021 to 0.25% for the three months ended March 31, 2022. This decrease was primarily due to a general decrease in retail and wholesale borrowing rates due to overall market decreases.

Interest expense on deposits decreased $171 thousand, or 42.9%, to $228 thousand for the three months ended March 31, 2022 from $399 thousand for the three months ended March 31, 2021. The average rate paid on interest bearing deposits decreased 18 basis points from 0.41% for the three months ended March 31, 2021 to 0.23% for the three months ended March 31, 2022. The decrease in the average rate paid on deposits was partially offset by an increase in the average balance of interest bearing deposits of $3.6 million, or 0.9%, to $394.2 million for the three months ended March 31, 2022 from $390.6 million for the three months ended March 31, 2021.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased by $156 thousand, or 48.4% to $166 thousand for the three months ended March 31, 2022 from $322 thousand for the three months ended March 31, 2021. The decrease in interest expense on these deposits was attributable to a decreasean increase in the average cost on these deposits to 1.86% from 0.39% from 0.68%, in addition tocombined with a $19.3$17.1 million decreaseincrease in average balances. The decreaseincrease in interest expensecost on these deposits is reflective ofdue to an overall declineincrease in market rates. The decreaseincrease in the average balance of these deposits is reflective of normal deposit fluctuation.

 

Interest expense on NOW, demand deposits, regular savings and other deposits decreasedincreased by $6$21 thousand to $54 thousand for the three months ended March 31, 2023 from $33 thousand for the three months ended March 31, 2022 from $39 thousand for the three months ended March 31, 2021.2022. The decreaseincrease in interest expense on these deposits was attributable to a decreasean increase in the average cost on these deposits to 0.10%0.17% from 0.14%0.10%, offset by a $20.1$1.7 million decrease in average balances. The increase in interest cost on these deposits is due to an overall increase in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense on money market deposits increased by $223 thousand, or 769.0%, to $252 thousand for the three months ended March 31, 2023 from $29 thousand for the three months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 1.12% from 0.13% combined with a $2.4 million increase in average balances. The decreaseincrease in interest expensecost on these deposits is reflective of an overall declineincrease in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.


Interest expense on money market deposits decreasedfor other borrowings increased by $9$353 thousand, or 23.7%1,888.3%, to $29$372 thousand for the three months ended March 31, 20222023 from $38 thousand for the three months ended March 31, 2021. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.13% from 0.18% offset by a $2.8 million increase in average balances. The decrease in interest expense on these deposits is reflective of an overall decline in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense for other borrowings was stable at $19 thousand for the three months ended March 31, 2022 and March 31, 2021.2022. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. AverageThe increase in interest expense on other borrowings were $5.0was attributable to an increase in the average cost of the borrowings to 4.37% from 1.54% combined with a $29.5 million increase in average balances. The increase in the cost of these borrowings is reflective of an overall increase in market rates. The increase in the average balance of these borrowings is reflective of funding needs for the three months ended March 31, 2022 and March 31, 2021. The average rate remained stable at 1.54% for the three months ended March 31, 2021 and March 31, 2022.loan growth.

 

Net Interest Income. Net interest income before the provision for loan losses increaseddecreased by $182$387 thousand, or 5.1%10.2%, to $3.8$3.4 million for the three months ended March 31, 2022.2023. Our interest rate spread and net interest margin increaseddecreased to 2.16% and 2.43%, from 2.95% and 3.00%, from 2.84% and 2.93%, for the three months ended March 31, 20222023 and March 31, 2021,2022, respectively. The increase in income on earning assets combined withwas less than the decreaseincrease in cost of interest bearing liabilities, contributed toresulting in the increasedecrease in net interest margin for the three months ended March 31, 2022.2023.

 

Provision for Loan Losses. We recorded noa $50 thousand provision for loan losses for the three months ended March 31, 2022 or2023 and no provision for the three months ended March 31, 2021.2022. There were no charge-offs for the three months ended March 31, 20222023 or for the three months ended March 31, 2021.2022. The lack of provision for the three months ended March 31, 20222023 is primarily due to a decrease inthe growth of the loan portfolio balance.

 

Our total allowance for loan losses was $1.3$1.5 million, or 0.40%0.37% of total gross loans as of March 31, 20222023 and $1.3 million, or 0.39%, of total gross loans as of June 30, 2021. Our total allowance for loan losses was 0.40% of total gross loans, net of PPP loans, as of March 31, 2022 and June 30, 2021. PPP loans are not allocated any allowance due to the 100% SBA guarantee.2022. There were no specifically identified impaired loans at March 31, 20222023 or June 30, 2021.2022. Total loans individually evaluated for impairment decreased $249$981 thousand, or 14.3%68.8%, to $1.5 million$445 thousand at March 31, 20222023 compared to $1.7$1.4 million at June 30, 2021.2022.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended March 31, 20222023 and 2021.2022. There have been no changes to our allowance for loan loss methodology during three months ended March 31, 2022.2023.

 

Noninterest Income. Noninterest income increased $57decreased $31 thousand, or 14.0%6.7%, to $433 thousand for the three months ended March 31, 2023 from $464 thousand for the three months ended March 31, 2022 from $4072022. The net gain on sale of mortgage loans reflected no gain for the three months ended March 31, 2023 and a $33 thousand gain for the three months ended March 31, 2022. Loan sales declined due to a decrease in demand brought on by the increased rate environment. Gains on the disposition of purchase credit impaired loans, which totaled $51 thousand for the three months ended March 31, 2021. Gain on sale of mortgage loans was $332023, decreased $19 thousand and $76 thousand for the three months ended March 31, 2022 and 2021, respectively. There was no change in the fair value of equity securities for the three months ended March 31, 2022 compared to a loss of $20 thousand for the three months ended March 31, 2021. Gains or losses on the fair value of equity securities are market driven. There were no sales of securities for the three months ended March 31, 2022 and March 31, 2021. The net gain on payoff of purchase credit impaired loans was $70 thousand for the three months ended March 31, 2022 due to2022. We did not have the liquidation of one loan. There were no payoffssame opportunities for gains on the disposition of purchase credit impaired loans forin the three months ended March 31, 2021.2023 as we did in the three months ended March 31, 2022. Changes in all other noninterest income items were due to normal periodic fluctuations.

 

Noninterest Expense. Noninterest expense for the three months ended March 31, 20222023 increased by $16$83 thousand, or 0.6%2.9%, to $3.0 million for three months ended March 31, 2023 from $2.9 million for the three months ended March 31, 2022. Salaries and employee benefits decreased $17increased $41 thousand due to reduced ESOP costs and higher deferred loan costs. Occupancy and equipment increased $24 thousand due to normal periodic fluctuations.routine salary increases. Data processing increased $22$31 thousand due to routine upgrades and volume increases in the current period. Foreclosed asset expenses increased $26 thousand. This is reflective of the three months ended March 31, 2022 having no expenses whereas the three months ended March 31, 2021 had $25 thousand in gains on the sale of REO. For the three months ended March 31, 2022,2023, we recognized a gain on foreclosed assets of $37 thousand due to the sale of foreclosed properties. There were no foreclosed asset sales for the increasethree months ended March 31, 2022. For the three months ended March 31, 2023, we recognized a gain in the value of the loan servicing asset of $22 thousand compared to a $42 thousand. There was no change in value of the loan servicing assetthousand gain for the three months ended March 31, 2021.2022. The fair value of our loan servicing asset is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to normal periodic fluctuations.

 

Income Tax Expense. Tax expense increased $49decreased $135 thousand, or 19.2%44.4%, to $169 thousand for the three months ended March 31, 2023 from $304 thousand for the three months ended March 31, 2022 from $255 thousand2022. This was primarily due to lower net income. Our effective income tax rate was 21.2% and 22.6% for the three months ended March 31, 2021. This was due to an increase in pre-tax income during the three months ended March 31,2023 and 2022, as compared to the three months ended March 31, 2021. Our effective income tax rate was 22.6% and 22.7% for the three months ended March 31, 2022 and 2021, respectively.


Comparison of Operating Results for the Nine Months Ended March 31, 20222023 and March 31, 20212022

 

General. We reported net income of $3.1 million for the nine months ended March 31, 20222023 as compared to netwell as for the nine months ended March 31, 2022. Interest income of $3.2increased $1.9 million for the nine months ended March 31, 2021. Interest income decreased $485 thousand for the nine months ended March 31, 20222023 compared to the nine months ended March 31, 20212022 and interest expense decreased $602 thousand,increased $1.6 million, resulting in a net increase to net interest income of $117$242 thousand. Noninterest income decreased $218 thousand for the nine months ended March 31, 2022 compared to the nine months ended March 31, 2021. Total noninterest expense increased $214decreased $66 thousand. Tax expense decreased $152increased $140 thousand.

 

Interest Income. Interest income decreasedincreased by $485 thousand$1.9 million to $12.2 million from $12.7$14.1 million for the nine months ended March 31, 2022 and March 31, 2021, respectively.2023. The yield on interest-earning assets decreased 27increased 26 basis points from 3.49% for the nine months ended March 31, 2021 to 3.22% for the nine months ended March 31, 2022.2022 to 3.48% for the nine months ended March 31, 2023. Total average interest-earning assets increased by $20.4$34.2 million to $538.5 million for the nine months ended March 31, 2023 from $504.4 million for the nine months ended March 31, 20222022.

Interest income on loans increased by $961 thousand to $11.5 million from $483.9$10.6 million for the nine months ended March 31, 2021.

Interest income2023 and March 31, 2022, respectively. The yield on loans decreased by $896 thousand to $10.6 milliontwo basis points from $11.5 million4.17% for the nine months ended March 31, 2022 and March 31, 2021, respectively. The yield on loans decreased 17 basis points from 4.34%to 4.15% for the nine months ended March 31, 20212023. The decrease in yield is primarily due to 4.17% forlower deferred fees recognized in the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022. The average balance of loans decreasedincreased by $14.7$32.9 million, or 4.2%9.8%, to $370.2 million for the nine months ended March 31, 2023 from $337.3 million for the nine months ended March 31, 2022 from $352.0 million for the nine months ended March 31, 2021.2022. The decreaseincrease in the average balance of our loans is reflective of reducedincreased originations andoffsetting normal loan repayments.

 

Interest income on investment securities increased $457$814 thousand, or 40.2%51.1%, to $2.4 million for the nine months ended March 31, 2023 from $1.6 million for the nine months ended March 31, 20222022. This was the result of an increase of $9.0 million, or 5.8%, in the average balances of securities to $163.4 million from $1.1$154.5 million for the nine months ended March 31, 2021, reflecting2023 and 2022, respectively, combined with an increase of $55.5 million, or 56.1%, in the average balances of securities to $154.5 million from $99.0 million for the nine months ended March 31, 2022 and 2021, respectively, offset by a decrease in the total average yield of our investment securities of 1558 basis points to 1.38%1.96% from 1.53%1.38%. The increase in average balances of our investment securities is reflective of our efforts during the past twelve months to invest in higher yielding assets. Our decreasedincreased yields are reflective of a decrease ofoverall higher yielding investments due to maturities, paydowns, sales and calls in the past twelve months along with overall lower investment rates that were available on purchases made in during the prior twelve months.

 

Income on other interest earning assets decreasedincreased by $46$94 thousand, or 54.8%246.8%, to $132 thousand for the nine months ended March 31, 2023 from $38 thousand for the nine months ended March 31, 2022 from $84 thousand for the nine months ended March 31, 2021.2022. The average balance of other interest-earning assets decreased $20.3$7.7 million to $4.9 million for the nine months ended March 31, 2023 from $12.6 million for the nine months ended March 31, 2022 from $32.9 million for the nine months ended March 31, 2021 and the yield increased six322 basis points over the same period. The decrease in average balance was primarily due to money market funds and fed funds being used to reduce FHLB advances and purchase higher yielding assets during the prior twelve months. The increase in yield was primarily a result of a shiftan overall increase in compositionmarket rates, primarily federal funds rates.

Interest Expense. Interest expense increased $1.6 million, or 188.5%, to $2.5 million for the nine months ended March 31, 2023 from $863 thousand for the nine months ended March 31, 2022. The average rate paid on interest bearing liabilities increased 48 basis points from 0.29% for the nine months ended March 31, 2022 to 0.77% for the nine months ended March 31, 2023.

Interest expense on deposits increased $1.0 million, or 125.1%, to $1.8 million for the nine months ended March 31, 2023 from $802 thousand for the nine months ended March 31, 2022. The average rate paid on interest bearing deposits increased 33 basis points from 0.27% for the nine months ended March 31, 2022 to 0.60% for the nine months ended March 31, 2023. The average balance of earning assets in this category. Money market funds decreased resulting in a higher percentage of restricted equity securities which earned higher rates duringinterest bearing deposits increased $11.8 million, or 3.0%, to $403.5 million for the nine months ended March 31, 2023 from $391.7 million for the nine months ended March 31, 2022.

 

Interest Expense. Interest expense decreased $602on certificates of deposit increased by $662 thousand, or 41.1%109.4%, to $863 thousand for the nine months ended March 31, 2022 from $1.5$1.3 million for the nine months ended March 31, 2021. The average rate paid on interest bearing liabilities decreased 21 basis points2023 from 0.50% for the nine months ended March 31, 2021 to 0.29% for the nine months ended March 31, 2022. This decrease was primarily due to a general decrease in retail and wholesale borrowing rates due to overall market decreases.

Interest expense on deposits decreased $606$605 thousand or 43.0%, to $802 thousand for the nine months ended March 31, 2022 from $1.4 million for the nine months ended March 31, 2021. The average rate paid on interest bearing liabilities decreased 22 basis points from 0.49% for the nine months ended March 31, 2021 to 0.27% for the nine months ended March 31, 2022. The decrease in the average rate paid on deposits was partially offset by an increase in the average balance of interest bearing deposits of $6.5 million, or 1.7%, to $391.7 million for the nine months ended March 31, 2022 from $385.2 million for the nine months ended March 31, 2021.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased by $551 thousand, or 47.7% to $605 thousand for the nine months ended March 31, 2022 from $1.2 million for the nine months ended March 31, 2021. The decrease in interest expense on these deposits was attributable to a decreasean increase in the average cost on these deposits to 0.45%0.98% from 0.79%0.45%, in addition to a $14.9offset by $7.5 million decrease in average balances. The decreaseincrease in interest expensecost on these deposits is reflective ofdue to an overall declineincrease in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.

 

Interest expense on NOW, demand deposits, regular savings and other deposits decreasedincreased by $24$49 thousand or 18.6%, to $154 thousand for the nine months ended March 31, 2023 from $105 thousand for the nine months ended March 31, 2022 from $129 thousand for the nine months ended March 31, 2021.2022. The decreaseincrease in interest expense on these deposits was attributable to a decrease$12.4 million increase in average balances combined with an increase in the average cost on these deposits to 0.11%0.15% from 0.16% offset0.11%. The increase in interest cost on these deposits is due to an overall increase in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense on money market deposits increased by $292 thousand, or 317.4%, to $384 thousand for the nine months ended March 31, 2023 from $92 thousand for the nine months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 0.55% from 0.14% combined with a $19.0$6.9 million increase in average balances. The decreaseincrease in interest expensecost on these deposits is reflective of an overall declineincrease in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.


Interest expense on money market deposits decreasedfor other borrowings increased by $31$624 thousand or 25.2%, to $92$685 thousand for the nine months ended March 31, 20222023 from $123 thousand for the nine months ended March 31, 2021. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.14% from 0.20% offset by a $2.3 million increase in average balances. The decrease in interest expense on these deposits is reflective of an overall decline in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense for other borrowings increased by $4 thousand, or 7.0%, to $61 thousand for the nine months ended March 31, 2022 from $57 thousand for the nine months ended March 31, 2021.2022. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. AverageThe increase in interest expense on other borrowings were $8.1was attributable to an increase in the average cost of the borrowings to 3.64% from 1.01% combined with a $17.0 million forincrease in average balances. The increase in the nine months ended March 31, 2022 compared to $5.0 million for the nine months ended March 31, 2021. The average rate decreased 51 basis points from 1.52% for the nine months ended March 31, 2021 to 1.01% for the nine months ended March 31, 2022 due to a decreasecost of these borrowings is reflective of an overall increase in market interest rates and use of shorter term advancesrates. The increase in the period ended March 31, 2022.average balance of these borrowings is reflective of funding needs for loan growth.

 

Net Interest Income. Net interest income before the provision for loan losses increased by $117$242 thousand, or 1.0%2.1%, to $11.3$11.6 million for the nine months ended March 31, 2022.2023. Our interest rate spread and net interest margin decreased to 2.71% and 2.87%, from 2.93% and 2.99%, from 2.99% and 3.09%, for the nine months ended March 31, 20222023 and March 31, 2021,2022, respectively. The decreaseincrease in income on earning assets was smallermore than the decreaseincrease in cost of interest bearing liabilities, which contributed toresulting in the increase in net interest margin for the nine months ended March 31, 2022.2023.

 

Provision for Loan Losses. We recorded noa $150 thousand provision for loan losses for the nine months ended March 31, 2022 or2023 and no provision for the nine months ended March 31, 2021.2022. There were no charge-offs for the nine months ended March 31, 2022. There were $7 thousand in charge-offs2023 or for the nine months ended March 31, 2021.2022. The lack of provision for the nine months ended March 31, 20222023 is primarily due to a decrease inthe growth of the loan portfolio balance.

 

Our total allowance for loan losses was $1.3$1.5 million, or 0.40%0.37% of total gross loans as of March 31, 20222023 and $1.3 million, or 0.39%, of total gross loans as of June 30, 2021. Our total allowance for loan losses was 0.40% of total gross loans, net of PPP loans, as of March 31, 2022 and June 30, 2021. PPP loans are not allocated any allowance due to the 100% SBA guarantee.2022. There were no specifically identified impaired loans at March 31, 20222023 or June 30, 2021.2022. Total loans individually evaluated for impairment decreased $249$981 thousand, or 14.3%68.8%, to $1.5 million$445 thousand at March 31, 20222023 compared to $1.7$1.4 million at June 30, 2021.2022.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the nine months ended March 31, 20222023 and 2021.2022. There have been no changes to our allowance for loan loss methodology during nine months ended March 31, 2022.2023.

 

Noninterest Income. Noninterest income decreased $218$6 thousand, or 14.6%0.5%, to $1.3 million for the nine months ended March 31, 2022 from $1.5 million2023. The net gain on sale of mortgage loans reflected a $12 thousand gain for the nine months ended March 31, 2021. Mortgage servicing income decreased $292023 and a $182 thousand gain for the nine months ended March 31, 2022. Loan sales declined due to a declinedecrease in demand brought on by the increased rate environment. The change in the servicing portfolio balance. Gain on salefair value of mortgage loansequity securities was $182 thousand and $177a loss of $1 thousand for the nine months ended March 31, 2022 and 2021, respectively. The change in fair value of equity securities was2023 compared to a loss of $49 thousand for the nine months ended March 31, 2022 compared to a loss of $11 thousand for the nine months ended March 31, 2021.2022. Gains or losses on the fair value of equity securities are market driven. There were no sales of securities for the nine months ended March 31, 2022. There were $109$84 thousand in gainslosses on the sale of securities for the nine months ended March 31, 2021. Gains or losses on the2023, and no sale of securities are largely market driven.for the nine months ended March 31, 2022. Securities were sold during the nine months ended March 31, 20212023 to realize market gains and adjust the investment portfolio so that funds could be more beneficially used to yield higher net earnings going forward. The net gain on payoff of purchasepurchased credit impaired loans wasincreased $170 thousand to $240 thousand for the nine months ended March 31, 2023 compared to $70 thousand for the nine months ended March 31, 2022 due to2022. We had more opportunities for gains on the liquidation of one loan. The net gain on payoffdisposition of purchase credit impaired loans was $195 thousand forin the nine months ended March 31, 2021 due to2023 than we did in the liquidation of two loans.nine months ended March 31, 2022. Changes in all other noninterest income items were due to normal periodic fluctuations.

 

Noninterest Expense. Noninterest expense for the nine months ended March 31, 2022 increased2023 decreased by $214$66 thousand, or 2.5%0.7%, to $8.8 million for nine months ended March 31, 2023 from $8.9 million for the nine months ended March 31, 2022. Salaries and employee benefits increased $102decreased $121 thousand due to routine increases. Occupancyreduced ESOP costs, as the ESOP loan was fully repaid in December 2022, and equipment increased $130 thousand due to normal periodic fluctuations.higher deferred loan costs. Data processing increased $40$68 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $39 thousand due to normal periodic fluctuations. Advertising increased $36 thousand due to normal periodic fluctuations. FDIC deposit insurance increased $12 thousand due to the increased Association asset size. For the nine months ended March 31, 2022,2023, we recognized a gain on foreclosed assets of $37 thousand due to the sale of foreclosed properties. There were no foreclosed asset sales for the increasenine months ended March 31, 2022. For the nine months ended March 31, 2023, we recognized a gain in the value of the loan servicing asset of $41 thousand compared to a $39 thousand. Forthousand gain for the nine months ended March 31, 2021, we recognized an expense for the decrease in value of the loan servicing asset of $72 thousand.2022. The fair value of our loan servicing asset is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to normal periodic fluctuations.


Income Tax Expense. Tax expense decreased $152increased $140 thousand, or 18.5%20.9%, to $809 thousand for the nine months ended March 31, 2023 from $669 thousand for the nine months ended March 31, 2022 from $821 thousand for the nine months ended March 31, 2021.2022. This was primarily due to a decrease in pre-tax income during the nine months ended March 31, 2022 as compared to the nine months ended March 31, 2021 along with a largersmaller permanent tax benefit being recognized during the nine months ended March 31, 20222023 as compared to the nine months ended March 31, 2021,2022, which was a result of morefewer nonqualified stock options being exercised during the nine months ended March 31, 20222023 as compared to the nine months ended March 31, 2021.2022. Our effective income tax rate was 18.0%20.9% and 20.3%18.0% for the nine months ended March 31, 20222023 and 2021,2022, respectively.

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. 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 generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

 

Liquidity management is both a daily and long-term responsibility of management. Our liquidity monitoring process is designed to contend with changing economic situations, which would include the current COVID-19 pandemic.situations. We have therefore not changed our daily or long-term liquidity management procedures. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Treasury and Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets, as of March 31, 2022,2023, or approximately $134.6$141.6 million as of that date, with a remaining availability of $129.6$99.6 million as of March 31, 2022.2023.

 

Common Stock Dividends. On August 19, 2021,25, 2022, November 24, 202123, 2022 and February 24, 202223, 2023 the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.7 million.

 

Equity Compensation Plans. During the three months ended March 31, 2022, no shares of restricted stock or common stock were issued.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

 

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2022.2023. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2022,2023, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II

 

ITEM 1. LEGAL PROCEEDINGS

ITEM 1. LEGAL PROCEEDINGS

 

There are various claims and lawsuits in which the Company is periodically involved incidental to the Company’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

 

ITEM 1A. RISK FACTORS

ITEM 1A. RISK FACTORS

 

Disclosures of risk factors are not required of smaller reporting companies, such as the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)None.

 

(b)Not applicable.

 

(c)Issuer Repurchases. On May 14, 2021,March 29, 2023, the Board of Directors authorized the repurchase of up to 100,00050,000 shares of the Company’s common stock, terminating the previous authorization on May 28, 2020stock. The Company did not have a repurchase plan in place January 1, 2023 to repurchase 100,000 shares. The repurchase authorization expires on June 30, 2022. In connection with the current repurchase authorization, the Company purchased a total of 16,582 shares of its common stock during the three months ended March 31, 2022.29, 2023.

 

The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended March 31, 2022:

Total Number of
Shares Purchased
Average Price
 Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced PlanApproximate Maximum Dollar Value or Number of Shares That May Yet be Purchased Under Publicly Announced Plans
January 1 - January 31, 2023$
February 1 - February 28, 2023
March 1 - March 31, 202350,000
Total$(1)

 

  Total
Number of
Shares
Purchased
  Average Price
Paid Per
Share
  Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
  Approximate Maximum
Dollar Value or Number
of Shares That May Yet
be Purchased Under
Publicly Announced Plans
 
January 1 - January 31, 2022  1,898  $22.28   1,898   73,670 
February 1 - February 28, 2022  12,884  $22.86   12,884   60,786 
March 1 - March 31, 2022  1,800  $26.30   1,800   58,986(2)
Total  16,582  $23.17   16,582(1)    

(1)All shares were purchased pursuantThe Company did not have a repurchase plan in place from January 1, 2023 to theMarch 29, 2023. A publicly announced repurchase program thatfor up to 50,000 shares of the Company’s issued and outstanding common stock was approved by the Board of Directors on May 14, 2021.March 30, 2023. The repurchase program expires on June 30, 2022.
(2)RepresentsCompany received a regulatory non-objection to make repurchases through the maximum number of shares available for repurchase under the May 14, 2021 plan at Marchthrough December 31, 2022.2023.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.


ITEM 6. INDEX TO EXHIBITS

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed below.

 

Exhibit
Numbernumber

 

Description

  
31.1 Certification of Curtis T. Evatt, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
  
31.2 

Certification of John W. Hobbs, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

32 Certification of Curtis T. Evatt, President and Chief Executive Officer, and John W. Hobbs, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022,2023, formatted in XBRL (Extensible Business Reporting Language):

(i)         Consolidated Balance Sheets

(ii)        Consolidated Statements of Income and Comprehensive Income

(iii)       Consolidated Statements of Changes In Shareholders’ Equity

(iv)      Consolidated Statements of Cash Flows, and

(v)       Notes to The Consolidated Financial Statements

   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
Oconee Federal Financial Corp.
Date: May 13, 202212, 2023 
   
  

/s/ Curtis T. Evatt

  Curtis T. Evatt
  President and Chief Executive Officer
   
  /s/ John W. Hobbs
  John W. Hobbs
  Executive Vice President and Chief Financial Officer

44