OCONEE FEDERAL FINANCIAL: Management report and analysis of the financial situation and operating results (form 10-K)
Oconee Federal Savings and Loan Associationhas 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. Governmentand 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 millionand 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. Governmentand 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 âSummary of significant accounting policiesâ and Note 4 âLoansâ 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.
Goodwillis 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
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
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
continuously operating in
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
Pickenscounties 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
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
30 days or more past due, from
total loans. 34
Comparison of financial position to
Our total assets increased by
Our total cash decreased by
$4.0 million, or 11.4%, to $30.6 millionat June 30, 2021from $34.6 millionat 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 millionfrom June 30, 2020to 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 millionto $339.1 millionat June 30, 2021from $355.7 millionat June 30, 2020. The majority of the decrease was in our one-to-four family loans, which decreased by $15.0 millionfrom June 30, 2020to June 30, 2021and 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
$15.0 millionand $5.0 millionin advances from the FHLB as of June 30, 2021and 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 millionand $126.0 millionat June 30, 2021and June 30, 2020, respectively. FHLB advances were increased due to advantageous funding rates.
Our total equity decreased
Comparison of operating results for the years ended
General. Net income increased by
$201 thousand, or 5.2%, to $4.1 millionfor the year ended June 30, 2021from $3.9 millionfor 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 millionfor the year ended June 30, 2020from $18.7 millionfor 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, 2021from 3.95% for the year ended June 30, 2020. The average balance of interest-earning assets increased to $488.2 millionfor the year ended June 30, 2021from $473.2 millionfor the year ended June 30, 2020. Interest income on loans decreased $1.4 million, or 8.3%, to $15.0 millionfor the year ended June 30, 2021from $16.4 millionfor the year ended June 30, 2020. The average balance of our loans decreased to $349.1 millionfor the year ended June 30, 2021from $358.3 millionfor 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, 2021compared 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 millionfor the year ended June 30, 2021from $1.9 millionfor 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 millionfrom $87.6 millionfor the years ended June 30, 2021and 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 thousandfor the year ended June 30, 2021from $451 thousandfor the year ended June 30, 2020. The average balance of other interest-earning assets increased $3.9 millionto $31.2 millionfor the year ended June 30, 2021from $27.3 millionfor the year ended June 30, 2020while 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 Reserveexcess 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 millionfor the year ended June 30, 2021from $3.9 millionfor 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 millionfor the year ended June 30, 2021from $377.0 millionfor 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 millionfor the year ended June 30, 2021from $2.9 millionfor the year ended June 30, 2020. The average cost on these deposits decreased from 1.37% for the year ended June 30, 2020to 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 millionfor the year ended June 30, 2020to $192.9 millionfor 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 thousandto $166 thousandfor the year ended June 30, 2021from $255 thousandfor 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 millionincrease 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 thousandas the cost of these deposits decreased 48 basis points from 0.67% for the year ended June 30, 2020to 0.19% for the year ended June 30, 2021. The average balance of money market deposits increased from $76.4 millionto $84.2 millionfor 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 thousandfor the year ended June 30, 2021from $217 thousandfor 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 millionfor the year ended June 30, 2021compared to $8.7 millionfor the year ended June 30, 2020. The average rate was 1.28% and 2.50% for the years ended June 30, 2021and 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 millionfor the year ended June 30, 2021compared to $14.82 millionfor fiscal 2020. Net interest margin for the year ended June 30, 2021was 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, 2021compared with a provision of $50 thousandfor the year ended June 30, 2020. Net charge-offs for the year ended June 30, 2021were $7 thousand. Net charge-offs for the year ended June 30, 2020were $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, 2021or June 30, 2020. The recorded investment in individually evaluated impaired loans was $1.7 millionand $2.4 millionat June 30, 2021and at June 30, 2020, respectively. Total loans individually evaluated for impairment decreased $683 thousand, or 28.5%, to $1.7 millionat June 30, 2021compared to $2.4 millionat 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 millionand $1.35 millionas of June 30, 2021and 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, 2021and 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, 2021and 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 thousandfor the year ended June 30, 2021, increased $87 thousandcompared to $184 thousandfor the year ended June 30, 2020. The change in fair value of equity securities totaled a negative $61 thousandfor the year ended June 30, 2021compared to a negative $34 thousandfor the year ended June 30, 2020. Mortgage servicing income totaled $148 thousandfor the year ended June 30, 2021compared to $183 thousandfor 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 thousandfor the year ended June 30, 2021compared to $181 thousandfor 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 thousandfor the year ended June 30, 2021, decreased $114 thousandcompared to $309 thousandfor 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, 2021as 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 millionfor the year ended June 30, 2021from $12.0 millionfor the year ended June 30, 2020. Salaries and employee benefits increased by $277 thousand, or 4.3%, to $6.7 millionfor the year ended June 30, 2021from $6.4 millionfor the year ended June 30, 2020due to routine increases. Occupancy and equipment expenses decreased by $202 thousand, or 10.2% to $1.8 millionfor the year ended June 30, 2021from $2.0 millionfor the year ended June 30, 2020due to normal periodic fluctuations. Data processing increased $77 thousanddue to routine upgrades and volume increases in the current period. Professional and supervisory fee expenses decreased by $77 thousand, or 12.7% to $527 thousandfor the year ended June 30, 2021from $604 thousandfor the year ended June 30, 2020primarily due to reduced audit and legal expenses. FDICdeposit insurance increased $104 thousand. The year ended June 30, 2021is reflective of the standard FDICassessed rate. The prior year reflected an assessment credit received from the FDICas 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 thousandfor the year ended June 30, 2021from $226 thousandfor 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 thousandcompared to $410 thousandfor 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 millionfor the year ended June 30, 2021from $900 thousandfor 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, 2021as 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, 2021as 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, 2021and 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 $ 15,0194.30 % $ 358,305 $ 16,3814.57 % $ 351,765 $ 16,1714.60 % 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 $ 506,657Liabilities and equity: Interest-bearing liabilities: NOW and demand deposits $ 71,825 $ 1160.16 % $ 57,734 $ 1830.32 % $ 50,983 $ 770.15 % 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 $ 506,657Net interest income $ 14,847 $ 14,816 $ 15,253Interest 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 )
$ 31Year Ended June 30, 2020 Compared to 2019 Volume Rate Net (Dollars in thousands) Interest income: Loans $ 298 $ (88 ) $ 210Investment 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
$ (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
? 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 Statestreasury 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, 2020in the event of designated changes in the United Statestreasury 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 millionfor the year ended June 30, 2021and $5.1 millionfor the year ended June 30, 2020. Net cash flows used in investing activities were $34.3 millionfor the year ended June 30, 2021and net cash flows provided by investing activities were $11.0 millionfor the year ended June 30, 2020. Net cash flows provided by financing activities for the year ended June 30, 2021were $25.4 millionand 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, 2021and 2020, cash and short-term investments totaled $30.6 millionand $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 Atlantaadvances and other borrowings. At June 30, 2021and 2020, we had outstanding commitments to originate loans of $13.8 millionand $10.1 million, respectively. We had $45.3 millionin unfunded commitments under lines of credit at June 30, 2021and $20.5 millionin 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, 2021totaled $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 millionin 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 $0.10per share dividend on August 20, 2020, November 19, 2020, February 25, 2021, and May 20, 2021for a total of $2.2 millionin 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 $0.10per 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
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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