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EX-32 - EXHIBIT 32 - Oconee Federal Financial Corp.t1600334_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Oconee Federal Financial Corp.t1600334_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Oconee Federal Financial Corp.t1600334_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549  

 

 

 

FORM 10-Q 

 

 

 

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

 

For the Quarterly Period ended December 31, 2015

 

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)  

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

There were 5,880,340 shares of Common Stock, par value $0.01 per share, outstanding as of February 16, 2016.

 

 

 

 

 

 

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 33
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
     
ITEM 4. CONTROLS AND PROCEDURES 43
     
PART II.   44
     
ITEM 1. LEGAL PROCEEDINGS 44
     
ITEM 1A. RISK FACTORS 44
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 44
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 45
     
ITEM 4. MINE SAFETY DISCLOSURES 45
     
ITEM 5. OTHER INFORMATION 45
     
ITEM 6. EXHIBITS 45
     
SIGNATURES 46
   
INDEX TO EXHIBITS 47

 

 1 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

PART I

 

ITEM 1.FINANCIAL STATEMENTS

 

   December 31,
2015
   June 30,
 2015
 
   (Unaudited)   (Audited) 
ASSETS          
Cash and due from banks  $4,515   $4,883 
Interest-earning deposits   19,715    21,309 
Total cash and cash equivalents   24,230    26,192 
Securities available-for-sale   124,168    111,167 
Loans   297,246    309,267 
Allowance for loan losses   (1,148)   (1,008)
Net loans   296,098    308,259 
Loans held for sale   -    118 
Premises and equipment, net   6,990    7,058 
Real estate owned, net   1,918    2,092 
Accrued interest receivable          
Loans   1,035    1,077 
Investments   414    312 
Restricted equity securities   440    440 
Bank owned life insurance   17,283    9,044 
Goodwill   2,593    2,593 
Core deposit intangible   804    874 
Loan servicing rights   1,310    1,396 
Deferred tax assets   2,847    3,766 
Other assets   656    956 
Total assets  $480,786   $475,344 
           
LIABILITIES          
Deposits          
Noninterest bearing  $22,644   $20,254 
Interest bearing   374,524    373,839 
Total deposits   397,168    394,093 
Accrued interest payable and other liabilities   947    461 
Total liabilities   398,115    394,554 
           
SHAREHOLDERS' EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized; 5,880,340 and 5,882,140, shares outstanding, respectively   65    65 
Treasury stock, $0.01 par value, 591,699 and 589,899 shares, respectively   (6)   (6)
Additional paid-in capital   13,647    13,354 
Retained earnings   70,230    68,950 
Accumulated other comprehensive income (loss)   98    (26)
Unearned ESOP shares   (1,363)   (1,547)
Total shareholders' equity   82,671    80,790 
Total liabilities and shareholders' equity  $480,786   $475,344 

 

See accompanying notes to the consolidated financial statements

 

 2 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   December 31,
2015
   December 31,
2014
   December 31,
2015
   December 31,
2014
 
Interest and dividend income:                    
Loans, including fees  $3,850   $3,337   $7,734   $6,224 
Securities, taxable   430    370    820    751 
Securities, tax-exempt   119    40    208    76 
Interest-earning deposits and other   26    16    42    54 
Total interest income   4,425    3,763    8,804    7,105 
                     
Interest expense:                    
Deposits   295    315    584    623 
Total interest expense   295    315    584    623 
                     
Net interest income   4,130    3,448    8,220    6,482 
                     
Provision for loan losses   277    9    422    9 
                    
Net interest income after provision for loan losses   3,853    3,439    7,798    6,473 
                     
Noninterest income:                    
Service charges on deposit accounts   121    81    240    100 
Income on bank owned life insurance   132    72    240    139 
Mortgage banking income   95    34    191    34 
Gain on sales of securities   -    24    9    29 
Gain on disposition of purchase credit impaired loans   90    -    809    - 
Gain on sales of real estate owned   10    44    -    36 
Change in loan servicing asset   (21)   (28)   (86)   (28)
Other   14    30    19    31 
Total noninterest income   441    257    1,422    341 
                     
Noninterest expense:                    
Salaries and employee benefits   1,857    1,232    3,346    2,142 
Occupancy and equipment   354    230    714    397 
Data processing   110    107    258    174 
Professional and supervisory fees   167    216    417    329 
Office expense   58    44    99    87 
Advertising   63    20    100    42 
FDIC deposit insurance   53    38    108    77 
Provision for real estate owned and related expenses   57    20    163    39 
Loss on sales of real estate owned   -    -    59    - 
Other   174    83    328    178 
Total noninterest expense   2,893    1,990    5,592    3,465 
                     
Income before income taxes   1,401    1,706    3,628    3,349 
Income tax expense   452    659    1,237    1,215 
                     
Net income  $949   $1,047   $2,391   $2,134 
                     
Other comprehensive income (loss)                    
Unrealized gain (loss) on securities available-for-sale  $(579)  $529   $204   $286 
Tax effect   209    (201)   (74)   (110)
Reclassification adjustment for gains realized in net income   -    (24)   (9)   (29)
Tax effect   -    9    3    11 
Total other comprehensive gain (loss)   (370)   313    124    158 
                     
Comprehensive income  $579   $1,360   $2,515   $2,292 
                     
Basic net income per share: (Note 3)  $0.17   $0.18   $0.42   $0.38 
Diluted net income per share: (Note 3)  $0.16   $0.18   $0.41   $0.37 
Dividends declared per share:  $0.10   $0.10   $0.20   $0.20 

 

See accompanying notes to the consolidated financial statements

 

 3 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

                   Accumulated         
           Additional       Other   Unearned     
   Common   Treasury   Paid-In   Retained   Comprehensive   ESOP     
   Stock   Stock   Capital   Earnings   Income (Loss)   Shares   Total 
                             
Balance at July 1, 2014  $64   $(6)  $12,186   $66,705   $(147)  $(1,821)  $76,981 
Net income   -    -    -    2,134    -    -    2,134 
Other comprehensive loss   -    -    -    -    158    -    158 
Stock-based compensation expense   -    -    132    -    -    -    132 
Common stock issued, 36,945 shares(1)   1    -    699    -    -    -    700 
Dividends(2)(3)   -    -    25    (1,124)   -    -    (1,099)
ESOP shares earned   -    -    119    -    -    175    294 
Balance at December 31, 2014  $65   $(6)  $13,161   $67,715   $11   $(1,646)  $79,300 
                                    
Balance at July 1, 2015  $65   $(6)  $13,354   $68,950   $(26)  $(1,547)  $80,790 
Net income   -    -    -    2,391    -    -    2,391 
Other comprehensive income   -    -    -    -    124    -    124 
Purchase of 1,800 shares of treasury stock(4)   -    -    (32)   -    -    -    (32)
Stock-based compensation expense   -    -    151    -    -    -    151 
Dividends(5)(6)   -    -    18    (1,111)   -    -    (1,093)
ESOP shares earned   -    -    156    -    -    184    340 
Balance at December 31, 2015  $65   $(6)  $13,647   $70,230   $98   $(1,363)  82,671 

 

 

(1)36,945 shares issued to Oconee MHC at approximately $18.95 per share for the acquisition of Stephens Federal Bank.
(2)Cash dividends declared on July 24, 2014 were paid on August 21, 2014.  Cash dividends declared on October 23, 2014 were paid on November 20, 2014.
(3)Approximately $99 of cash dividends paid on shares in the ESOP was used as additional principal reduction on the ESOP debt, resulting in the release of approximately 8,000 additional shares.  The portion of the dividend paid on allocated shares of approximately $25 was treated as a dividend.  The remaining portion of the dividend payment and resulting release of approximately 8,000 shares was accounted for as additional compensation expense of approximately $74 for the six months ended December 31, 2014.
(4)1,800 shares of treasury stock were purchased December 16, 2015 at $18.34 per share. Treasury stock repurchases were accounted for using the par value method.
(5)Approximately $99 of cash dividends paid on shares in the ESOP was used as additional principal reduction on the ESOP debt, resulting in the release of approximately 8,500 additional shares.  The portion of the dividend paid on allocated shares of approximately $18 was treated as a dividend.  The remaining portion of the dividend payment and resulting release of approximately 8,500 shares was accounted for as additional compensation expense of approximately $66 for the six months ended December 31, 2014.
(6)Cash dividends declared on July 30, 2015 were paid on August 27, 2015. Cash dividends declared on October 29, 2015 were paid on November 27, 2015.

 

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)

 

   Six Months Ended 
   December 31,
2015
   December 31,
2014
 
Cash Flows From Operating Activities          
Net income  $2,391   $2,134 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   422    9 
Provision for real estate owned   110    - 
Depreciation and amortization, net   557    454 
Deferred loan (costs) fees, net   35    (33)
Deferred income tax expense   848    9 
Net (gain) loss on sale of real estate owned   59    (36)
Change in loan servicing asset   86    28 
Gain on sales of securities   (9)   (29)
Mortgage loans originated for sale   (2,532)   (605)
Mortgage loans sold   2,690    591 
Gain on sales of mortgage loans   (40)   (5)
Increase in cash surrender value of bank owned life insurance   (240)   (139)
Gain on disposition of purchased credit impaired loans   (809)   - 
ESOP compensation expense   340    294 
Stock-based compensation expense   151    132 
Net change in operating assets and liabilities:          
Accrued interest receivable   (60)   (42)
Accrued interest payable   (7)   (1)
Other   794    (1,061)
Net cash provided by operating activities   4,786    1,700 
           
Cash Flows From Investing Activities          
Net cash received from acquisition of Stephens Federal   -    24,079 
Purchases of premises and equipment   (57)   (329)
Purchases of securities available-for-sale   (23,465)   (13,908)
Proceeds from maturities, paydowns and calls of securities available-for-sale   9,142    8,143 
Proceeds from sales of securities available-for-sale   1,164    6,421 
Purchases of bank owned life insurance   (8,000)   - 
Proceeds from sale of real estate owned   1,448    1,089 
Proceeds from dispositions of purchased credit impaired loans   2,648    - 
Loan originations and repayments, net   8,422    (3,812)
Net cash (used in) provided by investing activities   (8,698)   21,683 
           
Cash Flows from Financing Activities          
Net change in deposits   3,075    (12,873)
Dividends paid   (1,093)   (1,099)
Purchase of treasury stock   (32)   - 
Net cash provided by (used in) financing activities   1,950    (13,972)
           
Change in cash and cash equivalents   (1,962)   9,411 
           
Cash and cash equivalents, beginning of year   26,192    11,890 
Cash and cash equivalents, end of period  $24,230   $21,301 

 

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

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (70.82%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

On December 1, 2014, the Company acquired Stephens Federal Bank. The consolidated financial statements at December 31, 2015 and June 30, 2015 and for the three and six months ended December 31, 2015 and 2014 are reflective of the addition of Stephens Federal Bank’s assets and liabilities.

 

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 December 31, 2015 and June 30, 2015 and the results of operations and cash flows for the interim periods ended December 31, 2015 and 2014. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.

 

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.

 

(2)NEW ACCOUNTING STANDARDS

 

On January 5, 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe that this new guidance will have a material effect to the consolidated financial statements.

 

 6 

 

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

 

   Three Months Ended   Six Months Ended 
   December 31,
2015
   December 31,
2014
   December 31,
2015
   December 31,
2014
 
Earnings per share                    
Net income  $949   $1,047   $2,391   $2,134 
Less:  distributed earnings allocated to participating securities   (6)   (7)   (13)   (13)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities   (4)   (5)   (12)   (11)
Net earnings available to common shareholders  $939   $1,035   $2,366   $2,110 
                     
Weighted average common shares outstanding including participating securities   5,881,847    5,846,442    5,881,993    5,840,419 
Less:  participating securities   (62,502)   (65,899)   (62,502)   (65,899)
Less: average unearned ESOP shares   (141,676)   (170,170)   (144,160)   (172,535)
Weighted average common shares outstanding   5,677,669    5,610,373    5,675,331    5,601,985 
                     
Basic earnings per share  $0.17   $0.18   $0.42   $0.38 
                     
Weighted average common shares outstanding   5,677,669    5,610,373    5,675,331    5,601,985 
Add:  dilutive effects of assumed exercises of stock options   71,507    68,961    71,221    57,822 
Average shares and dilutive potential common shares   5,749,176    5,679,334    5,746,552    5,659,807 
                     
Diluted earnings per share  $0.16   $0.18   $0.41   $0.37 

 

During the three and six months ended December 31, 2015 and 2014, 15,400 and 7,700 shares, respectively, were considered anti-dilutive as the exercise price was below the average market price for the respective periods.

 

 7 

 

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 consist of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at December 31, 2015 and June 30, 2015 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2015  Cost   Gains   Losses   Value 
                 
FHLMC common stock  $20   $112   $-   $132 
Certificates of deposit   7,221    9    (22)   7,208 
Municipal securities   23,161    251    (42)   23,370 
SBA loan pools   1,468    7    (1)   1,474 
U.S. Government agency mortgage-backed securities   70,168    357    (576)   69,949 
U.S. Government agency bonds   21,976    110    (51)   22,035 
Total available-for-sale  $124,014   $846   $(692)  $124,168 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2015  Cost   Gains   Losses   Value 
                 
FHLMC common stock  $20   $160   $-   $180 
Certificates of deposit   7,221    29    (8)   7,242 
Municipal securities   13,574    11    (152)   13,433 
SBA loan pools   2,249    17    -    2,266 
U.S. Government agency mortgage-backed securities   64,177    488    (523)   64,142 
U.S. Government agency bonds   23,967    80    (143)   23,904 
Total available-for-sale  $111,208   $785   $(826)  $111,167 

 

Securities pledged at December 31, 2015 and June 30, 2015 had carrying amounts of $6,007 and $5,951, respectively. These securities were pledged to secure public deposits.

 

At December 31, 2015 and June 30, 2015, 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.

 

 8 

 

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 more than twelve months at December 31, 2015 and June 30, 2015. 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)
 
December 31, 2015                                             
                                              
Certificates of deposit  $3,962   $(22)   16   $-   $-    -   $3,962   $(22)   16 
Municipal securities   6,787    (39)   16    291    (3)   1    7,078    (42)   17 
SBA loan pools   660    (1)   1    -    -    -    660    (1)   1 
U.S. Government agency mortgage-backed securities   33,056    (329)   27    8,887    (247)   10    41,943    (576)   37 
U.S. Government agency bonds   1,997    (2)   1    2,946    (49)   2    4,943    (51)   3 
   $46,462   $(393)   61   $12,124   $(299)   13   $58,586   $(692)   74 

 

   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, 2015                                             
                                              
Certificates of deposit  $1,737   $(6)   7   $247   $(2)   1   $1,984   $(8)   8 
Municipal securities   10,472    (152)   30    -    -    -    10,472    (152)   30 
SBA loan pools   -    -    -    -    -    -    -    -    - 
U.S. Government agency mortgage-backed securities   18,981    (195)   15    11,521    (328)   12    30,502    (523)   27 
U.S. Government agency bonds   6,951    (68)   4    4,920    (75)   3    11,871    (143)   7 
   $38,141   $(421)   56   $16,688   $(405)   16   $54,829   $(826)   72 

 

 

(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 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 December 31, 2015 were recognized into net income for the three or six months ended December 31, 2015 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2015 were recognized as having OTTI during the three or six months ended December 31, 2015.

 

 9 

 

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 December 31, 2015 and June 30, 2015 by contractual maturity. FHLMC common stock is not presented in this table.

 

   December 31, 2015   June 30, 2015 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
Less than one year  $996   $998   $1,244   $1,249 
Due from one to five years   18,015    17,990    22,156    22,042 
Due from six to ten years   25,429    25,646    11,450    11,412 
Due after ten years   7,918    7,979    9,912    9,876 
Mortgage-backed securities(1)   71,636    71,423    66,426    66,408 
Total  $123,994   $124,036   $111,188   $110,987 

 

 

(1)Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty.

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and six months ended December 31, 2015 and 2014:

 

   Three Months Ended   Six Months Ended 
   December 31,
2015
   December 31,
2014
   December 31,
2015
   December 31,
2014
 
Proceeds  $-   $4,508   $1,164   $6,421 
Gross gains   -    24    9    29 
Gross losses   -    -    -    - 

 

The tax provision related to these net realized gains for the three and six months ended December 31, 2015 was $0 and $3, respectively, and for the three and six months ended December 31, 2014 was $9 and $11, respectively.

 

(5)LOANS

 

The components of loans at December 31, 2015 and June 30, 2015 were as follows:

 

   December 31,
2015
   June 30,
 2015
 
Real estate loans:          
One-to-four family  $248,071   $256,321 
Multi-family   2,060    2,574 
Home equity   7,401    8,198 
Nonresidential   21,779    21,685 
Agricultural   3,664    4,164 
Construction and land   13,520    14,590 
Total real estate loans   296,495    307,532 
Commercial and industrial   144    184 
Consumer and other loans   1,836    2,745 
Total loans   298,475    310,461 
Deferred net loan fees   (1,229)   (1,194)
Total loans net of deferred loan fees  $297,246   $309,267 

 

 10 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2015 by portfolio segment:

 

   Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Three Months Ended December 31, 2015                         
Real estate loans:                         
One-to-four family  $881   $148   $(68)  $-   $961 
Multi-family   4    -    -    -    4 
Home equity   20    53    (72)   -    1 
Nonresidential   68    (1)   -    -    67 
Agricultural   4    -    -    -    4 
Construction and land   19    67    -    -    86 
Total real estate loans   996    267    (140)   -    1,123 
Commercial and industrial   8    -    -    -    8 
Consumer and other loans   7    10    -    -    17 
Total loans  $1,011   $277   $(140)  $-   $1,148 
                          
Six Months Ended December 31, 2015                         
Real estate loans:                         
One-to-four family  $910   $259   $(208)  $-   $961 
Multi-family   4    -    -    -    4 
Home equity   1    72    (72)   -    1 
Nonresidential   55    12    -    -    67 
Agricultural   4    -    -    -    4 
Construction and land   25    61    -    -    86 
Total real estate loans   999    404    (280)   -    1,123 
Commercial and industrial   -    8    -    -    8 
Consumer and other loans   9    10    (2)   -    17 
Total loans  $1,008   $422   $(282)  $-   $1,148 

 

 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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2015:

 

   Ending Allowance on Loans:   Loans: 
At December 31, 2015  Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
   Non-PCI   PCI(1)       Non-PCI   PCI(1)     
Real estate loans:                              
One-to-four family  $288   $29   $644   $2,564   $2,065   $243,442 
Multi-family   -    -    4    -    -    2,060 
Home equity   -    -    1    34    -    7,367 
Nonresidential   -    13    54    -    2,001    19,778 
Agricultural   -    -    4    -    944    2,720 
Construction and land   58    6    22    241    555    12,724 
Total real estate loans   346    48    729    2,839    5,565    288,091 
Commercial and industrial   -    -    8    -    -    144 
Consumer and other loans   8    -    9    9    -    1,827 
Total loans  $354   $48   $746   $2,848   $5,565   $290,062 

 

 

(1)“Purchase Credit Impaired” (or “PCI”) loans include all loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

 

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2014 by portfolio segment:

 

Three Months Ended December 31, 2014  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Real estate loans:                         
One-to-four family  $771   $11   $-   $-   $782 
Multi-family   4    -    -    -    4 
Home equity   1    -    -    -    1 
Nonresidential   52    (2)   -    -    50 
Agricultural   -    -    -    -    - 
Construction and land   26    -    -    -    26 
Total real estate loans   854    9    -    -    863 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   1    -    -    -    1 
Total loans  $855   $9   $-   $-   $864 

 

 12 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Six Months Ended December 31, 2014  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Real estate loans:                         
One-to-four family  $736   $46   $-   $-   $782 
Multi-family   4    -    -    -    4 
Home equity   1    -    -    -    1 
Nonresidential   52    (2)   -    -    50 
Agricultural   -    -    -    -    - 
Construction and land   59    (33)   -    -    26 
Total real estate loans   852    11    -    -    863 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   3    (2)   -    -    1 
Total loans  $855   $9   $-   $-   $864 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2015:

 

   Ending Allowance on Loans:   Loans: 
At June 30, 2015  Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
   Non-PCI   PCI(1)       Non-PCI   PCI(1)     
Real estate loans:                              
One-to-four family  $197   $6   $707   $2,666   $2,778   $250,877 
Multi-family   -    -    4    -    -    2,574 
Home equity   -    -    1    -    -    8,198 
Nonresidential   -    10    45    -    2,627    19,058 
Agricultural   -    -    4    -    1,441    2,723 
Construction and land   -    -    25    -    599    13,991 
Total real estate loans   197    16    786    2,666    7,445    297,421 
Commercial and industrial   -    -    -    -    -    184 
Consumer and other loans   7    -    2    7    -    2,738 
Total loans  $204   $16   $788   $2,673   $7,445   $300,343 

 

 

(1)PCI loans include all loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

 

 13 

 

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 December 31, 2015 and June 30, 2015, including the average recorded investment balance and interest earned for the six months ended December 31, 2015 and year ended June 30, 2015:

 

   December 31, 2015 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $3,828   $2,898   $-   $3,151   $95 
Multi-family   -    -    -    -    - 
Home equity   225    34    -    17    - 
Nonresidential   2,240    1,131    -    1,219    38 
Agricultural   1,809    944    -    1,193    51 
Construction and land   1,070    535    -    567    53 
Total real estate loans   9,172    5,542    -    6,147    237 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total loans  $9,172   $5,542   $-   $6,147   $237 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $1,734   $1,731   $317   $1,887   $35 
Multi-family   -    -    -    -    - 
Home equity   -    -    -    -    - 
Nonresidential   1,308    870    13    1,095    11 
Agricultural   -    -    -    -    - 
Construction and land   354    261    64    131    7 
Total real estate loans   3,396    2,862    394    3,113    53 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   9    9    8    -    - 
Total loans  $3,405   $2,871   $402   $3,113   $53 
                          
Totals:                         
Real estate loans  $12,568   $8,404   $394   $9,260   $290 
Consumer and other loans   9    9    8    -    - 
Total loans  $12,577   $8,413   $402   $9,260   $290 

 

The unpaid principal balance and recorded investment in PCI loans was $9,729 and $5,565, respectively, at December 31, 2015.

 

 14 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   June 30, 2015 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $4,651   $3,403   $-   $1,889   $92 
Multi-family   -    -    -    -    - 
Home equity   207    -    -    -    - 
Nonresidential   2,830    1,307    -    654    39 
Agricultural   2,893    1,441    -    721    45 
Construction and land   1,271    599    -    300    23 
Total real estate loans   11,852    6,750    -    3,564    199 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $11,852   $6,750   $-   $3,564   $199 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $2,082   $2,042   $203   $1,658   $28 
Multi-family   -    -    -    -    - 
Home equity   -    -    -    -    - 
Nonresidential   1,938    1,319    10    660    25 
Agricultural   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Total real estate loans   4,020    3,361    213    2,318    53 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   9    7    7    -    - 
Total  $4,029   $3,368   $220   $2,318   $53 
                          
Totals:                         
Real estate loans  $15,872   $10,111   $213   $5,882   $252 
Consumer and other loans   9    7    7    -    - 
Total  $15,881   $10,118   $220   $5,882   $252 

 

The unpaid principal balance and recorded investment in PCI loans was $13,209 and $7,445, respectively, at June 30, 2015.

 

 15 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the carrying amount of those loans at December 31, 2015 and June 30, 2015:

 

PCI Loans, net of related discounts:

 

   December 31,
2015
   June 30,
2015
 
Real estate loans:          
One-to-four family  $2,036   $2,772 
Multi-family   -    - 
Home equity   -    - 
Nonresidential   1,987    2,617 
Agricultural   944    1,441 
Construction and land   550    599 
Total real estate loans   5,517    7,429 
Commercial and industrial   -    - 
Consumer and other loans   -    - 
Total loans  $5,517   $7,429 

 

Carrying amounts listed above are net of an allowance for loan losses of $48 and $16 at December 31, 2015 and June 30, 2015, respectively.

 

The following table presents the changes in the carrying value and the accretable yield on purchased credit impaired loans for the three and six months ended December 31, 2015.

 

   Three Months Ended 
December 31, 2015
   Six Months Ended 
December 31, 2015
 
   Accretable
Yield
   Carrying
Value
   Accretable
Yield
   Carrying
Value
 
Balance at beginning of year  $(500)  $6,250   $(694)  $7,429 
Subsequent adjustments   -    -    -    - 
Liquidations   5    (693)   123    (1,839)
Reductions from payments   -    (9)   -    (41)
Accretion   128    -    252    - 
Reclassification from nonaccretable to accretable   (151)   -    (199)   - 
Change in the allowance   -    (31)   -    (32)
Balance at end of period  $(518)  $5,517   $(518)  $5,517 

 

The acquisition of Stephens Federal Bank occurred on December 1, 2014. The amount of accretion recognized for the three and six months ended December 31, 2014 was $12.

 

 16 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amount of such loans at December 31, 2015 is as follows:

 

   December 31,
2015
   June 30,
2015
 
Balance at beginning of year  $2,798   $3,853 
Additions   132    1,407 
Reductions from payments and liquidations   (963)   (2,462)
Balance at end of period  $1,967   $2,798 

 

No income was recognized for the three or six months ended December 31, 2015 and 2014 on the cost recovery basis for these loans.

 

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 both collectively and individually for impairment. Separate tables are presented to show the aging of total past due loans and the aging of past due PCI loans only.

 

Total past due loans and nonaccrual loans at December 31, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
December 31, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $6,564   $1,723   $993   $9,280   $238,791   $248,071   $1,675   $- 
Multi-family   -    -    -    -    2,060    2,060    -    - 
Home equity   162    61    39    262    7,139    7,401    39    - 
Nonresidential   -    -    -    -    21,779    21,779    1,192    - 
Agricultural   939    51    31    1,021    2,643    3,664    469    - 
Construction and land   -    -    1,084    1,084    12,436    13,520    262    - 
Total real estate loans   7,665    1,835    2,147    11,647    284,848    296,495    3,637    - 
Commercial and industrial   -    -    -    -    144    144    -    - 
Consumer and other loans   19    325    109    453    1,383    1,836    2    - 
Total loans  $7,684   $2,160   $2,256   $12,100   $286,375   $298,475   $3,639   $- 

 

 17 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI past due and nonaccrual loans at December 31, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
December 31, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $131   $155   $127   $413   $1,652   $2,065   $282   $- 
Nonresidential   -    325    1,191    1,516    484    2,000    1,191    - 
Agricultural   469    -    -    469    475    944    469    - 
Construction and land   13    -    25    38    518    556    25    - 
Total loans  $613   $480   $1,343   $2,436   $3,129   $5,565   $1,967   $- 

 

PCI loans for which the Company cannot reasonably estimate the amount and timing of future cash flows are classified as nonaccrual.

 

Total past due and nonaccrual loans by portfolio segment at June 30, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
June 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $5,871   $1,243   $2,311   $9,425   $246,896   $256,321   $2,311   $- 
Multi-family   -    -    -    -    2,574    2,574    -    - 
Home equity   49    -    -    49    8,149    8,198    -    - 
Nonresidential   229    313    1,108    1,650    20,035    21,685    1,379    - 
Agricultural   -    -    -    -    4,164    4,164    487    - 
Construction and land   78    -    -    78    14,512    14,590    -    - 
Total real estate loans   6,227    1,556    3,419    11,202    296,330    307,532    4,177    - 
Commercial and industrial   -    -    -    -    184    184    -    - 
Consumer and other loans   1    1    -    2    2,743    2,745    -    - 
Total loans  $6,228   $1,557   $3,419   $11,204   $299,257   $310,461   $4,177   $- 

 

 18 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI past due and nonaccrual loans at June 30, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
June 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $237   $-   $932   $1,169   $1,609   $2,778   $932   $- 
Home equity   -    -    -    -    -    -    -    - 
Nonresidential   14    313    1,108    1,435    1,192    2,627    1,379    - 
Agricultural   -    -    -    -    1,441    1,441    487    - 
Construction and land   -    -    -    -    599    599    -    - 
Total loans  $251   $313   $2,040   $2,604   $4,841   $7,445   $2,798   $- 

 

PCI loans for which the Company cannot reasonably estimate the amount and timing of future cash flows are classified as nonaccrual.

 

Troubled Debt Restructurings:

 

At December 31, 2015 and June 30, 2015, total loans that have been modified as troubled debt restructurings were $469 and $487, respectively, which consisted of one agricultural loan and one home equity line of credit. These loans were PCI loans recorded initially at fair value. No additional allowance has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts under either loan or any payment default on any loan after the modification. There were no troubled debt restructurings during the three or six months ended December 31, 2015.

 

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.

 

 19 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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. For example, the Company currently offers mortgages of up to $95 with loan-to-value ratios of up to 95% to low- to moderate-income borrowers solely for the purchase of their primary residence. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.

 

The Company has 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.

 

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%.

 

 20 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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. In addition, 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.

 

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 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 loan-to-value ratio of these construction loans is 85%.

 

 21 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Commercial and Industrial Loans: As a result of the Stephens Federal Bank acquisition, the Company acquired commercial and industrial loans. These 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.

 

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. Separate tables are presented to show the risk grade of loans that have been acquired.

 

Total loans by risk grade and portfolio segment at December 31, 2015:

 

December 31, 2015  Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $233,249   $8,621   $1,572   $4,629   $-   $248,071 
Multi-family   2,060    -    -    -    -    2,060 
Home equity   6,918    200    248    35    -    7,401 
Nonresidential   14,067    4,188    1,523    2,001    -    21,779 
Agricultural   1,318    413    989    944    -    3,664 
Construction and land   11,541    939    244    796    -    13,520 
Total real estate loans   269,153    14,361    4,576    8,405    -    296,495 
Commercial and industrial   132    12    -    -    -    144 
Consumer and other loans   1,823    -    5    8    -    1,836 
Total loans  $271,108   $14,373   $4,581   $8,413   $-   $298,475 

 

 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 June 30, 2015:

 

June 30,  2015  Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $242,399   $6,909   $1,568   $5,445   $-   $256,321 
Multi-family   2,574    -    -    -    -    2,574 
Home equity   7,840    184    174    -    -    8,198 
Nonresidential   13,226    4,275    1,558    2,355    271    21,685 
Agricultural   1,295    423    1,005    1,441    -    4,164 
Construction and land   12,586    920    485    599    -    14,590 
Total real estate loans   279,920    12,711    4,790    9,840    271    307,532 
Commercial and industrial   169    15    -    -    -    184 
Consumer and other loans   2,725    6    7    7    -    2,745 
Total loans  $282,814   $12,732   $4,797   $9,847   $271   $310,461 

 

At December 31, 2015, consumer mortgage loans secured by residential real estate properties totaling $303 were in formal foreclosure proceedings.

 

(6)FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

Investment Securities:

 

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

 

Impaired Loans:

 

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

 

 23 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 December 31, 2015 and June 30, 2015 are summarized below:

 

   Fair Value Measurements 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
   December 31, 2015   June 30, 2015 
Financial assets:                    
Securities available-for-sale  $124,036   $132   $110,987   $180 
Loan servicing rights   -    1,310    -    1,396 
Total financial assets  $124,036   $1,442   $110,987   $1,576 

 

 24 

 

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 December 31, 2015 and June 30, 2015:

 

   Fair Value Measurements 
   (Level 3)   (Level 3) 
   December 31,
2015
   June 30,
 2015
 
Impaired loans, with specific allocations:          
One-to-four family  $1,414   $1,839 
Nonresidential   857    1,309 
Construction and land   197    - 
Consumer and other loans   1    - 
Total financial assets   2,469    3,148 
Non-financial assets:          
Real estate owned, net:          
One-to-four family   1,295    1,335 
Nonresidential   454    365 
Construction and land   169    392 
Total non-financial assets   1,918    2,092 
Total assets measured at fair value on a non-recurring basis  $4,387   $5,240 

 

The Company's impaired loans at December 31, 2015 and June 30, 2015 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of these loans were $2,469 and $3,148, respectively, which consisted of valuation allowances of $402 and $220, respectively. Not shown in the table above, there were recorded investments at June 30, 2015 of consumer and other loans with a recorded investment amount of $7 with a valuation allowance of $7. The impact to the provision for loan losses from the change in the valuation allowance for the three and six months ended December 31, 2015 was an increase of $262 and $292 and for the three and six months ended December 31, 2014 was an increase of $16 and $9.

 

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 and their respective valuation allowances at December 31, 2015 and June 30, 2015 were $1,918 and $2,092 and $77 and $84, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and six months ended were $15 and $110, respectively. There were no write-downs for real estate owned for the three and six months ended December 31, 2014.

 

 25 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs Level 3 for the three and six months ended December 31, 2015 and 2014:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended   Three Months Ended 
   December 31, 2015   December 31, 2014 
   FHLMC
Common
Stock
   Loan
 Servicing
Rights
   Total   FHLMC
Common
Stock
   Loan
Servicing
Rights
   Total 
Balance at beginning of period:  $179   $1,332   $1,511   $215   $-   $215 
Purchases   -    -    -    -    1,369    1,369 
Change in fair value   (47)   (22)   (69)   (48)   -    (48)
Balance at end of period:  $132   $1,310   $1,442   $167   $1,369   $1,536 

 

   Fair Value Measurements 
   (Level 3) 
   Six Months Ended   Six Months Ended 
   December 31, 2015   December 31, 2014 
   FHLMC
Common
Stock
   Loan
Servicing
Rights
   Total   FHLMC
Common
Stock
   Loan
Servicing
Rights
   Total 
Balance at beginning of year:  $180   $1,396   $1,576   $314   $-   $314 
Purchases   -    -    -    -    1,369    1,369 
Change in fair value   (48)   (86)   (134)   (147)   -    (147)
Balance at end of period:  $132   $1,310   $1,442   $167   $1,369   $1,536 

 

 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 December 31, 2015 and June 30, 2015.

 

   Level 3 Quantitative Information
   December 31,
2015
   June 30,
 2015
   Valuation
Technique
  Unobservable
Inputs
  Range
   Fair Value   Fair Value          
Impaired real estate loans net, with specific allocations:                   
                    
One-to-four family  $1,414   $1,839   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 30%
                    
Nonresidential   857    1,309   Discounted cash flows  Discount rate, estimated timing of cash flows  2% to 28%
                    
Construction and land   197    -   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 30%
                    
Real estate owned net:                   
                    
One-to-four family  $1,295   $1,335   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 20%
                    
Nonresidential   454    365   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 20%
                    
Construction and land   169    392   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 sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2015 and June 30, 2015 are summarized below:

 

   December 31, 2015 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $124,168   $-   $124,036   $132   $124,168 
Loans, net   296,098    -    -    296,163    296,163 
Loans held for sale(2)   -    -    -    -    - 
Loan servicing rights   1,310    -    -    1,310    1,310 
Restricted equity securities(1)   440    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $397,168   $134,726   $232,664   $-   $367,390 

 

   June 30, 2015 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $111,167   $-   $110,987   $180   $111,167 
Loans, net   308,259    -    -    310,116    310,116 
Loans held for sale(2)   118    -    -    118    118 
Loan servicing rights   1,396    -    -    1,396    1,396 
Restricted equity securities(1)   440    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $394,093   $137,618   $256,681   $-   $394,299 

 

 

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

 

(7)EMPLOYEE STOCK OWNERSHIP PLAN

 

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

 

No contributions to the ESOP were made during the three or six months ended December 31, 2015. The expense recognized for the three months ended December 31, 2015 and 2014 was $251 and $218, respectively. The expense recognized for the six months ended December 31, 2015 and 2014 was $340 and $294, respectively.  An additional $100 discretionary contribution was paid to the ESOP for additional debt retirement during the three months ended December 31, 2015, which resulted in the release of additional shares and recognition of additional compensation expense of $160 for both the three and six months ended December 31, 2015.

 

 28 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Shares held by the ESOP at December 31, 2015 and June 30, 2015 were as follows:

 

   December 31,
2015
   June 30,
2015
 
Committed to be released to participants   -    9,938 
Allocated to participants   114,179    85,248 
Unearned   134,663    153,656 
Total ESOP shares   248,842    248,842 
           
Fair value of unearned shares  $2,511   $2,827 

 

(8)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.

 

The following table summarizes stock option activity for the six months ended December 31, 2015:

 

   Options   Weighted-
Average
Exercise
Price/Share
   Weighted-
Average
Remaining
Contractual
Life (in years)
   Aggregate
Intrinsic 
Value(1)
 
Outstanding - July 1, 2015   248,686   $12.02           
Granted   -    -           
Exercised   -    -           
Forfeited   -    -           
Outstanding - December 31, 2015   248,686   $12.02    6.46   $1,649 
Fully vested and exercisable at December 31, 2015   128,841   $11.68    6.46   $898 
Expected to vest in future periods   119,845                
Fully vested and expected to vest - December 31, 2015   248,686   $12.02    6.46   $1,649 

 

 

(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 $18.65 per share on December 31, 2015.

 

 29 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the SNL Financial Index of Thrifts. The expected life of the options is calculated based on the “simplified” method as provided for under generally accepted accounting principles.

 

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

 

   Fiscal Years Granted 
   2015   2014   2012 
Risk-free interest rate   1.68%   2.32%   1.54%
Expected dividend yield   2.00%   2.33%   3.45%
Expected stock volatility   15.9    15.5    15.3 
Expected life (years)   8    8    8 
Fair value  $2.86   $2.46   $1.00 

 

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. There were 21,835 and 21,835 options that were earned during the six months ended December 31, 2015 and 2014, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2015 was $12 and $24, respectively, and for the three and six months ended December 31, 2014 was $11 and $22, respectively. Total unrecognized compensation cost related to stock options was $107 at December 31, 2015 and is expected to be recognized over a weighted-average period of 2.1 years.

 

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2015:

 

   December 31,
2015
 
Balance - beginning of year   62,502 
Granted   - 
Forfeited   - 
Vested   (1,800)
Balance - end of period   60,702 
Weighted average grant date fair value  $13.15 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The weighted-average grant date fair value of restricted stock granted on April 27, 2012 was $11.58 per share or $1,009 in total. The weighted-average grant date fair value of restricted stock granted on November 13, 2013 was $17.16 per share or $216 in total. The weighted-average grant date fair value of restricted stock granted on January 23, 2015 was $20.01 per share or $252 in total. Stock-based compensation expense for restricted stock included in noninterest expense for the three and six months ended December 31, 2015 was $64 and $127 and for the three and six months ended December 31, 2014 was $54 and $109, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $682 at December 31, 2015 and is expected to be recognized over a weighted-average period of 2.6 years.

 

 30 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(9)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 December 31, 2015 and June 30, 2015 are as follows:

 

   December 31,
2015
   June 30,
2015
 
Mortgage loan portfolio serviced for:          
FHLMC  $133,134   $141,195 

 

Custodial escrow balances maintained in connection with serviced loans were $426 and $986 at December 31, 2015 and June 30, 2015.

 

Activity for loan servicing rights for the three and six months ended December 31, 2015 and 2014 is as follows:

 

   Three Months Ended   Six Months 
   December 31,
 2015
   December 31,
2014
   December 31,
 2015
   December 31,
2014
 
Loan servicing rights:                    
Beginning of period:  $1,332   $-   $1,396   $- 
Additions   -    1,369    -    1,369 
Change in fair value   (22)   (28)   (86)   (28)
End of period:  $1,310   $1,341   $1,310   $1,341 

 

Fair value at December 31, 2015 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 5.2% to 17.5% Conditional Prepayment Rate (“CPR”) depending on the loans coupon, term and seasoning, and a weighted average default rate of 0.61%.  Fair value at December 31, 2014 was determined using a discount rate of 9.50%, prepayment speed assumptions ranging from 6.9% to 19.8% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.61%.

 

(10)SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the six months ended December 31, 2015 and 2014 is as follows:

 

   December 31,
2015
   December 31,
2014
 
Cash paid during the period for:          
Interest paid  $591   $316 
Income taxes paid  $117   $1,240 
Supplemental noncash disclosures:          
Transfers from loans to real estate owned  $1,443   $59 
           
Acquisition:          
Assets acquired (excluding goodwill) $2,593  $-   $137,291 
Liabilities assumed  $-   $140,249 
Acquisition price (common stock issued to OFED, MHC)  $-   $700 
Goodwill recorded  $-   $3,658 

 

 31 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(11)SUBSEQUENT EVENTS

 

On January 28, 2016, the Board of Directors of Oconee Federal Financial Corp. (the “Company”) declared a quarterly cash dividend of $0.10 per share of the Company’s common stock. The dividend is payable to stockholders of record as of February 11, 2016, and will be paid on or about February 25, 2016.

 

 32 

 

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

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates or our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·increased competition among depository and other financial institutions;

 

·our ability to attract and maintain deposits, including attracting and maintaining deposits from former depositors of Stephens Federal Bank and introducing new deposit products;

 

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

 

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

 

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

 

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

 

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

 

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

 

 33 

 

·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;

 

·the integration of our business with that of Stephens Federal Bank may not be successful, or such integration may take longer to accomplish than expected;

 

·the growth opportunities and cost savings from the acquisition of Stephens Federal Bank may not be fully realized or may take longer to realize than expected;

 

·our ability to manage increased expenses following the acquisition of Stephens Federal Bank, including salary and employee benefit expenses, occupation expenses, additional provisions related to loans acquired from Stephens Federal Bank and expenses related to foreclosed real estate acquired from Stephens Federal Bank;

 

·operating costs, customer losses and business disruption following the acquisition of Stephens Federal Bank, including adverse effects of relationships with employees, may be greater than expected;

 

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

 

·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;

 

·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.

 

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, 2015, as filed with the Securities and Exchange Commission.

 

 34 

 

Comparison of Financial Condition at December 31, 2015 and June 30, 2015

 

Our total assets increased by $5.5 million, or 1.2%, to $480.8 million at December 31, 2015 from $475.3 million at June 30, 2015. The increase largely reflects the increase in our total deposits of $3.1 million, or 0.79%, to $397.2 million at December 31, 2015 from $394.1 million at June 30, 2015 and net income less dividends paid for the six months ended December 31, 2015. Total cash and cash equivalents decreased $2.0 million, or 7.6%, to $24.2 million at December 31, 2015 from $26.2 million at June 30, 2015. The decrease in cash and cash equivalents is reflective of net cash used in investing activities of $13.2 million, net cash provided by a decrease in loans of $11.3 million, the purchase of $8.0 million in bank owned life insurance, and the increase in total deposits of $3.1 million during the six months ended December 31, 2015. Bank owned life insurance increased $8.3 million, or 92.2%, to $17.3 million at December 31, 2015 from $9.0 million at June 30, 2015. Securities available-for-sale increased to $124.2 million at December 31, 2015 from $111.2 million at June 30, 2015 due to new securities purchases and an increase in the unrealized gains on securities at December 31, 2015. New available-for-sale security purchases were funded by decreases in gross loans and increases in total deposits.

 

Total gross loans decreased by $12.1 million, or 3.9%, to $297.2 million at December 31, 2015 from $309.3 million at June 30, 2015. A portion of this decrease, $1.8 million, was from the liquidation and foreclosure of PCI loans during the six months ended December 31, 2015 that we acquired from the Stephens Federal Bank acquisition. An additional $786 thousand in originated loans were foreclosed on during the six months ended December 31, 2015. The remaining $9.5 million decrease in loans is reflective of the seasonally slower loan demand in our market area as well normal loan payment amortization.

 

Deposits increased $3.1 million, or 0.79%, to $397.2 million at December 31, 2015 from $394.1 million at June 30, 2015. The increase in our deposits reflected an increase in money market and NOW and demand deposits of $30.3 million, offset by a decrease of $23.9 million in certificates of deposit. The increase in money market deposits is reflective of an increase in rate on certain money market accounts during the six months ended December 31, 2015. We believe the decline in our certificates of deposit is reflective of depositors moving their deposits into higher yielding investments in the market.

 

Oconee Federal, MHC’s cash is held on deposit with the Company. We generally do not accept brokered deposits and no brokered deposits were accepted during the six months ended December 31, 2015.

 

We had no advances from the Federal Home Loan Bank of Atlanta as of December 31, 2015 or June 30, 2015. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% of our total assets (as of December 31, 2015), or approximately $52.9 million.

 

Total shareholders’ equity increased $1.9 million, or 2.4%, to $82.7 million at December 31, 2015 compared to $80.8 million at June 30, 2015. The increase in total shareholders’ equity is primarily reflective of net income of $2.4 million, net of dividends paid of $1.1 million, and increases from other comprehensive income, stock based compensation expense and ESOP expense of $124 thousand, $151 thousand, and $340 thousand, respectively, for the six months ended December 31, 2015.

 

 35 

 

Nonperforming Assets

 

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

 

   December 31,
2015
   June 30,
 2015
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $1,675   $2,311 
Home equity   39    - 
Nonresidential   1,192    1,379 
Agricultural   469    487 
Construction and land   262    - 
Total real estate loans   3,637    4,177 
Consumer and other loans   2    - 
Total nonaccrual loans  $3,639   $4,177 
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more  $-   $- 
Total of nonaccrual and 90 days or more past due loans (1)  $3,639   $4,177 
Real estate owned, net:          
One-to-four family  $1,295   $1,335 
Nonresidential   454    365 
Construction and land   169    392 
Total nonperforming assets  $5,557   $6,269 
           
Troubled debt restructurings  $469   $487 
Troubled debt restructurings and total nonperforming assets  $6,026   $6,756 
           
Total nonperforming loans to total loans   1.22%   1.35%
Total nonperforming assets to total assets   1.25%   1.42%
Total nonperforming assets to loans and real estate owned   2.01%   2.16%

 

 

(1)There were no loans past due 90 days or more and still accruing at December 31, 2015 and June 30, 2015.

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $97 thousand and $193 thousand for the six months ended December 31, 2015 and 2014, respectively. Interest of $31 thousand and $4 thousand, respectively, was recognized on these loans and is included in net income for the six months ended December 31, 2015 and 2014, respectively.

 

Interest income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms was $37 thousand for the six months ended December 31, 2015. No interest was recognized on trouble debt restructured loans for the six months ended December 31, 2014.

 

The decrease in nonperforming loans to total loans is reflective of continued improvement in asset quality by the successful liquidation through sale or payoff of $1.2 million in PCI loans that were nonperforming during the six months ended December 31, 2015. The net decline in our real estate owned of $174 thousand, or 8.3%, to $1.9 million at December 31, 2015 from $2.1 million at June 30, 2015 improved our ratios of nonperforming assets to total assets and nonperforming assets to loans and real estate owned to 1.25% and 2.01%, respectively, at December 31, 2015 from 1.42% and 2.16%, respectively at June 30, 2015.

 

 36 

 

Analysis of Net Interest Margin

 

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

 

   For the Three Months Ended 
   December 31, 2015   December 31, 2014 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $300,351   $3,850    5.13%  $265,831   $3,337    5.02%
Investment securities   98,791    430    1.74    91,228    370    1.62 
Investment securities, tax-free   21,600    119    2.20    6,831    40    2.34 
Interest-bearing deposits   19,555    26    0.53    8,617    16    0.74 
Total interest-earning assets   440,297    4,425    4.02    372,507    3,763    4.04 
Noninterest-earning assets   41,661              27,260           
Total assets  $481,958             $399,767           
                               
Liabilities and shareholders’ equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $50,029   $6    0.05%  $29,287   $5    0.07%
Money market and regular savings   86,437    55    0.25    57,734    42    0.29 
Certificates of deposit   239,525    234    0.39    222,096    268    0.48 
Total interest-bearing deposits   375,991    295    0.31    309,117    315    0.40 
Total interest-bearing liabilities   375,991              309,117           
Noninterest bearing deposits   20,641              10,485           
Other noninterest-bearing liabilities   2,262              1,530           
Total liabilities   398,894              321,132           
Shareholders’ equity   83,064              78,635           
Total liabilities and shareholders’ equity  $481,958             $399,767           
                               
Net interest income       $4,130             $3,448      
Interest rate spread             3.71%             3.64%
Net interest margin             3.75%             3.70%
Average interest-earning assets to average interest-bearing liabilities   1.17 x             1.21 x          

 

 37 

 

   For the Six Months Ended 
   December 31, 2015   December 31, 2014 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $303,389   $7,734    5.10%  $248,803   $6,224    5.00%
Investment securities   97,359    820    1.68    94,175    751    1.59 
Investment securities, tax-free   18,779    208    2.22    6,371    76    2.39 
Interest-earning deposits   17,106    42    0.49    9,184    54    1.18 
Total interest-earning assets   436,633    8,804    4.03    358,533    7,105    3.96 
Noninterest-earning assets   40,710              24,027           
Total assets  $477,343             $382,560           
                               
Liabilities and shareholders' equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $49,684   $19    0.08%  $23,666   $8    0.07%
Money market and regular savings   76,398    76    0.20    56,351    87    0.31 
Certificates of deposit   245,130    489    0.40    210,521    528    0.50 
Total interest-bearing deposits   371,212    584    0.31    290,538    623    0.43 
Total interest-bearing liabilities   371,212              290,538           
Noninterest bearing deposits   21,809              12,525           
Other noninterest-bearing liabilities   1,969              1,499           
Total liabilities   394,990              304,562           
Shareholders' equity   82,353              77,998           
Total liabilities and shareholders' equity  $477,343             $382,560           
                               
Net interest income       $8,220             $6,482      
Interest rate spread             3.72%             3.53%
Net interest margin             3.77%             3.62%
Average interest-earning assets to average interest-bearing liabilities   1.18 X             1.23 X           

 

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Comparison of Operating Results for the Three Months Ended December 31, 2015 and December 31, 2014

 

General. We reported net income of $949 thousand for the three months ended December 31, 2015 as compared to net income of $1.0 million for the three months ended December 31, 2014. The decrease in net income is largely reflective of the increased provision for loan losses to $277 thousand for the three months ended December 31, 2015 as compared to $9 thousand for the three months ended December 31, 2014, and the increase in noninterest expenses of $903 thousand, or 45.2%, to $2.9 million from $2.0 million for the same periods ended. The increases in the provision for loan losses and noninterest expense were offset, partially, by an increase in net interest income before the provision for loan losses and an increase in noninterest income. Net interest income before the provision for loan losses increased $682 thousand, or 20.1%, to $4.1 million from $3.4 million. Noninterest income increased $184 thousand, or 71.6%, to $441 thousand from $257 thousand.

 

Interest Income. Interest income increased by $662 thousand, or 17.4%, to $4.4 million for the three months ended December 31, 2015 from $3.8 million for the three months ended December 31, 2014. The increase reflected an increase in the average balance of interest-earning assets by $67.8 million, or 18.2%, to $440.3 million for the three months ended December 31, 2015 from $372.5 million for the three months ended December 31, 2014, offset partially by a slight decrease in the yield on interest earning-assets of two basis points. The increase in the average balance of interest-earning assets was primarily the result of the acquisition of Stephens Federal Bank and the related addition of $94.5 million in loans at fair value on December 1, 2014. The average balances of loans for the three months ended December 31, 2014 only included one month of these acquired assets.

 

Interest income on loans increased by $513 thousand, or 15.5%, to $3.9 million for the three months ended December 31, 2015 from $3.3 million for the three months ended December 31, 2014. The increase reflected an increase of $34.5 million, or 13.0%, in the average balance of loans to $300.3 million for the three months ended December 31, 2015 from $265.8 million for the three months ended December 31, 2014 and an increase of 11 basis points in the yield on loans to 5.13% from 5.02% for the same periods. The increase in the average balance of our loans is reflective of the aforementioned acquisition of Stephens Federal Bank, and as a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had the positive effect of increasing our overall loan portfolio yield. Interest income on investment securities increased by $139 thousand, or 33.9%, to $549 thousand for the three months ended December 31, 2015 from $410 thousand for the three months ended December 31, 2014. The increase reflected an increase in the average balance of securities of $22.3 million, or 22.7%, to $120.4 million for the three months ended December 31, 2015 from $98.1 million for the three months ended December 31, 2014 and an increase of 15 basis points in the yield on securities to 1.82% from 1.67%. The increase in the average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during this period of low loan demand. The increase in the yield on our investment securities is reflective of our efforts to shift our portfolio concentration to investments in municipal securities, which give us slightly higher yields.

 

Interest Expense. Interest expense decreased by $20 thousand, or 6.3%, to $295 thousand for the three months ended December 31, 2015 from $315 thousand for the three months ended December 31, 2014. The decrease reflected a decrease of nine basis points in the average rate paid on deposits for the three months ended December 31, 2015 to 0.31% from 0.40% for the three months ended December 31, 2014. The decrease in the average rate paid on deposits more than offset the increase of $66.9 million, or 21.6%, in the average balances of interest-bearing deposits to $376.0 million for the three months ended December 31, 2015 from $309.1 million for the three months ended December 31, 2014. The largest decrease in interest expense related to expense on certificates of deposit, which decreased $34 thousand, or 12.7%, to $234 thousand for the three months ended December 31, 2015 from $268 thousand for the three months ended December 31, 2014. The decrease is reflective of a decrease in the average rate paid on these deposits of nine basis points to 39 basis points for the three months ended December 31, 2015 compared to 48 basis points for the three months ended December 31, 2014, which more than offset the increase of $17.4 million, or 7.8%, in the average balance of these deposits to $239.5 million for the three months ended December 31, 2015 from $222.1 million for the three months ended December 31, 2014. The increase in the average balance of all deposits is largely the result of only one month of the $139.2 million in total deposits acquired from Stephens Federal Bank being in the three month average balances of deposits for the three months ended December 31, 2014, further aided by the increase in total deposits of $3.1 million, or 0.8%, to $397.2 million at December 31, 2015 compared to $394.1 million at June 30, 2015. The decrease in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions.

 

Net Interest Income. Net interest income before the provision for loan losses increased by $682 thousand, or 20.1%, to $4.1 million for the three months ended December 31, 2015 from $3.4 million for the three months ended December 31, 2014. Our interest rate spread and net interest margin for the three months ended December 31, 2015 increased to 3.71% and 3.75%, respectively, from 3.64% and 3.70%, respectively, for the three months ended December 31, 2014. The increase in interest rate spread and net interest margin are reflective of our lower costs of funds on interest-bearing liabilities for the three months ended December 31, 2015.

 

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Provision for Loan Losses. We recorded a provision for loan losses of $277 thousand for the three months ended December 31, 2015 compared with $9 thousand for the three months ended December 31, 2014. Net charge-offs for the three months ended December 31, 2015 were $140 thousand compared with no charge-offs for the three months ended December 31, 2014. The provision for specific valuation allowances on impaired loans was approximately $267 thousand for the three months ended December 31, 2015. Our general valuation component of our allowance only increased by approximately $10 thousand for the same period ended, which is due to the declines in our loan portfolio balances. Total loans evaluated collectively for impairment decreased $10.2 million, or 3.4%, to $290.1 million at December 31, 2015 compared to $300.3 million at December 31, 2014. Of the $267 thousand in provision for specific valuation allowances for the three months ended December 31, 2015, approximately $31 thousand was related to specific valuation allowances needed on PCI loans. All of the charge-offs for the three months ended December 31, 2015 were related to loans we acquired.

 

Our total allowance for loan losses was $1.1 million, or 0.38%, of total gross loans, at December 31, 2015 and $1.0 million, or 0.32%, of total gross loans at June 30, 2015. The ending allowance for specifically identified impaired loans was $402 thousand at December 31, 2015 compared to $220 thousand at June 30, 2015. The general valuation allowance at December 31, 2015 and June 30, 2015 was $746 thousand and $788 thousand, respectively. The allowance for specifically identified impaired loans at December 31, 2015 and June 30, 2015 includes an allowance of $48 thousand and $16 thousand, respectively for PCI loans. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2015 and 2014. There have been no changes to our allowance for loan loss methodology, and even though our policy with respect to identifying loans for individual impairment analysis does not require a review of every loan, we review all loans adversely classified as substandard or doubtful for impairment, regardless of size.

 

Noninterest Income. Noninterest income increased $184 thousand, or 71.6%, to $441 thousand for the three months ended December 31, 2015 from $257 thousand for the three months ended December 31, 2014. The majority of this increase comes from an increase in service charges on deposit accounts, income on bank owned life insurance, mortgage banking income, and gain on disposition of purchase credit impaired loans. Service charges on deposit accounts increased $40 thousand, or 49.4%, to $121 thousand for the three months ended December 31, 2015 from $81 thousand for the three months ended December 31, 2014. The significant factor contributing to the increase is that service charges on deposit accounts for the three months ended December 31, 2014 only included one month’s service charges and other deposit related fee income related to the acquired deposits from Stephens Federal Bank. Income on bank owned life insurance increased $60 thousand, or 83.3%, to $132 thousand for the three months ended December 31, 2015 from $72 thousand for the three months ended December 31, 2014, which is reflective of the purchase of $8.0 million in bank owned life insurance during the three months ended September 30, 2015. Mortgage banking income increased $61 thousand, or 179.4%, to $95 thousand for the three months ended December 31, 2015 from $34 thousand for the three months ended December 31, 2014. As with service charges on deposit accounts, the primary reason for the increase is the three months of mortgage banking income included in the three months ended December 31, 2015 as compared with one month for the three months ended December 31, 2014. Prior to the acquisition of Stephens Federal Bank, we did not have a secondary mortgage platform or perform any servicing of loans outside of our own portfolio. These gains were offset slightly by a decrease in gain on sales of securities of $24 thousand and a decrease in gain on sales of real estate owned of $34 thousand, or 77.3%, to $10 thousand for the three months ended December 31, 2015 from $44 thousand for the three months ended December 31, 2014. There were no sales of available-for-sale securities during the three months ended December 31, 2015. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold.

 

Noninterest Expense. Noninterest expense for the three months ended December 31, 2015 increased by $903 thousand, or 45.2%, to $2.9 million from $2.0 million for the same period in 2014. The increase in noninterest expenses is primarily reflective of increases in salaries and employee benefits of $625 thousand, or 52.1%, to $1.9 million for the three months ended December 31, 2015 from $1.2 million for the three months ended December 31, 2014 and occupancy and equipment expenses of $124 thousand, or 53.9%, to $354 thousand for the three months ended December 31, 2015 from $230 thousand for the three months ended December 31, 2014. The increase in salaries and employee benefits is primarily due to increases in salaries related to promotions and pay increases for supervisory and management personnel taking on more responsibilities resulting from the acquisition of Stephens Federal Bank, and the fact the total salaries and employee benefits for the three months ended December 31, 2014 only included one month of compensation and benefits expense for the employees of the former Stephens Federal Bank. We also accrued an additional $100 thousand in December 2015 for a profit sharing match for all eligible employees’ 401(k) accounts as a reward for our financial success and successful completion of the acquisition. This profit sharing match will be contributed to the 401(k) Plan during our third fiscal quarter. The increase in occupancy and equipment expenses is related to the increase in additional costs to maintain three newly added branch facilities as well as moderate increases in depreciation expense due to the addition of property and equipment, all as a result of the acquisition, and as with salaries and employee benefits, occupancy and equipment expenses for the three months ended December 31, 2014 only includes the additional costs for acquired Stephens Federal Bank properties for one month. These increases and other moderate increases in all other noninterest expenses were offset partially by a decrease in professional and supervisory fees of $49 thousand, or 22.7%, to $167 thousand for the three months ended December 31, 2015 from $216 thousand for the three months ended December 31, 2014. This decline is primarily related to merger related costs of $67 thousand for the three months ended December 31, 2014 but there were no merger related costs for the same period in 2015.

 

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Income Tax Expense. Income tax expense for the three months ended December 31, 2015 was $452 thousand compared with $659 thousand for the three months ended December 31, 2014. Our effective income tax rate was 32.3% and 38.6% for the same periods, respectively. The decrease in our effective tax rate is largely due to the increase in non-taxable bank owned life insurance, resulting from the purchase of $8.0 million of bank owned life insurance during the three months ended December 31, 2015.

 

Comparison of Operating Results for the Six Months Ended December 31, 2015 and December 31, 2014

 

General. We reported net income of $2.4 million for the six months ended December 31, 2015 as compared to net income of $2.1 million for the six months ended December 31, 2014. The increase in net income is largely reflective of increases in net interest income before the provision for loan losses and in noninterest income, offset partially by an increase in noninterest expense for the six months ended December 31, 2015 as compared to amounts reported for the six months ended December 31, 2014. Net interest income before the provision for loan losses increased $1.7 million, or 26.2%, to $8.2 million from $6.5 million. Noninterest income increased $1.1 million, or 322.6%, to $1.4 million from $341 thousand. Noninterest expense increased by $2.1 million, or 60.0%, to $5.6 million from $3.5 million.

 

Interest Income. Interest income increased by $1.7 million, or 23.9%, to $8.8 million for the six months ended December 31, 2015 from $7.1 million for the six months ended December 31, 2014. The increase reflected an increase in average balance of interest-earning assets by $78.1 million, or 21.8%, to $436.6 million for the six months ended December 31, 2015 from $358.5 million for the six months ended December 31, 2014 and a slight increase in the yield on interest earning assets of seven basis points. The increase in the average balance of interest-earning assets was primarily the result of the acquisition of Stephens Federal Bank and the related addition of $94.5 million in loans at fair value on December 1, 2014. The average balances of loans for the six months ended December 31, 2014 only included one month of these acquired assets. The increase in the yield on earning assets reflects slightly higher loan yields on the acquired loan portfolio and a 12 basis point increase in the yield on total investment securities.

 

Interest income on loans increased by $1.5 million, or 24.2%, to $7.7 million for the six months ended December 31, 2015 from $6.2 million for the six months ended December 31, 2014. The increase reflected an increase of $54.6 million, or 21.9%, in the average balance of loans to $303.4 million for the six months ended December 31, 2015 from $248.8 million for the six months ended December 31, 2014 and an increase of ten basis points in the yield on loans to 5.10% from 5.00% for the same periods. The increase in the average balance of our loans is reflective of the aforementioned acquisition of Stephens Federal Bank, and as a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield. Interest income on investment securities increased by $201 thousand, or 24.3%, to $1.0 million for the six months ended December 31, 2015 from $827 thousand for the six months ended December 31, 2014. The increase reflected an increase in the average balance of securities of $15.6 million, or 15.5%, to $116.1 million for the six months ended December 31, 2015 from $100.5 million for the six months ended December 31, 2014 and an increase of 12 basis points in the yield on securities to 1.77% from 1.65%. The increase in average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during this period of low loan demand. The increase in the yield on our investment securities is reflective of our efforts to shift our portfolio concentration to investments in municipal securities, which give us slightly higher yields.

 

Interest Expense. Interest expense decreased by $39 thousand, or 6.3%, to $584 thousand for the six months ended December 31, 2015 from $623 thousand for the six months ended December 31, 2014. The decrease reflected a decrease of 12 basis points in the average rate paid on deposits for the six months ended December 31, 2015 to 0.31% from 0.43% for the six months ended December 31, 2014. The decrease in the average rate paid on deposits more than offset the increase of $80.7 million, or 27.8%, in the average balances of interest-bearing deposits to $371.2 million for the six months ended December 31, 2015 from $290.5 million for the six months ended December 31, 2014. The largest decrease in interest expense came from certificates of deposit, which decreased $39 thousand, or 7.4%, to $489 thousand for the six months ended December 31, 2015 from $528 thousand for the six months ended December 31, 2014. The decrease is reflective of a decrease in the average rate paid on these deposits of 10 basis points to 40 basis points for the six months ended December 31, 2015 compared to 50 basis points for the six months ended December 31, 2014, which more than offset the increase of $34.6 million, or 16.4%, in the average balance of these deposits to $245.1 million for the six months ended December 31, 2015 from $210.5 million for the six months ended December 31, 2014. The increase in the average balance of all deposits is largely the result of only one month of the $139.2 million in total deposits acquired from Stephens Federal Bank being in the six month average balances of deposits for the six months ended December 31, 2014, further aided by the increase in total deposits of $3.1 million, or 0.8%, to $397.2 million at December 31, 2015 compared to $394.1 million at June 30, 2015. The decrease in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions.

 

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Net Interest Income. Net interest income before the provision for loan losses increased $1.7 million, or 26.2%, to $8.2 million from $6.5 million. Our interest rate spread and net interest margin for the six months ended December 31, 2015 increased to 3.72% and 3.77%, respectively, from 3.53% and 3.62%, respectively, for the six months ended December 31, 2014. The increase in interest rate spread and net interest margin are reflective of our lower costs of funds on interest-bearing liabilities for the six months ended December 31, 2015.

 

Provision for Loan Losses. We recorded a provision for loan losses of $422 thousand for the six months ended December 31, 2015 compared with $9 thousand for the six months ended December 31, 2014. Net charge-offs for the six months ended December 31, 2015 were $282 thousand compared with no charge-offs for the six months ended December 31, 2014. The provision for specific valuation allowances on impaired loans was approximately $297 thousand, and for our general valuation allowance, the provision was $125 thousand. Total loans evaluated collectively for impairment decreased $10.2, or 3.4%, to $290.1 million at December 31, 2015 compared to $300.3 million at December 31, 2014. Of the $297 thousand in provision for specific valuation allowances for the six months ended December 31, 2015, approximately $32 thousand was related to specific valuation allowances needed on PCI loans.

 

Our total allowance for loan losses was $1.1 million, or 0.38%, of total gross loans, at December 31, 2015 and $1.0 million, or 0.32%, of total gross loans at June 30, 2015. The ending allowance for specifically identified impaired loans was $402 thousand at December 31, 2015 compared to $220 thousand at June 30, 2015. The general valuation allowance at December 31, 2015 and June 30, 2015 was $746 thousand and $788 thousand, respectively. The allowance for specifically identified impaired loans at December 31, 2015 and June 30, 2015 includes an allowance of $48 thousand and $16 thousand, respectively for PCI loans. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2015 and 2014. There have been no changes to our allowance for loan loss methodology, and even though our policy with respect to identifying loans for individual impairment analysis does not require a review of every loan, we review all loans adversely classified as substandard or doubtful for impairment, regardless of size.

 

Noninterest Income. Noninterest income increased $1.1 million, or 322.6%, to $1.4 million for the six months ended December 31, 2015 from $341 thousand for the six months ended December 31, 2014. The majority of this increase comes from increases in service charges on deposit accounts, income on bank owned life insurance, mortgage banking income, and gain on disposition of purchase credit impaired loans. Service charges on deposit accounts increased $140 thousand, or 140.0%, to $240 thousand for the six months ended December 31, 2015 from $100 thousand for the six months ended December 31, 2014. The significant factor contributing to the increase is that service charges on deposit accounts for the six months ended December 31, 2014 only included one month’s service charges and other deposit related fee income related to acquired deposits from Stephens Federal Bank. Income on bank owned life insurance increased $104 thousand, or 74.8%, to $243 thousand for the six months ended December 31, 2015 from $139 thousand for the six months ended December 31, 2014, which is reflective of the purchase of $8.0 million in bank owned life insurance during the three months ended September 30, 2015. Mortgage banking income increased $157 thousand, or 461.8%, to $191 thousand for the six months ended December 31, 2015 from $34 thousand for the six months ended December 31, 2014. As with service charges on deposit accounts, the primary reason for the increase is the five additional months of mortgage banking income included in the six months ended December 31, 2015 as compared with one month for the six months ended December 31, 2014. Prior to the acquisition of Stephens Federal Bank, we did not have a secondary mortgage platform or perform any servicing of loans outside of our own portfolio. The increase in gain on disposition of purchased credit impaired loans represents the net total gains realized on the sale or disposition of purchased credit impaired loans during the six months ended December 31, 2015 of $809 thousand. These gains to noninterest income were offset slightly by decreases in gain on sales of securities, gain on sales of real estate owned and in the value of our loan servicing asset. The gain on sales of securities decreased $20 thousand, or 69.0%, to $9 thousand for the six months ended December 31, 2015 from $29 thousand for the six months ended December 31, 2014, and the gain on sales of real estate owned decreased $36 thousand for the same periods ended. There were no gains realized on the sale of real estate owned real estate owned during the six months ended December 31, 2015, but we did realize a net loss on sales of real estate owned of $59 thousand for the same period. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold. The net decline in the value of the loan servicing asset is mostly reflective of the decrease in the amount of loans serviced. The total loans serviced at December 31, 2015 was $133.1 million at December 31, 2015 compared to $141.2 million at June 30, 2015.

 

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Noninterest Expense. Noninterest expense for the six months ended December 31, 2015 increased by $2.1 million, or 60.0%, to $5.6 million from $3.5 million for the same period in 2014. The increase in noninterest expenses is primarily reflective of increases in salaries and employee benefits of $1.2 million, or 57.1%, to $3.3 million for the six months ended December 31, 2015 from $2.1 million for the six months ended December 31, 2014, occupancy and equipment expenses of $317 thousand, or 79.8%, to $714 thousand for the six months ended December 31, 2015 from $397 thousand for the six months ended December 31, 2014, and an increase in the provision for real estate owned and related expenses of $124 thousand, or 317.9%, to $163 thousand for the six months ended December 31, 2015 from $39 thousand for the six months ended December 31, 2014. The increase in salaries and employee benefits is primarily due to increases in salaries related to promotions and pay increases for supervisory and management personnel taking on more responsibilities resulting from the acquisition of Stephens Federal Bank, and the fact the total salaries and employee benefits for the six months ended December 31, 2014 only included one month of compensation and benefits expense for the employees of Stephens Federal Bank. We also accrued an additional $100 thousand in December 2015 for a profit sharing match to all eligible employees’ 401(k) accounts as reward for our financial success and successful completion of the acquisition. This profit sharing match will be contributed to the 401(k) Plan during our third fiscal quarter. The increase in occupancy and equipment expenses is related to the increase in additional costs to maintain three newly added branch facilities as well as moderate increases in depreciation expense due to the addition of property and equipment, all as a result of the acquisition, and as with salaries and employee benefits, occupancy and equipment expenses for the three months ended December 31, 2014 only includes the additional costs for acquired Stephens Federal Bank properties for one month. The increase in the provision for real estate owned and related expenses is primarily related to additional impairment losses taken on real estate properties due to declines in their fair market values less costs to sell below their carrying values.

 

Income Tax Expense. Income tax expense for the six months ended December 31, 2015 and December 31, 2014 was $1.2 million. Our effective income tax rate was 34.1% and 36.3% for the same periods ended, respectively. The decrease in our effective tax rate is largely due to the increase in non-taxable bank owned life insurance, resulting from the purchase of $8.0 million of bank owned life insurance during the six months ended December 31, 2015.

 

Liquidity and Capital Resources

 

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

 

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% assets (as of December 31, 2015), or approximately $52.9 million.

 

Common Stock Dividends. On August 27 and November 27, 2015, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.

 

Equity Compensation Plans. There were no issuances of restricted stock or stock options during the six months ended December 31, 2015.

 

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 December 31, 2015. 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.

 

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