Annual Statements Open main menu

Oconee Federal Financial Corp. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

 

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, 2013

 

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)

 


 

Federal

 

32-0330122

(State of Other Jurisdiction

of Incorporation)

 

(I.R.S Employer

Identification Number)

 

 

 

201 East North Second Street, Seneca, South Carolina

 

29678

(Address of Principal Executive Officers)

 

(Zip Code)

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 


 

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):

 

Large accelerated filer o

 

Accelerated filer                   o

 

 

 

Non-accelerated filer   o

 

Smaller reporting company x

 

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 5,833,395 shares of Common Stock, par value $.01 per share, outstanding as of November 1, 2013.

 

 

 



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

OCONEE FEDERAL FINANCIAL CORP.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I.

 

2

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

2

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

31

 

 

 

PART II.

 

31

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

31

 

 

 

ITEM 1A.

RISK FACTORS

31

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

32

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

32

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

32

 

 

 

ITEM 5.

OTHER INFORMATION

32

 

 

 

ITEM 6.

EXHIBITS

32

 

 

 

SIGNATURES

33

 

 

INDEX TO EXHIBITS

34

 

1



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

PART I

 

ITEM 1.         FINANCIAL STATEMENTS

 

 

 

September 30,
2013

 

June 30,
2013 (*)

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

1,594

 

$

1,362

 

Interest-bearing deposits

 

27,896

 

36,580

 

Total cash and cash equivalents

 

29,490

 

37,942

 

Securities held-to-maturity (fair value: September 30, 2013 - $8,890 and June 30, 2013 - $8,223)

 

8,726

 

8,039

 

Securities available-for-sale

 

90,891

 

87,985

 

Loans, net of allowance for loan losses of $832 and $751

 

221,858

 

221,163

 

Premises and equipment, net

 

3,015

 

3,047

 

Real estate owned, net

 

857

 

1,047

 

Accrued interest receivable

 

 

 

 

 

Loans

 

808

 

863

 

Investments

 

401

 

269

 

Restricted equity securities

 

449

 

449

 

Bank owned life insurance

 

8,526

 

8,450

 

Other assets

 

867

 

841

 

 

 

 

 

 

 

Total assets

 

$

365,888

 

$

370,095

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

4,791

 

$

4,861

 

Interest bearing

 

283,986

 

287,561

 

 

 

 

 

 

 

Total deposits

 

288,777

 

292,422

 

 

 

 

 

 

 

Accrued interest payable and other liabilities

 

1,920

 

1,511

 

 

 

 

 

 

 

Total liabilities

 

290,697

 

293,933

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 5,833,395 and 5,923,295 shares outstanding at September 30, 2013 and June 30, 2013

 

64

 

64

 

Treasury stock, at par 601,699 and 511,799 shares at September 30, 2013 and June 30, 2013

 

(6

)

(5

)

Additional paid in capital

 

12,068

 

13,413

 

Retained earnings

 

65,650

 

65,315

 

Accumulated other comprehensive loss

 

(565

)

(559

)

Unearned ESOP shares

 

(2,020

)

(2,066

)

 

 

 

 

 

 

Total shareholders’ equity

 

75,191

 

76,162

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

365,888

 

$

370,095

 

 


*Derived from audited consolidated financial statements.

 

See accompanying notes to the consolidated financial statements

 

2



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

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

 

 

 

Three Months Ended

 

 

 

September 30,
2013

 

September 30,
2012

 

Interest and dividend income:

 

 

 

 

 

Loans, including fees

 

$

2,852

 

$

3,370

 

Securities, taxable

 

371

 

266

 

Federal funds sold and other

 

15

 

18

 

Total interest income

 

3,238

 

3,654

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

429

 

625

 

Total interest expense

 

429

 

625

 

 

 

 

 

 

 

Net interest income

 

2,809

 

3,029

 

 

 

 

 

 

 

Provision for loan losses

 

81

 

141

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

2,728

 

2,888

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Service charges on deposit accounts

 

18

 

20

 

Gain (loss) on sales of real estate owned

 

(14

)

57

 

Other

 

76

 

9

 

Total noninterest income

 

80

 

86

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

861

 

790

 

Occupancy and equipment

 

155

 

177

 

Data processing

 

63

 

59

 

Professional and supervisory fees

 

112

 

79

 

Office expense

 

15

 

23

 

Advertising

 

21

 

19

 

FDIC deposit insurance

 

40

 

27

 

Provision for real estate owned and related expenses

 

32

 

37

 

Other

 

77

 

76

 

Total noninterest expense

 

1,376

 

1,287

 

 

 

 

 

 

 

Income before income taxes

 

1,432

 

1,687

 

Income tax expense

 

513

 

670

 

 

 

 

 

 

 

Net income

 

$

919

 

$

1,017

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

Unrealized (loss) gain on securities available-for-sale

 

$

(9

)

$

618

 

Tax effect

 

3

 

(235

)

Total other comprehensive income (loss)

 

(6

)

383

 

 

 

 

 

 

 

Comprehensive income

 

$

913

 

$

1,400

 

 

 

 

 

 

 

Basic net income per share: (Note 2)

 

$

0.16

 

$

0.16

 

Diluted net income per share: (Note 2)

 

$

0.16

 

$

0.16

 

Dividends declared per share:

 

$

0.10

 

$

0.10

 

 

See accompanying notes to the consolidated financial statements

 

3



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Unearned

 

 

 

 

 

Common

 

Treasury

 

Paid-In

 

Retained

 

Comprehensive

 

ESOP

 

 

 

 

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Shares

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2012

 

$

64

 

$

 

$

20,880

 

$

63,693

 

$

599

 

$

(2,252

)

$

82,984

 

Net income

 

 

 

 

1,017

 

 

 

1,017

 

Other comprehensive income

 

 

 

 

 

383

 

 

383

 

Stock-based compensation expense

 

 

 

58

 

 

 

 

58

 

Dividends

 

 

 

 

(643

)

 

 

(643

)

ESOP shares earned

 

 

 

9

 

 

 

39

 

48

 

Balance at September 30, 2012

 

$

64

 

$

 

$

20,947

 

$

64,067

 

$

982

 

$

(2,213

)

$

83,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 1, 2013

 

$

64

 

$

(5

)

$

13,413

 

$

65,315

 

$

(559

)

$

(2,066

)

$

76,162

 

Net income

 

 

 

 

919

 

 

 

919

 

Other comprehensive loss

 

 

 

 

 

(6

)

 

(6

)

Purchase of 89,900 shares of treasury stock (1)

 

 

(1

)

(1,423

)

 

 

 

(1,424

)

Stock-based compensation expense

 

 

 

57

 

 

 

 

57

 

Dividends (2)

 

 

 

 

(584

)

 

 

(584

)

ESOP shares earned

 

 

 

21

 

 

 

46

 

67

 

Balance at September 30, 2013

 

$

64

 

$

(6

)

$

12,068

 

$

65,650

 

$

(565

)

$

(2,020

)

$

75,191

 

 


(1)         The weighted average cost of treasury shares purchased during the three months ended was $15.85 per share.  Treasury stock repurchases were accounted for using the par value method.

(2)         Cash dividends declared on July 25, 2013 were paid on August 15, 2013.

 

See accompanying notes to the consolidated financial statements

 

4



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

 

 

 

Three Months Ended

 

 

 

September 30,
2013

 

September 30,
2012

 

Cash Flows From Operating Activities

 

 

 

 

 

Net income

 

$

919

 

$

1,017

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

81

 

141

 

Depreciation and amortization, net

 

252

 

276

 

Deferred loan fees, net

 

6

 

70

 

(Gain) loss on sale of real estate owned

 

14

 

(57

)

Increase in cash surrender value of bank owned life insurance

 

(76

)

 

ESOP compensation expense

 

67

 

48

 

Stock based compensation expense

 

57

 

58

 

Net change in operating assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

(77

)

(83

)

Accrued interest payable

 

(1

)

5

 

Other

 

387

 

689

 

Net cash provided by operating activities

 

1,629

 

2,164

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchases of premises and equipment

 

(19

)

(31

)

Purchases of securities held-to-maturity

 

(1,494

)

(498

)

Purchases of securities available-for-sale

 

(5,324

)

(8,347

)

Proceeds from maturities, paydowns and calls of securities available-for-sale

 

2,218

 

2,746

 

Proceeds from maturities, paydowns and calls of securities held-to-maturity

 

797

 

830

 

Proceeds from sale of real estate owned

 

176

 

674

 

Loan originations and repayments, net

 

(782

)

5,287

 

Net cash provided by (used in) investing activities

 

(4,428

)

661

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Net change in deposits

 

(3,638

)

144

 

Dividends paid

 

(584

)

(643

)

Purchase of treasury stock

 

(1,431

)

 

Net cash used in financing activities

 

(5,653

)

(499

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

(8,452

)

2,326

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

37,942

 

47,612

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

29,490

 

$

49,938

 

 

See accompanying notes to the consolidated financial statements

 

5



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(1)               BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (70.76%) 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, 2013 and June 30, 2013 and the results of operations and cash flows for the interim periods ended September 30, 2013 and 2012. 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, 2013.

 

(2)               EARNINGS PER SHARE (“EPS”)

 

Basic EPS 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,
2013

 

September 30,
2012

 

Earnings per share

 

 

 

 

 

Net income

 

$

919

 

$

1,017

 

Less: distributed earnings allocated to participating securities

 

(7

)

(8

)

Less: (undistributed income) dividends in excess of earnings allocated to participating securities

 

(4

)

(5

)

Net earnings available to common shareholders

 

$

908

 

$

1,004

 

 

 

 

 

 

 

Weighted average common shares outstanding including participating securities

 

5,850,522

 

6,423,645

 

Less: participating securities

 

(71,095

)

(87,092

)

Less: average unearned ESOP shares

 

(204,302

)

(222,912

)

Weighted average common shares outstanding

 

5,575,125

 

6,113,641

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.16

 

$

0.16

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

5,575,125

 

6,113,641

 

Add: dilutive effects of assumed exercises of stock options

 

47,856

 

7,522

 

Average shares and dilutive potential common shares

 

5,622,981

 

6,121,163

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.16

 

$

0.16

 

 

During the three months ended September 30, 2013 and 2012, there were no potential anti-dilutive common shares.

 

6



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(3)                                 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, 2013 and June 30, 2013 are as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

September 30, 2013

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,229

 

$

16

 

$

(22

)

$

5,223

 

GNMA mortgage-backed securities

 

3,497

 

170

 

 

3,667

 

Total held-to-maturity

 

$

8,726

 

$

186

 

$

(22

)

$

8,890

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

FHLMC common stock

 

$

20

 

$

82

 

$

 

$

102

 

Preferred stock (1)

 

271

 

26

 

 

297

 

FNMA CMO/REMIC

 

3,303

 

 

(101

)

3,202

 

FHLMC CMO/REMIC

 

1,892

 

 

(62

)

1,830

 

GNMA CMO/REMIC

 

6,602

 

 

(316

)

6,286

 

FNMA mortgage-backed securities

 

18,625

 

197

 

(163

)

18,659

 

FHLMC mortgage-backed securities

 

18,189

 

120

 

(241

)

18,068

 

GNMA mortgage-backed securities

 

3,559

 

 

(98

)

3,461

 

U.S. Government agencies

 

39,341

 

338

 

(693

)

38,986

 

Total available-for-sale

 

$

91,802

 

$

763

 

$

(1,674

)

$

90,891

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

3,985

 

$

18

 

$

(13

)

$

3,990

 

GNMA mortgage-backed securities

 

4,054

 

179

 

 

4,233

 

Total held-to-maturity

 

$

8,039

 

$

197

 

$

(13

)

$

8,223

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

FHLMC common stock

 

$

20

 

$

90

 

$

 

$

110

 

Preferred stock (1)

 

271

 

26

 

 

297

 

FNMA CMO/REMIC

 

3,389

 

 

(108

)

3,281

 

FHLMC CMO/REMIC

 

1,941

 

 

(74

)

1,867

 

GNMA CMO/REMIC

 

6,879

 

5

 

(173

)

6,711

 

FNMA mortgage-backed securities

 

17,562

 

112

 

(160

)

17,514

 

FHLMC mortgage-backed securities

 

17,819

 

67

 

(246

)

17,640

 

GNMA mortgage-backed securities

 

2,619

 

 

(105

)

2,514

 

U.S. Government agencies

 

38,387

 

294

 

(630

)

38,051

 

Total available-for-sale

 

$

88,887

 

$

594

 

$

(1,496

)

$

87,985

 

 


(1)  Consists of 300 shares of Southern First Bancshares, Inc. cumulative perpetual preferred stock, series T.

 

7



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table shows securities with unrealized losses at September 30, 2013, 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 Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA CMO/REMIC

 

$

3,202

 

$

(101

)

$

 

$

 

$

3,202

 

$

(101

)

FHLMC CMO/REMIC

 

 

 

1,830

 

(62

)

1,830

 

(62

)

GNMA CMO/REMIC

 

6,286

 

(316

)

 

 

6,286

 

(316

)

FNMA mortgage-backed securities

 

18,659

 

(163

)

 

 

18,659

 

(163

)

FHLMC mortgage-backed securities

 

18,068

 

(241

)

 

 

18,068

 

(241

)

GNMA mortgage-backed securities

 

3,461

 

(98

)

 

 

3,461

 

(98

)

U.S. Government agencies

 

38,986

 

(693

)

 

 

38,986

 

(693

)

 

 

$

88,662

 

$

(1,612

)

$

1,830

 

$

(62

)

$

90,492

 

$

(1,674

)

 

At September 30, 2013, there were twelve U.S. Government agency securities, five GNMA CMO/REMIC securities, two FNMA CMO/REMIC securities, two FHLMC CMO/REMIC securities, five FHLMC mortgage-backed securities, five FNMA mortgage-backed securities, three GNMA mortgage-backed securities, and ten certificates of deposit securities with unrealized losses at September 30, 2013.  None of the unrealized losses for these securities have been recognized into net income for the three months ended September 30, 2013 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 of these securities is expected to recover as they approach their maturity date or reset date.  None of the unrealized losses at June 30, 2013 was recognized as OTTI during the three months ended September 30, 2013.

 

At September 30, 2013, none of the securities classified as held-to-maturity with unrealized losses were in an unrealized loss position for 12 continuous months or more.  There were no securities at June 30, 2013 with unrealized losses that had been in an unrealized loss position for 12 continuous months or more.

 

The Company evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  The Company considers the length of time and the extent to which the fair value has been less than 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.

 

8



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The amortized cost and fair value of debt securities classified available-for-sale and held-to-maturity at September 30, 2013 by contractual maturity are summarized as follows:

 

 

 

September 30,
2013

 

June 30,
2013

 

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Less than one year

 

$

1,245

 

$

1,247

 

$

996

 

$

997

 

Due from one to five years

 

28,880

 

29,159

 

26,178

 

26,437

 

Due from five to ten years

 

10,445

 

10,045

 

11,198

 

10,800

 

Due after ten years

 

4,000

 

3,758

 

4,000

 

3,807

 

Mortgage backed securities

 

55,667

 

55,173

 

54,263

 

53,760

 

Total

 

$

100,237

 

$

99,382

 

$

96,635

 

$

95,801

 

 

There were no sales of securities during the three months ended September 30, 2013 and 2012.

 

(4)           LOANS

 

The components of loans at September 30, 2013 and June 30, 2013 were as follows:

 

 

 

September 30,
2013

 

June 30,
2013

 

Real estate loans:

 

 

 

 

 

One- to four-family

 

$

205,271

 

$

204,397

 

Multi-family

 

256

 

258

 

Home equity

 

268

 

292

 

Nonresidential

 

8,365

 

8,521

 

Construction and land

 

8,818

 

8,735

 

Total real estate loans

 

222,978

 

222,203

 

Consumer and other loans

 

932

 

925

 

Total loans

 

223,910

 

223,128

 

Net deferred loan fees

 

(1,220

)

(1,214

)

Allowance for loan losses

 

(832

)

(751

)

Loans, net

 

$

221,858

 

$

221,163

 

 

9



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the activity in the allowance for loan losses for the three months ended September 30, 2013 and 2012 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, 2013 and 2012:

 

 

 

Real estate

 

 

 

 

 

Three Months Ended September 30, 2013

 

One-to-four
family

 

Multi-family

 

Home
Equity

 

Nonresidential

 

Construction
and land

 

Consumer

 

Total

 

Beginning balance

 

$

665

 

$

4

 

$

1

 

$

52

 

$

27

 

$

2

 

$

751

 

Provision

 

82

 

 

 

(2

)

1

 

 

81

 

Charge-offs

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

Ending balance

 

$

747

 

$

4

 

$

1

 

$

50

 

$

28

 

$

2

 

$

832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance attributed to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

110

 

$

 

$

 

$

 

$

 

$

 

$

110

 

Collectively evaluated for impairment

 

637

 

4

 

1

 

50

 

28

 

2

 

722

 

Total ending allowance balance

 

$

747

 

$

4

 

$

1

 

$

50

 

$

28

 

$

2

 

$

832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

3,203

 

$

 

$

 

$

 

$

 

$

 

$

3,203

 

Loans collectively evaluated for impairment

 

202,068

 

256

 

268

 

8,365

 

8,818

 

932

 

220,707

 

Total ending loans balance

 

$

205,271

 

$

256

 

$

268

 

$

8,365

 

$

8,818

 

$

932

 

$

223,910

 

 

 

 

Real estate

 

 

 

 

 

Three Months Ended September 30, 2012

 

One-to-four
family

 

Multi-family

 

Home
Equity

 

Nonresidential

 

Construction
and land

 

Consumer

 

Total

 

Beginning balance

 

$

773

 

$

4

 

$

1

 

$

56

 

$

21

 

$

2

 

$

857

 

Provision

 

139

 

 

 

 

1

 

1

 

141

 

Charge-offs

 

(68

)

 

 

 

 

 

(68

)

Recoveries

 

 

 

 

 

 

 

 

Ending balance

 

$

844

 

$

4

 

$

1

 

$

56

 

$

22

 

$

3

 

$

930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance attributed to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

192

 

$

 

$

 

$

 

$

 

$

 

$

192

 

Collectively evaluated for impairment

 

652

 

4

 

1

 

56

 

22

 

3

 

738

 

Total ending allowance balance

 

$

844

 

$

4

 

$

1

 

$

56

 

$

22

 

$

3

 

$

930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

2,756

 

$

 

$

 

$

 

$

 

$

 

$

2,756

 

Loans collectively evaluated for impairment

 

225,437

 

262

 

383

 

9,110

 

7,345

 

851

 

243,388

 

Total ending loans balance

 

$

228,193

 

$

262

 

$

383

 

$

9,110

 

$

7,345

 

$

851

 

$

246,144

 

 

10



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method at June 30, 2013:

 

 

 

Real estate

 

 

 

 

 

June 30, 2013

 

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

 

$

27

 

$

 

$

 

$

 

$

 

$

 

$

27

 

Collectively evaluated for impairment

 

638

 

4

 

1

 

52

 

27

 

2

 

724

 

Total ending allowance balance

 

$

665

 

$

4

 

$

1

 

$

52

 

$

27

 

$

2

 

$

751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,986

 

$

 

$

 

$

 

$

 

$

 

$

1,986

 

Loans collectively evaluated for impairment

 

202,411

 

258

 

292

 

8,521

 

8,735

 

925

 

221,142

 

Total ending loans balance

 

$

204,397

 

$

258

 

$

292

 

$

8,521

 

$

8,735

 

$

925

 

$

223,128

 

 

11



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents loans individually evaluated for impairment by portfolio segment at September 30, 2013 and June 30, 2013, including the average recorded investment balance and interest earned for the three months ended September 30, 2013 and year ended June 30, 2013:

 

 

 

September 30, 2013

 

June 30, 2013

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Related
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

With no recorded allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

929

 

$

929

 

$

 

$

1,332

 

$

9

 

$

1,734

 

$

1,734

 

$

 

$

1,202

 

$

27

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

 

 

 

 

 

 

 

 

 

 

Construction and land

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

929

 

929

 

 

1,332

 

9

 

1,734

 

1,734

 

 

1,202

 

27

 

Consumer and other loans

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

929

 

$

929

 

$

 

$

1,332

 

$

9

 

$

1,734

 

$

1,734

 

$

 

$

1,202

 

$

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With recorded allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

2,274

 

$

2,274

 

$

110

 

$

1,263

 

$

7

 

$

252

 

$

252

 

$

27

 

$

1,033

 

$

6

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

 

 

 

 

 

 

 

 

 

 

Construction and land

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

2,274

 

2,274

 

110

 

1,263

 

7

 

252

 

252

 

27

 

1,033

 

6

 

Consumer and other loans

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,274

 

$

2,274

 

$

110

 

$

1,263

 

$

7

 

$

252

 

$

252

 

$

27

 

$

1,033

 

$

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

3,203

 

$

3,203

 

$

110

 

$

2,595

 

$

16

 

$

1,986

 

$

1,986

 

$

27

 

$

2,235

 

$

33

 

Consumer and other loans

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,203

 

$

3,203

 

$

110

 

$

2,595

 

$

16

 

$

1,986

 

$

1,986

 

$

27

 

$

2,235

 

$

33

 

 

12



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the aging of the recorded investment in past due loans at September 30, 2013 and June 30, 2013 by portfolio segment of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

 

 

30-59

 

60-89

 

90 Days

 

 

 

 

 

 

 

Loans

 

 

 

Days

 

Days

 

or More

 

Total

 

 

 

Total

 

Past Due 90

 

September 30, 2013

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Loans

 

Days or More

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

3,753

 

$

1,163

 

$

2,806

 

$

7,722

 

$

197,549

 

$

205,271

 

$

 

Multi-family

 

 

 

 

 

256

 

256

 

 

Home equity

 

 

 

 

 

268

 

268

 

 

Nonresidential

 

21

 

 

 

21

 

8,344

 

8,365

 

 

Construction and land

 

 

 

 

 

8,818

 

8,818

 

 

Total real estate loans

 

3,774

 

1,163

 

2,806

 

7,743

 

215,235

 

222,978

 

 

Consumer and other loans

 

 

 

 

 

932

 

932

 

 

Total

 

$

3,774

 

$

1,163

 

$

2,806

 

$

7,743

 

$

216,167

 

$

223,910

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing

 

 

 

30-59

 

60-89

 

90 Days

 

 

 

 

 

 

 

Loans

 

 

 

Days

 

Days

 

or More

 

Total

 

 

 

Total

 

Past Due 90

 

June 30, 2013

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Loans

 

Days or More

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

5,932

 

$

2,397

 

$

1,726

 

$

10,055

 

$

194,342

 

$

204,397

 

$

493

 

Multi-family

 

 

 

 

 

258

 

258

 

 

Home equity

 

30

 

 

 

30

 

262

 

292

 

 

Nonresidential

 

 

 

 

 

8,521

 

8,521

 

 

Construction and land

 

 

 

 

 

8,735

 

8,735

 

 

Total real estate loans

 

5,962

 

2,397

 

1,726

 

10,085

 

212,118

 

222,203

 

493

 

Consumer and other loans

 

1

 

 

 

1

 

924

 

925

 

 

Total

 

$

5,963

 

$

2,397

 

$

1,726

 

$

10,086

 

$

213,042

 

$

223,128

 

$

493

 

 

At September 30, 2013, nonaccrual loans were $3,203, of which $2,806 were past due 90 days or more.  There were $223 of nonaccrual loans that were classified in the “60-89 days past due” category and $174 of nonaccrual loans that were classified in the “30-59 days past due” category.  Nonaccrual loans at June 30, 2013 were $1,493.  All of these loans were past due 90 days or more except one loan of $73 classified in the “30-59 days past due” category.  There were no troubled debt restructures at September 30, 2013 or June 30, 2013.

 

All loans graded pass, special mention, substandard and doubtful not specifically evaluated for impairment are collectively evaluated for impairment by portfolio segment.  To develop and document a systematic methodology for determining the portion of the allowance for loan losses for loans evaluated collectively, the Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk and utilizes a loan grading system whereby all loans within each portfolio segment are assigned a grade based on the risk profile of each loan.  Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  All loans, regardless of size, are analyzed and assigned a grade based upon management’s assessment of the ability of borrowers to service their debts.  The following describes each of the Company’s loan grades and general information as to the risk profile of each of the Company’s loan portfolio segments:

 

13



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Loan Grades:

 

Pass:  Loans not meeting any of the criteria listed below for special mention, substandard, or doubtful are graded “Pass.”

 

Special Mention:  Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard:  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Portfolio Segments:

 

One-to-four family:  One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a one-to-four family residence.  These loans are collateralized by owner-occupied properties located in the Company’s market area.  We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.

 

Multi-family:  Multi-family real estate loans generally have a maximum term of 5 years with a 30 year amortization period and a final balloon payment and are secured by properties containing five or more units in the Company’s market area.  These loans are generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio.  The Company’s underwriting analysis includes considering the borrower’s expertise and requires verification of the borrower’s credit history, income and financial statements, banking relationships, independent appraisals, references and income projections for the property.  The Company generally obtains personal guarantees on these loans.

 

Multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project.

 

Home Equity:  We originate fixed-rate home equity loans secured by a lien on the borrower’s primary residence but only where we hold the first mortgage on the property.  Our home equity loans are limited to an 80% loan-to-value ratio (including all prior liens), and have terms of up to 10 years with 10-year amortization periods.  We use the same underwriting standards for home equity loans as we use for one- to four-family residential mortgage loans.

 

Nonresidential Real Estate:  Our non-residential real estate loans are secured primarily by churches and, to a much lesser extent, office buildings, and retail and mixed-use properties located in our primary market area.  The non-residential real estate loans that we originate generally have maximum terms of 5 years with amortization periods of 30 years.  For loans secured by church property, our loans generally have maximum terms of 20 years with amortization periods of up to 20 years.  The maximum loan-to-value ratio of our non-residential real estate loans is generally 75%.

 

Loans secured by non-residential real estate generally are larger than one- to four-family residential loans and involve greater credit risk.  Non-residential real estate loans often involve large loan balances to single borrowers or groups of related borrowers.  Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.  In addition, because a church’s financial stability often depends on donations from congregation members, some of whom may not reside in our market area,

 

14



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar.  In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other non-residential real estate.

 

Construction and Land:  We make construction loans to individuals for the construction of their primary residences and interim construction loans for non-residential properties.  These loans generally have maximum terms of eight months, and upon completion of construction convert to conventional amortizing mortgage loans.  These construction loans have rates and terms comparable to one- to four-family residential mortgage loans that we originate.  During the construction phase, the borrower generally pays interest only.  The maximum loan-to-value ratio of our owner-occupied construction loans is 80%.  Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans.  Finally, we make loans secured by land to complement our construction and non-residential lending activities.  These loans have terms of up to 10 years, and maximum loan-to-value ratios of 75% for improved lots and 65% for unimproved land.

 

To the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers.  Further, the nature of these loans is such that they are more difficult to evaluate and monitor.  Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project.  If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project.  Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.

 

Consumer and Other Loans:   We offer installment loans for various consumer purposes, including the purchase of automobiles, boats, appliances and recreational vehicles, and for other legitimate personal purposes.  The maximum terms of consumer loans is 18 months for unsecured loans, 12 months for loans secured by marketable securities and 18-60 months for loans secured by a vehicle, depending on the age of the vehicle.  We generally only extend consumer loans to existing customers or their immediate family members, and these loans generally have relatively low limits.

 

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

15



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

At September 30, 2013 and June 30, 2013, and based on the most recent analyses performed, the loan grade for each loan by portfolio segment is as follows:

 

 

 

Real estate

 

 

 

One-to four family

 

Multi-family

 

Home Equity

 

Nonresidential

 

 

 

September 30,
2013

 

June 30,
2013

 

September 30,
2013

 

June 30,
2013

 

September 30,
2013

 

June 30,
2013

 

September 30,
2013

 

June 30,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

202,068

 

$

202,411

 

$

256

 

$

258

 

$

268

 

$

292

 

$

8,365

 

$

8,521

 

Special mention

 

 

 

 

 

 

 

 

 

Substandard

 

3,203

 

1,986

 

 

 

 

 

 

 

Total

 

$

205,271

 

$

204,397

 

$

256

 

$

258

 

$

268

 

$

292

 

$

8,365

 

$

8,521

 

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Construction and Land

 

Consumer

 

Total

 

 

 

September 30,
2013

 

June 30,
2013

 

September 30,
2013

 

June 30,
2013

 

September 30,
2013

 

June 30,
2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

8,818

 

$

8,735

 

$

932

 

$

925

 

$

220,707

 

$

221,142

 

Special mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

3,203

 

1,986

 

Total

 

$

8,818

 

$

8,735

 

$

932

 

$

925

 

$

223,910

 

$

223,128

 

 

Loan risk ratings in the table above were updated for the three months ended September 30, 2013 and the year ended June 30, 2013.

 

16



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(5)           FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Investment Securities:

 

The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  The Company’s preferred stock investments are not actively traded; therefore, management estimates the fair value of its preferred stock using estimations provided by external dealer quotes.

 

Impaired Loans:

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

Real estate owned:

 

Nonrecurring adjustments to certain commercial and residential real estate properties classified as real estate owned are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

17



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and June 30, 2013 are summarized below:

 

 

 

Fair Value Measurements

 

 

 

(Level 2)

 

(Level 2)

 

 

 

September 30,
2013

 

June 30,
2013

 

Financial assets:

 

 

 

 

 

Securities available-for-sale

 

$

90,891

 

$

87,985

 

Total financial assets

 

$

90,891

 

$

87,985

 

 

Presented in the table below are assets measured at fair value on a non-recurring basis using level 3 inputs at September 30, 2013 and June 30, 2013:

 

 

 

Fair Value Measurements

 

 

 

(Level 3)

 

(Level 3)

 

 

 

September 30,
2013

 

June 30,
2013

 

Financial assets:

 

 

 

 

 

Impaired real estate loans, with specific allocations:

 

 

 

 

 

One-to-four-family

 

$

2,164

 

225

 

 

 

 

 

 

 

Non-financial assets:

 

 

 

 

 

Real estate owned, net:

 

 

 

 

 

One- to four-family

 

857

 

1,047

 

Total non-financial assets

 

857

 

1,047

 

Total assets measured at fair value on a non-recurring basis

 

$

3,021

 

$

1,272

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,164 and $225 at September 30, 2013 and June 30, 2013, respectively.  The carrying values included a valuation allowance of $110 and $27, respectively, resulting in an increase in the provision for loan loss of $82 for the three months ended September 30, 2013.

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell.  The outstanding balances of real estate owned and their respective valuation allowances at September 30, 2013 and June 30, 2013 were $857 and $0 and $1,047 and $0, respectively.  There were no write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three months ended September 30, 2013.

 

18



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2013:

 

 

 

Level 3 Quantitative Information at September 30, 2013

 

 

 

 

 

 

 

 

 

Range

 

 

 

Fair Value

 

Valuation
Technique

 

Unobservable
Inputs

 

(Weighted
Average)

 

Impaired real estate loans net, with specific allocations:

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

2,164

 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 

0% to 30%

(15%)

 

 

 

 

 

 

 

 

 

 

 

Real estate owned:

 

 

 

 

 

 

 

 

 

One-to four-family

 

$

857

 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 

0% to 20%

(10%)

 

 

19



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully.  The estimated fair values of the Company’s remaining on-balance sheet financial instruments at September 30, 2013 and June 30, 2013 are summarized below:

 

 

 

September 30, 2013

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

$

90,891

 

$

 

$

90,891

 

$

 

$

90,891

 

Securities held-to-maturity

 

8,726

 

 

8,890

 

 

8,890

 

Loans, net

 

221,858

 

 

 

228,707

 

229,664

 

Restricted equity securities (1)

 

449

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

288,784

 

$

75,616

 

$

213,593

 

$

 

$

292,324

 

 

 

 

June 30, 2013

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

$

87,985

 

$

 

$

87,985

 

$

 

$

87,985

 

Securities held-to-maturity

 

8,039

 

 

8,223

 

 

8,223

 

Loans, net

 

221,163

 

 

 

229,745

 

229,745

 

Restricted equity securities (1)

 

449

 

N/A

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

292,422

 

$

74,471

 

$

218,395

 

$

 

$

292,866

 

 


(1)               It was not practicable to determine fair value of restricted equity securities due to restrictions placed on transferability.

 

(6)           EMPLOYEE STOCK OWNERSHIP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”).  The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10 per share during 2011.  The Company makes discretionary contributions to the ESOP, and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan.  When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded.  Dividends on allocated shares increase participant accounts.

 

Participants receive the shares at the end of employment.  No contributions to the ESOP were made during the three months ended September 30, 2013.  The expense recognized for the three months ended September 30, 2013 and 2012 was $67 and $48, respectively.

 

20



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Shares held by the ESOP at September 30, 2013 and June 30, 2013 were as follows:

 

 

 

September 30,
2013

 

June 30,
2013

 

Committed to be released to participants

 

13,595

 

9,064

 

Allocated to participants

 

33,211

 

33,211

 

Unearned

 

202,036

 

206,567

 

Total ESOP shares

 

248,842

 

248,842

 

 

 

 

 

 

 

Fair value of unearned shares

 

$

3,333,594

 

$

3,059,257

 

 

(7)           STOCK BASED COMPENSATION

 

On April 5, 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity Incentive Plan (the “Plan”) for employees and directors of the Company.  The Plan authorizes the issuance of up to 435,472 shares of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options, either incentive stock options or non-qualified stock options.  The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted.  The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

 

On April 27, 2012, the compensation committee of the board of directors approved the issuance of 62,208 stock options to purchase Company stock and 24,884 shares of restricted stock to its directors.  In addition, a total of 171,078 stock options and 62,210 shares of restricted stock were granted to officers.  Stock options and restricted stock have vesting periods of 5 years or 7 years, a percentage of which vests annually on each anniversary date of grant.  The weighted average vesting period of stock options and restricted stock granted was 5.7 and 5.6 years, respectively.  Stock options expire ten years after issuance.  Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

 

The following table summarizes stock option activity for the three months ended September 30, 2013:

 

 

 

Options

 

Weighted-
Average
Exercise
Price/Share

 

Weighted-
Average
Remaining
Contractual
Life (in years)

 

Aggregate
Intrinsic Value
(1)

 

Outstanding - July 1, 2013

 

233,286

 

$

11.58

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding - September 30, 2013

 

233,286

 

$

11.58

 

8.58

 

$

1,147,767

 

Fully vested and exercisable at September 30, 2013

 

42,214

 

$

11.58

 

8.58

 

$

207,693

 

Expected to vest in future periods

 

191,072

 

 

 

 

 

 

 

Fully vested and expected to vest - September 30, 2013

 

233,286

 

$

11.58

 

8.58

 

$

1,147,767

 

 


(1)  Based on closing price of $16.50 per share on September 30, 2013.

 

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

 

The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the following assumptions.  The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate.  The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant.  Expected stock volatility is based on historical

 

21



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

volatilities of the SNL Financial Index of Thrifts.  The expected life of the options is calculated based on the “simplified” method as provided for under Staff Accounting Bulletin No.110.

 

The weighted-average fair value of options granted and assumptions used in the Black-Scholes-Merton option pricing model to determine the fair value of options are listed below:

 

Risk-free interest rate

 

1.54

%

Expected dividend yield

 

3.45

%

Expected stock volatility

 

15.3

 

Expected life (years)

 

8

 

Weighted-average fair value of options granted

 

$

1.00

 

 

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned.  There were 10,640 options that were earned during the three months ended September 30, 2013 and 2012. Stock-based compensation expense for stock options for the three months ended September 30, 2013 and 2012 was $10 and $11, respectively. Total unrecognized compensation cost related to nonvested stock options was $170 at September 30, 2013 and is expected to be recognized over a weighted-average period of 4.2 years.

 

The following table summarizes non-vested restricted stock activity for the three months ended September 30, 2013:

 

 

 

September 30,
2013

 

Balance - beginning of year

 

71,095

 

Granted

 

 

Forfeited

 

 

Vested

 

 

Balance - end of period

 

71,095

 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest.  The weighted-average grant date fair value of restricted stock granted during the year ended June 30, 2012 was $11.58 per share or $1,009.  Stock-based compensation expense for restricted stock included in noninterest expense was $47 for the three months ended September 30, 2013 and 2012.  Unrecognized compensation expense for nonvested restricted stock awards was $730 at September 30, 2013 and is expected to be recognized over a weighted-average period of 4.2 years.

 

(8)           SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the three months ended September 30, 2013 and 2012: 

 

 

 

September 30,
2013

 

September 30,
2012

 

Cash paid during the period for:

 

 

 

 

 

Interest paid

 

$

430

 

$

620

 

Income taxes paid

 

$

200

 

$

35

 

Supplemental noncash disclosures:

 

 

 

 

 

Transfers from loans to real estate owned

 

$

 

$

583

 

Unrealized gains (losses) on securities available-for-sale, net

 

$

(6

)

$

383

 

 

22



Table of Contents

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(9)           SUBSEQUENT EVENTS

 

On October 24, 2013, the Board of Directors of Oconee Federal Financial Corp. (the “Company”) declared a quarterly cash dividend of $0.10 per share of the Company’s common stock. The dividend will be payable to stockholders of record as of November 7, 2013, and will be paid on or about November 21, 2013.

 

23



Table of Contents

 

ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

 

·                  statements of our goals, intentions and expectations;

 

·                  statements regarding our business plans and prospects and growth and operating strategies;

 

·                  statements regarding the asset quality of our loan and investment portfolios; and

 

·                  estimates or our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·                  our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and employment levels) nationally and in our market areas;

 

·                  adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

 

·                  significant increases in our delinquencies and loan losses, including as a result of our inability to resolve classified assets, changes in the underlying cash flows of our borrowers, and management’s assumptions in determining the adequacy of the allowance for loan losses;

 

·                  credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance and provision for loan losses;

 

·                  use of estimates for determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

 

·                  increased competition among depository and other financial institutions;

 

·                  our ability to attract and maintain deposits, including attracting and maintaining deposits and introducing new deposit products;

 

·                  changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

 

·                  fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

 

·                  declines in the yield on our assets resulting from the current low interest rate environment;

 

·                  our ability to successfully implement our business strategies, including attracting and maintaining deposits and introducing new financial products;

 

·                  risks related to high concentration of  loans secured by real estate located in our market areas;

 

·                  changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations;

 

24



Table of Contents

 

·                  changes in the level of government support of housing finance;

 

·                  our ability to manage our operations following increased leverage and risk-based capital requirements due to the implementation of Basel III by our regulators;

 

·                  the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

 

·                  our ability to enter new markets successfully and capitalize on growth opportunities;

 

·                  risks relating to acquisitions, including losses that we may incur on loans originated by such institutions, and an ability to integrate and operate profitably any financial institution that we may acquire;

 

·                  our reliance on a small executive staff;

 

·                  changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs to implement our strategic plan;

 

·                  changes in consumer spending, borrowing and savings habits;

 

·                  changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·                  our ability to control costs and expenses, particularly those related to operating as a publicly traded company;

 

·                  changes in our financial condition or results of operations that reduce capital available to pay dividends;

 

·                  changes in the financial condition or future prospects of issuers of securities that we own, including our stock in the FHLB of Atlanta; and

 

·                  other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2013, as filed with the Securities and Exchange Commission.

 

Comparison of Financial Condition at September 30, 2013 and June 30, 2013

 

Our total assets decreased by $4.2 million, or 1.1%, to $365.9 million at September 30, 2013 from $370.1 million at June 30, 2013.  A substantial portion of this decrease is reflected in the decrease in cash and cash equivalents of $8.5 million, or 22.3%, offset partially by an increase in investment securities of $3.6 million, or 3.7% and an increase in net loans of $695 thousand, or 0.3%.  We are continuing to deploy excess funds to purchase high-quality investment securities.  The decrease in cash is reflective of a slight increase in loan demand and a decline in loan pay-offs for the three months ended September 30, 2013.  The remaining portion of the decrease in cash and cash equivalents is attributed to the repurchase of $1.4 million of shares of treasury stock, the payment of $584 thousand in dividends, and approximately $3.6 million decrease in total deposits, exclusive of the treasury stock repurchases and dividend payments.  Total equity decreased to $75.2 million at September 30, 2013 compared with $76.2 million at June 30, 2013.  The decrease in total equity is the result of the repurchase of 89,900 shares of treasury stock for $1.4 million and the payment of dividends of $584 thousand, offset partially by net income of $919 thousand.

 

25



Table of Contents

 

Total gross loans increased by $782 thousand, or 0.35%, to $223.9 million at September 30, 2013 from $223.1 million at June 30, 2013.  Our one-to four-family real estate loans increased by $874 thousand, or 0.43%, to $205.3 million at September 30, 2013 from $204.4 million at June 30, 2013.  The increase is a reflection of increasing mortgage rates in the market.  As mortgage rates have trended upward, our rates offered on one-to four-family mortgage loans have become more competitive in the market leading to a slight increase in demand and a reduction in loan pay-offs stemming from borrower refinances with other institutions.  The increase in one-to four-family loans was offset by slight declines in every other loan category with the exception of construction and land and consumer and other loans, which both increased modestly by $83 thousand and $7 thousand, respectively.

 

Deposits decreased by $3.6 million, or 1.2%, to $288.8 million at September 30, 2013 from $292.4 million at June 30, 2013.  The decrease was primarily attributed to a decrease in interest bearing deposit accounts of $3.6 million, or 1.2%, primarily within our certificates of deposit accounts.  As older certificates of deposits with slightly higher rates have matured, some depositors have moved funds out of the Company and into other higher yielding investments.  Oconee Federal MHC’s cash is held on deposit with the Company.  We generally do not accept brokered deposits and no brokered deposits were accepted during the three months ended September 30, 2013.

 

We had no advances from the Federal Home Loan Bank of Atlanta as of September 30, 2013 or June 30, 2013. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% of total assets (as of September 30, 2013), or approximately $40.7 million.

 

Total equity decreased by $978 thousand, or 1.3%, to $75.2 million at September 30, 2013 compared with $76.2 million at June 30, 2013.  The decrease in total equity is the result of the repurchase of 89,900 shares of treasury stock for $1.4 million and the payment of dividends of $584 thousand, offset partially by net income of $919 thousand.

 

26



Table of Contents

 

Nonperforming Assets

 

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

 

 

 

September 30,
2013

 

June 30,
 2013

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

Real estate loans:

 

 

 

 

 

One- to four-family

 

$

3,203

 

$

1,493

 

Multi-family

 

 

 

Home equity

 

 

 

Non-residential

 

 

 

Construction and land

 

 

 

Total real estate loans

 

3,203

 

1,493

 

Consumer and other loans

 

 

 

Total nonaccrual loans

 

$

3,203

 

$

1,493

 

Accruing loans past due 90 days or more:

 

 

 

 

 

Real estate loans:

 

 

 

 

 

One- to four-family

 

$

 

$

493

 

Multi-family

 

 

 

Home equity

 

 

 

Non-residential

 

 

 

Construction and land

 

 

 

Total real estate loans

 

 

493

 

Consumer and other loans

 

 

 

Total accruing loans past due 90 days or more

 

 

493

 

Total of nonaccrual and 90 days or more past due loans

 

$

3,203

 

$

1,986

 

Real estate owned, net:

 

 

 

 

 

One- to four-family

 

$

857

 

$

1,047

 

Multi-family

 

 

 

Home equity

 

 

 

Non-residential

 

 

 

Other

 

 

 

Other nonperforming assets

 

 

 

Total nonperforming assets

 

$

4,060

 

$

3,033

 

 

 

 

 

 

 

Troubled debt restructurings

 

 

 

Troubled debt restructurings and total nonperforming assets

 

$

4,060

 

$

3,033

 

 

 

 

 

 

 

Total nonperforming loans to total loans

 

1.43

%

0.89

%

Total nonperforming assets to total assets

 

1.11

%

0.82

%

Total nonperforming assets to loans and real estate owned

 

1.81

%

1.35

%

 

There were no other loans that are not disclosed above where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $63 thousand and $59 thousand for the three months ended September 30, 2013 and 2012, respectively.  Interest of

 

27



Table of Contents

 

$16 thousand and $8 thousand was recognized on these loans and is included in net income for the three months ended September 30, 2013 and 2012, respectively.

 

The increase in the ratio of nonperforming loans to total loans was primarily the result of the declining balance of our loan portfolio along with an increase in nonperforming loans. The increase in nonperforming loans was primarily related to two large balance loans, totaling approximately $1.2 million that became past due 90 days during the three months ended September 30, 2013.  All nonperforming loans, regardless of size, are evaluated by management for impairment.

 

Analysis of Net Interest Margin

 

The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to income.

 

28



Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

Average
Balance

 

Interest
and
Dividends

 

Yield/
Cost

 

Average
Balance

 

Interest
and
Dividends

 

Yield/
Cost

 

 

 

(Dollars in Thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

221,611

 

$

2,852

 

5.15

%

$

248,053

 

$

3,370

 

5.43

%

Investment securities

 

99,060

 

371

 

1.50

 

73,021

 

266

 

1.46

 

Interest-bearing deposits

 

31,178

 

15

 

0.19

 

47,857

 

18

 

0.15

 

Total interest-earning assets

 

351,849

 

3,238

 

3.68

 

368,931

 

3,654

 

3.96

 

Noninterest-earning assets

 

15,022

 

 

 

 

 

9,760

 

 

 

 

 

Total assets

 

$

366,871

 

 

 

 

 

$

378,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and demand deposits

 

$

18,872

 

$

3

 

0.06

%

$

17,858

 

$

3

 

0.07

%

Money market deposits

 

12,271

 

6

 

0.20

 

12,060

 

7

 

0.24

 

Regular savings and other deposits

 

39,391

 

38

 

0.38

 

34,478

 

62

 

0.71

 

Certificates of deposit

 

215,474

 

382

 

0.70

 

225,130

 

553

 

0.97

 

Total interest-bearing deposits

 

286,008

 

429

 

0.60

 

289,526

 

625

 

0.86

 

Total interest-bearing liabilities

 

286,008

 

 

 

 

 

289,526

 

 

 

 

 

Noninterest bearing deposits

 

3,781

 

 

 

 

 

3,764

 

 

 

 

 

Other noninterest-bearing liabilities

 

1,416

 

 

 

 

 

1,986

 

 

 

 

 

Total liabilities

 

291,205

 

 

 

 

 

295,275

 

 

 

 

 

Equity

 

75,666

 

 

 

 

 

83,416

 

 

 

 

 

Total liabilities and equity

 

$

366,871

 

 

 

 

 

$

378,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

2,809

 

 

 

 

 

$

3,029

 

 

 

Interest rate spread

 

 

 

 

 

3.09

%

 

 

 

 

3.10

%

Net interest margin

 

 

 

 

 

3.19

%

 

 

 

 

3.28

%

Average interest-earning assets to average interest-bearing liabilities

 

1.23

X

 

 

 

 

1.27

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29



Table of Contents

 

Comparison of Operating Results for the Three Months Ended September 30, 2013 and September 30, 2012

 

General. We recognized net income of  $919 thousand for the three months ended September 30, 2013 as compared to net income of $1.0 million for the three months ended September 30, 2012.  The decrease of $98 thousand was primarily attributable to a decrease in net interest income after provision for loan losses of $160 thousand, or 5.5%, and an increase in noninterest expense of $89 thousand, or 6.9%.

 

Interest Income. Interest income decreased by $416 thousand, or 11.4%, to $3.2 million for the three months ended September 30, 2013 from $3.7 million for the three months ended September 30, 2012.  The decrease was primarily the result of a decrease in the average yield on interest earning assets of 28 basis points to 3.68% for the three months ended September 30, 2013 from 3.96% for the three months ended September 30, 2012 and a decrease in the average balance of interest earning assets of $17.1 million, or 4.6%, to $351.8 million for the three months ended September 30, 2013 from $368.9 million for the three months ended September 30, 2012.

 

Interest income on loans decreased by $518 thousand, or 15.4%, to $2.9 million for the three months ended September 30, 2013 from $3.4 million for the three months ended September 30, 2012.  The decrease resulted from a decrease in the average balances of loans of $26.4 million, or 10.6%, to $221.6 million for the three months ended September 30, 2013 from $248.1 million for the three months ended September 30, 2012 and a decrease in the yield on loans of 28 basis points to 5.15% for the three months ended September 30, 2013 from 5.43% for the three months ended September 30, 2012.  Interest income on investment securities increased by $105 thousand, or 39.5%, to $371 thousand for the three months ended September 30, 2013 from $266 thousand for the three months ended September 30, 2012.  The increase reflected an increase in the average balance of securities of $26.1 million, or 35.6%, to $99.1 million for the three months ended September 30, 2013 from $73.0 million for the three months ended September 30, 2012 and a slight increase of four basis points in the yield on securities to 1.50% from 1.46%.  The increase in average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during this period of low loan demand.

 

Interest Expense. Interest expense decreased $196 thousand, or 31.4%, to $429 thousand for the three months ended September 30, 2013 from $625 thousand for the three months ended September 30, 2012.  The decrease reflected a decrease of 26 basis points in the average rate paid on deposits for the three months ended September 30, 2013 to 0.60% from 0.86% for the three months ended September 30, 2012 and a decrease in the average balances of deposits of $3.5 million, or 1.2%, to $286.0 million for the three months ended September 30, 2013 from $289.5 million for the three months ended September 30, 2012.  The largest decrease in interest expense came from certificates of deposit, which decreased $171 thousand, or 30.9%, to $382 thousand for the three months ended September 30, 2013 from $533 thousand for the same period.  The decrease is reflective of a decrease of $9.6 million, or 4.3%, in the average balance of certificates of deposit to $215.5 million for the three months ended September 30, 2013 from $225.1 million for the three months ended September 30, 2012 and a decrease of 27 basis points in the average rate paid on such deposits to 0.70% from 0.97% for the same periods ended.

 

Net Interest Income. Net interest income before the provision for loan losses decreased by $220 thousand, or 7.3%, to $2.8 million for the three months ended September 30, 2013 from $3.0 million for the three months ended September 30, 2012.  The decrease resulted from a decrease in our interest rate spread to 3.09% from 3.10% and a decrease in our net interest margin to 3.19% from 3.28% for the same periods.  The decrease in our interest rate spread and margin was largely due to declining yields on interest earning assets, which reflected the continuing decline across the U.S. Treasury yield curve.

 

Provision for Loan Losses. We recorded a provision for loan losses of $81 thousand for the three months ended September 30, 2013, compared with a provision of $141 thousand for the three months ended September 30, 2012.  Net charge-offs for the three months ended September 30, 2013 were $0 compared to $68 thousand for the three months ended September 30, 2012.  The decrease in our provision is primarily a factor of lower net charge-offs as compared with the three months ended September 30, 2012 and an overall decline in our loan balances as compared with September 30, 2012.  Our gross loans at September 30, 2013 were $223.9 million compared with $246.1 million at September 30, 2012.  Our allowance for loan losses was $832 thousand at September 30, 2013 and $751 thousand at June 30, 2013.

 

We used the same methodology in assessing the allowances for both periods.  To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 30, 2013 and 2012.

 

Noninterest Income. Noninterest income for the three months ended September 30, 2013 was $80 thousand compared with $86 thousand for the same period in 2012.  The Company’s $14 thousand loss on sales of real estate owned for the three months ended September 30, 2013 compared with three months ended September 30, 2012 was offset by an increase in other noninterest income of $67 thousand to $76 thousand for a $57 thousand gain the three months ended September 30, 2013 from $9 thousand for the same period in 2012.  The $76 thousand of other noninterest income is largely attributable to income on bank owned life insurance.  In April 2013, the Company purchased an additional $8.0 million in bank owned life insurance.

 

30



Table of Contents

 

Noninterest Expense. Noninterest expense for the three months ended September 30, 2013 increased by $89 thousand, or 6.9%, over the same period in 2012.  The increase to the Company’s noninterest expense primarily resulted from increases in salaries and employee benefits of $71 thousand, or 9.0%, and professional and supervisory fees of $33 thousand, or 41.8%.  These increases were offset, partially, by a decrease in occupancy and equipment expenses of $22 thousand, or 12.4%

 

Income Tax Expense. Income tax expense for the three months ended September 30, 2013 was $513 thousand compared with $670 thousand for the three months ended September 30, 2012.  Our effective income tax rate decreased to 35.8% for the three months ended September 30, 2013 from 39.7% for the three months ended September 30, 2012.  The decrease in effective tax rates is largely due to income on bank owned life insurance, which is non-taxable for income tax purposes and represents a permanent difference between book and taxable income.

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

 

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% assets (as of September 30, 2013), or approximately $40.7 million.

 

Common Stock Dividend Policy.  The Company’s Board of Directors declared $0.10 per share cash dividends on its common stock on July 25, 2013.  Dividends were paid to stockholders of record as of August 15, 2013.  Total dividends paid for the three months ended September 30, 2012 were $584 thousand.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2013. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2013, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

There are various claims and lawsuits in which the Company is periodically involved incidental to the Company’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

 

ITEM 1A. RISK FACTORS

 

Disclosures of risk factors are not required by smaller reporting companies, such as the Company.

 

31



Table of Contents

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)   None.

 

(b)   Not applicable.

 

(c)   Issuer Repurchases.  The following table sets forth information in connection with repurchases of the Company’s common stock for the period July 1, 2013 through September 30, 2013.  On June 19, 2013, the Board of Directors authorized the repurchase of up to 150,000 shares of the Company’s common stock. The repurchase authorization has no expiration date.  In connection with this repurchase authorization, the Company had purchased a total of 89,900 shares of its common stock.

 

 

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
Per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plan

 

Approximate Maximum
Dollar Value or Number
of Shares That May Yet
be Purchased Under
Publicly Announced Plan

 

July 1 - July 31, 2013

 

84,684

 

15.82

 

84,684

(1)

65.316

(2)

August 1 - August 31, 2013

 

5,216

 

16.29

 

5,216

(1)

60,100

(2)

September 1 - September 30, 2013

 

 

 

 

60,100

(2)

Total

 

89,900

 

$

15.85

 

89,900

 

 

 

 


(1)  All shares were purchased pursuant to a publicly announced repurchase program that was approved by the Board of Directors on June 19, 2013.

(2)  Represents the maximum number of shares available for repurchase under the June 19, 2013 plan at June 30, 2013.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

 

32



Table of Contents

 

SIGNATURES

 

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

 

 

Oconee Federal Financial Corp.

 

 

Date: November 14, 2013

 

 

 

 

/s/ T. Rhett Evatt

 

T. Rhett Evatt

 

President and Chief Executive Officer

 

 

 

/s/ Curtis. T. Evatt

 

Curtis T. Evatt

 

Executive Vice President and Chief Financial Officer

 

33



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit
number

 

Description

 

 

 

31.1

 

Certification of T. Rhett Evatt, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

31.2

 

Certification of Curtis T. Evatt, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

 

 

 

32.1

 

Certification of T. Rhett Evatt, President and Chief Executive Officer, and Curtis T. Evatt, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language):

(i)                                     Consolidated Balance Sheets

(ii)                                  Consolidated Statements of Income and Other Comprehensive Income

(iii)                               Consolidated Statements of Shareholders’ Equity

(iv)                              Consolidated Statements of Cash Flows, and

(v)                                 Notes to The Consolidated Financial Statements

 

34