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 December 31, 2021

☐	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)


Federal		32-0330122
(State of Other Jurisdiction of Incorporation)		(I.R.S Employer Identification Number)

201 East North Second Street, Seneca, South Carolina		29678
(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 share

OFED

The 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.

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. ☐

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 February 7, 2022, the registrant had 5,580,402 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 STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	41
PART II.		42
ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	42
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42
ITEM 4.	MINE SAFETY DISCLOSURES	42
ITEM 5.	OTHER INFORMATION	42
ITEM 6.	INDEX TO EXHIBITS	43
SIGNATURES		43
EXHIBITS		44

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

PART I

ITEM 1. FINANCIAL STATEMENTS

	December 31, 2021 (unaudited)			June 30, 2021
ASSETS
Cash and due from banks	$	3,382		$	9,026
Interest-earning deposits		4,193			21,575
Fed funds sold		102			48
Total cash and cash equivalents		7,677			30,649
Securities available-for-sale		155,654			139,061
Loans		338,277			339,089
Allowance for loan losses		(1,339	)		(1,339	)
Net loans		336,938			337,750
Loans held for sale, at fair value		731			164
Premises and equipment, net		8,761			8,972
Accrued interest receivable
Loans		933			939
Investments		447			437
Restricted equity securities, at cost		1,033			1,408
Bank owned life insurance		20,164			19,937
Goodwill		2,593			2,593
Core deposit intangible		100			134
Loan servicing rights		302			305
Deferred tax assets		1,240			787
Other assets		428			580
Total assets	$	537,001		$	543,716

LIABILITIES
Deposits
Noninterest - bearing	$	52,283		$	53,250
Interest - bearing		391,273			386,680
Total deposits		443,556			439,930
Federal Home Loan Bank advances		5,000			15,000
Accrued interest payable and other liabilities		788			686
Total liabilities		449,344			455,616

SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,571,464 and 6,563,409 shares outstanding, respectively		66			66
Treasury stock, at par, 978,164 and 970,274 shares, respectively		(10	)		(10	)
Additional paid-in capital		6,410			6,400
Retained earnings		81,816			80,915
Accumulated other comprehensive (loss)/income		(516	)		941
Unearned ESOP shares		(109	)		(212	)
Total shareholders’ equity		87,657			88,100
Total liabilities and shareholders’ equity	$	537,001		$	543,716

See accompanying notes to the consolidated financial statements

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

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


	Three Months Ended						Six Months Ended
	December 31, 2021			December 31, 2020			December 31, 2021			December 31, 2020
Interest and dividend income:
Loans, including fees	$	3,722		$	3,822		$	7,168		$	7,849
Securities, taxable		441			284			793			575
Securities, tax-exempt		86			91			172			182
Other interest-earning assets		16			32			31			59
Total interest income		4,265			4,229			8,164			8,665

Interest expense:
Deposits		269			460			575			1,010
Other borrowings		19			19			42			38
Total interest expense		288			479			617			1,048

Net interest income		3,977			3,750			7,547			7,617

Provision for loan losses		—			—			—			—
Net interest income after provision for loan losses		3,977			3,750			7,547			7,617

Noninterest income:
Service charges on deposit accounts		102			93			202			175
Income on bank owned life insurance		114			112			226			224
Mortgage servicing income		28			38			58			78
Gain on sale of mortgage loans		42			66			149			101
ATM & debit card income		112			97			223			195
Change in fair value of equity securities, net		1			32			(49	)		9
Gain on sale of securities, net		—			47			—			109
Gain on payoff of purchase credit impaired loans		—			—			—			195
Other		4			2			6			4
Total noninterest income		403			487			815			1,090

Noninterest expense:
Salaries and employee benefits		1,716			1,692			3,412			3,297
Occupancy and equipment		494			410			977			869
Data processing		249			236			501			483
ATM & debit card expense		84			76			170			145
Professional and supervisory fees		129			144			236			265
Office expense		56			69			92			110
Advertising		57			61			134			112
FDIC deposit insurance		36			32			69			63
Foreclosed assets, net		—			24			(1	)		32
Change in loan servicing asset		(11	)		29			3			72
Other		187			178			398			349
Total noninterest expense		2,997			2,951			5,991			5,797

Income before income taxes		1,383			1,286			2,371			2,910
Income tax expense		147			215			364			566

Net income	$	1,236		$	1,071		$	2,007		$	2,344

Other comprehensive (loss)/ income
Unrealized (losses)/gains on securities available-for-sale	$	(834	)	$	63		$	(1,844	)	$	(88	)
Tax effect		174			(14	)		387			18
Reclassification adjustment for gains realized in net income		—			(47	)		—			(109	)
Tax effect		—			10			—			23
Total other comprehensive (loss)/income		(660	)		12			(1,457	)		(156	)
Comprehensive income	$	576		$	1,083		$	550		$	2,188


Basic net income per share: (Note 3)	$	0.22		$	0.19		$	0.36		$	0.42
Diluted net income per share: (Note 3)	$	0.22		$	0.19		$	0.36		$	0.42
Dividends declared per share:	$	0.10		$	0.10		$	0.20		$	0.20

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 December 31, 2021 and December 31, 2020


												Accumulated
						Additional						Other			Unearned
	Common		Treasury			Paid-In			Retained			Comprehensive			ESOP
	Stock		Stock			Capital			Earnings			Income (loss)			Shares			Total

Balance at September 30, 2020	$	65	$	(9	)	$	7,371		$	79,783		$	2,075		$	(357	)	$	88,928
Net income		—		—			—			1,071			—			—			1,071
Other comprehensive income		—		—			—			—			12			—			12
Purchase of 8,591 shares of treasury stock ⁽¹⁾		—		—			(218	)		—			—			—			(218	)
Stock-based compensation expense		—		—			20			—			—			—			20
Common Stock Issued		—		—			1			—			—			—			1
Dividends ⁽²⁾		—		—			21			(539	)		—			—			(518	)
ESOP shares earned		—		—			77			—			—			43			120
Balance at December 31, 2020	$	65	$	(9	)	$	7,272		$	80,315		$	2,087		$	(314	)	$	89,416

Balance at September 30, 2021	$	66	$	(10	)	$	6,401		$	81,127		$	144		$	(161	)	$	87,567
Net income		—		—			—			1,236			—			—			1,236
Other comprehensive loss		—		—			—			—			(660	)		—			(660	)
Purchase of 5,025 shares of treasury stock ⁽³⁾		—		—			(121	)		—			—			—			(121	)
Stock-based compensation expense		—		—			31			—			—			—			31
Dividends ⁽⁴⁾		—		—			—			(547	)		—			—			(547	)
ESOP shares earned		—		—			99			—			—			52			151
Balance at December 31, 2021	$	66	$	(10	)	$	6,410		$	81,816		$	(516	)	$	(109	)	$	87,657

(1)

The weighted average cost of treasury shares purchased during the three months ended December 31, 2020 was $23.50 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

Approximately $76 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 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $55 and resulting release of approximately 5,000 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $21 and resulting release of approximately 2,100 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2020.

(3)

The weighted average cost of treasury shares purchased during the three months ended December 31, 2021 was $24.11 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

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 7,000 additional shares. The portion of the dividend paid on allocated shares of approximately $63 and resulting release of approximately 5,700 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $12 and resulting release of approximately 1,300 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2021.

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 six months ended December 31, 2021 and December 31, 2020


												Accumulated
						Additional						Other			Unearned
	Common		Treasury			Paid-In			Retained			Comprehensive			ESOP
	Stock		Stock			Capital			Earnings			Income (loss)			Shares			Total

Balance at June 30, 2020	$	65	$	(9	)	$	7,342		$	79,071		$	2,243		$	(407	)	$	88,305
Net income		—		—			—			2,344			—			—			2,344
Other comprehensive loss		—		—			—			—			(156	)		—			(156	)
Purchase of 9,867 shares of treasury stock ⁽¹⁾		—		—			(249	)		—			—			—			(249	)
Stock-based compensation expense		—		—			41			—			—			—			41
Common Stock Issued		—		—			6			—			—			—			6
Dividends ⁽²⁾		—		—			21			(1,100	)		—			—			(1,079	)
ESOP shares earned		—		—			111			—			—			93			204
Balance at December 31, 2020	$	65	$	(9	)	$	7,272		$	80,315		$	2,087		$	(314	)	$	89,416

Balance at June 30, 2021	$	66	$	(10	)	$	6,400		$	80,915		$	941		$	(212	)	$	88,100
Net income		—		—			—			2,007			—			—			2,007
Other comprehensive loss		—		—			—			—			(1,457	)		—			(1,457	)
Purchase of 7,890 shares of treasury stock ⁽³⁾		—		—			(188	)		—			—			—			(188	)
Stock-based compensation expense		—		—			61			—			—			—			61
Dividends ⁽⁴⁾		—		—			—			(1,106	)		—			—			(1,106	)
ESOP shares earned		—		—			137			—			—			103			240
Balance at December 31, 2021	$	66	$	(10	)	$	6,410		$	81,816		$	(516	)	$	(109	)	$	87,657

(1)

The weighted average cost of treasury shares purchased during the six months ended December 31, 2020 was $23.64 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

(3)

The weighted average cost of treasury shares purchased during the six months ended December 31, 2021 was $23.86 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

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)


	Six Months Ended
	December 31, 2021			December 31, 2020
Cash Flows From Operating Activities
Net income	$	2,007		$	2,344
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for real estate owned		—			21
Depreciation and amortization, net		988			870
Net accretion of purchase accounting adjustments		(118	)		(124	)
Deferred income tax benefit		(66	)		(40	)
Change in loan servicing asset		3			72
Net gain on sales of securities		—			(109	)
Mortgage loans originated for sale		(7,821	)		(6,320	)
Mortgage loans sold		7,403			6,281
Gain on sales of mortgage loans		(149	)		(101	)
Change in fair value of equity securities		49			(9	)
Increase in cash surrender value of bank owned life insurance		(227	)		(224	)
Gain on payoff of purchased credit impaired loans		—			(195	)
ESOP compensation expense		240			204
Stock based compensation expense		61			41
Net change in operating assets and liabilities:
Accrued interest receivable and other assets		148			17
Accrued interest payable and other liabilities		102			(617	)
Net cash provided by operating activities		2,620			2,111

Cash Flows From Investing Activities
Purchases of premises and equipment		(102	)		(175	)
Purchases of securities available-for-sale		(36,238	)		(35,124	)
Proceeds from maturities, paydowns and calls of securities available-for-sale		17,111			11,745
Proceeds from sales of securities available-for-sale		—			7,923
Sales of restricted equity securities		375			—
Loan originations and repayments, net		930			8,254
Net cash used in investing activities		(17,924	)		(7,377	)

Cash Flows from Financing Activities
Net change in deposits		3,626			8,472
Repayment of notes payable to FHLB		(10,000	)		—
Dividends paid		(1,106	)		(1,079	)
Purchase of treasury stock		(188	)		(249	)
Proceeds from sale of common stock, net of issuance costs		—			6
Net cash (used in)/provided by financing activities		(7,668	)		7,150

Change in cash and cash equivalents		(22,972	)		1,884

Cash and cash equivalents, beginning of period		30,649			34,582
Cash and cash equivalents, end of period	$	7,677		$	36,466

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 (74.45%) 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 December 31, 2021 and June 30, 2021 and the results of operations and cash flows for the interim periods ended December 31, 2021 and 2020. 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, 2022 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.

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; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

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”) 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 does 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. 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 this quarter 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						Six Months Ended
	December 31, 2021			December 31, 2020			December 31, 2021			December 31, 2020
Earnings per share
Net income	$	1,236		$	1,071		$	2,007		$	2,344
Less: distributed earnings allocated to participating securities		(2	)		—			(3	)		(1	)
Less: (undistributed income) dividends in excess of earnings allocated to participating securities		(1	)		(1	)		(2	)		(1	)
Net earnings available to common shareholders	$	1,233		$	1,070		$	2,002		$	2,342

Weighted average common shares outstanding including participating securities		5,589,974			5,604,358			5,591,279			5,604,395
Less: participating securities		(14,300	)		(5,800	)		(14,300	)		(5,800	)
Less: average unearned ESOP shares		(8,553	)		(28,870	)		(11,154	)		(32,280	)
Weighted average common shares outstanding		5,567,121			5,569,688			5,565,825			5,566,315

Basic earnings per share	$	0.22		$	0.19		$	0.36		$	0.42

Weighted average common shares outstanding		5,567,121			5,569,688			5,565,825			5,566,315
Add: dilutive effects of assumed exercises of stock options		69,478			69,893			67,814			71,531
Average shares and dilutive potential common shares		5,636,599			5,639,581			5,633,639			5,637,846

Diluted earnings per share	$	0.22		$	0.19		$	0.36		$	0.42

For the three and six months ended December 31, 2021, 21,200 options were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and six months ended December 31, 2020, 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

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 December 31, 2021 and June 30, 2021 are as follows:

			Gross		Gross			Change in
	Amortized		Unrealized		Unrealized			Fair Value		Fair
December 31, 2021	Cost		Gains		Losses			Equity Securities		Value
Available-for-sale:
FHLMC common stock	$	20	$	—	$	—		$	48	$	68
Certificates of deposit		1,995		22		—			—		2,017
Municipal securities		18,678		676		—			—		19,354
CMOs		13,726		127		(133	)		—		13,720
U.S. Government agency mortgage-backed securities		109,379		601		(1,619	)		—		108,361
U.S. Treasury and Government agency bonds		12,461		—		(327	)		—		12,134
Total available-for-sale	$	156,259	$	1,426	$	(2,079	)	$	48	$	155,654

			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 December 31, 2021 and June 30, 2021 had fair values of $20,455 and $22,726, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

At December 31, 2021 and June 30, 2021, 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.

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 (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 December 31, 2021 and June 30, 2021. 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
	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⁾
December 31, 2021
Available-for-sale:
CMOs	$	7,489	$	(100	)		2	$	970	$	(33	)		1	$	8,459	$	(133	)		3
U.S. Government agency mortgage-backed securities		81,930		(1,445	)		36		7,386		(174	)		7		89,316		(1,619	)		43
U.S. Treasury and Government agency bonds		6,151		(78	)		4		5,983		(249	)		3		12,134		(327	)		7
	$	95,570	$	(1,623	)		42	$	14,339	$	(456	)		11	$	109,909	$	(2,079	)		53

	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⁾
June 30, 2021
Available-for-sale:
CMOs	$	990	$	(14	)		1	$	—	$	—			—	$	990	$	(14	)		1
U.S. Government agency mortgage-backed securities		51,863		(606	)		25		1,101		(8	)		1		52,964		(614	)		26
U.S. Treasury and Government agency bonds		7,993		(238	)		5		—		—			—		7,993		(238	)		5
	$	60,846	$	(858	)		31	$	1,101	$	(8	)		1	$	61,947	$	(866	)		32

(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 December 31, 2021 were recognized into net income for the three or six months ended December 31, 2021 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, 2021 were recognized as having OTTI during the year ended June 30, 2021.

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 (continued)

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2021 and June 30, 2021 by contractual maturity.

	December 31, 2021				June 30, 2021
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Less than one year	$	2,986	$	3,004	$	3,003	$	3,034
Due from one to five years		4,953		5,100		5,793		6,008
Due after five years to ten years		22,394		22,457		22,258		22,459
Due after ten years		2,801		2,944		3,420		3,614
Mortgage-backed securities, CMOs and FHLMC stock ⁽¹⁾		123,125		122,149		103,299		103,946
Total available for sale	$	156,259	$	155,654	$	137,773	$	139,061

(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 six months ended December 31, 2021 and 2020:


	Three Months Ended				Six Months Ended
Available-for-sale:	December 31, 2021		December 31, 2020		December 31, 2021		December 31, 2020
Proceeds	$	—	$	6,051	$	—	$	7,923
Gross gains		—		47		—		109
Gross losses		—		—		—		—

The tax provision related to the net realized gain for the three and six months ended December 31, 2020 was $10 and $23, respectively.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(5)

LOANS

The components of loans at December 31, 2021 and June 30, 2021 were as follows:

	December 31, 2021		June 30, 2021
Real estate loans:
One-to-four family	$	270,758	$	268,889
Multi-family		382		649
Home equity		5,969		6,158
Nonresidential		22,466		21,868
Agricultural		2,629		2,683
Construction and land		25,457		27,002
Total real estate loans		327,661		327,249
Commercial and industrial ⁽¹⁾		5,303		5,871
Consumer and other loans		5,313		5,969
Total loans	$	338,277	$	339,089

(1)

Includes $1,112 and $2,677 of 100% Small Business Administration (“SBA”) guaranteed Paycheck Protection Program (“PPP”) loans as of December 31, 2021 and June 30, 2021, 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 present the activity in the allowance for loan losses for the three and six months ended December 31, 2021 by portfolio segment:

Three months ended December 31, 2021	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	1,002	$	(13	)	$	—	$	—	$	989
Multi-family		4		—			—		—		4
Home equity		41		—			—		—		41
Nonresidential		135		4			—		—		139
Agricultural		15		—			—		—		15
Construction and land		90		5			—		—		95
Total real estate loans		1,287		(4	)		—		—		1,283
Commercial and industrial		23		3			—		—		26
Consumer and other loans		29		1			—		—		30
Total loans	$	1,339	$	—		$	—	$	—	$	1,339

Six months ended December 31, 2021	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	992	$	(3	)	$	—	$	—	$	989
Multi-family		4		—			—		—		4
Home equity		41		—			—		—		41
Nonresidential		133		6			—		—		139
Agricultural		15		—			—		—		15
Construction and land		103		(8	)		—		—		95
Total real estate loans		1,288		(5	)		—		—		1,283
Commercial and industrial		22		4			—		—		26
Consumer and other loans		29		1			—		—		30
Total loans	$	1,339	$	—		$	—	$	—	$	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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2021:

	Ending Allowance on Loans:				Loans:
At December 31, 2021	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Real estate loans:
One-to-four family	$	—	$	989	$	978	$	269,780
Multi-family		—		4		—		382
Home equity		—		41		—		5,969
Nonresidential		—		139		498		21,968
Agricultural		—		15		—		2,629
Construction and land		—		95		—		25,457
Total real estate loans		—		1,283		1,476		326,185
Commercial and industrial ⁽¹⁾		—		26		—		5,303
Consumer and other loans		—		30		—		5,313
Total loans	$	—	$	1,339	$	1,476	$	336,801

(1)

Includes $1,112 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 six months ended December 31, 2020 by portfolio segment:

Three months ended December 31, 2020	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	989	$	38		$	—		$	—	$	1,027
Multi-family		4		—			—			—		4
Home equity		40		1			(5	)		—		36
Nonresidential		108		9			—			—		117
Agricultural		4		—			—			—		4
Construction and land		96		(2	)		—			—		94
Total real estate loans		1,241		46			(5	)		—		1,282
Commercial and industrial		74		(46	)		—			—		28
Consumer and other loans		29		—			—			—		29
Total loans	$	1,344	$	—		$	(5	)	$	—	$	1,339

Six months ended December 31, 2020	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	1,032	$	(3	)	$	(2	)	$	—	$	1,027
Multi-family		4		—			—			—		4
Home equity		34		7			(5	)		—		36
Nonresidential		75		42			—			—		117
Agricultural		4		—			—			—		4
Construction and land		105		(11	)		—			—		94
Total real estate loans		1,254		35			(7	)		—		1,282
Commercial and industrial		65		(37	)		—			—		28
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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2021:

	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.

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 December 31, 2021 and June 30, 2021, including the average recorded investment balance and interest earned for the six months ended December 31, 2021 and the year ended June 30, 2021:

	December 31, 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	$	984	$	978	$	—	$	1,345	$	17
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		528		498		—		249		—
Agricultural		—		—		—		—		—
Construction and land		—		—		—		—		—
Total real estate loans		1,512		1,476		—		1,594		17
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	1,512	$	1,476	$	—	$	1,594	$	17

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	$	1,512	$	1,476	$	—	$	1,594	$	17
Consumer and other loans		—		—		—		—		—
Total	$	1,512	$	1,476	$	—	$	1,594	$	17

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(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

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 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 individually for impairment.

Total past due loans and nonaccrual loans at December 31, 2021:

	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	$	2,332	$	628	$	370	$	3,330	$	267,428	$	270,758	$	1,249	$	—
Multi-family		212		—		—		212		170		382		—		—
Home equity		17		—		—		17		5,952		5,969		—		—
Nonresidential		—		—		—		—		22,466		22,466		498		—
Agricultural		—		—		—		—		2,629		2,629		—		—
Construction and land		—		—		—		—		25,457		25,457		—		—
Total real estate loans		2,561		628		370		3,559		324,102		327,661		1,747		—
Commercial and industrial		—		—		—		—		5,303		5,303		—		—
Consumer and other loans		—		—		—		—		5,313		5,313		—		—
Total	$	2,561	$	628	$	370	$	3,559	$	334,718	$	338,277	$	1,747	$	—

COVID-19 Loan Modifications:

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 performed to date to be troubled debt restructurings. Included in the table above are $9,227 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 $6,488 in one-to-four family loans, $2,357 in non-residential loans and $382 in multi-family loans. As of December 31, 2021, $8,678 of such loans were current and $549 were 30 days or more past due. As of December 31, 2021, all of the COVID-19 related modifications had returned to regular payment status.

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:

	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	$	2,302	$	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.

Troubled Debt Restructurings:

At December 31, 2021 and June 30, 2021, total loans that have been modified as troubled debt restructurings were $910 and $1,661, respectively, which consisted of one non-residential real estate loan and two one-to-four family first lien loans at December 31, 2021 and one non-residential real estate loan and three one-to-four family first lien loans at June 30, 2021. 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 six months ended December 31, 2021. No loans modified as troubled debt restructurings during the twelve months ended December 31, 2021 have defaulted since restructuring. All of these loans are on nonaccrual at December 31, 2021 and June 30, 2021. At December 31, 2021 and June 30, 2021, $879 and $1,107, 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 December 31, 2021. We have assessed the impact 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 as a result no additional provision for loan losses has been recorded during the quarter ended December 31, 2021. However, the fluidity of this pandemic precludes any prediction as to its ultimate impact. 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 six months ended December 31, 2021 and December 31, 2020.

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.

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 five 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.

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.

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 two 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%.

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 six months ended December 31, 2021 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 six months ended December 31, 2021 and December 31, 2020, $73 and $118 of PPP loan fees were recognized in income, respectively. As of December 31, 2021 $6,513 of the original $7,654 of PPP loans have been forgiven, with a remaining amount of $29 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.

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 December 31, 2021:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	262,160	$	3,210	$	2,634	$	2,754	$	—	$	270,758
Multi-family		382		—		—		—		—		382
Home equity		5,753		208		—		8		—		5,969
Nonresidential		21,599		—		195		672		—		22,466
Agricultural		2,629		—		—		—		—		2,629
Construction and land		25,056		365		—		36		—		25,457
Total real estate loans		317,579		3,783		2,829		3,470		—		327,661
Commercial and industrial		5,303		—		—		—		—		5,303
Consumer and other loans		5,313		—		—		—		—		5,313
Total	$	328,195	$	3,783	$	2,829	$	3,470	$	—	$	338,277

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(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:

	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

At December 31, 2021, one loan for $112 was in formal foreclosure proceedings and is included in the one-to-four family loan category.

(6) BORROWINGS

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

	December 31, 2021
	Balance		Stated Interest Rate
FHLB advances due February 2023 through January 2025	$	5,000	1.40% - 1.59%
Total	$	5,000

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

Payments over the next five years are as follows:

	2023			$	2,500
	2025			$	2,500

The average interest rate of all outstanding FHLB advances was 1.50% and 0.61% on December 31, 2021 and June 30, 2021, respectively.

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $17,940 and $19,613 of investment securities at December 31, 2021 and June 30, 2021, 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 $136,254 at December 31, 2021.

There were no overnight borrowings at December 31, 2021 or June 30, 2021.

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

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).

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 December 31, 2021 or June 30, 2021.

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 2 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.

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 December 31, 2021 and June 30, 2021 are summarized below:

	Fair Value Measurements
	December 31, 2021				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		2,017		—		2,297		—
Municipal securities		19,354		—		19,531		—
CMOs		13,720		—		7,716		—
U.S. Government agency mortgage-backed securities		108,361		—		96,113		—
U.S. Treasury and Government agency bonds		12,134		—		13,287		—
Total securities available-for-sale		155,654		—		139,061		—
Loan servicing rights		—		302		—		305
Total financial assets	$	155,654	$	302	$	139,061	$	305

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

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)

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 six months ended December 31, 2021 and 2020:

	Fair Value Measurements (Level 3)
	Three Months Ended					Six Months Ended
	December 31, 2021		December 31, 2020			December 31, 2021			December 31, 2020
	Loan Servicing Rights		Loan Servicing Rights			Loan Servicing Rights			Loan Servicing Rights
Balance at beginning of period:	$	291	$	415		$	305		$	458
Unrealized net gains/(losses) included in net income		11		(29	)		(3	)		(72	)
Balance at end of period:	$	302	$	386		$	302		$	386

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

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value at December 31, 2021 and June 30, 2021.

Level 3 Quantitative Information

December 31, 2021
Fair Value

June 30, 2021
Fair Value

Valuation
Technique

Unobservable
Inputs

Range

Loan servicing rights

302

305

Discounted cash
flows

Discount rate, estimated timing of cash flows

8.50% to 8.63%

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)

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 December 31, 2021 and June 30, 2021 are summarized below:

	December 31, 2021
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	155,654	$	—	$	155,654	$	—	$	155,654
Loans, net ⁽¹⁾		336,938		—		—		334,817		334,817
Loans held for sale⁽²⁾		731		—		—		731		731
Loan servicing rights		302		—		—		302		302
Restricted equity securities		1,033		N/A		N/A		N/A		N/A

Financial liabilities
Deposits	$	443,556	$	—	$	441,368	$	—	$	441,368
FHLB Advances		5,000		—		5,003		—		5,003

	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 December 31, 2021 and June 30, 2021 was measured using an exit price notion.

(2)

(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.

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 2021 or 2020. Total ESOP compensation expense for the three and six months ended December 31, 2021 was $101 and $190, respectively, and for the three and six months ended December 31, 2020 was $120 and $204, respectively.

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)

Shares held by the ESOP at December 31, 2021 and June 30, 2021 were as follows:

	December 31, 2021		June 30, 2021
Committed to be released to participants		20,403		10,202
Allocated to participants		144,674		161,206
Unearned		10,692		11,616
Total ESOP shares		175,769		183,024

Fair value of unearned shares	$	238	$	272

(9) STOCK BASED COMPENSATION

On April 5, 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 may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

There have been no stock options or restricted stock issued in fiscal 2022.

The following table summarizes stock option activity for the six months ended December 31, 2021:

	Options			Weighted- Average Exercise Price/Share		Aggregate Intrinsic Value ⁽¹⁾
Outstanding - June 30, 2021		131,901		$	15.70
Granted		—			—
Exercised		(15,552	)		11.58
Forfeited		—			—
Outstanding - December 31, 2021		116,349		$	16.25	$	694
Fully vested and exercisable at December 31, 2021		98,449		$	14.81	$	730
Expected to vest in future periods		17,900
Fully vested and expected to vest - December 31, 2021		116,349		$	16.25	$	694

(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 $22.22 per share on December 31, 2021.

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 six months ended December 31, 2020:

	Options			Weighted- Average Exercise Price/Share		Aggregate Intrinsic Value ⁽¹⁾
Outstanding - June 30, 2020		164,319		$	14.18
Granted		—			—
Exercised		(15,552	)		11.58
Forfeited		—			—
Outstanding - December 31, 2020		148,767		$	14.46	$	1,613
Fully vested and exercisable at December 31, 2020		134,367		$	13.44	$	1,593
Expected to vest in future periods		14,400
Fully vested and expected to vest - December 31, 2020		148,767		$	14.46	$	1,613

(1)

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 2,873 and 3,272 options that were earned during the six months ended December 31, 2021 and 2020, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2021 was $5 and $11, respectively, and for the three and six months ended December 31, 2020 was $5 and $11, respectively. Total unrecognized compensation cost related to stock options was $59 at December 31, 2021 and is expected to be recognized over a weighted-average period of 3.4 years.

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2021 and December 31, 2020:

	December 31, 2021		December 31, 2020
Balance - beginning of year		14,300		5,800
Granted		—		250
Forfeited		—		—
Vested		—		(250	)
Balance - end of period		14,300		5,800
Weighted average grant date fair value	$	22.50	$	19.78

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 six months ended December 31, 2021 was $25 and $50, respectively, and for the three and six months ended December 31, 2020 was $15 and $30, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $251 at December 31, 2021 and is expected to be recognized over a weighted-average period of 3.7 years.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(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 December 31, 2021 and June 30, 2021 are as follows:

	December 31, 2021		June 30, 2021
Mortgage loan portfolio serviced for:
FHLMC	$	44,844	$	52,199

Custodial escrow balances maintained in connection with serviced loans were $254 and $559 at December 31, 2021 and June 30, 2021.

Activity for loan servicing rights for the three and six months ended December 31, 2021 and 2020 is as follows:

	Three Months Ended					Six Months Ended
	December 31, 2021		December 31, 2020			December 31, 2021			December 31, 2020
Loan servicing rights:
Beginning of period:	$	291	$	415		$	305		$	458
Change in fair value		11		(29	)		(3	)		(72	)
End of period:	$	302	$	386		$	302		$	386

Fair value at December 31, 2021 was determined using a discount rate of 8.63%, prepayment speed assumptions ranging from 9.76% to 19.17% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.07%. Fair value at December 31, 2020 was determined using a discount rate of 8.25%, prepayment speed assumptions ranging from 12.58% to 26.42% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.18%.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the six months ended December 31, 2021 and 2020 is as follows:

	December 31, 2021			December 31, 2020
Cash paid during the period for:
Interest paid	$	615		$	1,046
Income taxes paid	$	460		$	962
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	—		$	52
Change in unrealized gain/loss on securities available-for-sale	$	(1,844	)	$	(197)

(12) SUBSEQUENT EVENTS

Dividend Declared

On January 27, 2022, 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 February 10, 2022, and will be paid on or about February 24, 2022.

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;

●

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;

●

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;

●

our reliance on a small executive staff;

●

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;

●

changes in consumer spending, borrowing and savings habits;

●

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;

●

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)

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, as filed with the Securities and Exchange Commission.

Comparison of Financial Condition at December 31, 2021 and June 30, 2021

Our total assets decreased by $6.7 million, or 1.2%, to $537.0 million at December 31, 2021 from $543.7 million at June 30, 2021.

Total cash and cash equivalents decreased $23.0 million, or 75.0%, to $7.7 million at December 31, 2021 from $30.7 million at June 30, 2021. The decrease in cash and cash equivalents was due to funds being used to reduce FHLB advances as well as invest in higher yielding assets during the six month period.

Our available-for-sale securities portfolio increased by $16.6 million from $139.1 million at June 30, 2021 to $155.7 million at December 31, 2021. The increase in securities classified as available-for-sale was primarily a result of our continuing efforts in fiscal 2022 to invest in higher yielding assets.

Gross loans decreased $812 thousand, or 0.2%, to $338.3 million at December 31, 2021 from $339.1 million at June 30, 2021. This decrease was primarily a result of loan originations generally not matching loan repayments during the six months ended December 31, 2021.

Deposits increased $3.6 million, or 0.8%, to $443.6 million at December 31, 2021 from $439.9 million at June 30, 2021. The increase in our deposits reflected an increase of $5.8 million in interest bearing demand deposit accounts, $3.7 million in money market accounts, and $4.4 million in savings deposits, partially offset by a decrease of $9.3 million in certificates of deposit and $1.0 million in non-interest bearing deposits. 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 six months ended December 31, 2021.

FHLB advances decreased $10.0 million, or 66.7%, to $5.0 million at December 31, 2021 from $15.0 million at June 30, 2021. The decrease was due to the repayment and non-renewal of short term advances that no longer had advantageous rates. 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 December 31, 2021, or approximately $136.3 million. We had no federal funds purchased as of December 31, 2021 or as of June 30, 2021.

Total shareholders’ equity decreased $443 thousand, or 0.5%, to $87.7 million at December 31, 2021 compared to $88.1 million at June 30, 2021. The decrease was primarily the result of net income for the six months ended December 31, 2021 of $2.0 million and the increase of $240 thousand in ESOP shares earned being offset by $1.5 million in other comprehensive loss, $188 thousand of stock repurchases and $1.1 million in dividends distributed. The Association exceeded all regulatory capital requirements at December 31, 2021 and June 30, 2021.

Nonperforming Assets

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

	December 31, 2021			June 30, 2021
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One-to-four family	$	1,249		$	2,260
Multi-family		—			—
Home equity		—			—
Nonresidential		498			521
Agricultural		—			—
Construction and land		—			—
Total real estate loans		1,747			2,781
Commercial and industrial		—			—
Consumer and other loans		—			—
Total nonaccrual loans ⁽¹⁾	$	1,747		$	2,781
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⁾	$	1,747		$	2,781
Real estate owned, net:
One-to-four family	$	—		$	—
Nonresidential		—			—
Construction and land		—			—
Other nonperforming assets		—			—
Total nonperforming assets	$	1,747		$	2,781

Accruing troubled debt restructurings	$	—		$	—
Troubled debt restructurings and total nonperforming assets	$	1,747		$	2,781

Total nonperforming loans to total loans		0.52	%		0.82	%
Total nonperforming assets to total assets		0.33	%		0.51	%
Total nonperforming assets to loans and real estate owned		0.52	%		0.82	%

(1)

Nonaccrual troubled debt restructurings included in the totals above were $910 thousand and $1.7 million, at December 31, 2021 and June 30, 2021, respectively.

(2)

There were no loans past due 90 days or more and still accruing at December 31, 2021 or June 30, 2021.

Nonperforming assets, which are comprised of nonaccrual loans only, decreased $1.03 million from $2.78 million as of June 30, 2021 to $1.75 million as of December 31, 2021. 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 0.33% and 0.52%, respectively, at December 31, 2021 compared to 0.51% and 0.82%, respectively at June 30, 2021.

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
	December 31, 2021								December 31, 2020
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	337,869		$	3,722		4.41	%	$	354,367		$	3,822		4.31	%
Investment securities		142,827			441		1.24			81,035			284		1.40
Investment securities, tax-free		15,029			86		2.29			16,054			91		2.27
Other interest-earning assets		8,054			16		0.79			31,970			32		0.40
Total interest-earning assets		503,779			4,265		3.39			483,426			4,229		3.50
Noninterest-earning assets		37,401								40,602
Total assets	$	541,180							$	524,028

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	79,885		$	26		0.13	%	$	71,756		$	30		0.17	%
Money market deposits		85,365			31		0.14			82,973			40		0.19
Regular savings and other deposits		47,030			9		0.08			36,516			15		0.16
Certificates of deposit		180,299			203		0.45			193,520			375		0.77
Total interest-bearing deposits		392,579			269		0.27			384,765			460		0.47
Other Borrowings		5,000			19		1.51			5,000			19		1.51
Total interest-bearing liabilities		397,579			288		0.29			389,765			479		0.49
Noninterest bearing deposits		54,980								43,586
Other noninterest-bearing liabilities		976								1,639
Total liabilities		453,535								434,990
Equity		87,645								89,038
Total liabilities and equity	$	541,180							$	524,028

Net interest income				$	3,977							$	3,750
Interest rate spread							3.10	%							3.01	%
Net interest margin							3.16	%							3.10	%
Average interest-earning assets to average interest-bearing liabilities		1.27	x							1.24	x

	For the Six Months Ended
	December 31, 2021								December 31, 2020
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	337,748		$	7,168		4.24	%	$	355,781		$	7,849		4.41	%
Investment securities		136,556			793		1.16			76,334			575		1.51
Investment securities, tax-free		15,043			172		2.29			16,116			182		2.26
Other interest-earning assets		15,201			31		0.40			32,049			59		0.37
Total interest-earning assets		504,548			8,164		3.24			480,280			8,665		3.61
Noninterest-earning assets		38,367								39,023
Total assets	$	542,915							$	519,303

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	78,475		$	53		0.13	%	$	69,903		$	63		0.18	%
Money market deposits		83,862			63		0.15			81,798			86		0.21
Regular savings and other deposits		45,743			19		0.08			35,817			29		0.16
Certificates of deposit		182,338			440		0.48			194,982			832		0.85
Total interest-bearing deposits		390,418			575		0.29			382,500			1,010		0.52
Other Borrowings		9,583			42		0.87			5,000			38		1.51
Total interest-bearing liabilities		400,001			617		0.31			387,500			1,048		0.54
Noninterest bearing deposits		53,886								43,135
Other noninterest-bearing liabilities		909								1,550
Total liabilities		454,796								432,185
Equity		88,119								87,118
Total liabilities and equity	$	542,915							$	519,303

Net interest income				$	7,547							$	7,617
Interest rate spread							2.93	%							3.07	%
Net interest margin							2.99	%							3.17	%
Average interest-earning assets to average interest-bearing liabilities		1.26	x							1.24	x

Comparison of Operating Results for the Three Months Ended December 31, 2021 and December 31, 2020

General. We reported net income of $1.2 million for the three months ended December 31, 2021 as compared to net income of $1.1 million for the three months ended December 31, 2020. Interest income increased $36 thousand for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 and interest expense decreased $191 thousand, resulting in a net increase to net interest income of $227 thousand. Noninterest income decreased $84 thousand for the three months ended December 31, 2021 compared to the three months ended December 31, 2020. Total noninterest expense increased $46 thousand. Tax expense decreased $68 thousand.

Interest Income. Interest income increased by $36 thousand to $4.27 million from $4.23 million for the three months ended December 31, 2021 and December 31, 2020, respectively. The yield on interest-earning assets decreased 11 basis points from 3.50% for the three months ended December 31, 2020 to 3.39% for the three months ended December 31, 2021. Total average interest-earning assets increased by $20.4 million to $503.8 million for the three months ended December 31, 2021 from $483.4 million for the three months ended December 31, 2020.

Interest income on loans decreased by $100 thousand to $3.7 million from $3.8 million for the three months ended December 31, 2021 and December 31, 2020, respectively. The yield on loans increased ten basis points from 4.31% for the three months ended December 31, 2020 to 4.41% for the three months ended December 31, 2021. The increase in yield on our loans was effected by the payoff of a large non-accrual loan. The average balance of loans decreased by $16.5 million, or 4.7%, to $337.9 million for the three months ended December 31, 2021 from $354.4 million for the three months ended December 31, 2020. The decrease in the average balance of our loans is reflective of reduced originations and normal loan repayments.

Interest income on investment securities increased $152 thousand, or 40.5%, to $527 thousand for the three months ended December 31, 2021 from $375 thousand for the three months ended December 31, 2020. This reflected an increase of $60.8 million, or 62.6%, in the average balances of securities to $157.9 million from $97.1 million for the three months ended December 31, 2021 and 2020, respectively, offset by a decrease in the total average yield of our investment securities of 20 basis points to 1.34% from 1.54%. 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 decreased yields are reflective of a decrease of 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 decreased by $16 thousand, or 50.0%, to $16 thousand for the three months ended December 31, 2021 from $32 thousand for the three months ended December 31, 2020. The average balance of other interest-earning assets decreased $23.9 million to $8.1 million for the three months ended December 31, 2021 from $32.0 million for the three months ended December 31, 2020 and the yield increased 39 basis points over the same period. The decrease in average balance was primarily due to money market 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 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 during the three months ended December 31, 2021.

Interest Expense. Interest expense decreased $191 thousand, or 39.9%, to $288 thousand for the three months ended December 31, 2021 from $479 thousand for the three months ended December 31, 2020. The average rate paid on interest bearing liabilities decreased 20 basis points from 0.49% for the three months ended December 31, 2020 to 0.29% for the three months ended December 31, 2021. 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 $191 thousand, or 41.5%, to $269 thousand for the three months ended December 31, 2021 from $460 thousand for the three months ended December 31, 2020. The average rate paid on interest bearing deposits decreased 20 basis points from 0.47% for the three months ended December 31, 2020 to 0.27% for the three months ended December 31, 2021. The decrease in the average rate paid on deposits was partially offset by an increase in the average balance of interest bearing deposits of $7.8 million, or 2.0%, to $392.6 million for the three months ended December 31, 2021 from $384.8 million for the three months ended December 31, 2020.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased by $172 thousand, or 45.9% to $203 thousand for the three months ended December 31, 2021 from $375 thousand for the three months ended December 31, 2020. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.45% from 0.77%, in addition to a $13.2 million decrease in average balances. The decrease in interest expense on these deposits is reflective of an overall decline in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense on NOW and demand deposits and regular savings and other deposits decreased by $4 thousand to $26 thousand for the three months ended December 31, 2021 from $30 thousand for the three months ended December 31, 2020. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.13% from 0.17% offset by a $8.1 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 on money market deposits decreased by $9 thousand, or 22.5%, to $31 thousand for the three months ended December 31, 2021 from $40 thousand for the three months ended December 31, 2020. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.14% from 0.19% offset by a $2.4 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 remained stable at $19 thousand for the three months ended December 31, 2021 and December 31, 2020. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. Average other borrowings were $5.0 million for the three months ended December 31, 2021 and December 31, 2020. The average rate remained stable at 1.51 basis points for the three months ended December 31, 2020 and December 31, 2021.

Net Interest Income. Net interest income before the provision for loan losses increased by $227 thousand, or 6.1%, to $4.0 million for the three months ended December 31, 2021. Our interest rate spread and net interest margin increased to 3.10% and 3.16%, from 3.01% and 3.10%, for the three months ended December 31, 2021 and December 31, 2020, respectively. The increase in yield on earning assets combined with the decrease in cost of interest bearing liabilities contributed to the increase in net interest margin for the three months ended December 31, 2021.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended December 31, 2021 or for the three months ended December 31, 2020. There were no charge-offs for the three months ended December 31, 2021. There were $5 thousand in charge-offs for the three months ended December 31, 2020. The lack of provision for the three months ended December 31, 2021 is primarily due to a decrease in the loan portfolio balance.

Our total allowance for loan losses was $1.3 million, or 0.40% of total gross loans as of December 31, 2021 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 December 31, 2021 and June 30, 2021. PPP loans are not allocated any allowance due to the 100% SBA guarantee. There were no specifically identified impaired loans at December 31, 2021 or June 30, 2021. Total loans individually evaluated for impairment decreased $235 thousand, or 13.7%, to $1.5 million at December 31, 2021 compared to $1.7 million at June 30, 2021.

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2021 and 2020. There have been no changes to our allowance for loan loss methodology during three months ended December 31, 2021.

Noninterest Income. Noninterest income decreased $84 thousand, or 17.2%, to $403 thousand for the three months ended December 31, 2021 from $487 thousand for the three months ended December 31, 2020. Mortgage servicing income decreased $10 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $42 thousand and $66 thousand for the three months ended December 31, 2021 and 2020, respectively. The change in fair value of equity securities was a gain of $1 thousand for the three months ended December 31, 2021 compared to a gain of $32 thousand for the three months ended December 31, 2020. Gains or losses on the fair value of equity securities are market driven. There were no sales of securities for the three months ended December 31, 2021. There were $47 thousand in gains on the sale of securities for the three months ended December 31, 2020. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarter ended December 31, 2020 to realize market gains and adjust the investment portfolio so that funds could be more beneficially used to yield higher net earnings going forward. Changes in all other noninterest income items were due to normal periodic fluctuations.

Noninterest Expense. Noninterest expense for the three months ended December 31, 2021 increased by $46 thousand, or 1.6%, to $3.0 million for three months ended December 31, 2021. Salaries and employee benefits increased $24 thousand due to routine increases. Occupancy and equipment increased $84 thousand due to normal periodic fluctuations. Data processing increased $13 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $15 thousand due to normal periodic fluctuations. Advertising decreased $4 thousand due to normal periodic fluctuations. FDIC deposit insurance increased $4 thousand due to the increased Association asset size. Foreclosed asset expenses decreased $24 thousand due to having no foreclosed assets during the three months ended December 31, 2021. For the three months ended December 31, 2021, we recognized a gain for the increase in value of the loan servicing asset of $11 thousand compared to a $29 thousand expense for the three months ended December 31, 2020. 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 $68 thousand, or 31.6%, to $147 thousand for the three months ended December 31, 2021 from $215 thousand for the three months ended December 31, 2020. This was primarily due to a larger permanent tax benefit being recognized during the three months ended December 31, 2021 as compared to the three months ended December 31, 2020, which was a result of more nonqualified stock options being exercised during the three months ended December 31, 2021 as compared to the three months ended December 31, 2020. Our effective income tax rate was 10.6% and 16.7% for the three months ended December 31, 2021 and 2020, respectively.

Comparison of Operating Results for the Six Months Ended December 31, 2021 and December 31, 2020

General. We reported net income of $2.0 million for the six months ended December 31, 2021 as compared to net income of $2.3 million for the six months ended December 31, 2020. Interest income decreased $501 thousand for the six months ended December 31, 2021 compared to the six months ended December 31, 2020 and interest expense decreased $431 thousand, resulting in a net decrease to net interest income of $70 thousand. Noninterest income decreased $275 thousand for the six months ended December 31, 2021 compared to the six months ended December 31, 2020. Total noninterest expense increased $194 thousand. Tax expense decreased $202 thousand.

Interest Income. Interest income decreased by $501 thousand to $8.2 million from $8.7 million for the six months ended December 31, 2021 and December 31, 2020, respectively. The yield on interest-earning assets decreased 37 basis points from 3.61% for the six months ended December 31, 2020 to 3.24% for the six months ended December 31, 2021. Total average interest-earning assets increased by $24.3 million to $504.55 million for the six months ended December 31, 2021 from $480.28 million for the six months ended December 31, 2020.

Interest income on loans decreased by $681 thousand to $7.17 million from $7.85 million for the six months ended December 31, 2021 and December 31, 2020, respectively. The yield on loans decreased 17 basis points from 4.41% for the six months ended December 31, 2020 to 4.24% for the six months ended December 31, 2021. The average balance of loans decreased by $18.0 million, or 5.1%, to $337.75 million for the six months ended December 31, 2021 from $355.78 million for the six months ended December 31, 2020. The decrease in the average balance of our loans is reflective of reduced originations and normal loan repayments.

Interest income on investment securities increased $208 thousand, or 27.5%, to $965 thousand for the six months ended December 31, 2021 from $757 thousand for the six months ended December 31, 2020, reflecting an increase of $59.1 million, or 64.0%, in the average balances of securities to $151.6 million from $92.5 million for the six months ended December 31, 2021 and 2020, respectively, offset by a decrease in the total average yield of our investment securities of 37 basis points to 1.27% from 1.64%. 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 decreased yields are reflective of a decrease of 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 decreased by $28 thousand, or 47.5%, to $31 thousand for the six months ended December 31, 2021 from $59 thousand for the six months ended December 31, 2020. The average balance of other interest-earning assets decreased $16.8 million to $15.2 million for the six months ended December 31, 2021 from $32.0 million for the six months ended December 31, 2020 and the yield increased three basis points over the same period. The decrease in average balance was primarily due to money market 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 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 during the six months ended December 31, 2021.

Interest Expense. Interest expense decreased $431 thousand, or 41.1%, to $617 thousand for the six months ended December 31, 2021 from $1.0 million for the six months ended December 31, 2020. The average rate paid on interest bearing liabilities decreased 23 basis points from 0.54% for the six months ended December 31, 2020 to 0.31% for the six months ended December 31, 2021. 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 $435 thousand, or 43.1%, to $575 thousand for the six months ended December 31, 2021 from $1.0 million for the six months ended December 31, 2020. The average rate paid on interest bearing liabilities decreased 23 basis points from 0.52% for the six months ended December 31, 2020 to 0.29% for the six months ended December 31, 2021. The decrease in the average rate paid on deposits was partially offset by an increase in the average balance of interest bearing deposits of $7.9 million, or 2.1%, to $390.4 million for the six months ended December 31, 2021 from $382.5 million for the six months ended December 31, 2020.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased by $392 thousand, or 47.1% to $440 thousand for the six months ended December 31, 2021 from $832 thousand for the six months ended December 31, 2020. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.48% from 0.85%, in addition to a $12.6 million decrease in average balances. The decrease in interest expense on these deposits is reflective of an overall decline in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.

Interest expense on NOW and demand deposits and regular savings and other deposits decreased by $10 thousand, or 15.9%, to $53 thousand for the six months ended December 31, 2021 from $63 thousand for the six months ended December 31, 2020. 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 $8.6 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 on money market deposits decreased by $23 thousand, or 26.7%, to $63 thousand for the six months ended December 31, 2021 from $86 thousand for the six months ended December 31, 2020. The decrease in interest expense on these deposits was attributable to a decrease in the average cost on these deposits to 0.15% from 0.21% offset by a $2.1 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 10.5%, to $42 thousand for the six months ended December 31, 2021 from $38 thousand for the six months ended December 31, 2020. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. Average other borrowings were $9.6 million for the six months ended December 31, 2021 compared to $5.0 million for the six months ended December 31, 2020. The average rate decreased 64 basis points from 1.51% for the six months ended December 31, 2020 to 0.87% for the six months ended December 31, 2021 due to a decrease in market interest rates and use of shorter term advances in the period ended December 31, 2021.

Net Interest Income. Net interest income before the provision for loan losses decreased by $70 thousand, or 0.9%, to $7.5 million for the six months ended December 31, 2021. Our interest rate spread and net interest margin decreased to 2.93% and 2.99%, from 3.07% and 3.17%, for the six months ended December 31, 2021 and December 31, 2020, respectively. The decrease in yield on earning assets was larger than the decrease in cost of interest bearing liabilities which contributed to the decrease in net interest margin for the six months ended December 31, 2021.

Provision for Loan Losses. We recorded no provision for loan losses for the six months ended December 31, 2021 or for the six months ended December 31, 2020. There were no charge-offs for the six months ended December 31, 2021. There were $7 thousand in charge-offs for the six months ended December 31, 2020. The lack of provision for the six months ended December 31, 2021 is primarily due to a decrease in the loan portfolio balance.

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2021 and 2020. There have been no changes to our allowance for loan loss methodology during six months ended December 31, 2021.

Noninterest Income. Noninterest income decreased $275 thousand, or 25.2%, to $815 thousand for the six months ended December 31, 2021 from $1.1 million for the six months ended December 31, 2020. Mortgage servicing income decreased $20 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $149 thousand and $101 thousand for the six months ended December 31, 2021 and 2020, respectively. The change in fair value of equity securities was a loss of $49 thousand for the six months ended December 31, 2021 compared to a gain of $9 thousand for the six months ended December 31, 2020. Gains or losses on the fair value of equity securities are market driven. There were no sales of securities for the six months ended December 31, 2021. There were $109 thousand in gains on the sale of securities for the six months ended December 31, 2020. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarter ended December 31, 2020 to realize market gains and adjust the investment portfolio so that funds could be more beneficially used to yield higher net earnings going forward. There were no payoffs of purchase credit impaired loans for the six months ended December 31, 2021. The net gain on payoff of purchase credit impaired loans was $195 thousand for the six months ended December 31, 2020 due to the liquidation of two loans. Changes in all other noninterest income items were due to normal periodic fluctuations.

Noninterest Expense. Noninterest expense for the six months ended December 31, 2021 increased by $194 thousand, or 3.3%, to $6.0 million for six months ended December 31, 2021. Salaries and employee benefits increased $115 thousand due to routine increases. Occupancy and equipment increased $108 thousand due to normal periodic fluctuations. Data processing increased $18 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $29 thousand due to normal periodic fluctuations. Advertising increased $22 thousand due to normal periodic fluctuations. FDIC deposit insurance increased $6 thousand due to the increased Association asset size. Foreclosed asset expenses decreased $33 thousand due to having no foreclosed assets during the six months ended December 31, 2021. For the six months ended December 31, 2021, we recognized an expense for the decrease in value of the loan servicing asset of $3 thousand compared to $72 thousand for the six months ended December 31, 2020. 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 $202 thousand, or 35.7%, to $364 thousand for the six months ended December 31, 2021 from $566 thousand for the six months ended December 31, 2020. This was due to a decrease in pre-tax income during the six months ended December 31, 2021 as compared to the six months ended December 31, 2020 along with a larger permanent tax benefit being recognized during the six months ended December 31, 2021 as compared to the six months ended December 31, 2020, which was a result of more nonqualified stock options being exercised during the six months ended December 31, 2021 as compared to the six months ended December 31, 2020. Our effective income tax rate was 15.4% and 19.5% for the six months ended December 31, 2021 and 2020, 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. 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 December 31, 2021, or approximately $136.3 million as of that date, with a remaining availability of $131.3 million as of December 31, 2021.

Common Stock Dividends. On August 19, 2021 and November 24, 2021, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.

Equity Compensation Plans. During the three months ended December 31, 2021, 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 December 31, 2021. 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 December 31, 2021, 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

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

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, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company’s common stock, terminating the previous authorization on May 28, 2020 to repurchase 100,000 shares. The repurchase authorization expires on March 31, 2022. In connection with the current repurchase authorization, the Company purchased a total of 5,025 shares of its common stock during the three months ended December 31, 2021.

The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended December 31, 2021:

	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
October 1 - October 31, 2021		—	$	—		—			80,593
November 1 - November 30, 2021		1,326	$	24.60		1,326			79,267
December 1 - December 31, 2021		3,699	$	23.93		3,699			75,568	(2)
Total		5,025	$	24.11		5,025	(1)

(1)

All shares were purchased pursuant to the publicly announced repurchase program that was approved by the Board of Directors on May 14, 2021. The repurchase program expires on March 31, 2022.

(2)

Represents the maximum number of shares available for repurchase under the May 14, 2021 plan at December 31, 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

Exhibit number		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 December 31, 2021, 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: February 11, 2022	/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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company