Oconee Federal Financial Corp. - FORM 10-Q

Attached files

file	filename
EX-32 - CERTIFICATION OF PRESIDENT, CHIEF EXECUTIVE OFFICER AND EXECUTIVE VICE PRESIDENT - Oconee Federal Financial Corp.	ex32.htm
EX-31.2 - CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER - Oconee Federal Financial Corp.	ex31-2.htm
EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Oconee Federal Financial Corp.	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended March 31, 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.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

As of May 10, 2021, the registrant had 5,598,177 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.		2
ITEM 1.	FINANCIAL STATEMENTS	2
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43
ITEM 4.	CONTROLS AND PROCEDURES	43
PART II.		43
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 5.	OTHER INFORMATION	44
ITEM 6.	INDEX TO EXHIBITS	45
SIGNATURES		45
EXHIBITS		46

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

PART I
ITEM 1. FINANCIAL STATEMENTS
	March 31, 2021 (unaudited)			June 30, 2020
ASSETS
Cash and due from banks	$	4,607		$	4,673
Interest-earning deposits		30,274			29,843
Fed funds sold		—			66
Total cash and cash equivalents		34,881			34,582
Securities available-for-sale		125,181			90,726
Loans		339,538			355,667
Allowance for loan losses		(1,339	)		(1,346	)
Net loans		338,199			354,321
Loans held for sale, at fair value		352			92
Premises and equipment, net		9,095			9,367
Real estate owned, net		—			159
Accrued interest receivable
Loans		1,008			1,074
Investments		392			364
Restricted equity securities, at cost		1,058			1,249
Bank owned life insurance		19,826			19,482
Goodwill		2,593			2,593
Core deposit intangible		151			211
Loan servicing rights		386			458
Deferred tax assets		884			365
Other assets		466			539
Total assets	$	534,472		$	515,582

LIABILITIES
Deposits
Noninterest - bearing	$	45,966		$	43,995
Interest - bearing		395,225			377,097
Total deposits		441,191			421,092
Federal Home Loan Bank advances		5,000			5,000
Accrued interest payable and other liabilities		602			1,185
Total liabilities		446,793			427,277

SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized;
6,551,909 and 6,530,074 shares outstanding, respectively		66			65
Treasury stock, at par, 951,932 and 924,618 shares, respectively		(10	)		(9	)
Additional paid-in capital		6,803			7,342
Retained earnings		80,624			79,071
Accumulated other comprehensive income		458			2,243
Unearned ESOP shares		(262	)		(407	)
Total shareholders’ equity		87,679			88,305
Total liabilities and shareholders’ equity	$	534,472		$	515,582

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						Nine Months Ended
	March 31, 2021			March 31, 2020			March 31, 2021			March 31, 2020
Interest and dividend income:
Loans, including fees	$	3,612		$	4,174		$	11,456		$	12,436
Securities, taxable		294			368			868			1,149
Securities, tax-exempt		86			93			268			292
Other interest-earning assets		25			84			84			422
Total interest income		4,017			4,719			12,676			14,299

Interest expense:
Deposits		399			905			1,408			2,991
Other borrowings		19			13			57			198
Total interest expense		418			918			1,465			3,189

Net interest income		3,599			3,801			11,211			11,110

Provision for loan losses		—			—			—			—
Net interest income after provision for loan losses		3,599			3,801			11,211			11,110

Noninterest income:
Service charges on deposit accounts		85			104			260			330
Income on bank owned life insurance		120			121			344			348
Mortgage servicing income		36			44			114			141
Gain on sale of mortgage loans		76			21			177			103
ATM & debit card income		107			82			303			255
Change in fair value of equity securities, net		(20	)		(130	)		(11	)		(98	)
Gain on sale of securities, net		—			113			109			125
Gain on payoff of purchase credit impaired loans		—			277			195			309
Other		3			1			7			5
Total noninterest income		407			633			1,498			1,518

Noninterest expense:
Salaries and employee benefits		1,706			1,628			4,999			4,796
Occupancy and equipment		444			556			1,313			1,483
Data processing		244			230			728			667
ATM & debit card expense		82			60			227			182
Professional and supervisory fees		124			132			388			460
Office expense		55			57			165			165
Advertising		48			72			160			199
FDIC deposit insurance		30			1			93			3
Foreclosed assets, net		(26	)		123			5			267
Change in loan servicing asset		—			191			72			278
Other		174			196			524			601
Total noninterest expense		2,881			3,246			8,674			9,101

Income before income taxes		1,125			1,188			4,035			3,527
Income tax expense		255			242			821			556

Net income	$	870		$	946		$	3,214		$	2,971

Other comprehensive income
Unrealized (losses)/gains on securities available-for-sale	$	(2,064	)	$	1,635		$	(2,152	)	$	2,034
Tax effect		435			(341	)		453			(426	)
Reclassification adjustment for gains realized in net income		—			(113	)		(109	)		(125	)
Tax effect		—			23			23			26
Total other comprehensive (loss)/income		(1,629	)		1,204			(1,785	)		1,509
Comprehensive (loss)/income	$	(759	)	$	2,150		$	1,429		$	4,480

Basic net income per share: (Note 3)	$	0.16		$	0.17		$	0.58		$	0.52
Diluted net income per share: (Note 3)	$	0.15		$	0.17		$	0.57		$	0.52
Dividends declared per share:	$	0.10		$	0.10		$	0.30		$	0.30

See accompanying notes to the consolidated financial statements

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

For the three months ended March 31, 2021 and March 31, 2020

	Common Stock		Treasury Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Unearned ESOP Shares			Total
Balance at December 31, 2019	$	65	$	(8	)	$	10,215		$	78,392		$	699		$	(507	)	$	88,856
Net income		—		—			—			946			—			—			946
Other comprehensive income		—		—			—			—			1,204			—			1,204
Purchase of 42,981 shares of treasury stock ⁽¹⁾		—		(1	)		(1,109	)		—			—			—			(1,110	)
Stock-based compensation expense		—		—			20			—			—			—			20
Dividends		—		—			—			(593	)		—			—			(593	)
ESOP shares earned		—		—			66			—			—			50			116
Balance at March 31, 2020	$	65	$	(9	)	$	9,192		$	78,745		$	1,903		$	(457	)	$	89,439

Balance at December 31, 2020	$	65	$	(9	)	$	7,272		$	80,315		$	2,087		$	(314	)	$	89,416
Net income		—		—			—			870			—			—			870
Other comprehensive loss		—		—			—			—			(1,629	)		—			(1,629	)
Purchase of 17,447 shares of treasury stock ⁽²⁾		—		(1	)		(523	)		—			—			—			(524	)
Stock-based compensation expense		—		—			17			—			—			—			17
Common Stock Issued		1		—			—			—			—			—			1
Dividends		—		—			—			(561	)		—			—			(561	)
ESOP shares earned		—		—			37			—			—			52			89
Balance at March 31, 2021	$	66	$	(10	)	$	6,803		$	80,624		$	458		$	(262	)	$	87,679

	(1)	The weighted average cost of treasury shares purchased during the three months ended was $25.81 per share. Treasury stock repurchases were accounted for using the par value method.
	(2)	The weighted average cost of treasury shares purchased during the three months ended was $26.69 per share. Treasury stock repurchases were accounted for using the par value method.

See accompanying notes to the consolidated financial statements

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

For the nine months ended March 31, 2021 and March 31, 2020

	Common Stock		Treasury Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Unearned ESOP Shares			Total
Balance at June 30, 2019	$	65	$	(8	)	$	10,986		$	77,464		$	394		$	(604	)	$	88,297
Net income		—		—			—			2,971			—			—			2,971
Other comprehensive income		—		—			—			—			1,509			—			1,509
Purchase of 83,060 shares of treasury stock ⁽¹⁾		—		(1	)		(2,036	)		—			—			—			(2,037	)
Stock-based compensation expense		—		—			59			—			—			—			59
Dividends ⁽²⁾		—		—			29			(1,690	)		—			—			(1,661	)
ESOP shares earned		—		—			154			—			—			147			301
Balance at March 31, 2020	$	65	$	(9	)	$	9,192		$	78,745		$	1,903		$	(457	)	$	89,439

Balance at June 30, 2020	$	65	$	(9	)	$	7,342		$	79,071		$	2,243		$	(407	)	$	88,305
Net income		—		—			—			3,214			—			—			3,214
Other comprehensive loss		—		—			—			—			(1,785	)		—			(1,785	)
Purchase of 27,314 shares of treasury stock ⁽³⁾		—		(1	)		(771	)		—			—			—			(772	)
Stock-based compensation expense		—		—			58			—			—			—			58
Common Stock Issued		1		—			5			—			—			—			6
Dividends ⁽⁴⁾		—		—			21			(1,661	)		—			—			(1,640	)
ESOP shares earned		—		—			148			—			—			145			293
Balance at March 31, 2021	$	66	$	(10	)	$	6,803		$	80,624		$	458		$	(262	)	$	87,679

	(1)	The weighted average cost of treasury shares purchased during the nine months ended was $24.52 per share. Treasury stock repurchases were accounted for using the par value method.
	(2)	Approximately $79 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 7,300 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,400 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,800 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2020.
	(3)	The weighted average cost of treasury shares purchased during the nine months ended was $25.59 per share. Treasury stock repurchases were accounted for using the par value method.
	(4)	Approximately $77 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,000 additional shares. The portion of the dividend paid on allocated shares of approximately $56 and resulting release of approximately 5,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $21 and resulting release of approximately 1,700 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2021.

See accompanying notes to the consolidated financial statements

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

	Nine Months Ended
	March 31,			March 31,
	2021			2020
Cash Flows From Operating Activities
Net income	$	3,214		$	2,971
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for real estate owned		21			117
Depreciation and amortization, net		1,367			932
Net accretion of purchase accounting adjustments		(160	)		(50	)
Deferred income tax (benefit)/expense		(54	)		403
Net (gain)/loss on sale of real estate owned		(26	)		120
Change in loan servicing asset		72			278
Net gain on sales of securities		(109	)		(125	)
Mortgage loans originated for sale		(11,431	)		(9,603	)
Mortgage loans sold		11,348			8,623
Gain on sales of mortgage loans		(177	)		(103	)
Change in fair value of equity securities		11			98
Increase in cash surrender value of bank owned life insurance		(344	)		(348	)
Gain on payoff of purchased credit impaired loans		(195	)		(309	)
ESOP compensation expense		293			301
Stock based compensation expense		58			59
Net change in operating assets and liabilities:
Accrued interest receivable and other assets		111			289
Accrued interest payable and other liabilities		(583	)		(1	)
Net cash provided by operating activities		3,416			3,652

Cash Flows From Investing Activities
Purchases of premises and equipment		(217	)		(1,798	)
Purchases of securities available-for-sale		(64,054	)		(21,627	)
Proceeds from maturities, paydowns and calls of securities available-for-sale		18,706			16,708
Proceeds from sales of securities available-for-sale		7,923			14,762
Sales of restricted equity securities		191			818
Purchases of restricted equity securities		—			(213	)
Proceeds from sale of real estate owned		216			279
Loan originations and repayments, net		16,425			7,282
Net cash (used)/provided in investing activities		(20,810	)		16,211

Cash Flows from Financing Activities
Net change in deposits		20,099			(12,743	)
Proceeds from notes payable to FHLB		—			5,000
Repayment of notes payable to FHLB		—			(19,000	)
Dividends paid		(1,640	)		(1,661	)
Purchase of treasury stock		(772	)		(2,037	)
Proceeds from sale of common stock, net of issuance costs		6			—
Net cash provided/(used) by financing activities		17,693			(30,441	)

Change in cash and cash equivalents		299			(10,578	)

Cash and cash equivalents, beginning of period		34,582			36,690
Cash and cash equivalents, end of period	$	34,881		$	26,112

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 (74.36%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2021 and June 30, 2020 and the results of operations and cash flows for the interim periods ended March 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, 2021 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, 2020.

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 novel coronavirus (“COVID-19”) pandemic has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic and government responses continue to disrupt global supply chains and adversely impact many industries. The pandemic may continue to have a material adverse impact on economic and market conditions. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and legislation has been passed to provide relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices with regard to interactions of employees and customers. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the COVID-19 pandemic with regard to capital, liquidity, loan loss reserves, etc. Nevertheless, the pandemic presents uncertainty and risk with respect to the Company, its performance, and its financial results.

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”) 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. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its 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.

ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”. Issued in April 2019, ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures. The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January 2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

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 has determined that it will continue to prepare its credit loss allowance internally. 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						Nine Months Ended
	March 31, 2021			March 31, 2020			March 31, 2021			March 31, 2020
Earnings per share
Net income	$	870		$	946		$	3,214		$	2,971
Less: distributed earnings allocated to participating securities		—			(1	)		(1	)		(3	)
Less: (undistributed income) dividends in excess of earnings allocated to participating securities		—			—			(1	)		(2	)
Net earnings available to common shareholders	$	870		$	945		$	3,212		$	2,966

Weighted average common shares outstanding including participating securities		5,603,199			5,705,937			5,604,002			5,721,903
Less: participating securities		(2,800	)		(8,800	)		(2,800	)		(8,800	)
Less: average unearned ESOP shares		(25,927	)		(51,990	)		(32,181	)		(54,778	)
Weighted average common shares outstanding		5,574,472			5,645,147			5,569,021			5,658,325

Basic earnings per share	$	0.16		$	0.17		$	0.58		$	0.52

Weighted average common shares outstanding		5,574,472			5,645,147			5,569,021			5,658,325
Add: dilutive effects of assumed exercises of stock options		71,769			71,002			71,593			67,598
Average shares and dilutive potential common shares		5,646,241			5,716,149			5,640,614			5,725,923

Diluted earnings per share	$	0.15		$	0.17		$	0.57		$	0.52

For the three and nine months ended March 31, 2021, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and nine months ended March 31, 2020, 11,200 shares 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 March 31, 2021 and June 30, 2020 are as follows:

March 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Change in Fair Value Equity Securities		Fair Value
Available-for-sale:
FHLMC common stock	$	20	$	—	$	—		$	147	$	167
Certificates of deposit		2,493		65		—			—		2,558
Municipal securities		18,767		721		(14	)		—		19,474
CMOs		8,204		269		(11	)		—		8,462
U.S. Government agency mortgage-backed securities		83,453		975		(975	)		—		83,453
U.S. Treasury and Government agency bonds		11,518		13		(464	)		—		11,067
Total available-for-sale	$	124,455	$	2,043	$	(1,464	)	$	147	$	125,181

June 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Change in Fair Value Equity Securities		Fair Value
Available-for-sale:
FHLMC common stock	$	20	$	—	$	—		$	158	$	178
Certificates of deposit		2,493		99		—			—		2,592
Municipal securities		20,821		822		—			—		21,643
CMOs		9,723		383		—			—		10,106
U.S. Government agency mortgage-backed securities		53,660		1,538		(25	)		—		55,173
U.S. Treasury and Government agency bonds		1,011		23		—			—		1,034
Total available-for-sale	$	87,728	$	2,865	$	(25	)	$	158	$	90,726

Securities pledged at March 31, 2021 and June 30, 2020 had fair values of $15,073 and $12,524, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

At March 31, 2021 and June 30, 2020, 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)

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at March 31, 2021 and June 30, 2020. 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⁾
March 31, 2021
Available-for-sale:
Municipal securities	$	1,263	$	(14	)		4	$	—	$	—		—	$	1,263	$	(14	)		4
CMOs		994		(11	)		1		—		—		—		994		(11	)		1
U.S. Government agency mortgage-backed securities		56,677		(975	)		28		—		—		—		56,677		(975	)		28
U.S. Treasury and Government agency bonds		10,049		(464	)		6		—		—		—		10,049		(464	)		6
	$	68,983	$	(1,464	)		39	$	—	$	—		—	$	68,983	$	(1,464	)		39

	Less than 12 Months							12 Months or More						Total
June 30, 2020	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⁾

Available-for-sale:
U.S. Government agency mortgage-backed securities	$	6,342	$	(25	)		4	$	—	$	—		—	$	6,342	$	(25	)		4
	$	6,342	$	(25	)		4	$	—	$	—		—	$	6,342	$	(25	)		4

(1)

Actual amounts.

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

None of the unrealized losses at March 31, 2021 were recognized into net income for the three or nine months ended March 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, 2020 were recognized as having OTTI during the year ended June 30, 2020.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2021 and June 30, 2020 by contractual maturity.

	March 31, 2021				June 30, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Less than one year	$	2,755	$	2,797	$	499	$	503
Due from one to five years		6,296		6,528		7,759		8,044
Due after five years to ten years		19,676		19,599		10,707		11,152
Due after ten years		4,051		4,175		5,360		5,570
Mortgage-backed securities, CMOs and FHLMC stock ⁽¹⁾		91,677		92,082		63,403		65,457
Total available for sale	$	124,455	$	125,181	$	87,728	$	90,726

(1)

Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty. FHLMC common stock is not scheduled because it has no contractual maturity date.

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended March 31, 2021 and 2020:

	Three Months Ended					Nine Months Ended
Available-for-sale:	March 31, 2021		March 31, 2020			March 31, 2021		March 31, 2020
Proceeds	$	—	$	9,494		$	7,923	$	14,762
Gross gains		—		122			109		137
Gross losses		—		(9	)		—		(12	)

The tax provision related to the net realized gain for the three months ended March 31, 2020 was $23. The tax provision related to the net realized gain for the nine months ended March 31, 2021 and March 31, 2020 was $23 and $26, 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 March 31, 2021 and June 30, 2020 were as follows:

	March 31, 2021		June 30, 2020
Real estate loans:
One-to-four family	$	273,276	$	283,931
Multi-family		665		704
Home equity		6,233		5,763
Nonresidential		21,228		20,083
Agricultural		1,073		1,187
Construction and land		24,793		29,096
Total real estate loans		327,268		340,764
Commercial and industrial ⁽¹⁾		6,176		8,135
Consumer and other loans		6,094		6,768
Total loans	$	339,538	$	355,667

(1)

Includes $2,823 and $4,094 of 100% Small Business Administration (“SBA”) guaranteed Paycheck Protection Program (“PPP”) loans as of March 31, 2021 and June 30, 2020, respectively.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2021:

	Ending Allowance on Loans:				Loans:
At March 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	$	—	$	1,024	$	1,748	$	271,528
Multi-family		—		4		—		665
Home equity		—		41		—		6,233
Nonresidential		—		123		—		21,228
Agricultural		—		4		—		1,073
Construction and land		—		91		—		24,793
Total real estate loans		—		1,287		1,748		325,520
Commercial and industrial ⁽¹⁾		—		23		—		6,176
Consumer and other loans		—		29		—		6,094
Total loans	$	—	$	1,339	$	1,748	$	337,790

(1)	Includes $2,823 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2020 by portfolio segment:

Three months ended March 31, 2020	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	993	$	6		$	—	$	—	$	999
Multi-family		4		—			—		—		4
Home equity		33		3			—		—		36
Nonresidential		77		(14	)		—		—		63
Agricultural		4		—			—		—		4
Construction and land		94		10			—		—		104
Total real estate loans		1,205		5			—		—		1,210
Commercial and industrial		66		(7	)		—		—		59
Consumer and other loans		25		2			—		—		27
Total loans	$	1,296	$	—		$	—	$	—	$	1,296

Nine months ended March 31, 2020	Beginning Balance		Ending Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	995	$	4		$	—		$	—	$	999
Multi-family		4		—			—			—		4
Home equity		24		12			—			—		36
Nonresidential		87		(24	)		—			—		63
Agricultural		3		1			—			—		4
Construction and land		94		10			—			—		104
Total real estate loans		1,207		3			—			—		1,210
Commercial and industrial		67		(8	)		—			—		59
Consumer and other loans		23		5			(1	)		—		27
Total loans	$	1,297	$	—		$	(1	)	$	—	$	1,296

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2020:

	Ending Allowance on Loans:				Loans:
At June 30, 2020	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Real estate loans:
One-to-four family	$	—	$	1,032	$	1,832	$	282,099
Multi-family		—		4		—		704
Home equity		—		34		—		5,763
Nonresidential		—		75		562		19,521
Agricultural		—		4		—		1,187
Construction and land		—		105		—		29,096
Total real estate loans		—		1,254		2,394		338,370
Commercial and industrial ⁽¹⁾		—		65		—		8,135
Consumer and other loans		—		27		—		6,768
Total loans	$	—	$	1,346	$	2,394	$	353,273

(1)

Includes $4,094 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)

The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 2021 and June 30, 2020, including the average recorded investment balance and interest earned for the nine months ended March 31, 2021 and the year ended June 30, 2020:

	March 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	$	1,771	$	1,748	$	—	$	1,790	$	26
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		—		—		—		281		—
Agricultural		—		—		—		—		—
Construction and land		—		—		—		—		—
Total real estate loans		1,771		1,748		—		2,071		26
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	1,771	$	1,748	$	—	$	2,071	$	26

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	$	1,771	$	1,748	$	—	$	2,071	$	26
Consumer and other loans		—		—		—		—		—
Total	$	1,771	$	1,748	$	—	$	2,071	$	26

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

	June 30, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family	$	1,863	$	1,832	$	—	$	2,062	$	36
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		596		562		—		588		—
Agricultural		—		—		—		178		—
Construction and land		—		—		—		—		—
Total real estate loans		2,459		2,394		—		2,828		36
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	2,459	$	2,394	$	—	$	2,828	$	36

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	$	2,459	$	2,394	$	—	$	2,828	$	36
Consumer and other loans		—		—		—		—		—
Total	$	2,459	$	2,394	$	—	$	2,828	$	36

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

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 March 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	$	2,031	$	866	$	627	$	3,524	$	269,752	$	273,276	$	2,455	$	—
Multi-family		218		—		—		218		447		665		—		—
Home equity		—		—		—		—		6,233		6,233		—		—
Nonresidential		381		—		—		381		20,847		21,228		531		—
Agricultural		—		—		—		—		1,073		1,073		—		—
Construction and land		—		—		—		—		24,793		24,793		—		—
Total real estate loans		2,630		866		627		4,123		323,145		327,268		2,986		—
Commercial and industrial		—		—		—		—		6,176		6,176		—		—
Consumer and other loans		—		—		—		—		6,094		6,094		—		—
Total	$	2,630	$	866	$	627	$	4,123	$	335,415	$	339,538	$	2,986	$	—

In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Included in the table above are $12,610 in loans 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 $8,950 in one-to-four family loans, $3,256 in non-residential loans and $404 in multi-family loans. 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 provides 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 have 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. As of March 31, 2021, $11,669 of such loans were current and $941 were 30 days or more past due. As of March 31, 2021, $12,267 of these are no longer in deferral.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

Total past due and nonaccrual loans by portfolio segment at June 30, 2020:

	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	$	2,055	$	407	$	561	$	3,023	$	280,908	$	283,931	$	1,969	$	—
Multi-family		—		—		—		—		704		704		—		—
Home equity		—		—		40		40		5,723		5,763		40		—
Nonresidential		179		—		—		179		19,904		20,083		732		—
Agricultural		—		—		—		—		1,187		1,187		—		—
Construction and land		—		10		—		10		29,086		29,096		—		—
Total real estate loans		2,234		417		601		3,252		337,512		340,764		2,741		—
Commercial and industrial		—		—		—		—		8,135		8,135		—		—
Consumer and other loans		—		—		—		—		6,768		6,768		—		—
Total	$	2,234	$	417	$	601	$	3,252	$	352,415	$	355,667	$	2,741	$	—

Included in the table above are $15,024 in loans 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 $10,993 in one-to-four family loans, $3,615 in non-residential loans and $416 in multi-family loans. As of June 30, 2020, $14,781 were current and $243 were 30 days or more past due.

Troubled Debt Restructurings:

At March 31, 2021 and June 30, 2020, total loans that have been modified as troubled debt restructurings were $1,699 and $1,985, respectively, which consisted of one non-residential real estate loan and three one-to-four family first lien loans at March 31, 2021, and two non-residential real estate loans and four one-to-four family first lien loans at June 30, 2020. There was no specific allowance for loss established for these loans at March 31, 2021 or June 30, 2020. 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 nine months ended March 31, 2021. No loans modified as troubled debt restructurings during the twelve months ended March 31, 2021 have defaulted since restructuring. All of these loans are on nonaccrual at March 31, 2021 and June 30, 2020. At March 31, 2021 and June 30, 2020, $1,134 and $1,774, respectively, were individually evaluated for impairment.

Allowance for Loan Loss:

There have been no changes to our allowance for loan loss methodology during the quarter ended March 31, 2021. We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become present. After such adjustments to the calculation, we have determined that the recorded allowance is believed to be adequate at this time and as a result no additional provision for loan losses has been recorded during the quarter ended March 31, 2021. However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and the country continues to fully reopen. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three and nine months ended March 31, 2021 and March 31, 2020.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

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%.

The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of 2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered. The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the Company’s permission. Such homes must be “de-titled” by the State of South Carolina or Georgia so that they are taxed and must be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such homes are affixed.

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.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

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.

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. Our nonresidential real estate lending includes a significant amount of loans to churches. Because a church’s financial stability often depends on donations from congregation members rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other nonresidential real estate.

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). For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current operating budgets. 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, and in the case of church loans, guarantees from the applicable denomination may be obtained.

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.

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

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%.

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

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

Within this category for the nine months ended March 31, 2021 and the year ended June 30, 2020 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. As of March 31, 2021 $4.2 million of the original $7.0 million of PPP loans have been forgiven.

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.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Total loans by risk grade and portfolio segment at March 31, 2021:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	263,267	$	3,541	$	2,789	$	3,679	$	—	$	273,276
Multi-family		665		—		—		—		—		665
Home equity		5,995		230		—		8		—		6,233
Nonresidential		20,234		—		855		139		—		21,228
Agricultural		1,073		—		—		—		—		1,073
Construction and land		24,363		391		—		39		—		24,793
Total real estate loans		315,597		4,162		3,644		3,865		—		327,268
Commercial and industrial		6,176		—		—		—		—		6,176
Consumer and other loans		6,094		—		—		—		—		6,094
Total	$	327,867	$	4,162	$	3,644	$	3,865	$	—	$	339,538

Total loans by risk grade and portfolio segment at June 30, 2020:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	273,228	$	3,848	$	2,930	$	3,925	$	—	$	283,931
Multi-family		704		—		—		—		—		704
Home equity		5,268		392		54		49		—		5,763
Nonresidential		19,077		172		—		834		—		20,083
Agricultural		1,187		—		—		—		—		1,187
Construction and land		28,611		416		—		69		—		29,096
Total real estate loans		328,075		4,828		2,984		4,877		—		340,764
Commercial and industrial		8,135		—		—		—		—		8,135
Consumer and other loans		6,768		—		—		—		—		6,768
Total	$	342,978	$	4,828	$	2,984	$	4,877	$	—	$	355,667

At March 31, 2021, two loans for $98 were in formal foreclosure proceedings and are included in the one-to-four family loan category.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(6) BORROWINGS

At March 31, 2021 and June 30, 2020, advances from the Federal Home Loan Bank were as follows:

	March 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, 2020
	Balance		Stated Interest Rate
FHLB advances due February 2023 through January 2025	$	5,000	1.40% - 1.59%
Total	$	5,000

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% on March 31, 2021 and June 30, 2020, respectively.

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $10,906 and $10,786 of investment securities at March 31, 2021 and June 30, 2020, 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 $131,581 at March 31, 2021.

There were no overnight borrowings at March 31, 2021 or June 30, 2020.

(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).

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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.

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.

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.

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.

Assets measured at fair value on a recurring basis at March 31, 2021 and June 30, 2020 are summarized below:

	Fair Value Measurements
	March 31, 2021				June 30, 2020
	(Level 2)		(Level 3)		(Level 2)		(Level 3)
Financial assets:
Securities available-for-sale:
FHLMC common stock	$	167	$	—	$	178	$	—
Certificates of deposit		2,558		—		2,592		—
Municipal securities		19,474		—		21,643		—
CMOs		8,462		—		10,106		—
U.S. Government agency mortgage-backed securities		83,453		—		55,173		—
U.S. Treasury and Government agency bonds		11,067		—		1,034		—
Total securities available-for-sale		125,181		—		90,726		—
Loan servicing rights		—		386		—		458
Total financial assets	$	125,181	$	386	$	90,726	$	458

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)

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at March 31, 2021 and June 30, 2020:

	Fair Value Measurements
	March 31,		June 30,
	2021		2020
	(Level 3)		(Level 3)
Non-financial assets:
Real estate owned, net:
Nonresidential	$	—	$	159
Total non-financial assets		—		159
Total assets measured at fair value on a non-recurring basis	$	—	$	159

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. There was no real estate owned at March 31, 2021. The carrying value of real estate owned at June 30, 2020 was $159. There were no valuation allowances associated with these properties at June 30, 2020.

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended March 31, 2021 and 2020:

	Fair Value Measurements (Level 3)
	Three Months Ended					Nine Months Ended
	March 31, 2021		March 31, 2020			March 31, 2021			March 31, 2020
	Loan Servicing Rights		Loan Servicing Rights			Loan Servicing Rights			Loan Servicing Rights
Balance at beginning of period:	$	386	$	781		$	458		$	868
Unrealized net losses included in net income		—		(191	)		(72	)		(278	)
Balance at end of period:	$	386	$	590		$	386		$	590

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2021 and June 30, 2020.

Level 3 Quantitative Information

March 31, 2021
Fair Value

June 30, 2020
Fair Value

Valuation
Technique

Unobservable Inputs

Range

Loan servicing rights

386

458

Discounted cash flows

Discount rate, estimated timing of cash flows

8.25% to 8.75%

Real estate owned net:
Nonresidential

—

159

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 20%

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheets approximate fair value. These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at March 31, 2021 and June 30, 2020 are summarized below:

	March 31, 2021
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	125,181	$	—	$	125,181	$	—	$	125,181
Loans, net ⁽¹⁾		338,199		—		—		338,850		338,850
Loans held for sale⁽²⁾		352		—		—		352		352
Loan servicing rights		386		—		—		386		386
Restricted equity securities		1,058		N/A		N/A		N/A		N/A

Financial liabilities
Deposits	$	441,191	$	249,972	$	189,966	$	—	$	439,938
Fed Funds Purchased		—		—		—		—		—
FHLB Advances		5,000		—		5,093		—		5,093

	June 30, 2020
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	90,726	$	—	$	90,726	$	—	$	90,726
Loans, net ⁽¹⁾		354,321		—		—		364,636		364,636
Loans held for sale⁽²⁾		92		—		—		92		92
Loan servicing rights		458		—		—		458		458
Restricted equity securities		1,249		N/A		N/A		N/A		N/A

Financial liabilities
Deposits	$	421,092	$	223,172	$	197,020	$	—	$	420,192
Fed Funds Purchased		—		—		—		—		—
FHLB Advances		5,000		—		5,141		—		5,141

	(1)	Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of March 31, 2021 and June 30, 2020 was measured using an exit price notion.
	(2)	Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors and result in a Level 3 classification.

(8) EMPLOYEE STOCK OWNERSHIP PLAN

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 2020 or 2019. Total ESOP compensation expense for the three and nine months ended March 31, 2021 was $88 and $256, respectively, and for the three and nine months ended March 31, 2020 was $93 and $301, respectively.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Shares held by the ESOP at March 31, 2021 and June 30, 2020 were as follows:

	March 31, 2021		June 30, 2020
Committed to be released to participants		5,120		12,903
Allocated to participants		161,352		141,264
Unearned		25,829		38,534
Total ESOP shares		192,301		192,701

Fair value of unearned shares	$	674	$	993

(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.

On September 22, 2020, the compensation committee of the board of directors approved the issuance of 250 shares of restricted stock to a non-executive officer with immediate vesting. There are no performance-based conditions or any other material conditions applicable to the award issued. There were no stock options or restricted stock issued in fiscal 2020.

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

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

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

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. There were 4,453 and 3,681 options that were earned during the nine months ended March 31, 2021 and 2020, respectively. Stock-based compensation expense for stock options for the three and nine months ended March 31, 2021 was $5 and $16, respectively, and for the three and nine months ended March 31, 2020 was $5 and $15, respectively. Total unrecognized compensation cost related to stock options was $40 at March 31, 2021 and is expected to be recognized over a weighted-average period of 3.0 years.

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

	March 31, 2021
Balance - beginning of year		5,800
Granted		250
Forfeited		—
Vested		(3,250	)
Balance - end of period		2,800
Weighted average grant date fair value	$	19.79

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense for the three and nine months ended March 31, 2021 was $12 and $42, respectively, and for the three and nine months ended March 31, 2020 was $15 and $44, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $47 at March 31, 2021 and is expected to be recognized over a weighted-average period of 1.2 years.

(10) LOAN SERVICING RIGHTS

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

The principal balances of those loans at March 31, 2021 and June 30, 2020 are as follows:

	March 31, 2021		June 30, 2020
Mortgage loan portfolio serviced for:
FHLMC	$	57,208	$	69,553

Custodial escrow balances maintained in connection with serviced loans were $475 and $702 at March 31, 2021 and June 30, 2020.

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	Three Months Ended					Nine Months Ended
	March 31, 2021		March 31, 2020			March 31, 2021			March 31, 2020
Loan servicing rights:
Beginning of period:	$	386	$	781		$	458		$	868
Change in fair value		—		(191	)		(72	)		(278	)
End of period:	$	386	$	590		$	386		$	590

Fair value at March 31, 2021 was determined using a discount rate of 8.75%, prepayment speed assumptions ranging from 10.45% to 16.95% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.15%. Fair value at March 31, 2020 was determined using a discount rate of 9.00%, prepayment speed assumptions ranging from 7.43% to 30.79% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.26%.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

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

	March 31, 2021			March 31, 2020
Cash paid during the period for:
Interest paid	$	1,463		$	3,187
Income taxes paid	$	1,082		$	140
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	52		$	—
Change in unrealized gain/loss on securities available-for-sale	$	(2,261	)	$	1,909

(12) SUBSEQUENT EVENTS

Dividend Declared

On April 22, 2021, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of May 6, 2021, and will be paid on or about May 20, 2021.

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 nationally and in our market areas;

•

the social and economic effects of the COVID-19 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.

Novel Coronavirus Pandemic (COVID-19)

The COVID-19 pandemic has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic and government responses continue to disrupt global supply chains and adversely impact many industries. The pandemic may continue to have a material adverse impact on economic and market conditions. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and legislation has been passed to provide relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices with regard to interactions of employees and customers. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the COVID-19 pandemic. Nevertheless, the pandemic presents uncertainty and risk with respect to the Company, its performance, and its financial results. As a result we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

demand for our products and services may decline, making it difficult to grow assets and income;

•

if the economy is unable to substantially and successfully stay open, and high levels of unemployment continue for an extended period of time, 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 loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, 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;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend,

•

limitations may be placed on our ability to foreclose on properties during the pandemic;

•

litigation, regulatory enforcement risk and reputation risk regarding our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guarantees;

•

the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period, that would adversely impact our results of operations and the ability of the Association to pay dividends to us;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

•

Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

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, 2020, as filed with the Securities and Exchange Commission.

Comparison of Financial Condition at March 31, 2021 and June 30, 2020

Our total assets increased by $18.9 million, or 3.7%, to $534.5 million at March 31, 2021 from $515.6 million at June 30, 2020.

Total cash and cash equivalents increased $299 thousand, or 0.9%, to $34.9 million at March 31, 2021 from $34.6 million at June 30, 2020. The increase in cash and cash equivalents was due to normal periodic fluctuations during the nine month period.

Our available-for-sale securities portfolio increased by $34.5 million from $90.7 million at June 30, 2020 to $125.2 million at March 31, 2021. The Association began actively replenishing security repayments and maturities with purchases due to increased liquidity.

Gross loans decreased $16.2 million, or 4.6%, to $339.5 million at March 31, 2021 from $355.7 million at June 30, 2020. This decrease was due to normal repayments and a decrease in new loan demand during the nine months ended March 31, 2021.

Deposits increased $20.1 million, or 4.8%, to $441.2 million at March 31, 2021 from $421.1 million at June 30, 2020. The increase in our deposits reflected an increase of $9.8 million in interest bearing demand deposit accounts, $9.0 million in money market accounts, $6.0 million in savings deposits and $2.0 million in non-interest bearing deposits partially offset by a decrease of $6.7 million in certificates of deposit. Oconee Federal, MHC’s cash is held on deposit with the Association. We generally do not accept brokered deposits and no brokered deposits were accepted during the nine months ended March 31, 2021.

Federal Home Loan Bank advances remained stable at $5.0 million. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of March 31, 2021, or approximately $131.6 million. We had no federal funds purchased as of March 31, 2021 or as of June 30, 2020.

Total shareholders’ equity decreased $626 thousand, or 0.7%, to $87.7 million at March 31, 2021 compared to $88.3 million at June 30, 2020. This was primarily due to our payment of dividends of $1.7 million, an increase in after-tax unrealized losses in our investment portfolio of $1.8 million and $772 thousand used for the repurchase of treasury stock offset by our net income during the period of $3.2 million and the increase of $293 thousand in ESOP shares earned. The Company and the Association exceeded all regulatory capital requirements at March 31, 2021 and June 30, 2020.

Nonperforming Assets

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

	March 31, 2021			June 30, 2020
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One-to-four family	$	2,455		$	1,969
Multi-family		—			—
Home equity		—			40
Nonresidential		531			732
Agricultural		—			—
Construction and land		—			—
Total real estate loans		2,986			2,741
Commercial and industrial		—			—
Consumer and other loans		—			—
Total nonaccrual loans ⁽¹⁾	$	2,986		$	2,741
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⁾	$	2,986		$	2,741
Real estate owned, net:
One-to-four family	$	—		$	—
Nonresidential		—			159
Construction and land		—			—
Other nonperforming assets		—			—
Total nonperforming assets	$	2,986		$	2,900

Accruing troubled debt restructurings	$	—		$	—
Troubled debt restructurings and total nonperforming assets	$	2,986		$	2,900

Total nonperforming loans to total loans		0.88	%		0.77	%

(1)	Nonaccrual troubled debt restructurings included in the totals above were $1.7 million and $2.0 million, at March 31, 2021 and June 30, 2020, respectively.

(2)	There were no loans past due 90 days or more and still accruing at March 31, 2021 or June 30, 2020.

Nonperforming assets increased $86 thousand from $2.90 million as of June 30, 2020 to $3.0 million as of March 31, 2021. Nonaccrual loans increased $245 thousand to $3.0 million as of March 31, 2021 and real estate owned decreased $159 thousand to zero as of March 31, 2021. There were no accruing loans past due 90 days or more at either date. The increase in nonaccrual loans primarily related to normal monthly fluctuations. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.56% and 0.88%, respectively, at March 31, 2021 compared to 0.56% and 0.82%, respectively at June 30, 2020.

Analysis of Net Interest Margin

The following tables set 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 tables 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
	March 31, 2021								March 31, 2020
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	344,551		$	3,612		4.19	%	$	356,416		$	4,174		4.68	%
Investment securities		96,824			294		1.21			67,393			368		2.18
Investment securities, tax-free		15,189			86		2.26			16,675			93		2.23
Other interest-earning assets		34,619			25		0.29			21,138			84		1.59
Total interest-earning assets		491,183			4,017		3.27			461,622			4,719		4.09
Noninterest-earning assets		40,712								40,715
Total assets	$	531,895							$	502,337

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	72,015		$	27		0.15	%	$	57,242		$	47		0.33
Money market deposits		86,465			38		0.18			76,843			127		0.66	%
Regular savings and other deposits		38,865			12		0.13			29,765			18		0.24
Certificates of deposit		193,300			322		0.68			208,684			713		1.37
Total interest-bearing deposits		390,645			399		0.41			372,534			905		0.97
Other Borrowings		5,000			19		1.54			3,294			13		1.58
Total interest-bearing liabilities		395,645			418		0.43			375,828			918		0.98
Noninterest bearing deposits		45,454								34,090
Other noninterest-bearing
liabilities		990								2,106
Total liabilities		442,089								412,024
Equity		89,806								90,313
Total liabilities and equity	$	531,895							$	502,337
												$	3,801
Net interest income				$	3,599		2.84	%							3.11	%
Interest rate spread							2.93	%							3.29	%
Net interest margin
Average interest-earning assets to
average interest-bearing liabilities		1.24	x							1.23	x

	For the Nine Months Ended
	March 31, 2021								March 31, 2020
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	352,037		$	11,456		4.34	%	$	359,565		$	12,436		4.61	%
Investment securities		83,164			868		1.39			70,618			1,149		2.17
Investment securities, tax-free		15,807			268		2.26			17,633			292		2.21
Other interest-earning assets		32,905			84		0.34			26,579			422		2.12
Total interest-earning assets		483,913			12,676		3.49			474,395			14,299		4.02
Noninterest-earning assets		38,943								38,977
Total assets	$	522,856							$	513,372

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	70,607		$	89		0.17	%	$	56,328		$	142		0.34	%
Money market deposits		83,354			123		0.20			76,005			452		0.79
Regular savings and other deposits		36,833			40		0.14			28,980			59		0.27
Certificates of deposit		194,421			1,156		0.79			216,937			2,338		1.43
Total interest-bearing deposits		385,215			1,408		0.49			378,250			2,991		1.05
Other Borrowings		5,000			57		1.52			9,882			198		2.67
Total interest-bearing liabilities		390,215			1,465		0.50			388,132			3,189		1.09
Noninterest bearing deposits		43,909								34,766
Other noninterest-bearing
liabilities		1,364								2,306
Total liabilities		435,488								425,204
Equity		87,368								88,168
Total liabilities and equity	$	522,856							$	513,372

Net interest income				$	11,211							$	11,110
Interest rate spread							2.99	%							2.93	%
Net interest margin							3.09	%							3.13	%
Average interest-earning assets to
average interest-bearing liabilities		1.24	x							1.22	x

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

General. We reported net income of $870 thousand for the three months ended March 31, 2021 as compared to net income of $946 thousand for the three months ended March 31, 2020. Interest income decreased $702 thousand for the three months ended March 31, 2021 compared to March 31, 2020 and interest expense decreased $500 thousand resulting in a net decrease to net interest income of $202 thousand. Noninterest income decreased $226 thousand for the three months ended March 31, 2021 compared to March 31, 2020. Total noninterest expense decreased $365 thousand. Tax expense increased $13 thousand.

Interest Income. Interest income decreased by $702 thousand to $4.0 million from $4.7 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The yield on interest-earning assets decreased 82 basis points from 4.09% for the three months ended March 31, 2020 to 3.27% for the three months ended March 31, 2021. Total average interest-earning assets increased by $29.6 million to $491.2 million for the three months ended March 31, 2021 from $461.6 million for the three months ended March 31, 2020.

Interest income on loans decreased by $562 thousand to $3.6 million from $4.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The yield on loans decreased 49 basis points from 4.68% for the three months ended March 31, 2020 to 4.19% for the three months ended March 31, 2021. The average balance of loans decreased by $11.8 million, or 3.31%, to $344.6 million for the three months ended March 31, 2021 from $356.4 million for the three months ended March 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 decreased by $81 thousand, or 17.6%, to $380 thousand for the three months ended March 31, 2021 from $461 thousand for the three months ended March 31, 2020. The decrease reflected a decrease in the yield on securities to 1.36% for the three months ended March 31, 2021 from 2.19% for the three months ended March 31, 2020 offset by an increase in the average balance of securities of $27.9 million, or 33.2%, to $112.0 million for the three months ended March 31, 2021 from $84.1 million for the three months ended March 31, 2020. The increase in the average balances of our securities reflected our efforts during fiscal 2021 to invest in higher yielding assets.

Income on other interest earning assets decreased by $59 thousand, or 70.2%, to $25 thousand for the three months ended March 31, 2021 from $84 thousand for the three months ended March 31, 2020. The average balance of other interest-earning assets increased $13.5 million from the three months ended March 31, 2020 to the three months ended March 31, 2021 and the yield decreased 130 basis points over the same period. The increase in the average balance was due to normal periodic fluctuations. The decrease in yield was primarily the result of an overall decline in rates on money market accounts and our Federal Reserve excess balance account, the balance of which comprised 95.7% of this category during the three months ended March 31, 2021.

Interest Expense. Interest expense decreased by $500 thousand, or 54.5%, to $418 thousand for the three months ended March 31, 2021 from $918 thousand for the three months ended March 31, 2020. This decrease was attributable to a general decrease in retail and wholesale borrowing rates due to overall market decreases. The decrease reflected a decrease of 56 basis points in the average rate paid on interest-bearing deposits for the three months ended March 31, 2021 to 0.41% from 0.97% for the three months ended March 31, 2020. The decrease in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible in the current declining rate market while remaining competitive in our market. Average interest-bearing deposits were $390.6 million for the three months ended March 31, 2021 compared to $372.5 million for the three months ended March 31, 2020.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased $391 thousand, or 54.8%, to $322 thousand for the three months ended March 31, 2021 from $713 thousand for the three months ended March 31, 2020. The average rate paid on certificates of deposit decreased by 69 basis points from 1.37% for the three months ended March 31, 2020 to 0.68% for the three months ended March 31, 2021 and the average balances decreased by $15.4 million from $208.7 million for the three-month period ended March 31, 2020 to $193.3 million for the three-month period ended March 31, 2021. The decrease in the average balance of certificates of deposit is reflective of normal deposit fluctuation. The decrease in the average rate paid on our certificates of deposit is reflective of an overall decline in market rates.

The second largest decrease in deposit interest expense was related to expense on money market deposits, which decreased $89 thousand, or 70.1%, to $38 thousand for the three months ended March 31, 2021 from $127 thousand for the three months ended March 31, 2020. The average rate paid on money market deposits decreased by 48 basis points from 0.66% for the three months ended March 31, 2020 to 0.18% for the three months ended March 31, 2021 and the average balances increased by $9.7 million from $76.8 million for the three-month period ended March 31, 2020 to $86.5 million for the three-month period ended March 31, 2021. The increase in the average balance of money market deposits is reflective of normal deposit fluctuation. The decrease in the average rate paid on our money market deposits is reflective of an overall decline in market rates.

Interest expense for other borrowings increased by $6 thousand, or 46.2%, to $19 thousand for the three months ended March 31, 2021 from $13 thousand for the three months ended March 31, 2020. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $5.0 million for the three months ended March 31, 2021 compared to $3.3 million for the three months ended March 31, 2020. The average rate was 1.54% and 1.59% for the three months ended March 31, 2021 and 2020, respectively, due to a decrease in market interest rates.

Net Interest Income. Net interest income before the provision for loan losses decreased by $202 thousand, or 5.3%, to $3.6 million for the three months ended March 31, 2021. Our interest rate spread and net interest margin decreased to 2.84% and 2.93%, respectively, from 3.11% and 3.29%, respectively, for the three months ended March 31, 2021 and March 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 three months ended March 31, 2021.

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

Our total allowance for loan losses was $1.3 million, or 0.39% of total gross loans as of March 31, 2021 and $1.3 million, or 0.38% of total gross loans as of June 30, 2020. Our total allowance for loan losses was 0.40% and 0.38% of total gross loans, net of PPP loans, as of March 31, 2021 and June 30, 2020, respectively. PPP loans are not allocated any allowance due to the 100% SBA guarantee. There were no specifically identified impaired loans at March 31, 2021 or June 30, 2020. Total loans individually evaluated for impairment decreased $646 thousand, or 27.0%, to $1.7 million at March 31, 2021 compared to $2.4 million at June 30, 2020.

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

Noninterest Income. Noninterest income decreased $226 thousand, or 35.7%, to $407 thousand for the three months ended March 31, 2021 from $633 thousand for the three months ended March 31, 2020. Mortgage servicing income decreased $8 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $76 thousand and $21 thousand for the three months ended March 31, 2021 and 2020, respectively. The change in fair value of equity securities was a loss of $20 thousand for the three months ended March 31, 2021 compared to a loss of $130 thousand for the three months ended March 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 March 31, 2021. There were $113 thousand in gains on the sale of securities for the three months ended March 31, 2020. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarter ended March 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 three months ended March 31, 2021. The net gain on payoff of purchase credit impaired loans was $277 thousand for the three months ended March 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 three months ended March 31, 2021 decreased by $365 thousand, or 11.2%, to $2.9 million for three months ended March 31, 2021. Salaries and employee benefits increased $78 thousand due to routine increases. Occupancy and equipment decreased $112 thousand due to normal periodic fluctuations. Data processing increased $14 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $8 thousand due to normal periodic fluctuations. FDIC deposit insurance increased $29 thousand. The three months ended March 31, 2021 is reflective of the standard FDIC assessed rate. The prior year period reflected an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of December 31, 2019. Foreclosed asset expenses decreased $149 thousand. This is reflective of the three months ended March 31, 2021 having $25 thousand in net gains on the sale of REO whereas the three months ended March 31, 2020 had a $120 thousand loss on the sale of REO property. For the three months ended March 31, 2021, we did not recognize a change in value of the loan servicing asset as compared to a $191 thousand decrease for the three months ended March 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 increased $13 thousand, or 5.4%, to $255 thousand for the three months ended March 31, 2021 from $242 thousand for the three months ended March 31, 2020. This was primarily due to less favorable temporary tax differences being recognized during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Our effective income tax rate was 22.7% and 20.4% for the three months ended March 31, 2021 and 2020, respectively.

Comparison of Operating Results for the Nine Months Ended March 31, 2021 and March 31, 2020

General. We reported net income of $3.2 million for the nine months ended March 31, 2021 as compared to net income of $3.0 million for the nine months ended March 31, 2020. Interest income decreased $1.6 million for the nine months ended March 31, 2021 compared to March 31, 2020 and interest expense decreased $1.7 million resulting in a net increase to net interest income of $101 thousand. Noninterest income decreased $20 thousand for the nine months ended March 31, 2021 compared to March 31, 2020. Total noninterest expense decreased $427 thousand. Tax expense increased $265 thousand.

Interest Income. Interest income decreased by $1.6 million to $12.7 million from $14.3 million for the nine months ended March 31, 2021 and March 31, 2020, respectively. The yield on interest-earning assets decreased 53 basis points from 4.02% for the nine months ended March 31, 2020 to 3.49% for the nine months ended March 31, 2021. Total average interest-earning assets increased by $9.5 million to $483.9 million for the nine months ended March 31, 2021 from $474.4 million for the nine months ended March 31, 2020.

Interest income on loans decreased by $980 thousand to $11.5 million from $12.4 million for the nine months ended March 31, 2021 and March 31, 2020, respectively. The yield on loans decreased 27 basis points from 4.61% for the nine months ended March 31, 2020 to 4.34% for the nine months ended March 31, 2021. The average balance of loans decreased by $7.6 million, or 2.1%, to $352.0 million for the nine months ended March 31, 2021 from $359.6 million for the nine months ended March 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 decreased by $305 thousand, or 21.2%, to $1.1 million for the nine months ended March 31, 2021 from $1.4 million for the nine months ended March 31, 2020. The decrease reflected a decrease in the yield on securities to 1.53% for the nine months ended March 31, 2021 from 2.18% for the nine months ended March 31, 2020 offset by an increase in the average balance of securities of $10.7 million, or 12.1%, to $99.0 million for the nine months ended March 31, 2021 from $88.3 million for the nine months ended March 31, 2020. The increase in the average balances of our securities reflected our efforts during fiscal 2021 to invest in higher yielding assets.

Income on other interest earning assets decreased by $338 thousand, or 80.1%, to $84 thousand for the nine months ended March 31, 2021 from $422 thousand for the nine months ended March 31, 2020. The average balance of other interest-earning assets increased $6.3 million from the nine months ended March 31, 2020 to the nine months ended March 31, 2021 and the yield decreased 178 basis points over the same period. The increase in the average balance was due to normal periodic fluctuations. The decrease in yield was primarily the result of an overall decline in rates on money market accounts and our Federal Reserve excess balance account, the balance of which comprised 95.4% of this category during the nine months ended March 31, 2021.

Interest Expense. Interest expense decreased by $1.7 million, or 54.1%, to $1.5 million for the nine months ended March 31, 2021 from $3.2 million for the nine months ended March 31, 2020. This decrease was attributable to a general decrease in retail and wholesale borrowing rates due to overall market decreases. The decrease reflected a decrease of 56 basis points in the average rate paid on interest-bearing deposits for the nine months ended March 31, 2021 to 0.49% from 1.05% for the nine months ended March 31, 2020. The decrease in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible in the current declining rate market while remaining competitive in our market. Average interest-bearing deposits were $385.2 million for the nine months ended March 31, 2021 compared to $378.3 million for the nine months ended March 31, 2020.

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased $1.1 million, or 47.8%, to $1.2 million for the nine months ended March 31, 2021 from $2.3 million for the nine months ended March 31, 2020. The average rate paid on certificates of deposit decreased by 64 basis points from 1.43% for the nine months ended March 31, 2020 to 0.79% for the nine months ended March 31, 2021 and the average balances decreased by $22.5 million from $216.9 million for the nine-month period ended March 31, 2020 to $194.4 million for the nine-month period ended March 31, 2021. The decrease in the average balance of certificates of deposit is reflective of normal deposit fluctuation. The decrease in the average rate paid on our certificates of deposit is reflective of an overall decline in market rates.

The second largest decrease in deposit interest expense was related to expense on money market deposits, which decreased $329 thousand, or 72.8%, to $123 thousand for the nine months ended March 31, 2021 from $452 thousand for the nine months ended March 31, 2020. The average rate paid on money market deposits decreased by 59 basis points from 0.79% for the nine months ended March 31, 2020 to 0.20% for the nine months ended March 31, 2021 and the average balances increased by $7.4 million from $76.0 million for the nine-month period ended March 31, 2020 to $83.4 million for the nine-month period ended March 31, 2021. The increase in the average balance of money market deposits is reflective of normal deposit fluctuation. The decrease in the average rate paid on our money market deposits is reflective of an overall decline in market rates.

Interest expense for other borrowings decreased by $141 thousand, or 71.2%, to $57 thousand for the nine months ended March 31, 2021 from $198 thousand for the nine months ended March 31, 2020. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $5.0 million for the nine months ended March 31, 2021 compared to $9.9 million for the nine months ended March 31, 2020. The average rate was 1.52% and 2.67% for the nine months ended March 31, 2021 and 2020, respectively, due to a decrease in market interest rates.

Net Interest Income. Net interest income before the provision for loan losses increased by $101 thousand, or 0.91%, to $11.2 million for the nine months ended March 31, 2021. Our interest rate spread increased to 2.99% from 2.93% for the nine months ended March 31, 2021 and March 31, 2020, respectively. Our net interest margin decreased to 3.09% from 3.13% for the nine months ended March 31, 2021 and March 31, 2020, respectively. The interest margin decline is partially attributed to an increase in the percentage of investments to total interest earning assets. The decreasing yield on earning assets, when coupled with the increased balances of interest earning assets, offset by the lower cost of interest bearing liabilities contributed to the increase in net interest income for the nine months ended March 31, 2021.

Provision for Loan Losses. We recorded no provision for loan losses for the nine months ended March 31, 2021 or for the nine months ended March 31, 2020. There were $7 thousand in charge-offs for the nine months ended March 31, 2021 and $1 thousand in charge-offs for the nine months ended March 31, 2020. The lack of provision for the nine months ended March 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 nine months ended March 31, 2021 and 2020. There have been no changes to our allowance for loan loss methodology during the nine months ended March 31, 2021.

Noninterest Income. Noninterest income decreased $20 thousand, or 1.3%, to $1.50 million for the nine months ended March 31, 2021 from $1.52 million for the nine months ended March 31, 2020. Mortgage servicing income decreased $27 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $177 thousand and $103 thousand for the nine months ended March 31, 2021 and 2020, respectively. The change in fair value of equity securities was a loss of $11 thousand for the nine months ended March 31, 2021 and a loss of $98 thousand for the nine months ended March 31, 2020. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $109 thousand gain for the nine months ended March 31, 2021. There were $125 thousand in gains on the sale of securities for the nine months ended March 31, 2020. Gains or losses on the sale of securities are largely market driven. Securities were sold during the nine months ended March 31, 2021 and March 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. The net gain on payoff of purchase credit impaired loans was $195 thousand for the nine months ended March 31, 2021 due to the liquidation of two loans. The net gain on payoff of purchase credit impaired loans was $309 thousand for the nine months ended March 31, 2020 due to the liquidation of three loans. Changes in all other noninterest income items were due to normal periodic fluctuations.

Noninterest Expense. Noninterest expense for the nine months ended March 31, 2021 decreased by $427 thousand, or 4.7%, to $8.7 million for nine months ended March 31, 2021. Salaries and employee benefits increased $203 thousand due to routine increases. Occupancy and equipment decreased $170 thousand due to normal periodic fluctuations. Data processing increased $61 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $72 thousand primarily due to reduced legal expenses. FDIC deposit insurance increased $90 thousand. The nine months ended March 31, 2021 is reflective of the standard FDIC assessed rate. The prior year period reflected an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of June 30, 2019, September 30, 2019 and December 31, 2019. Foreclosed asset expenses decreased $262 thousand. This is reflective of the nine months ended March 31, 2021 having $83 thousand in losses on sale of REO offset by $87 thousand in gains on sale of REO, whereas the nine months ended March 31, 2020 had $237 thousand in write downs and losses on sale of REO. The change in the value of the loan servicing portfolio decreased $206 thousand. The fair value of our loan servicing asset is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to normal periodic fluctuations.

Income Tax Expense. Tax expense increased $265 thousand, or 47.7%, to $821 thousand for the nine months ended March 31, 2021 from $556 thousand for the nine months ended March 31, 2020. This was primarily due to smaller permanent tax benefits being recognized during the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020, which were a result of fewer nonqualified stock options being exercised during the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020. Our effective income tax rate was 20.3% and 15.8% for the nine months ended March 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 March 31, 2021, or approximately $131.6 million as of that date, with a remaining availability of $126.6 million as of March 31, 2021.

Common Stock Dividends. On August 20, 2020, November 19, 2020 and February 25, 2021, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.7 million.

Equity Compensation Plans. During the three months ended March 31, 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 March 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 March 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 28, 2020, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company’s common stock. In connection with the authorization of this stock repurchase program, the Board of Directors terminated the Company’s then existing stock repurchase program, which had authorized the Company to purchase up to 100,000 shares of its issued and outstanding common stock. Under this previous program, the Company purchased a total of 97,147 shares of its common stock at a weighted average price of $24.52 per share.

The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended March 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
January 1 - January 31, 2021		321	$	23.52		321			19,987
February 1 - February 28, 2021		—	$	—		—			19,987
March 1 - March 31, 2021		17,126	$	26.75		17,126			2,861	⁽²⁾
Total		17,447	$	26.69		17,447	⁽¹⁾

(1)

All shares were purchased pursuant to the publicly announced repurchase program that was approved by the Board of Directors on May 28, 2020. The repurchase program has no expiration date.

(2)

Represents the maximum number of shares available for repurchase under the May 28, 2020 plan at March 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 March 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

SIGNATURES

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

	Oconee Federal Financial Corp.
Date: May 14, 2021
		/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

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