Oconee Federal Financial Corp. - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the Quarterly Period ended September 30, 2011

 

Or

 

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

 

For transition period from              to             

 

Commission File Number 001-35033

 

 

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

 

 

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

 

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

 

 

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

 

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

 

There were 6,348,000 shares of Common Stock, par value $.01 per share, outstanding as of  November 10, 2011.

 

 

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Explanatory Note

 

On January 13, 2011, Oconee Federal Financial Corp. (the “Registrant”), headquartered in Seneca, South Carolina, became the holding company for Oconee Federal Savings and Loan Association following the mutual-to-stock conversion of Oconee Federal Savings and Loan Association. The financial statements for the three months ended September 30, 2010 are for Oconee Federal Savings and Loan Association.

 

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OCONEE FEDERAL FINANCIAL CORP.

 

Form 10-Q Quarterly Report

 

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	PART I
ITEM 1.	FINANCIAL STATEMENTS — OCONEE FEDERAL FINANCIAL CORP.	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OCONEE FEDERAL FINANCIAL CORP.	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
ITEM 4.	CONTROLS AND PROCEDURES	24
	PART II
ITEM 1.	LEGAL PROCEEDINGS	24
ITEM 1A.	RISK FACTORS	24
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	24
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	24
ITEM 4.	(REMOVED AND RESERVED)	24
ITEM 5.	OTHER INFORMATION	24
ITEM 6.	EXHIBITS	24

 

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Part I

 

ITEM 1.    FINANCIAL STATEMENTS

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

		September 30,			June 30,
		2011			2011 (*)
		(Unaudited)
ASSETS
Cash and cash equivalents		$	22,617		$	11,453
Federal funds sold and overnight interest bearing deposits		33,913			49,377
Total cash and cash equivalents		56,530			60,830
Securities held to maturity (estimated fair value: September 30, 2011 - $9,225 and June 30, 2011 - $9,473)		8,718			9,035
Securities available for sale		35,705			30,631
Loans, net of allowance for loan losses of $723 and $749		264,904			264,913
Premises and equipment, net		3,234			3,255
Real estate owned, net		2,571			2,254
Accrued interest receivable
Loans		950			936
Investments		207			107
Restricted equity securities		557			557
Bank owned life insurance		369			369
Prepaid FDIC insurance premiums		452			488
Other assets		917			902
Total assets		$	375,114		$	374,277
LIABILITIES AND EQUITY
Deposits
Non-interest bearing		$	2,473		$	2,014
Interest bearing		289,298			290,455
Total deposits		291,771			292,469
Accrued interest payable and other liabilities		2,050			1,597
Total liabilities		293,821			294,066
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,348,000 shares outstanding at September 30, 2011 and June 30, 2011		63			63
Additional paid in capital		20,940			20,935
Retained earnings		62,493			61,516
Accumulated other comprehensive income		211			136
Unearned ESOP shares		(2,414		)	(2,439		)
Total shareholders’ equity		81,293			80,211
Total liabilities and shareholders’ equity		$	375,114		$	374,277

 

(*) Derived from audited financial statements.

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except share data)

 

		Three Months Ended
		September 30,			September 30,
		2011			2010
Interest and dividend income:
Loans, including fees		$	3,670		$	3,678
Securities, taxable		172			129
Federal funds sold and other		29			20
Total interest income		3,871			3,827
Interest expense:
Deposits		946			1,376
Total interest expense		946			1,376
Net interest income		2,925			2,451
Provision for loan losses		28			69
Net interest income after provision for loan losses		2,897			2,382
Noninterest income:
Service charges on deposit accounts		18			23
Gains on sales of securities		67			—
Other		6			(15		)
Total noninterest income		91			8
Noninterest expense:
Salaries and employee benefits		666			608
Occupancy and equipment		160			175
Data processing		75			60
Professional and supervisory fees		128			50
Office expense		27			16
Advertising		20			16
FDIC deposit insurance		41			64
Charitable contributions		—			4
Provison for real estate owned and related expenses		144			69
Other		120			23
Total noninterest expense		1,381			1,085
Income before income taxes		1,607			1,305
Income tax expense		630			493
Net income		$	977		$	812
Other comprehensive income, net of tax
Unrealized gain on securities available for sale, net of taxes		$	78		$	—
Reclassification adjustment for gains realized in income, net of taxes		(3		)	—
Other comprehensive income		75			—
Comprehensive income		$	1,052		$	812
Net income per share:		$	0.16		N/A
Dividends declared per share		$	—		N/A

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(All amounts in thousands, except share data)

 

											Accumulated
					Additional						Other			Unearned
		Common			Paid-In			Retained			Comprehensive			ESOP
		Stock			Capital			Earnings			Income			Shares			Total
Balance July 1, 2010		$	—		$	—		$	59,661		$	—		$	—		$	59,661
Other comprehensive income		—			—			—			—			—			—
Net income		—			—			812			—			—			812
Balance September 30, 2010		$	—		$	—		$	60,473		$	—		$	—		$	60,473
Balance July 1, 2011		$	63		$	20,935		$	61,516		$	136		$	(2,439	)	$	80,211
Net income		—			—			977			—			—			977
Other comprehensive income		—			—			—			75			—			75
ESOP shares earned		—			5			—			—			25			30
Balance at September 30, 2011		$	63		$	20,940		$	62,493		$	211		$	(2,414	)	$	81,293

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended
		September 30,			September 30,
		2011			2010
Cash Flows From Operating Activities
Net income		$	977		$	812
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		28			69
Provision for real estate owned		71			32
Depreciation and amortization, net		91			77
Deferred loan fees, net of accretion		13			(10		)
Deferred income tax benefit		(2		)	—
Gain on sale of real estate owned		(12		)	—
Gains on sales of securities		(67		)	—
Loss from other-than-temporary impairment		4			9
ESOP compensation expense		30			—
Net change in operating assets and liabilities:
Accrued interest receivable		(114		)	7
Accrued interest payable		(9		)	409
Other		660			(116		)
Net cash provided by operating activities		1,670			1,289
Cash Flows From Investing Activities
Purchases of premises and equipment		(38		)	(15		)
Purchases of securities available-for-sale		(15,233		)	—
Proceeds from maturities, paydowns and calls of securities held-to-maturity		317			867
Proceeds from maturities, paydowns and calls of securities available for sale		130			—
Proceeds from sales of available-for-sale securities		10,182			—
Proceeds from sale of real estate owned		51			200
Loan originations and repayments, net		(459		)	(899		)
Net cash provided by (used in) investing activities		(5,050		)	153
Cash Flows from Financing Activities
Net change in deposits		(698		)	11,013
Dividends paid		(222		)	—
Net cash provided by (used in) financing activities		(920		)	11,013
Change in cash and cash equivalents		(4,300		)	12,455
Cash and cash equivalents, beginning of year		60,830			49,792
Cash and cash equivalents, end of period		$	56,530		$	62,247
Cash paid during the period for:
Interest paid		$	955		$	967
Income taxes paid		$	—		$	—
Supplemental noncash disclosures:
Transfers from loans to real estate owned		$	427		$	25

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

(1)               BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp. (referred to herein as “the Company,” “we,” “us,” or “our”) include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (65.02%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2011 and June 30, 2011 and the results of operations and cash flows for the interim periods ended September 30, 2011 and 2010. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Form 10-K Annual Report of Oconee Federal Financial Corp. for the year ended June 30, 2011.

 

(2)               NEW ACCOUNTING STANDARDS

 

ASU 2011-02, Receivables ( Topic 310 ): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring provides additional guidance to clarify when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of U.S. GAAP for debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance regarding the evaluation of both considerations above. Additionally, the amendments clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a TDR. This amendment is effective for us July 1, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, we may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Implementation of these updates did not have a significant impact to the consolidated financial statements.

 

In May 2011, the FASB has issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.  The amendments to the FASB Accounting Standards Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.  The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

 

 In June 2011, the FASB has issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has already complied with this update and the changes are reflected in our financial statements.

 

(3)               EARNINGS PER SHARE (“EPS”)

 

Basic EPS or loss per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. ESOP shares are considered outstanding for this calculation unless unearned. The factors used in the earnings per common share computation follow:

 

		Three Months Ended
		September 30,
		2011
Net income		$	977
Weighted average common shares outstanding		6,348,000
Less: Average unearned ESOP shares		(241,377		)
Average shares for basic EPS		6,106,623
Basic EPS		$	0.16

 

There were no potential dilutive common shares for the period presented; therefore, basic and diluted EPS are the same.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

(4)               SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

 

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at September 30, 2011 and June 30, 2011 are as follows:

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
September 30, 2011
Held to maturity:
FHLMC mortgage-backed securities		$	356		$	23		$	—		$	379
GNMA mortgage-backed securities		8,362			484			—			8,846
Total held-to-maturity		$	8,718		$	507		$	—		$	9,225
Available for sale:
FHLMC common stock		$	20		$	—		$	—		$	20
FNMA mortgage backed securities		2,520			43			—			2,563
FHLMC mortgage backed securities		2,522			12			—			2,534
U.S. Government agencies		30,299			343			(54		)	30,588
Total available for sale		$	35,361		$	398		$	(54	)	$	35,705
June 30, 2011
Held to maturity:
FHLMC mortgage-backed securities		$	384		$	27		$	—		$	411
GNMA mortgage-backed securities		8,651			411			—			9,062
Total held-to-maturity		$	9,035		$	438		$	—		$	9,473
Available for sale:
FHLMC common stock		$	24		$	4		$	—		$	28
U.S. Government agencies		30,387			216			—			30,603
Total available for sale		$	30,411		$	220		$	—		$	30,631

 

The following table shows securities with unrealized losses at September 30, 2011 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

		Less than 12 months						12 Months or More						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value			Loss			Value			Loss			Value			Loss
September 30, 2011
U.S. Government agencies		$	15,051		$	(54	)	$	—		$	—		$	15,051		$	(54	)
Total temporarily impaired		$	15,051		$	(54	)	$	—		$	—		$	15,051		$	(54	)

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

There were nine U.S. Government agency securities with an unrealized loss at September 30, 2011. None of the unrealized losses for these securities have been recognized in net income for the three months ended September 30, 2011 because the issuer’s bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach their maturity date or reset date. There were no securities with unrealized losses at June 30, 2011.

 

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

 

During the three months ended September 30, 2011 and 2010, management recorded an other-than-temporary impairment charge on the FHLMC common stock of $4 and $9, respectively based on management’s evaluation of the length of time the FHLMC had been impaired and the prospects of recoverability.

 

The amortized cost and fair value of securities available for sale and held to maturity debt securities at September 30, 2011 by contractual maturity are summarized as follows:

 

		September 30, 2011
		Amortized			Estimated
		Cost			Fair Value
Due from one to five years		$	22,852		$	23,176
Due from five to ten years		7,447			7,412
Due after ten years		—			—
Mortgage backed securities		13,760			14,322
Total		$	44,059		$	44,910

 

Gross proceeds from sales of securities and gross gains for the three months ended September 30, 2011 were $10,182 and $67, respectively. There were no losses on sales. Additionally, there were no sales of securities for the three months ended September 30, 2010.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

(5)     LOANS

 

The components of loans receivable at September 30, 2011 and June 30, 2011 were as follows:

 

		September 30,			June 30,
		2011			2011
Real estate loans:
One to four family		$	248,157		$	249,064
Multi-family		268			269
Home equity		446			466
Nonresidential		9,217			9,399
Construction and land		8,287			7,156
Total real estate loans		266,375			266,354
Consumer loans		942			985
Total loans		267,317			267,339
Net deferred loan fees		(1,690		)	(1,677		)
Allowance for loan losses		(723		)	(749		)
Loans, net		$	264,904		$	264,913

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2011 and the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method at September 30, 2011:

 

September 30, 2011

 

		Real estate
		One to four family			Multi- family			Home equity			Nonresidential			Construction and land			Consumer			Total
Beginning balance		$	647		$	4		$	1		$	56		$	38		$	3		$	749
Provision		44			—			—			—			(15		)	(1		)	28
Charge-offs		(54		)	—			—			—			—			—			(54		)
Recoveries		—			—			—			—			—			—			—
Ending allowance attributed to loans:		$	637		$	4		$	1		$	56		$	23		$	2		$	723
Allowance for loan losses:
Ending allowance attributed to loans:
Individually evaluated for impairment		$	21		$	—		$	—		$	—		$	—		$	—		$	21
Collectively evaluated for impairment		616			4			1			56			23			2			702
Total ending allowance balance:		$	637		$	4		$	1		$	56		$	23		$	2		$	723
Loans:
Loans individually evaluated for impairment		$	1,533		$	—		$	—		$	—		$	—		$	—		$	1,533
Loans collectively evaluated for impairment		246,624			268			446			9,217			8,287			942			265,784
Total ending loans balance		$	248,157		$	268		$	446		$	9,217		$	8,287		$	942		$	267,317

 

The activity in the allowance for loan losses for the three months ended September 30, 2010 was as follows:

 

		Three Months Ended
		2010
Beginning balance		$	888
Provision for loan losses		69
Loans charged off		(11		)
Recoveries		—
Ending balance		$	946

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

 

The following table presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method at June 30, 2011:

 

June 30, 2011

 

		Real estate
		One to four family			Multi- family			Home equity			Nonresidential			Construction and land			Consumer			Total
Allowance for loan losses:
Ending allowance attributed to loans:
Individually evaluated for impairment		$	22		$	—		$	—		$	—		$	—		$	—		$	22
Collectively evaluated for impairment		625			4			1			56			38			3			727
Total ending allowance balance:		$	647		$	4		$	1		$	56		$	38		$	3		$	749
Loans:
Loans individually evaluated for impairment		$	2,008		$	—					$	—		$	—		$	—		$	2,008
Loans collectively evaluated for impairment		247,056			269			466			9,399			7,156			985			265,331
Total ending loans balance		$	249,064		$	269		$	466		$	9,399		$	7,156		$	985		$	267,339

 

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