OCONEE FEDERAL FINANCIAL: Management report and analysis of the financial situation and operating results (form 10-K)


Overview

Oconee Federal Savings and Loan Association has historically operated as a
traditional thrift institution headquartered in Seneca, South Carolina. Our
principal business consists of attracting retail deposits from the general
public in our market area and investing those deposits, together with funds
generated from operations, in one-to-four family residential mortgage loans and,
to a much lesser extent, nonresidential mortgage, construction and land and
other loans. We also invest in U.S. Government and federal agency securities,
mortgage-backed securities and municipal securities. Our revenues are derived
principally from the interest on loans and securities and loan fees and service
charges. Our primary sources of funds are deposits and principal and interest
payments on loans and securities. At June 30, 2021, we had total assets of
$543.7 million, total deposits of $439.9 million and total equity of $88.1
million.



A significant majority of our assets consist of long-term, fixed-rate
residential mortgage loans and, to a much lesser extent, investment-quality
securities, which we have funded primarily with deposit accounts and the
repayment of existing loans. Our results of operations depend primarily on our
net interest income. Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities (including U.S. Government and federal agency securities,
mortgage-backed securities and municipal securities) and other interest-earning
assets, primarily interest-earning deposits at other financial institutions, and
the interest paid on our interest-bearing liabilities, consisting primarily of
savings and transaction accounts and certificates of deposit. Our results of
operations also are affected by our provisions for loan losses, noninterest
income and noninterest expense. Noninterest income currently consists primarily
of service charges on deposit accounts and miscellaneous other
income. Noninterest expense currently consists primarily of compensation and
employee benefits, occupancy and equipment expenses, data processing,
professional and supervisory fees, office expense, provision for real estate
owned and related expenses, and other operating expenses. Our results of
operations also may be affected significantly by general and local economic and
competitive conditions, changes in market interest rates, governmental policies
and actions of regulatory authorities.



Other than our loans for the construction of one-to-four family residential
mortgage loans, we do not offer "interest only" mortgage loans on one-to-four
family residential properties (where the borrower pays interest for an initial
period, after which the loan converts to a fully amortizing loan). We also do
not offer loans that provide for negative amortization of principal, such as
"Option ARM" loans, where the borrower can pay less than the interest owed on
his or her loan, resulting in an increased principal balance during the life of
the loan.  We do not offer "subprime loans" (loans that generally target
borrowers with weakened credit histories typically characterized by payment
delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with
questionable repayment capacity as evidenced by low credit scores or high
debt-burden ratios) or Alt-A loans.



Critical Accounting Policies



We consider accounting policies that require management to exercise significant
judgment or discretion or make significant assumptions that have, or could have,
a material impact on the carrying value of certain assets or on income, to be
critical accounting policies. Additional discussions of these policies are
discussed in Note 1 "Summary of Significant Accounting Policies" to the
accompanying Consolidated Financial Statements contained in Item 8. We consider
the following to be our critical accounting policies:



Allowance for Loan Losses.  Our allowance for loan losses is the estimated
amount considered necessary to reflect probable losses inherent in the loan
portfolio at the balance sheet date. The allowance is established through the
provision for loan losses, which is charged against income. In determining the
allowance for loan losses, management makes significant estimates and judgments,
which to some extent involve assumptions about borrowers' abilities to continue
to make future principal and interest payments. These estimates and judgments
involve a high degree of judgment and subjectivity and are based on facts and
circumstances that existed at the date in which the allowance is
determined. Changes in the macro and micro economic environment can have a
significant impact on these estimates and judgments in the future that could
result in changes to the allowance for loan losses.



                                       32





Integral to our allowance methodology is the use of a loan grading system
whereby all loans are assigned a grade based on the risk profile of each
loan. Loan grades are initially assigned at origination and are routinely
evaluated to determine if grades need to be changed. Through our internal credit
review function, ongoing credit monitoring, and continuous review of past due
trends, loan grades are adjusted by management either to respond to improvements
in or deterioration of credit. 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.



The allowance methodology consists of two parts: an evaluation of loss for
specific loans and an evaluation of loss for homogenous pools of loans, commonly
referred to as the specific and general valuation allowance. Certain loans
exhibiting signs of potential credit weakness are evaluated individually for
impairment. A loan is considered to be impaired if it is probable that we will
not receive substantially all contractual principal and interest payments. The
amount of impairment, or specific valuation allowance, is measured by a
comparison of the present value of expected future cash flows less selling
expenses to the loan's carrying value, or in the case of collateral dependent
loans a comparison to the fair value of the collateral less selling costs. To
the extent the carrying value of the loan exceeds the present value of a loan's
expected cash flows less selling expenses, a specific allowance is recorded. If
the carrying value is less than the present value of the impaired loan's
expected future cash flows, no specific allowance is recorded however the loan
is not included in the determination of the general valuation allowance.



As a substantial amount of our loan portfolio is collateralized by real estate,
appraisals of the underlying value of property securing loans and discounted
cash flow valuations of properties are critical in determining the amount of the
allowance required for specific loans. Assumptions for appraisals and discounted
cash flow valuations are instrumental in determining the value of
properties. Overly optimistic assumptions or negative changes to assumptions
could significantly impact the valuation of a property securing a loan and the
related allowance determined. The assumptions supporting such appraisals and
discounted cash flow valuations are carefully reviewed by management to
determine that the resulting values reasonably reflect amounts realizable on the
related loans.



The general valuation allowance is determined for loans not determined to be
impaired. We segregate our loan portfolio into portfolio segments. These
portfolio segments share common characteristics such as the type of loan, its
purpose, its underlying collateral, and other risk characteristics. Once
segregated, these loans are further segregated by loan grade. To calculate the
allowance by grade, we apply internally developed loss factors comprised of both
quantitative and qualitative considerations.



We estimate our loss factors by taking into consideration both quantitative and
qualitative aspects that would affect our estimation of probable incurred
losses. These aspects include, but are not limited to historical charge-offs;
loan delinquencies and foreclosure trends; current economic trends and
demographic data within our market area, such as unemployment rates and
population trends; current trends in real estate values; charge-off trends of
other comparable institutions; the results of any internal loan reviews;
loan-to-value ratios; our historically conservative credit risk policy; the
strength of our underwriting and ongoing credit monitoring function; and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revision based on
changes in economic and real estate market conditions. Actual loan losses may be
significantly more than the allowance for loan losses we have established, which
could have a material negative effect on our financial results.



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. However, the fluidity of this pandemic
precludes any prediction as to the ultimate 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 reopens.



See Note 1 “Summary of significant accounting policies” and Note 4 “Loans” to the accompanying consolidated financial statements contained in Item 8 for further discussion of the allowance for loan losses.




Business Combinations.  Business combinations are accounted for using the
acquisition method of accounting. As such, assets acquired, including identified
intangible assets, and liabilities assumed are recorded at their fair value,
which often involves estimates based on third party valuations, such as
appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques, all of which are inherently subjective. Identified
intangible assets are amortized based upon the estimated economic benefits to be
received, which is also subjective. Management will review identified intangible
assets for impairment at least annually, or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, in which case an impairment charge would be recorded. Goodwill is
subject to impairment testing on at least an annual basis. In addition, goodwill
is tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Our reporting unit for purposes of
testing our goodwill for impairment is our banking operations unit, which
contains all other activities performed by the Company.



                                       33





Valuation of Goodwill.  The testing for impairment of goodwill is a two-step
process. The first step in testing for impairment is to determine the fair value
of our reporting unit and compare that fair value with the carrying value of the
reporting unit (including goodwill.) If the fair value of the reporting unit
exceeds the carrying value, the second step is not necessary and goodwill is
deemed not to be impaired. If the fair value of the reporting unit is less than
the carrying value, the Company must estimate a hypothetical purchase price for
the reporting unit (representing the unit's fair value) and then compare that
hypothetical purchase price with the fair value of the unit's net assets
(excluding goodwill). Any excess of the estimated purchase price over the fair
value of the reporting unit's net assets represents the implied fair value of
goodwill. An impairment loss would be recognized as a charge to earnings if the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of goodwill. Our annual impairment evaluation is May of each year.



Deferred Income Taxes.  We use the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. If
current available information raises doubt as to the realization of the deferred
tax assets, a valuation allowance is established. These judgments and estimates
are reviewed on a continual basis as regulatory and business factors change.



Business Strategy



We have continued our primarily focus on the execution of our community oriented
retail banking strategy. Highlights of our current business strategy include the
following:


? Continue to focus on residential loans. We have been and will continue to be

primarily a residential mortgage lender of one to four families for borrowers from

our market area. From June 30, 2021, $ 275.0 millionor 81.1% of our total

loan portfolio consisting of one to four family residential mortgages

(including home equity loans). In the future, we could gradually increase our

    residential construction and home equity loan portfolios.



? Maintain a modest portfolio of non-residential mortgage loans. We have

has historically maintained a small portfolio of non-residential mortgage loans.

Our non-residential real estate loans have been $ 21.9 millionor 6.5% of our total

    loan portfolio at June 30, 2021.




  ? Manage Interest Rate Risk While Maintaining or Enhancing, to the Extent

Practicable, our net interest margin. Subject to market conditions, we have

sought to increase net interest income by focusing on controlling the cost of

funds, especially on deposit products that we offer, rather than

attempt to maximize returns on assets, as high yield loans often involve

greater credit risk and can be repaid during times of market downturn

interest rate. In addition, given our strong capitalization, from time to time

occasionally, we place more importance on improving our net interest income than

    limiting our interest rate risk.



? Count on community orientation and high quality service to maintain and build a

Loyal local clientele and maintenance of our independent status

Community institution. We were established in 1924 and have been

continuously operating in Oconee County Since that time. Using our

recognized brand and goodwill developed over the years of supply

fast and efficient banking services, we have succeeded in attracting a solid base

local private customers on which to continue building our bank

Business. We have always focused on fostering relationships within our

community rather than specific banking products, and we plan to continue to

build our customer base by relying on customer references and references from

local builders and real estate agents. We extend this strategy to Rabun, Stephens

    and Pickens counties as well.




  ? Adhere to Conservative Underwriting Guidelines to Maintain Strong Asset

Quality. We have focused on maintaining strong asset quality by following

prudent underwriting guidelines, sound loan administration and focus

on loans secured by real estate located in our market area only. Our

non-performing assets total $ 2.8 million, i.e. 0.51% of total assets in June

30, 2021. Our ratio of non-performing loans to total loans was 0.82% in June.

30, 2021. Total delinquencies on loans, 30 days or more past due, as of June 30th,

2021, were $ 4.0 million, or 1.2% of total loans. Total credit arrears,

30 days or more past due, from June 30, 2020, were $ 3.3 million, or 0.9% of

    total loans.




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Comparison of financial position to June 30, 2021 and June 30, 2020

Our total assets increased by $ 28.1 million, or 5.5%, to $ 543.7 million To June 30, 2021 of $ 515.6 million To June 30, 2020.




Our total cash decreased by $4.0 million, or 11.4%, to $30.6 million at June 30,
2021 from $34.6 million at June 30, 2020. This decrease was primarily due to
normal fluctuations. Our total cash and deposit balance includes the deposits of
Oconee Federal, MHC.


Securities available-for-sale increased $48.3 million from June 30, 2020 to June
30, 2021. The increase in securities classified as available-for-sale is
primarily a result of our efforts in fiscal 2021 to invest in higher yielding
assets.



Total gross loans decreased $16.6 million to $339.1 million at June 30, 2021
from $355.7 million at June 30, 2020. The majority of the decrease was in our
one-to-four family loans, which decreased by $15.0 million from June 30, 2020 to
June 30, 2021 and was offset by increases in other loan categories. This
decrease was primarily a result of loan originations generally not matching loan
repayments during the year ended June 30, 2021.



Our total deposits have increased to $ 439.9 million To June 30, 2021 of $ 421.1 million To June 30, 2020. This increase is mainly due to normal fluctuations. We do not generally accept brokerage deposits and no brokerage deposits were accepted during the year ended. June 30, 2021.

We had $15.0 million and $5.0 million in advances from the FHLB as of June 30,
2021 and June 30, 2020, respectively. We had credit available under a loan
agreement with the FHLB in the amount of 25% of total assets, or approximately
$134.0 million and $126.0 million at June 30, 2021 and June 30, 2020,
respectively. FHLB advances were increased due to advantageous funding rates.



Our total equity decreased $ 205,000 To $ 88.1 million To June 30, 2021 of $ 88.3 million To June 30, 2020. The decrease is mainly attributable to the net profit for the year ended. June 30, 2021 of $ 4.1 million being compensated by $ 1.3 million in other overall losses, $ 1.2 million share buybacks and $ 2.2 million in distributed dividends.

Comparison of operating results for the years ended June 30, 2021 and June 30, 2020




General.  Net income increased by $201 thousand, or 5.2%, to $4.1 million for
the year ended June 30, 2021 from $3.9 million for the year ended June 30, 2020.
There was an increase in net interest income before the provision for loan
losses of $31 thousand, or 0.2%. This increase in net interest income was
coupled with a decrease in loan loss provision of $50 thousand, or 100.0%,
offset by a decrease in noninterest income of $37 thousand, or 1.8%, and a
decrease in noninterest expense of $321 thousand, or 2.7%. Tax expense increased
$164 thousand, or 18.2%.



Interest Income.  Interest income decreased by $2.0 million, or 10.9%, to $16.7
million for the year ended June 30, 2020 from $18.7 million for the year ended
June 30, 2020. The decrease was primarily the result of a decrease in our
average yield on interest-earning assets. The average yield on interest-earning
assets decreased to 3.41% for the year ended June 30, 2021 from 3.95% for the
year ended June 30, 2020. The average balance of interest-earning assets
increased to $488.2 million for the year ended June 30, 2021 from $473.2 million
for the year ended June 30, 2020.



Interest income on loans decreased $1.4 million, or 8.3%, to $15.0 million for
the year ended June 30, 2021 from $16.4 million for the year ended June 30,
2020. The average balance of our loans decreased to $349.1 million for the year
ended June 30, 2021 from $358.3 million for the year ended June 30, 2020. The
decrease in the average balance of our loans is due to normal repayments and a
decrease in loan demand during the year ended June 30, 2021. The average yield
was 4.30% for the year ended June 30, 2021 compared to 4.57% for the year ended
June 30, 2020, a result of a decreased loan rate environment during the year
ended June 30, 2021.


Interest income on investment securities decreased $340 thousand, or 18.1%, to
$1.5 million for the year ended June 30, 2021 from $1.9 million for the year
ended June 30, 2020, reflecting an increase of $20.3 million, or 23.2%, in the
average balances of securities to $107.9 million from $87.6 million for the
years ended June 30, 2021 and 2020, respectively, offset by a decrease in the
total average yield of our investment securities of 71 basis points to 1.43%
from 2.14%. The increase in average balances of our investment securities is
reflective of our efforts in fiscal 2021 to invest in higher yielding assets.
Our decreased yields are reflective of a decrease of higher yielding investments
due to maturities, paydowns, sales and calls in fiscal 2021 along with overall
lower investment rates that were available on purchases made in during fiscal
2021.



                                       35





Income on other interest earning assets decreased by $340 thousand, or 75.4%, to
$111 thousand for the year ended June 30, 2021 from $451 thousand for the year
ended June 30, 2020. The average balance of other interest-earning assets
increased $3.9 million to $31.2 million for the year ended June 30, 2021 from
$27.3 million for the year ended June 30, 2020 while the yield decreased 129
basis points over the same period. The increase in average balance was primarily
due to normal periodic fluctuations. The decrease in yield was primarily a
result of decreased rates on money market accounts and our Federal Reserve
excess balance account, the balance of which comprised 95.3% of this category
during the year ended June 30, 2021.



Interest Expense.  Interest expense decreased $2.1 million, or 53.2%, to $1.8
million for the year ended June 30, 2021 from $3.9 million for the year ended
June 30, 2020. The average rate paid on interest bearing liabilities decreased
55 basis points in fiscal year 2021 to 0.46% from 1.01% for fiscal year 2020.
This decrease was primarily due to a general decrease in retail and wholesale
borrowing rates due to overall market decreases. The decrease in the average
rate paid on deposits was offset by an increase in the average balance of
interest bearing deposits of $10.2 million, or 2.7%, to $387.2 million for the
year ended June 30, 2021 from $377.0 million for the year ended June 30, 2020.



The largest decrease in deposit interest expense was related to expense on
certificates of deposit, which decreased by $1.5 million, or 51.3% to $1.4
million for the year ended June 30, 2021 from $2.9 million for the year ended
June 30, 2020. The average cost on these deposits decreased from 1.37% for the
year ended June 30, 2020 to 0.74% for the year ended June 30, 2021. The decrease
in interest expense on these deposits is reflective of an overall decline in
market rates. The average balance on these deposits decreased $20.0 million,
from $212.9 million for the year ended June 30, 2020 to $192.9 million for the
year ended June 30, 2021. The decrease in the average balance of certificates of
deposit is reflective of normal deposit fluctuation.



Interest expense on NOW and demand deposits and regular savings and other
deposits decreased by $89 thousand to $166 thousand for the year ended June 30,
2021 from $255 thousand for the year ended June 30, 2020. The decrease in
interest expense on these deposits was attributable to a decrease in the average
cost on these deposits to 0.15% from 0.29% offset by a $22.3 million increase in
average balances. The decrease in interest expense on these deposits is
reflective of an overall decline in market rates. The increase in the average
balance of these deposits is reflective of normal deposit fluctuation.



Interest expense on money market deposits decreased $353 thousand as the cost of
these deposits decreased 48 basis points from 0.67% for the year ended June 30,
2020 to 0.19% for the year ended June 30, 2021. The average balance of money
market deposits increased from $76.4 million to $84.2 million for the same
period. The decrease in interest expense on these deposits is reflective of an
overall decline in market rates. The increase in the average balance of these
deposits is reflective of normal deposit fluctuation.



Interest expense for other borrowings decreased by $139 thousand, or 64.1%, to
$78 thousand for the year ended June 30, 2021 from $217 thousand for the year
ended June 30, 2020. Other borrowings include both FHLB advances as well as any
overnight federal funds purchased. Average other borrowings were $6.1 million
for the year ended June 30, 2021 compared to $8.7 million for the year ended
June 30, 2020. The average rate was 1.28% and 2.50% for the years ended June 30,
2021 and 2020, respectively, due to a decrease in market interest rates.



Net Interest Income.  Net interest income increased by $31 thousand, or 0.21%,
to $14.85 million for the year ended June 30, 2021 compared to $14.82 million
for fiscal 2020. Net interest margin for the year ended June 30, 2021 was 3.04%,
down nine basis points from 3.13% for the year ended June 30, 2020. The decrease
in yield on earning assets was more significant than the decrease in cost of
interest bearing liabilities to the net interest margin decline for the year
ended June 30, 2021.



Provision for Loan Losses.  We did not record a provision for loan losses for
the year ended June 30, 2021 compared with a provision of $50 thousand for the
year ended June 30, 2020. Net charge-offs for the year ended June 30, 2021 were
$7 thousand. Net charge-offs for the year ended June 30, 2020 were $1 thousand.
The lack of provision is primarily due to a decline in outstanding loan balances
during the year ended June 30, 2021.



Our total allowance for loan losses was $1.34 million, or 0.39%, of total gross
loans as of June 30, 2021. Our total allowance for loan losses was $1.35
million, or 0.38%, of total gross loans as of June 30, 2020. There were no
specifically identified impaired loans at June 30, 2021 or June 30, 2020. The
recorded investment in individually evaluated impaired loans was $1.7 million
and $2.4 million at June 30, 2021 and at June 30, 2020, respectively. Total
loans individually evaluated for impairment decreased $683 thousand, or 28.5%,
to $1.7 million at June 30, 2021 compared to $2.4 million at June 30, 2020.


                                       36





We used the same overall methodology in assessing the allowances for both
periods. Our allowance reflects a general valuation component of $1.34 million
and $1.35 million as of June 30, 2021 and June 30, 2020, respectively, with no
specific component for loans determined to be impaired based upon analysis of
certain individual loans determined to be impaired for the periods ended June
30, 2021 and June 30, 2020. To the best of our knowledge, we have recorded all
losses that are both probable and reasonably estimable for the years ended
June
30, 2021 and 2020.



Noninterest Income.  For the year ended June 30, 2021, noninterest income
decreased $37 thousand, or 1.8%, to $2.0 million. Gains on the sale of mortgage
loans, which totaled $271 thousand for the year ended June 30, 2021, increased
$87 thousand compared to $184 thousand for the year ended June 30, 2020. The
change in fair value of equity securities totaled a negative $61 thousand for
the year ended June 30, 2021 compared to a negative $34 thousand for the year
ended June 30, 2020. Mortgage servicing income totaled $148 thousand for the
year ended June 30, 2021 compared to $183 thousand for the year ended June 30,
2020. The mortgage servicing income is reducing due to the decreasing size of
the loan servicing portfolio. Gains on the sale of securities totaled $222
thousand for the year ended June 30, 2021 compared to $181 thousand for the year
ended June 30, 2020. Gains or losses on the sale of securities are largely
market driven. Securities were sold during the year to realize market gains and
adjust the investment portfolio so that funds could be more beneficially used to
yield higher net earnings going forward. Gains on the disposition of purchase
credit impaired loans, which totaled $195 thousand for the year ended June 30,
2021, decreased $114 thousand compared to $309 thousand for the year ended June
30, 2020. We did not have the same opportunities for gains on the disposition of
purchase credit impaired loans in the year ending June 30, 2021 as we did in the
year ending June 30, 2020. Changes in all other noninterest income items were
due to normal periodic fluctuations.



Noninterest Expense.  Noninterest expense decreased $321 thousand, or 2.7%, to
$11.7 million for the year ended June 30, 2021 from $12.0 million for the year
ended June 30, 2020. Salaries and employee benefits increased by $277 thousand,
or 4.3%, to $6.7 million for the year ended June 30, 2021 from $6.4 million for
the year ended June 30, 2020 due to routine increases. Occupancy and equipment
expenses decreased by $202 thousand, or 10.2% to $1.8 million for the year ended
June 30, 2021 from $2.0 million for the year ended June 30, 2020 due to normal
periodic fluctuations. Data processing increased $77 thousand due to routine
upgrades and volume increases in the current period. Professional and
supervisory fee expenses decreased by $77 thousand, or 12.7% to $527 thousand
for the year ended June 30, 2021 from $604 thousand for the year ended June 30,
2020 primarily due to reduced audit and legal expenses. FDIC deposit insurance
increased $104 thousand. The year ended June 30, 2021 is reflective of the
standard FDIC assessed rate. The prior year reflected an assessment credit
received from the FDIC as a result of the FDIC Deposit Insurance Fund Reserve
Ratio exceeding required benchmarks during the year ended June 30, 2020.
Foreclosed asset expenses decreased by $220 thousand, or 97.3% to $6 thousand
for the year ended June 30, 2021 from $226 thousand for the year ended June 30,
2020. In the prior year, we recognized more write downs and losses from the sale
of properties than in the current year. For the year ended June 30, 2021, we
recognized an expense for the decrease in value of the loan servicing asset of
$153 thousand compared to $410 thousand for the year ended June 30, 2020. When
mortgage loans are sold with servicing retained, servicing rights are initially
recorded at fair value. These servicing rights are then measured at each
reporting date and changes are recorded as "change in loan servicing asset" on
the consolidated statements of income and comprehensive income. The fair values
of servicing rights are 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.  Income tax expense increased $164 thousand, or 18.2%, to
$1.1 million for the year ended June 30, 2021 from $900 thousand for the year
ended June 30, 2020. The increase was primarily due to an increase of pre-tax
net income as well as smaller permanent tax benefits being recognized during the
year ended June 30, 2021 as compared to the year ended June 30, 2020, which were
a result of fewer nonqualified stock options being exercised during the year
ended June 30, 2021 as compared to the year ended June 30, 2020. Our effective
income tax rate was 20.7% and 18.9% for the years ended June 30, 2021 and 2020,
respectively.


Analysis of net interest income

Net interest income is the difference between the income we earn on interest-bearing assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends on the relative amounts of interest-bearing assets and liabilities and the interest rates earned or paid on them.



                                       37





The following table sets forth average balance sheets, average yields and costs,
and certain other information at the dates and for the periods indicated. 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
deferred fees, discounts and premiums that are amortized or accreted to interest
income.



                                                                         For the Year Ended June 30,
                                        2021                                        2020                                        2019
                                      Interest                                    Interest                                    Interest
                        Average          and          Yield/        Average          and          Yield/        Average          and          Yield/
                        Balance       Dividends        Cost         Balance       Dividends        Cost         Balance       Dividends        Cost
                                                                           (Dollars in Thousands)
Assets:
Interest-earning
assets:
Loans                  $ 349,085     $    15,019          4.30 %   $ 358,305     $    16,381          4.57 %   $ 351,765     $    16,171          4.60 %
Investment
securities                92,294           1,184          1.28        70,291           1,488          2.12        76,176           1,637          2.15
Investment
securities, tax-free      15,627             354          2.27        17,318             390          2.25        32,350             728          2.25
Other
interest-earning
assets                    31,184             111          0.36        27,333             451          1.65        10,377             310          2.99
Total
interest-earning
assets                   488,190          16,668          3.41      

473 247 18 710 3.95 470 668 18 846

  4.00
Noninterest-earning
assets                    38,636                                      39,152                                      35,989
Total assets           $ 526,826                                   $ 512.399                                   $ 506,657

Liabilities and
equity:
Interest-bearing
liabilities:
NOW and demand
deposits               $  71,825     $       116          0.16 %   $  57,734     $       183          0.32 %   $  50,983     $        77          0.15 %
Money market
deposits                  84,192             158          0.19        76,362             511          0.67        65,688             400          0.61
Regular savings and
other deposits            38,207              50          0.13        29,994              72          0.24        27,941              61          0.22
Certificates of
deposit                  192,942           1,419          0.74       212,906           2,911          1.37       220,820           2,499          1.13
Total
interest-bearing
deposits                 387,166           1,743          0.45       376,996           3,677          0.98       365,432           3,037          0.83
Other Borrowings           6,104              78          1.28         8,665             217          2.50        21,404             556          2.60
Total
interest-bearing
liabilities              393,270           1,821          0.46       385,661           3,894          1.01       386,836           3,593          0.93
Noninterest bearing
deposits                  45,232                                      36,650                                      32,539
Other
noninterest-bearing
liabilities                1,286                                       2,160                                       1,600
Total liabilities        439,788                                     424,471                                     420,975
Equity                    87,038                                      87,928                                      85,682
Total liabilities
and equity             $ 526,826                                   $ 512,399                                   $ 506,657

Net interest income                  $    14,847                                 $    14,816                                 $    15,253
Interest rate spread                                      2.95 %                                      2.94 %                                      3.07 %
Net interest margin                                       3.04 %                                      3.13 %                                      3.24 %
Average
interest-earning
assets to average
interest-bearing
liabilities                 1.24 x                                      1.23 x                                      1.22 x





                                       38





Rate/Volume Analysis



The following tables present the dollar amount of changes in interest income and
interest expense for the major categories of our interest-earning assets and
interest-bearing liabilities. Information is provided for each category of
interest-earning assets and interest-bearing liabilities with respect to
(i) changes attributable to changes in volume (i.e., changes in average balances
multiplied by the prior-period average rate) and (ii) changes attributable to
rate (i.e., changes in average rate multiplied by prior-period average
balances). For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.



                                                            Year Ended
                                                  June 30, 2021 Compared to 2020
                                              Volume            Rate           Net
                                                      (Dollars in thousands)
Interest income:
Loans                                        $    (414 )     $      (948 )   $ (1,362 )
Investment securities                              763            (1,103 )       (340 )
Other interest-earning assets                       74              (414 )       (340 )
Total                                              423            (2,465 )     (2,042 )

Interest expense:
Deposits                                           102            (2,036 )     (1,934 )
Other Borrowings                                   (52 )             (87 )       (139 )
Total                                               50            (2,123 )     (2,073 )
Increase (decrease) in net interest income   $     373       $      (342 ) 
 $     31




                                                             Year Ended
                                                   June 30, 2020 Compared to 2019
                                                Volume             Rate          Net
                                                       (Dollars in thousands)
Interest income:
Loans                                        $       298       $     (88 )     $  210
Investment securities                               (449 )           (38 )       (487 )
Other interest-earning assets                        194             (53 )        141
Total                                                 43            (179 )       (136 )

Interest expense:
Deposits                                             (10 )           650          640
Other Borrowings                                    (320 )           (19 )       (339 )
Total                                               (330 )           631          301

Increase (decrease) in net interest income $ 373 $ (810)

   $ (437 )




Management of Market Risk


Our most significant form of market risk is interest rate risk because, as a
financial institution, the majority of our assets and liabilities are sensitive
to changes in interest rates. Therefore, a principal part of our operations is
to manage interest rate risk and limit the exposure of our net interest income
to changes in market interest rates. Our board of directors is responsible for
the review and oversight of our asset/liability strategies. The Asset/Liability
Committee of our board of directors meets monthly and is charged with developing
an asset/liability management plan. Our board of directors has established an
Asset/Liability Management Committee, consisting of senior management, which
communicates daily to review pricing and liquidity needs and to assess our
interest rate risk. This committee is responsible for evaluating the interest
rate risk inherent in our assets and liabilities, for determining the level of
risk that is appropriate, given our business strategy, operating environment,
capital, liquidity and performance objectives, and for managing this risk
consistent with the guidelines approved by our board of directors.



                                       39




The techniques we are currently using to manage interest rate risk include:

? using pricing strategies in an effort to balance the 30-year proportions

    and 15-year fixed rate loans in our portfolio;


  ? maintaining a modest portfolio of adjustable-rate one-to-four family
    residential loans;

? finance part of our operations with deposits with a maturity of more than one

year;

? focus our business operations on local retail customers who value our

community orientation and personal service and which can be a little less

sensitive to changes in interest rates as wholesale deposit customers; and

? maintaining a solid capital position, which ensures a level of

    interest-earning assets relative to interest-bearing liabilities.



Depending on market conditions, from time to time we place more emphasis on
enhancing net interest margin rather than matching the interest rate sensitivity
of our assets and liabilities. In particular, we believe that the increased net
interest income resulting from a mismatch in the maturity of our assets and
liabilities portfolios can, during periods of stable or declining interest
rates, provide high enough returns to justify increased exposure to sudden and
unexpected increases in interest rates. As a result of this philosophy, our
results of operations and the economic value of our equity will remain
vulnerable to increases in interest rates and to declines due to the difference
between long- and short-term interest rates.



An important measure of interest rate risk is the amount by which the net
present value ("NPV") of an institution's cash flows from assets, liabilities
and off balance sheet items changes in the event of a range of assumed changes
in market interest rates.  We have prepared an analysis of estimated changes in
our NPV under the assumed instantaneous changes in the United States treasury
yield curve. The financial model uses a discounted cash flow analysis and an
option-based pricing approach to measuring the interest rate sensitivity of the
NPV. Set forth below is an analysis of the changes to the economic value of our
equity as of June 30, 2020 in the event of designated changes in the United
States treasury yield curve.  At June 30, 2021, our NPV exposure related to
these hypothetical changes in market interest rates was within the current
guidelines we have established.



                                         Net Portfolio        Dollar        Percentage        Percentage Total
                                           Value per          Change          Change           of Market Value
                                             Model          from Base        from Base            of Assets
                                                                 (Dollars in thousands)
Up 300 basis points                      $       87,772     $   (9,911 )          (10.15 )%               (1.80 )%
Up 200 basis points                              94,008         (3,675 )           (3.76 )                (0.67 )
Up 100 basis points                              97,373           (310 )           (0.32 )                (0.06 )
Base                                             97,683              -                 -                      -
Down 100 basis points                            89,906         (7,777 )           (7.96 )                (1.42 )




Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurement.  Modeling changes in net portfolio value requires making
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the net portfolio value table presented assumes that the composition of our
interest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration or repricing of specific assets and liabilities. In
addition, the net portfolio value table does not reflect the impact of a change
in interest rates on the credit quality of our assets. Accordingly, although the
net portfolio value table provides an indication of our interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on our net interest income and will differ from actual results.



Our policies generally do not permit us to engage in derivative transactions,
such as futures, options, caps, floors or swap transactions; however, such
transactions may be entered into with the prior approval of the Asset/Liability
Management Committee or the board of directors for hedging purposes only.



                                       40




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.


Our cash flows are derived from operating activities, investing activities and
financing activities. Net cash flows provided by operating activities were $4.9
million for the year ended June 30, 2021 and $5.1 million for the year ended
June 30, 2020. Net cash flows used in investing activities were $34.3 million
for the year ended June 30, 2021 and net cash flows provided by investing
activities were $11.0 million for the year ended June 30, 2020. Net cash flows
provided by financing activities for the year ended June 30, 2021 were $25.4
million and net cash flows used by financing activities were $18.2 million
for
the year ended June 30, 2020.



Our most liquid assets are cash and short-term investments. The levels of these
assets are dependent on our operating, financing, lending, and investing
activities during any given period. At June 30, 2021 and 2020, cash and
short-term investments totaled $30.6 million and $34.6 million, respectively. We
may also utilize as sources of funds the sale of securities available-for-sale,
federal funds purchased, Federal Home Loan Bank of Atlanta advances and other
borrowings.



At June 30, 2021 and 2020, we had outstanding commitments to originate loans of
$13.8 million and $10.1 million, respectively. We had $45.3 million in unfunded
commitments under lines of credit at June 30, 2021 and $20.5 million in unfunded
commitments under lines of credit at June 30, 2020. We anticipate that we will
have sufficient funds available to meet our current loan commitments. In recent
periods, loan commitments have been funded through liquidity and normal deposit
flows. Certificates of deposit scheduled to mature in one year or less from June
30, 2021 totaled $154.6 million. Management believes based on past experience
that a significant portion of such deposits will remain with us.  Based on the
foregoing, in addition to our level of core deposits and capital, we consider
our liquidity and capital resources sufficient to meet our outstanding
short-term and long-term needs. Liquidity management is both a daily and
long-term responsibility of management. We adjust our investments in liquid
assets based upon management's assessment of expected loan demand, expected
deposit flows, yields available on interest-earning deposits and investment
securities, and the objectives of our asset/liability management program. Excess
liquid assets are invested generally in interest-earning overnight deposits and
federal funds sold. If we require funds beyond our ability to generate them
internally, we have additional borrowing capacity with the FHLB. At June 30,
2021, we had a remaining available borrowing limit of $119.0 million in advances
from the FHLB.



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 as a result
of COVID-19.



We are subject to various regulatory capital requirements and at June 30, 2021,
we were in compliance with all applicable capital requirements. See "Supervision
and Regulation-Federal Banking Regulation-Capital Requirements" and Note 11 of
the Notes to our Consolidated Financial Statements.



Common Stock Dividend Policy.  The Company paid a quarterly $0.10 per share
dividend on August 20, 2020, November 19, 2020, February 25, 2021, and May 20,
2021 for a total of $2.2 million in dividends paid during the year ended June
30, 2021. On July 22, 2021, the Board of Directors of the Company declared a
quarterly cash dividend of $0.10 per share of the Company's common stock payable
to stockholders of record as of August 5, 2021, which was paid on August 19,
2021.



Off-Balance Sheet Arrangements.  In the normal course of operations, we engage
in a variety of financial transactions that, in accordance with U.S. generally
accepted accounting principles, are not recorded in our consolidated financial
statements. These transactions involve, to varying degrees, elements of credit,
interest rate and liquidity risk. Such transactions are used primarily to manage
customers' requests for funding and take the form of loan commitments and lines
of credit. For information about our loan commitments and unused lines of
credit, see Note 10 of the Notes to our Consolidated Financial Statements.

For the year ended June 30, 2021, we have not carried out any off-balance sheet transactions other than loan origination commitments in the normal course of our lending activities.



                                       41




Recent accounting positions

For an analysis of the impact of recent accounting pronouncements, refer to Note 1 of the Notes to our Consolidated Financial Statements.

Impact of inflation and price changes




The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on our operations is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.



ARTICLE 7A. Quantitative and qualitative information on market risk

Quantitative and qualitative information on market risk is not required for smaller reporting companies, such as the Company. However, see section 7. Management’s Discussion and Analysis and Analysis of Financial Position and Results of Operations – Market Risk Management.


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