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Oconee Federal Financial Corp. - Quarter Report: 2020 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q 

 

 

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

 

For the Quarterly Period ended September 30, 2020

 

Or

 

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

 

For transition period from              to             

 

Commission File Number 001-35033

 

 

 

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

 

 
     
Federal   32-0330122

(State of Other Jurisdiction

of Incorporation)

 

(I.R.S Employer

Identification Number)

   
201 East North Second Street, Seneca, South Carolina   29678
(Address of Principal Executive Officers)   (Zip Code)

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Trading

Symbol(s)

  Name of each exchange on which registered
Common Stock, par value $0.01 per share   OFED   The NASDAQ Stock Market, LLC

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

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

             
Large accelerated filer     Accelerated filer  
             
Non-accelerated filer     Smaller reporting company  

 

 

      Emerging growth company  

 

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

 

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

 

As of November 5, 2020, the registrant had 5,604,430 shares of common stock, $0.01 par value per share, outstanding. 

 

 

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I.   2
ITEM 1. FINANCIAL STATEMENTS 2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
ITEM 4. CONTROLS AND PROCEDURES 39
PART II.   39
ITEM 1. LEGAL PROCEEDINGS 39
ITEM 1A. RISK FACTORS 39
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 40
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 40
ITEM 4. MINE SAFETY DISCLOSURES 40
ITEM 5. OTHER INFORMATION 40
ITEM 6. INDEX TO EXHIBITS 41
SIGNATURES 41
EXHIBITS  

 

1 

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

PART I

ITEM 1. FINANCIAL STATEMENTS

 

   September 30, 2020
(unaudited)
   June 30, 2020 
ASSETS          
Cash and due from banks  $3,715   $4,673 
Interest-earning deposits   28,482    29,843 
Fed funds sold   48    66 
Total cash and cash equivalents   32,245    34,582 
Securities available-for-sale   92,980    90,726 
Loans   359,006    355,667 
Allowance for loan losses   (1,344)   (1,346)
Net loans   357,662    354,321 
Loans held for sale, at fair value   905    92 
Premises and equipment, net   9,339    9,367 
Real estate owned, net   211    159 
Accrued interest receivable          
Loans   1,140    1,074 
Investments   332    364 
Restricted equity securities, at cost   1,249    1,249 
Bank owned life insurance   19,594    19,482 
Goodwill   2,593    2,593 
Core deposit intangible   189    211 
Loan servicing rights   415    458 
Deferred tax assets   368    365 
Other assets   534    539 
Total assets  $519,756   $515,582 
           
LIABILITIES          
Deposits          
Noninterest - bearing  $42,682   $43,995 
Interest - bearing   382,156    377,097 
Total deposits   424,838    421,092 
Federal Home Loan Bank advances   5,000    5,000 
Accrued interest payable and other liabilities   990    1,185 
Total liabilities   430,828    427,277 
           
SHAREHOLDERS’ EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,530,324 and 6,530,074 shares outstanding, respectively   65    65 
Treasury stock, at par, 925,894 and 924,618 shares, respectively   (9)   (9)
Additional paid-in capital   7,371    7,342 
Retained earnings   79,783    79,071 
Accumulated other comprehensive income   2,075    2,243 
Unearned ESOP shares   (357)   (407)
Total shareholders’ equity   88,928    88,305 
Total liabilities and shareholders’ equity  $519,756   $515,582 

 

See accompanying notes to the consolidated financial statements

 

2 

 

 

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,
2020
   September 30,
2019
 
Interest and dividend income:          
Loans, including fees  $4,027   $4,118 
Securities, taxable   291    408 
Securities, tax-exempt   91    104 
Other interest-earning assets   27    188 
Total interest income   4,436    4,818 
Interest expense:          
Deposits   550    1,060 
Other borrowings   19    127 
Total interest expense   569    1,187 
Net interest income   3,867    3,631 
Provision for loan losses        
Net interest income after provision for loan losses   3,867    3,631 
Noninterest income:          
Service charges on deposit accounts   82    121 
Income on bank owned life insurance   112    113 
Mortgage servicing income   40    49 
Gain on sale of mortgage loans   35    32 
ATM & debit card income   98    89 
Change in fair value of equity securities, net   (23)   80 
Gain on sale of securities, net   62    12 
Gain on payoff of purchase credit impaired loans   195     
Other   2    3 
Total noninterest income   603    499 
Noninterest expense:          
Salaries and employee benefits   1,605    1,590 
Occupancy and equipment   459    468 
Data processing   247    222 
ATM & debit card expense   69    59 
Professional and supervisory fees   121    147 
Office expense   42    44 
Advertising   51    56 
FDIC deposit insurance   31    1 
Foreclosed assets, net   7    45 
Change in loan servicing asset   43    53 
Other   172    216 
Total noninterest expense   2,847    2,901 
Income before income taxes   1,623    1,229 
Income tax expense   350    295 
         Net income  $1,273   $934 
Other comprehensive income          
Unrealized (losses)/gains on securities available-for-sale  $(151)  $482 
Tax effect   32    (101)
Reclassification adjustment for gains realized in net income   (62)   (12)
Tax effect   13    3 
Total other comprehensive (loss)/income   (168)   372 
Comprehensive income  $1,105   $1,306 
           
Basic net income per share: (Note 3)  $0.22   $0.16 
Diluted net income per share: (Note 3)  $0.22   $0.16 
Dividends declared per share:  $0.10   $0.10 

 

See accompanying notes to the consolidated financial statements

 

3 

 

 

OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands, except share and per share data)

 

For the three months ended September 30, 2020 and September 30, 2019

 

                   Accumulated         
           Additional       Other   Unearned     
   Common   Treasury   Paid-In   Retained   Comprehensive   ESOP     
   Stock   Stock   Capital   Earnings   Income (loss)   Shares   Total 
                             
Balance at June 30, 2019  $65   $(8)  $10,986   $77,464   $394   $(604)  $88,297 
Net income               934            934 
Other comprehensive income                   372        372 
Purchase of 34,380 shares of treasury stock (1)           (796)               (796)
Stock-based compensation expense           19                19 
Dividends               (575)           (575)
ESOP shares earned           45            49    94 
Balance at September 30, 2019  $65   $(8)  $10,254   $77,823   $766   $(555)  $88,345 
                                    
Balance at June 30, 2020  $65   $(9)  $7,342   $79,071   $2,243   $(407)  $88,305 
Net income               1,273            1,273 
Other comprehensive loss                   (168)       (168)
Purchase of 1,276 shares of treasury stock (2)           (31)               (31)
Stock-based compensation expense           21                21 
Common Stock Issued           5                5 
Dividends               (561)           (561)
ESOP shares earned           34            50    84 
Balance at September 30, 2020  $65   $(9)  $7,371   $79,783   $2,075   $(357)  $88,928 

 

(1)The weighted average cost of treasury shares purchased during the three months ended was $23.16 per share. Treasury stock repurchases were accounted for using the par value method.
(2)The weighted average cost of treasury shares purchased during the three months ended was $24.58 per share. Treasury stock repurchases were accounted for using the par value method.

 

See accompanying notes to the consolidated financial statements

 

4 

 

 

 

OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands, except share and per share data)

 

   Three Months Ended 
   September 30,
2020
   September 30,
2019
 
Cash Flows From Operating Activities          
Net income  $1,273   $934 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for real estate owned       28 
Depreciation and amortization, net   423    300 
Net accretion of purchase accounting adjustments   (84)   (8)
Deferred income tax expense   88    49 
Change in loan servicing asset   43    53 
Net gain on sales of securities   (62)   (12)
Mortgage loans originated for sale   (3,103)   (3,029)
Mortgage loans sold   2,325    3,061 
Gain on sales of mortgage loans   (35)   (32)
Change in fair value of equity securities   (23)   (80)
Increase in cash surrender value of bank owned life insurance   (112)   (114)
Gain on payoff of purchased credit impaired loans   (195)    
ESOP compensation expense   84    94 
Stock based compensation expense   21    19 
Net change in operating assets and liabilities:          
Accrued interest receivable and other assets   (29)   153 
Accrued interest payable and other liabilities   (195)   403 
Net cash provided by operating activities   419    1,819 
Cash Flows From Investing Activities          
Purchases of premises and equipment   (141)   (805)
Purchases of securities available-for-sale   (10,059)   (5,581)
Proceeds from maturities, paydowns and calls of securities available-for-sale   5,527    5,556 
Proceeds from sales of securities available-for-sale   1,872    5,268 
Redemption of restricted equity securities       213 
Proceeds from sale of real estate owned       77 
Loan originations and repayments, net   (3,114)   (787)
Net cash (used)/provided in investing activities   (5,915)   3,941 
Cash Flows from Financing Activities          
Net change in deposits   3,746    (1,448)
Repayment of notes payable to FHLB       (5,000)
Dividends paid   (561)   (575)
Purchase of treasury stock   (31)   (796)
Proceeds from sale of common stock, net of issuance costs   5     
Net cash provided/(used) by financing activities   3,159    (7,819)
Change in cash and cash equivalents   (2,337)   (2,059)
Cash and cash equivalents, beginning of period   34,582    36,690 
Cash and cash equivalents, end of period  $32,245   $34,631 

 

See accompanying notes to the consolidated financial statements

 

5 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

  

(1)BASIS OF PRESENTATION, RISKS AND UNCERTAINTIES

 

Basis of Presentation:

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (74.31%) 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, 2020 and June 30, 2020 and the results of operations and cash flows for the interim periods ended September 30, 2020 and 2019. All interim amounts are unaudited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 2021 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

 

Reclassifications:

 

Certain amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.

 

Cash Flows:

 

Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-earning deposits and amounts due from other depository institutions.

 

Use of Estimates:

 

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.

 

Risks and Uncertainties:

 

On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses continue to disrupt global supply chains and adversely impact many industries. The outbreak may continue to have a material adverse impact on economic and market conditions and could trigger a period of global economic slowdown. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

 

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

 

6 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

(2) NEW ACCOUNTING STANDARDS

 

Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848)”. Issued in March 2020, ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

 

ASU 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information difficult for investors to understand. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13.

 

ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. Issued in November 2019, ASU 2019-10 provides guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies (such as the Company) applying standards on current expected credit losses (CECL), derivatives, hedging and leases. For the Company, the new effective date for Credit Losses (CECL) will be for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. For the Company, the effective dates for Derivatives, Hedging and Leases were not deferred under this guidance.

 

ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”. Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.

 

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

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

7 

 

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

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

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has determined that it will continue to prepare its credit loss allowance internally. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.

 

There have been no accounting standards that have been issued or proposed by the FASB or other standards-setting bodies during this quarter that are expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company continues to evaluate the impact of standards previously issued and not yet effective, and have no changes in our assessment to disclose since filing of the Annual Report on Form 10-K.

 

8 

 

  

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

(3) EARNINGS PER SHARE (“EPS”)

 

Basic EPS is based on the weighted average number of common shares outstanding and is adjusted for ESOP shares not yet committed to be released. Unvested restricted stock awards, which contain rights to non-forfeitable dividends, are considered participating securities and the two-class method of computing basic and diluted EPS is applied. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive, using the treasury stock method. The factors used in the earnings per common share computation follow:

 

    Three Months Ended  
    September 30,
2020
    September 30,
2019
 
Earnings per share            
Net income   $ 1,273     $ 934 
Less:  distributed earnings allocated to participating securities     (1 )     (1 )
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities            
Net earnings available to common shareholders   $ 1,272     $ 933  
                 
Weighted average common shares outstanding including participating securities     5,758,040       5,739,658  
Less:  participating securities     (5,800 )     (8,800 )
Less: average unearned ESOP shares     (35,124 )     (56,249 )
Weighted average common shares outstanding     5,717,116       5,674,609  
                 
Basic earnings per share   $ 0.22     $ 0.16  
                 
Weighted average common shares outstanding     5,717,116       5,674,609  
Add:  dilutive effects of assumed exercises of stock options     73,103       64,803  
Average shares and dilutive potential common shares     5,790,219       5,739,412  
                 
Diluted earnings per share   $ 0.22     $ 0.16  

 

For the three months ended September 30, 2020, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three months ended September 30, 2019, 16,400 shares were considered anti-dilutive as the exercise price was in excess of the average market price.

 

9 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

(4)SECURITIES AVAILABLE-FOR-SALE

 

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at September 30, 2020 and June 30, 2020 are as follows:

 

September 30, 2020  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Change in
Fair Value
Equity Securities
   Fair
Value
 
Available-for-sale:                    
FHLMC common stock  $20   $   $   $135   $155 
Certificates of deposit   2,493    89            2,582 
Municipal securities   19,832    855            20,687 
CMOs   9,893    361    (5)       10,249 
U.S. Government agency mortgage-backed securities   54,995    1,417    (109)       56,303 
U.S. Government agency bonds   2,985    21    (2)       3,004 
Total available-for-sale  $90,218   $2,743   $(116)  $135   $92,980 

 

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

 

Securities pledged at September 30, 2020 and June 30, 2020 had fair values of $14,384 and $12,524, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

 

At September 30, 2020 and June 30, 2020, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

 

10 

 

  

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at September 30, 2020 and June 30, 2020. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

    Less than 12 Months     12 Months or More     Total  
    Fair Value     Unrealized
Loss
    Number in
Unrealized
Loss (1)
    Fair Value     Unrealized
Loss
    Number in
Unrealized
Loss (1)
    Fair Value     Unrealized
Loss
    Number in
Unrealized
Loss (1)
 
September 30, 2020                                                      
Available-for-sale:                                                      
CMOs   $ 1,002     $ (5 )     1     $     $           $ 1,002     $ (5 )     1  
U.S. Government agency mortgage-backed securities     11,042       (109 )     8                         11,042       (109 )     8  
U.S. Government agency bonds     1,975       (2 )     1                         1,975       (2 )     1  
    $ 14,019     $ (116 )     10     $     $           $ 14,019     $ (116 )     10  

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair Value   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair Value   Unrealized
Loss
   Number in
Unrealized
Loss (1)
 
June 30, 2020                                    
Available-for-sale:                                    
U.S. Government agency mortgage-backed securities  $6,342   $(25)   4   $   $        6,342    (25)   4 
   $6,342   $(25)   4   $   $       $6,342   $(25)   4 

 

(1)Actual amounts.

 

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

 

None of the unrealized losses at September 30, 2020 were recognized into net income for the three months ended September 30, 2020 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2020 were recognized as having OTTI during the year ended June 30, 2020.

 

11 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

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

                 
   September 30, 2020   June 30, 2020 
   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
Less than one year  $249   $252   $499   $503 
Due from one to five years   7,743    7,997    7,759    8,044 
Due after five years to ten years   12,464    12,934    10,707    11,152 
Due after ten years   4,854    5,090    5,360    5,570 
Mortgage-backed securities, CMOs and FHLMC stock (1)   64,908    66,707    63,403    65,457 
Total available for sale  $90,218   $92,980   $87,728   $90,726 

 

 

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

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three months ended September 30, 2020 and 2019:

 

   Three Months Ended 
Available-for-sale:  September 30,
2020
   September 30,
2019
 
Proceeds  $1,872   $5,268 
Gross gains   62    15 
Gross losses       (3)

 

The tax provision related to the net realized gain for the three months ended September 30, 2020 and September 30, 2019 was $13 and $3, respectively.

 

12 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

(5)LOANS

 

The components of loans at September 30, 2020 and June 30, 2020 were as follows:

 

   September 30,
2020
   June 30,
2020
 
Real estate loans:          
One-to-four family  $288,084   $283,931 
Multi-family   697    704 
Home equity   6,381    5,763 
Nonresidential   19,682    20,083 
Agricultural   1,170    1,187 
Construction and land   27,895    29,096 
 Total real estate loans   343,909    340,764 
Commercial and industrial (1)   8,834    8,135 
Consumer and other loans   6,263    6,768 
Total loans  $359,006   $355,667 

 

(1)Includes $4,108 and $4,094 of 100% SBA-guaranteed Paycheck Protection Program (“PPP”) loans as of September 30, 2020 and June 30, 2020, respectively.

  

The following tables present the activity in the allowance for loan losses for the three months ended September 30, 2020 by portfolio segment:

 

Three months ended September 30, 2020  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $1,032   $(41)  $(2)  $   $989 
Multi-family   4                4 
Home equity   34    6            40 
Nonresidential   75    33            108 
Agricultural   4                4 
Construction and land   105    (9)           96 
Total real estate loans   1,254    (11)   (2)       1,241 
Commercial and industrial   65    9            74 
Consumer and other loans   27    2            29 
Total loans  $1,346   $   $(2)  $   $1,344 

 

13 

 

  

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

 

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

 

   Ending Allowance on Loans:   Loans: 
At September 30, 2020  Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
   Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
 
Real estate loans:                    
One-to-four family  $   $989   $1,812   $286,272 
Multi-family       4        697 
Home equity       40        6,381 
Nonresidential       108    552    19,130 
Agricultural       4        1,170 
Construction and land       96        27,895 
Total real estate loans       1,241    2,364    341,545 
Commercial and industrial (1)       74        8,834 
Consumer and other loans       29        6,263 
Total loans  $   $1,344   $2,364   $356,642 

 

(1)Includes $4,108 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

  

The following tables present the activity in the allowance for loan losses for the three months ended September 30, 2019 by portfolio segment:

 

Three months ended September 30, 2019  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $995   $(2)  $   $   $993 
Multi-family   4                4 
Home equity   24    5            29 
Nonresidential   87    (2)           85 
Agricultural   3    1            4 
Construction and land   94    (7)           87 
Total real estate loans   1,207    (5)           1,202 
Commercial and industrial   67    3            70 
Consumer and other loans   23    2            25 
Total loans  $1,297   $   $   $   $1,297 

 

14 

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

(1)Includes $4,094 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

 

15 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

   September 30, 2020 
   Unpaid Principal Balance   Recorded Investment   Related Allowance   Average Recorded Investment   Interest Income Recognized 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $1,839   $1,812   $   $1,822   $9 
Multi-family                    
Home equity                    
Nonresidential   585    552        557     
Agricultural                    
Construction and land                    
Total real estate loans   2,424    2,364        2,379    9 
Commercial and industrial                    
Consumer and other loans                    
Total  $2,424   $2,364   $   $2,379   $9 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $   $   $   $   $ 
Multi-family                    
Home equity                    
Nonresidential                    
Agricultural                    
Construction and land                    
Total real estate loans                    
Commercial and industrial                    
Consumer and other loans                    
Total  $   $   $   $   $ 
                          
Totals:                         
Real estate loans  $2,424   $2,364   $   $2,379   $9 
Consumer and other loans                    
Total  $2,424   $2,364   $   $2,379   $9 

 

16 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

17 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or individually for impairment.

 

Total past due loans and nonaccrual loans at September 30, 2020:

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
   Total
Past Due
   Current   Total
Loans
   Nonaccrual
Loans
   Accruing
Loans
Past Due 90
Days or More
 
Real estate loans:                                        
One-to-four family  $2,796   $1,166   $336   $4,298   $283,786   $288,084   $1,802   $ 
Multi-family                   697    697         
Home equity   15            15    6,366    6,381         
Nonresidential                   19,682    19,682    552     
Agricultural                   1,170    1,170         
Construction and land       9        9    27,886    27,895         
Total real estate loans   2,811    1,175    336    4,322    339,587    343,909    2,354     
Commercial and industrial                   8,834    8,834         
Consumer and other loans                   6,263    6,263         
Total  $2,811   $1,175   $336   $4,322   $354,684   $359,006   $2,354   $ 

 

COVID-19 Loan Modifications:

 

In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Included in the table above are $14,665 in loans that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. There are $10,827 in one-to-four family loans, $3,421 in non-residential loans and $417 in multi-family loans. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 troubled debt restructuring classifications for a limited period of time to account for the effects of COVID-19. The Federal Reserve and the other banking agencies and regulators have also issued a joint statement encouraging banks to work prudently with borrowers and to describe the agencies’ interpretations of how accounting rules under ASC 310-40 apply to certain COVID-19 related modifications. We have not considered any of the COVID-19 related modifications performed to date to be troubled debt restructurings. As of September 30, 2020, $14,369 were current and $296 were 30 days or more past due. As of September 30, 2020, $5,800 of the original $14,665 in original COVID-19 relief modified loans are no longer in deferral.

 

18 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
   Total
Past Due
   Current   Total
Loans
   Nonaccrual
Loans
   Accruing
Loans
Past Due 90
Days or More
 
Real estate loans:                                        
One-to-four family  $2,055   $407   $561   $3,023   $280,908   $283,931   $1,969   $ 
Multi-family                   704    704         
Home equity           40    40    5,723    5,763    40     
Nonresidential   179            179    19,904    20,083    732     
Agricultural                   1,187    1,187         
Construction and land       10        10    29,086    29,096         
Total real estate loans   2,234    417    601    3,252    337,512    340,764    2,741     
Commercial and industrial                   8,135    8,135         
Consumer and other loans                   6,768    6,768         
Total  $2,234   $417   $601   $3,252   $352,415   $355,667   $2,741   $ 

 

Included in the table above are $15,024 in loans that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. There are $10,993 in one-to-four family loans, $3,615 in non-residential loans and $416 in multi-family loans. As of June 30, 2020, $14,781 were current and $243 were 30 days or more past due.

 

Troubled Debt Restructurings:

 

At September 30, 2020 and June 30, 2020, total loans that have been modified as troubled debt restructurings were $1,781 and $1,985, respectively, which consisted of two non-residential real estate loans and three one-to-four family first lien loans at September 30, 2020, and two non-residential real estate loans and four one-to-four family first lien loans at June 30, 2020. There was no specific allowance for loss established for these loans at September 30, 2020 or June 30, 2020. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. No loans have been modified as troubled debt restructurings during the three months ended September 30, 2020. No loans modified as troubled debt restructurings during the twelve months ended September 30, 2020 have defaulted since restructuring. All of these loans are on nonaccrual at September 30, 2020 and June 30, 2020. At September 30, 2020 and June 30, 2020, $1,745 and $1,774, respectively, were individually evaluated for impairment.

 

Allowance for Loan Loss:

 

There have been no changes to our allowance for loan loss methodology during the quarter ended September 30, 2020. We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become present. After such adjustments to the calculation, we have determined that the recorded allowance is believed to be adequate at this time and as a result no additional provision for loan losses has been recorded during the quarter ended September 30, 2020.  However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and the country continues to fully reopen. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 30, 2020 and September 30, 2019.

 

19 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Loan Grades:

 

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.

 

Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.

 

Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.

 

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

 

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

 

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

 

Portfolio Segments:

 

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

 

For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.

 

The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of December 1, 2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered. The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the Company’s permission. Such homes must be “de-titled” by the State of South Carolina or Georgia so that they are taxed and must be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such homes are affixed.

 

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

 

20 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

Home Equity: The Company offers home equity loans and lines of credit secured by first or second deeds of trust on primary residences in our market area. The Company’s home equity loans and lines of credit are limited to an 80% loan-to-value ratio (including all prior liens). Standard residential mortgage underwriting requirements are used to evaluate these loans. The Company offers adjustable-rate and fixed-rate options for these loans with a maximum term of 10 years. The repayment terms on lines of credit are interest only monthly with principle due at maturity. Home equity loans have a more traditional repayment structure with principal and interest due monthly. The maximum term on home equity loans is 10 years with an amortization schedule not exceed 20 years.

 

Nonresidential Real Estate: Nonresidential loans include those secured by real estate mortgages on churches, owner-occupied and non-owner-occupied commercial buildings of various types, retail and office buildings, hotels, and other business and industrial properties. The nonresidential real estate loans that the Company originates generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75%.

 

Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions. Our nonresidential real estate lending includes a significant amount of loans to churches. Because a church’s financial stability often depends on donations from congregation members rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other nonresidential real estate.

 

The Company considers a number of factors in originating nonresidential real estate loans. The Company evaluates the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions. In evaluating the property securing the loan, the factors the Company considers include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current operating budgets. The collateral underlying all nonresidential real estate loans is appraised by outside independent appraisers approved by our board of directors. Personal guarantees may be obtained from the principals of nonresidential real estate borrowers, and in the case of church loans, guarantees from the applicable denomination may be obtained.

 

Agricultural: These loans are secured by farmland and related improvements in the Company’s market area. These loans generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of these loans is generally 75%. The Company is managing a small number of these loans in our portfolio. We continue to closely monitor our existing relationships.

 

Loans secured by agricultural real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Agricultural real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.

 

21 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.

 

The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only two such loans at a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans is 85%.

 

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

 

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

 

Within this category for the quarter ended September 30, 2020 and the year ended June 30, 2020 are PPP loans that were authorized under the CARES Act. PPP loans are originated by the Association, are 100% guaranteed by the Small Business Administration (“SBA”) and qualify to be forgiven based on certain criteria as determined by the SBA. The Association received a fee, with the percentage depending on the size of the loan, for originating these loans and earn 1% on the outstanding balance for the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA. As of September 30, 2020 no PPP loans have been forgiven.

 

Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.

 

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

 

22 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

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

 

   Pass   Pass- Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $277,878   $3,756   $3,147   $3,303   $   $288,084 
Multi-family   697                    697 
Home equity   5,936    383    53    9        6,381 
Nonresidential   19,016            666        19,682 
Agricultural   1,170                    1,170 
Construction and land   27,445    408        42        27,895 
Total real estate loans   332,142    4,547    3,200    4,020        343,909 
Commercial and industrial   8,834                    8,834 
Consumer and other loans   6,263                    6,263 
Total  $347,239   $4,547   $3,200   $4,020   $   $359,006 

 

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

 

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

 

At September 30, 2020, there were no loans in formal foreclosure proceedings. 

 

23 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

(6)BORROWINGS

 

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

 

   September 30, 2020
   Balance   Stated Interest Rate
FHLB advances due February 2023 through January 2025  $5,000    1.40% - 1.59%
Total  $5,000    

  

   June 30, 2020
   Balance   Stated Interest Rate
FHLB advances due February 2023 through January 2025  $5,000    1.40% - 1.59%
Total  $5,000    

 

Payments over the next five years are as follows:

  

2023 $2,500
2025 $2,500

 

The average interest rate of all outstanding FHLB advances was 1.50% on September 30, 2020 and June 30, 2020, respectively.

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $9,873 and $10,786 of investment securities at September 30, 2020 and June 30, 2020, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $129,359 at September 30, 2020.

  

There were no overnight borrowings at September 30, 2020 or June 30, 2020.

  

(7)FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

Investment Securities:

 

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

 

24 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

Impaired Loans:

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. 

 

Real Estate Owned:  

 

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

 

Loan Servicing Rights:  

 

Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data and results in a Level 3 classification.

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and June 30, 2020 are summarized below: 

 

   Fair Value Measurements 
   September 30, 2020   June 30, 2020 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
Financial assets:                    
Securities available-for-sale:                    
FHLMC common stock  $155   $   $178   $ 
Certificates of deposit   2,582        2,592     
Municipal securities   20,687        21,643     
CMOs   10,249        10,106     
U.S. Government agency mortgage-backed securities   56,303        55,173     
U.S. Government agency bonds   3,004        1,034     
Total securities available-for-sale   92,980        90,726     
Loan servicing rights       415        458 
Total financial assets  $92,980   $415   $90,726   $458 

 

25 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

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

 

   Fair Value Measurements 
   September 30,
2020
   June 30,
2020
 
   (Level 3)   (Level 3) 
Non-financial assets:          
Real estate owned, net:          
One-to-four family  $52   $ 
Nonresidential   159    159 
Total non-financial assets   211    159 
Total assets measured at fair value on a non-recurring basis  $211   $159 

  

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned at September 30, 2020 and June 30, 2020 was $211 and $159, respectively. There were no valuation allowances associated with these properties at September 30, 2020 or June 30, 2020.

  

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three months ended September 30, 2020 and 2019:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended 
   September 30,
 2020
   September 30,
 2019
 
    Loan
Servicing
Rights
    Loan
Servicing
Rights
 
Balance at beginning of period:  $458   $868 
Purchases        
Unrealized net losses included in net income   (43)   (53)
Balance at end of period:  $415   $815 

 

26 

 

 

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, 2020 and June 30, 2020.

 

   Level 3 Quantitative Information 
   September 30,
 2020
   June 30,
 2020
   Valuation
Technique
  Unobservable
Inputs
  Range 
   Fair Value   Fair Value           
Loan servicing rights  $415   $458   Discounted cash flows  Discount rate, estimated timing of cash flows   8.63% to 8.38% 
                      
Real estate owned net:                     
 One-to-four family  $52   $   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 20% 
 Nonresidential  $159   $159   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 20% 

 

27 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

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

  

   September 30, 2020 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $92,980   $   $92,980   $   $92,980 
Loans, net (1)   357,662            365,144    365,144 
Loans held for sale(2)   905            905    905 
Loan servicing rights   415            415    415 
Restricted equity securities   1,249     N/A     N/A     N/A     N/A 
                          
Financial liabilities                         
Deposits  $424,838   $230,007   $193,858   $   $423,865 
FHLB Advances   5,000        5,146        5,146 

 

   June 30, 2020 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $90,726   $   $90,726   $   $90,726 
Loans, net (1)   354,321            364,636    364,636 
Loans held for sale(2)   92            92    92 
Loan servicing rights   458            458    458 
Restricted equity securities   1,249     N/A     N/A     N/A     N/A 
                          
Financial liabilities                         
Deposits  $421,092   $223,172   $197,020   $   $420,192 
FHLB Advances   5,000        5,141        5,141 

 

 

(1)Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2020 and June 30, 2020 was measured using an exit price notion.

(2)Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors and result in a Level 3 classification.

  

(8)EMPLOYEE STOCK OWNERSHIP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10.00 per share during 2011. The Company makes discretionary contributions to the ESOP and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

 

28 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. There were no discretionary contributions made to the ESOP for debt retirement in 2019. Total ESOP compensation expense for the three months ended September 30, 2020 was $84, and for the three months ended September 30, 2019 was $94. 

 

Shares held by the ESOP at September 30, 2020 and June 30, 2020 were as follows:

 

   September 30,
 2020
   June 30,
2020
 
Committed to be released to participants   19,344    12,903 
Allocated to participants   141,264    141,264 
Unearned   31,714    38,534 
Total ESOP shares   192,322    192,701 
           
Fair value of unearned shares  $681   $993 

  

(9)STOCK BASED COMPENSATION

  

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

  

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

 

The following table summarizes stock option activity for the three months ended September 30, 2020:

 

   Options   Weighted-
Average
Exercise
Price/Share
   Aggregate
Intrinsic
Value (1)
 
Outstanding - June 30, 2020   164,319   $14.18      
Granted             
Exercised             
Forfeited             
Outstanding - September 30, 2020   164,319   $14.18   $1,197 
Fully vested and exercisable at September 30, 2020   148,319   $13.08   $1,245 
Expected to vest in future periods   16,000           
Fully vested and expected to vest - September 30, 2020   164,319   $14.18   $1,197 

 

 

(1)The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based on the closing price of common stock of $21.47 per share on September 30, 2020.

 

29 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. There were 1,638 and 1,235 options that were earned during the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense for stock options for the three months ended September 30, 2020 was $6, and for the three months ended September 30, 2019 was $4. Total unrecognized compensation cost related to stock options was $50 at September 30, 2020 and is expected to be recognized over a weighted-average period of 2.8 years.

  

The following table summarizes non-vested restricted stock activity for the three months ended September 30, 2020:

 

   September 30,
 2020
 
Balance - beginning of year   5,800 
Granted   250 
Forfeited    
Vested   (250)
Balance - end of period   5,800 
Weighted average grant date fair value  $19.78 

  

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense was $15 for the three months ended September 30, 2020 and 2019, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $75 at September 30, 2020 and is expected to be recognized over a weighted-average period of 1.5 years.

  

(10)LOAN SERVICING RIGHTS

 

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

  

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

  

   September 30,
2020
   June 30,
2020
 
Mortgage loan portfolio serviced for:          
FHLMC  $65,481   $69,553 

  

Custodial escrow balances maintained in connection with serviced loans were $845 and $702 at September 30, 2020 and June 30, 2020.

 

30 

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

Activity for loan servicing rights for the three months ended September 30, 2020 and 2019 is as follows:

 

   Three Months Ended 
   September 30,
2020
   September 30,
2019
 
Loan servicing rights:          
Beginning of period:  $458   $868 
Additions        
Change in fair value   (43)   (53)
End of period:  $415   $815 

  

Fair value at September 30, 2020 was determined using a discount rate of 8.38%, prepayment speed assumptions ranging from 10.32% to 26.58% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.21%. Fair value at September 30, 2019 was determined using a discount rate of 9.13%, prepayment speed assumptions ranging from 5.9% to 14.6% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.31%.

  

(11)SUPPLEMENTAL CASH FLOW INFORMATION

  

Supplemental cash flow information for the three months ended September 30, 2020 and 2019 is as follows:

 

     September 30,
2020
   September 30,
2019
 
Cash paid during the period for:            
Interest paid    $567   $ 1,185  
Income taxes paid    $267   $ 45  
Supplemental noncash disclosures:               
Transfers from loans to real estate owned    $52   $  
Change in unrealized gain/loss on securities available-for-sale    $(213)  $ 1,132  

  

(12)SUBSEQUENT EVENTS

 

Dividend Declared

  

On October 22, 2020, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of November 5, 2020, and will be paid on or about November 19, 2020.

 

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

 

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

  

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.

 

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

 

our ability to manage our operations nationally and in our market areas;

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

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

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

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

increased competition among depository and other financial institutions;

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

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

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

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

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

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

changes in the level of government support of housing finance;

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

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

changes in laws or government regulations or policies affecting financial institutions, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

changes in the ability of third-party providers to perform their obligations to us;

technological changes that may be more difficult or expensive than expected;

cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems;

our reliance on a small executive staff;

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

changes in consumer spending, borrowing and savings habits;

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

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

 

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the effects of actual government shutdowns;

the ability of the U.S. government to manage federal debt limits;

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

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

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

  

Novel Coronavirus Pandemic (COVID-19) 

 

On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses continue to disrupt global supply chains and adversely impact many industries. The outbreak may continue to have a material adverse impact on economic and market conditions and could trigger a period of global economic slowdown. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have certain employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.  

 

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

 

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

if the economy is unable to substantially and successfully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

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

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

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

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

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

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

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

  

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

 

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

 

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

 

Critical Accounting Policies  

 

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

  

Comparison of Financial Condition at September 30, 2020 and June 30, 2020  

 

Our total assets increased by $4.2 million, or 0.8%, to $519.8 million at September 30, 2020 from $515.6 million at June 30, 2020. Total cash and cash equivalents decreased $2.3 million, or 6.8%, to $32.2 million at September 30, 2020 from $34.6 million at June 30, 2020. The decrease in cash and cash equivalents was due to normal periodic fluctuations during the three month period. Our available-for-sale securities portfolio increased by $2.3 million from $90.7 million at June 30, 2020 to $93.0 million at September 30, 2020. The Association began actively replenishing security repayments and maturities with purchases due to increased liquidity. Gross loans increased $3.3 million, or 0.9%, to $359.0 million at September 30, 2020 from $355.7 million at June 30, 2020. This increase was due to normal growth during the three months ended September 30, 2020.

  

Deposits increased $3.7 million, or 0.9%, to $424.8 million at September 30, 2020 from $421.1 million at June 30, 2020. The increase in our deposits reflected an increase of $5.3 million in NOW accounts, $1.1 million in money market accounts and $1.7 million in savings deposits, offset by a decrease of $3.1 million in certificates of deposit and $1.3 million in non-interest bearing deposits.

  

Oconee Federal, MHC’s cash is held on deposit with the Association. We generally do not accept brokered deposits and no brokered deposits were accepted during the three months ended September 30, 2020.

  

Federal Home Loan Bank advances remained stable at $5.0 million. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of September 30, 2020, or approximately $129.4 million. We had no federal funds purchased as of September 30, 2020 or as of June 30, 2020.

  

Total shareholders’ equity increased $623 thousand, or 0.7%, to $88.9 million at September 30, 2020 compared to $88.3 million at June 30, 2020. This was primarily due to our net income during the period of $1.3 million and the increase of $84 thousand in ESOP shares earned partially offset by our payment of dividends of $561 thousand, an increase in after-tax unrealized losses in our investment portfolio of $168 thousand and $31 thousand used for the repurchase of treasury stock. The Company and the Association exceeded all regulatory capital requirements at September 30, 2020 and June 30, 2020.

 

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Nonperforming Assets

 

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

  

   September 30,
2020
   June 30,
 2020
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $1,802   $1,969 
Multi-family        
Home equity       40 
Nonresidential   552    732 
Agricultural        
Construction and land        
Total real estate loans   2,354    2,741 
Commercial and industrial        
Consumer and other loans        
Total nonaccrual loans (1)  $2,354   $2,741 
Accruing loans past due 90 days or more:          
Real estate loans:          
Total accruing loans past due 90 days or more  $   $ 
Total of nonaccrual and 90 days or more past due loans (2)  $2,354   $2,741 
Real estate owned, net:          
One-to-four family  $52   $ 
Nonresidential   159    159 
Construction and land        
Other nonperforming assets        
Total nonperforming assets  $2,565   $2,900 
           
Accruing troubled debt restructurings  $   $ 
Troubled debt restructurings and total nonperforming assets  $2,565   $2,900 
           
Total nonperforming loans to total loans   0.66%   0.77%
Total nonperforming assets to total assets   0.49%   0.56%
Total nonperforming assets to loans and real estate owned   0.71%   0.82%

 

 

(1)Nonaccrual troubled debt restructurings included in the totals above were $1.8 million and $2.0 million, at September 30, 2020 and June 30, 2020, respectively.

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

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $33 thousand and $73 thousand for the three months ended September 30, 2020 and 2019, respectively. There was no interest recognized on these loans for the three months ended September 30, 2020 and September 30, 2019.

 

Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $19 thousand and $33 thousand for the three months ended September 30, 2020 and 2019, respectively. There was no interest recognized on troubled debt restructured loans for the three months ended September 30, 2020 and September 30, 2019.

  

Nonperforming assets decreased $335 thousand from $2.9 million as of June 30, 2020 to $2.6 million as of September 30, 2020. Nonaccrual loans decreased $387 thousand to $2.4 million as of September 30, 2020 and real estate owned increased $52 thousand to $211 thousand as of September 30, 2020. There were no accruing loans past due 90 days or more at either date. The decrease in nonaccrual loans primarily related to normal monthly fluctuations. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.49% and 0.71%, respectively, at September 30, 2020 compared to 0.56% and 0.82%, respectively at June 30, 2020.

 

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Analysis of Net Interest Margin

 

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

 

  

For the Three Months Ended

 
  

September 30, 2020

  

September 30, 2019 

 
   Average
Balance
   Interest and
Dividends
   Yield/ Cost   Average
Balance
   Interest and
Dividends
   Yield/ Cost 
   (Dollars in Thousands) 
Assets:                        
Interest-earning assets:                              
Loans  $357,195   $4,027    4.47%  $362,064   $4,118    4.51%
Investment securities   71,633    291    1.62    74,153    408    2.20 
Investment securities, tax-free   16,178    91    2.25    19,025    104    2.19 
Other interest-earning assets   32,127    27    0.33    30,056    188    2.48 
Total interest-earning assets   477,133    4,436    3.69    485,298    4,818    3.94 
Noninterest-earning assets   41,392              39,354           
Total assets  $518,525             $524,652           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $68,050   $33    0.19%  $55,188   $44    0.32%
Money market deposits   80,623    46    0.23    75,306    181    0.95 
Regular savings and other deposits   35,119    14    0.16    28,307    21    0.29 
Certificates of deposit   196,445    457    0.92    222,190    814    1.45 
Total interest-bearing deposits   380,237    550    0.57    380,991    1,060    1.10 
Other Borrowings   5,000    19    1.51    18,000    127    2.80 
Total interest-bearing liabilities   385,237    569    0.59    398,991    1,187    1.18 
Noninterest bearing deposits   42,686              35,368           
Other noninterest-bearing liabilities   1,461              2,039           
Total liabilities   429,384              436,398           
Equity   89,141              88,254           
Total liabilities and equity  $518,525             $524,652           
                               
Net interest income       $3,867             $3,631      
Interest rate spread             3.10%             2.76%
Net interest margin             3.22%             2.97%
Average interest-earning assets to average interest-bearing liabilities    1.24 x              1.27 x          

 

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Comparison of Operating Results for the Three Months Ended September 30, 2020 and September 30, 2019  

 

General. We reported net income of $1.3 million for the three months ended September 30, 2020 as compared to net income of $934 thousand for the three months ended September 30, 2019. Interest income decreased $382 thousand for the three months ended September 30, 2020 compared to September 30, 2019 and interest expense decreased $618 thousand resulting in a net increase to net interest income of $236 thousand. Noninterest income increased $104 thousand for the three months ended September 30, 2020 compared to September 30, 2019. Total noninterest expense decreased $54 thousand. Tax expense increased $55 thousand. 

 

Interest Income. Interest income decreased by $382 thousand to $4.4 million from $4.8 million for the three months ended September 30, 2020 and September 30, 2019, respectively. The yield on interest-earning assets decreased 25 basis points from 3.94% for the three months ended September 30, 2019 to 3.69% for the three months ended September 30, 2020. Total average interest-earning assets decreased by $8.2 million to $477.1 million for the three months ended September 30, 2020 from $485.3 million for the three months ended September 30, 2019. 

 

Interest income on loans decreased by $91 thousand to $4.0 million from $4.1 million for the three months ended September 30, 2020 and September 30, 2019, respectively. The yield on loans decreased four basis points from 4.51% for the three months ended September 30, 2019 to 4.47% for the three months ended September 30, 2020. The average balance of loans decreased by $4.9 million, or 1.34%, to $357.2 million for the three months ended September 30, 2020 from $362.1 million for the three months ended September 30, 2019. The decrease in the average balance of our loans is reflective of reduced originations and normal loan repayments. 

 

Interest income on investment securities decreased by $130 thousand, or 25.4%, to $382 thousand for the three months ended September 30, 2020 from $512 thousand for the three months ended September 30, 2019. The decrease reflected the combination of a decrease in the average balance of securities of $5.4 million, or 5.8%, to $87.8 million for the three months ended September 30, 2020 from $93.2 million for the three months ended September 30, 2019 and a decrease in the yield on securities to 1.74% from 2.20% for the respective periods. The decrease in the average balances of our investment securities reflected our continued efforts during fiscal 2020 to reduce investment purchases, which allowed us to use those funds as well as investment repayments and maturities to fund loan originations and repay FHLB advances.

 

Income on other interest earning assets decreased by $161 thousand, or 85.6%, to $27 thousand for the three months ended September 30, 2020 from $188 thousand for the three months ended September 30, 2019. The average balance of other interest-earning assets increased $2.1 million from the three months ended September 30, 2019 to the three months ended September 30, 2020 and the yield decreased 215 basis points over the same period. The increase in the average balance was due to normal periodic fluctuations. The decrease in yield was primarily the result of an overall decline in money market account rates, the balance of which comprised 96.1% of this category during the three months ended September 30, 2020. 

 

Interest Expense. Interest expense decreased by $618 thousand, or 52.1%, to $569 thousand for the three months ended September 30, 2020 from $1.2 million for the three months ended September 30, 2019. This decrease was attributable to a general decrease in retail and wholesale borrowing rates due to overall market decreases. The decrease reflected a decrease of 53 basis points in the average rate paid on interest-bearing deposits for the three months ended September 30, 2020 to 0.57% from 1.10% for the three months ended September 30, 2019. The decrease in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible in the current declining rate market. Average interest-bearing deposits were $380.2 million for the three months ended September 30, 2020 compared to $381.0 million for the three months ended September 30, 2019. 

 

The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased $357 thousand, or 43.9%, to $457 thousand for the three months ended September 30, 2020 from $814 thousand for the three months ended September 30, 2019. The average rate paid on certificates of deposit decreased by 53 basis points from 1.45% for the three months ended September 30, 2019 to 0.92% for the three months ended September 30, 2020 and the average balances decreased by $25.7 million from $222.2 million for the three-month period ended September 30, 2019 to $196.4 million for the three-month period ended September 30, 2020. The decrease in the average balance of certificates of deposit is reflective of normal deposit fluctuation along with a large customer deposit transfer to the money market deposit category. The decrease in the average rate paid on our certificates of deposit is reflective of an overall decline in market rates. 

 

The second largest decrease in deposit interest expense was related to expense on money market deposits, which decreased $135 thousand, or 74.6%, to $46 thousand for the three months ended September 30, 2020 from $181 thousand for the three months ended September 30, 2019. The average rate paid on money market deposits decreased by 72 basis points from 0.95% for the three months ended September 30, 2019 to 0.23% for the three months ended September 30, 2020 and the average balances increased by $5.3 million from $75.3 million for the three-month period ended September 30, 2019 to $80.6 million for the three-month period ended September 30, 2020. The increase in the average balance of money market deposits is reflective of normal deposit fluctuation along with a large customer deposit transfer from the certificate of deposit category. The decrease in the average rate paid on our money market deposits is reflective of an overall decline in market rates.

 

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Interest expense for other borrowings decreased by $108 thousand, or 85.0%, to $19 thousand for the three months ended September 30, 2020 from $127 thousand for the three months ended September 30, 2019. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $5.0 million for the three months ended September 30, 2020 compared to $18.0 million for the three months ended September 30, 2019. The average rate was 1.51% and 2.80% for the three months ended September 30, 2020 and 2019, respectively, due to a decrease in market interest rates. 

 

Net Interest Income. Net interest income before the provision for loan losses increased by $236 thousand, or 6.5%, to $3.9 million for the three months ended September 30, 2020. Our interest rate spread and net interest margin increased to 3.11% and 3.22%, respectively, from 2.76% and 2.97%, respectively, for the three months ended September 30, 2020 and September 30, 2019, respectively. The decreasing yield on earning assets offset by the lower cost of interest bearing liabilities contributed to the increase in net interest margin for the three months ended September 30, 2020.

 

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended September 30, 2020 or for the three months ended September 30, 2019. There were $2 thousand in charge-offs for the three months ended September 30, 2020 and no charge-offs for the three months ended September 30, 2019. The lack of provision for the three months ended September 30, 2020 is primarily due to minimal loan portfolio growth coupled with favorable loan allowance model metrics during the three months ended September 30, 2020.

  

Our total allowance for loan losses was $1.3 million, or 0.37% of total gross loans as of September 30, 2020 and $1.3 million, or 0.38% of total gross loans as of June 30, 2020. Our total allowance for loan losses was 0.38% of total gross loans, net of PPP loans, as of September 30, 2020 and June 30, 2020. PPP loans are not allocated any allowance due to the 100% SBA guarantee. There were no specifically identified impaired loans at September 30, 2020 or June 30, 2020. Total loans individually evaluated for impairment decreased $30 thousand, or 1.3%, to $2.36 million at September 30, 2020 compared to $2.39 million at June 30, 2020.

  

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 30, 2020 and 2019. There have been no changes to our allowance for loan loss methodology during the quarter.

  

Noninterest Income. Noninterest income increased $104 thousand, or 20.8%, to $603 thousand for the three months ended September 30, 2020 from $499 thousand for the three months ended September 30, 2019. Mortgage servicing income decreased $9 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $35 thousand and $32 thousand for the three months ended September 30, 2020 and 2019, respectively. The change in fair value of equity securities was a loss of $23 thousand for the three months ended September 30, 2020 compared to a gain of $80 thousand for the three months ended September 30, 2019. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $62 thousand and $12 thousand gain for the three months ended September 30, 2020 and 2019, respectively. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarters ended September 30, 2020 and September 30, 2019 to realize market gains and adjust the investment portfolio so that funds could be more beneficially used to yield higher net earnings going forward. The net gain on payoff of purchase credit impaired loans was $195 thousand for the three months ended September 30, 2020 due to the liquidation of two loans. There were no payoffs of purchase credit impaired loans for the three months ended September 30, 2019. Changes in all other noninterest income items were due to normal periodic fluctuations.

  

Noninterest Expense. Noninterest expense for the three months ended September 30, 2020 decreased by $54 thousand, or 1.9%, to $2.8 million from $2.9 million for the same period in 2019. Salaries and employee benefits increased $15 thousand due to routine increases. Occupancy and equipment decreased $9 thousand due to normal periodic fluctuations. Data processing increased $25 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $26 thousand primarily due to reduced legal expenses. FDIC deposit insurance increased $30 thousand. The three months ended September 30, 2020 is reflective of the standard FDIC assessed rate. The prior year period reflected an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of June 30, 2019. Foreclosed asset expenses decreased $38 thousand. This is reflective of the three months ended September 30, 2020 not having REO write downs, whereas the three months ended September 30, 2019 had $28 thousand in REO write downs. The change in the value of the loan servicing portfolio decreased $10 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.

 

Income Tax Expense. Tax expense increased $55 thousand, or 18.6%, to $350 thousand for the three months ended September 30, 2020 from a $295 thousand for the three months ended September 30, 2019. The increase is primarily due to a higher taxable income for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Our effective income tax rate was 21.6% and 24.0% for the three months ended September 30, 2020 and 2019, respectively.

 

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Liquidity and Capital Resources

 

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

 

Liquidity management is both a daily and long-term responsibility of management. Our liquidity monitoring process is designed to contend with changing economic situations, which would include the current COVID-19 pandemic. We have therefore not changed our daily or long-term liquidity management procedures. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets (as of September 30, 2020), or approximately $129.4 million as of that date, with a remaining availability of $124.4 million as of September 30, 2020.

  

Common Stock Dividends. On August 20, 2020 the Company paid a $0.10 per share cash dividend on its common stock for a total of $561 thousand.

  

Equity Compensation Plans. During the three months ended September 30, 2020, 250 shares of restricted stock were issued. No common stock options were issued during the three months ended September 30, 2020.

 

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, 2020. 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, 2020, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

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

  

ITEM 1A. RISK FACTORS

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

 

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

 

(a)None.

  

(b)Not applicable.

 

(c)Issuer Repurchases. On May 28, 2020, the Board of Directors authorized the repurchase of up to 100,000 of the Company’s common stock. In connection with the authorization of this stock repurchase program, the Board of Directors terminated the Company’s then existing stock repurchase program, which had authorized the Company to purchase up to 100,000 shares of its issued and outstanding common stock. Under this previous program, the Company purchased a total of 97,147 shares of its common stock at a weighted average price of $24.52 per share.

  

The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended September 30, 2020:

  

    Total
Number of
Shares
Purchased
   Average Price
Paid Per
Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
   Approximate Maximum
Dollar Value or Number
of Shares That May Yet
be Purchased Under
Publicly Announced Plans
 
July 1 - July 31, 2020    1,110   $24.96    1,110    29,065 
August 1 - August 31, 2020       $        29,065 
September 1 - September 30, 2020    166   $21.64    166    28,899(2)
Total    1,276   $24.53    1,276(1)     

 

 

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

(2)Represents the maximum number of shares available for repurchase under the May 28, 2020 plan at September 30, 2020.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

 

None. 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable. 

 

ITEM 5. OTHER INFORMATION

 

None. 

 

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ITEM 6. EXHIBITS

  

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed below.

  

Exhibit
number

 

Description

31.1   Certification of Curtis T. Evatt, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2   Certification of John W. Hobbs, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32   Certification of Curtis T. Evatt, President and Chief Executive Officer, and John W. Hobbs, Senior 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, 2020, formatted in XBRL (Extensible Business Reporting Language): 

(i)        Consolidated Balance Sheets

(ii)       Consolidated Statements of Income and Comprehensive Income

(iii)      Consolidated Statements of Changes In Shareholders’ Equity

(iv)      Consolidated Statements of Cash Flows, and

(v)       Notes to The Consolidated Financial Statements

  

SIGNATURES

 

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

 

  Oconee Federal Financial Corp.
     
Date: November 13, 2020    
     
 

/s/ Curtis T. Evatt

    Curtis T. Evatt
    President and Chief Executive Officer
     
    /s/ John W. Hobbs
    John W. Hobbs
    Executive Vice President and Chief Financial Officer

 

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