Attached files

file filename
EX-31.2 - CERTIFICATION OF JOHN W. HOBBS, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICE - Oconee Federal Financial Corp.ex31-2.htm
EX-32 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - Oconee Federal Financial Corp.ex32.htm
EX-31.1 - CERTIFICATION OF CURTIS T. EVATT, PRESIDENT AND CHIEF EXECUTIVE OFFICER - Oconee Federal Financial Corp.ex31-1.htm

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549  

 

 

 

FORM 10-Q 

 

 

 

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

 

For the Quarterly Period ended March 31, 2018

 

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  ☒    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  ☒    No  

 

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

           
Large accelerated filer     Accelerated filer
           
Non-accelerated filer     Smaller reporting company
(Do not check if a smaller reporting company)  
        Emerging growth company

 

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

 

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

 

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

 

There were 5,774,589 shares of Common Stock, par value $0.01 per share, outstanding as of May 8, 2018.

 

 

 

 

 

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 29
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37
     
ITEM 4. CONTROLS AND PROCEDURES 37
     

PART II.

 

  37
ITEM 1. LEGAL PROCEEDINGS 37
     
ITEM 1A. RISK FACTORS 37
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 37
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 38
     
ITEM 4. MINE SAFETY DISCLOSURES 38
     
ITEM 5. OTHER INFORMATION 38
     
ITEM 6. EXHIBITS 38
     
SIGNATURES 39
   
INDEX TO EXHIBITS 40

 

1

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS 

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

(Unaudited)

 

PART I  

 

ITEM 1.FINANCIAL STATEMENTS

 

   March 31,
2018
   June 30,
2017
 
ASSETS          
Cash and due from banks  $2,050   $3,526 
Interest-earning deposits   6,788    17,211 
Fed funds sold   76    8 
Total cash and cash equivalents   8,914    20,745 
Securities available-for-sale   119,090    118,334 
Loans   319,469    307,558 
Allowance for loan losses   (1,052)   (1,016)
Net loans   318,417    306,542 
Loans held for sale, at fair value   178    245 
Premises and equipment, net   6,780    6,574 
Real estate owned, net   850    865 
Accrued interest receivable          
Loans   962    944 
Investments   571    568 
Restricted equity securities, at cost   1,575    1,023 
Bank owned life insurance   18,438    18,071 
Goodwill   2,593    2,593 
Core deposit intangible   448    568 
Loan servicing rights   1,099    1,141 
Deferred tax assets   2,113    2,370 
Other assets   443    734 
Total assets  $482,471   $481,317 
           
LIABILITIES          
Deposits          
Noninterest bearing  $28,125   $25,900 
Interest bearing   355,950    368,605 
Total deposits   384,075    394,505 
FHLB advances   13,000     
Accrued interest payable and other liabilities   814    851 
Total liabilities   397,889    395,356 
           
SHAREHOLDERS’ EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,463,039 shares issued and outstanding   65    65 
Treasury stock, at par, 714,386 and 699,345 shares, respectively   (7)   (7)
Additional paid-in capital   11,884    11,940 
Retained earnings   75,785    75,169 
Accumulated other comprehensive loss   (2,295)   (202)
Unearned ESOP shares   (850)   (1,004)
Total shareholders’ equity   84,582    85,961 
Total liabilities and shareholders’ equity  $482,471   $481,317 

 

See accompanying notes to the consolidated financial statements.

 

2

  

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) 

(Unaudited)

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

 

   Three Months Ended   Nine Months Ended 
   March 31,
2018
   March 31,
2017
   March 31,
2018
   March 31,
2017
 
Interest and dividend income:                    
Loans, including fees  $3,635   $3,633   $10,811   $11,009 
Securities, taxable   414    382    1,182    1,213 
Securities, tax-exempt   215    186    635    544 
Interest-earning deposits and other   24    57    66    134 
Total interest income   4,288    4,258    12,694    12,900 
                     
Interest expense:                    
Deposits   386    329    1,112    972 
Other borrowings   94        156     
Total interest expense   480    329    1,268    972 
Net interest income   3,808    3,929    11,426    11,928 
Provision for loan losses   20    105    75    193 
Net interest income after provision for loan losses   3,788    3,824    11,351    11,735 
                     
Noninterest income:                    
Service charges on deposit accounts   107    107    327    318 
Income on bank owned life insurance   128    137    367    390 
Mortgage banking income   64    74    197    227 
Gain on sale of mortgage loans   26    1    28    23 
Gain on sales of securities, net       3    10    128 
Gain on disposition of purchase credit impaired loans       482        678 
Other   20    2    76    4 
  Total noninterest income   345    806    1,005    1,768 
Noninterest expense:                    
Salaries and employee benefits   1,688    1,637    4,896    4,609 
Occupancy and equipment   405    372    1,244    1,110 
Data processing   228    112    660    383 
Professional and supervisory fees   288    140    745    596 
Office expense   57    92    165    188 
Advertising   43    44    171    122 
FDIC deposit insurance   33    34    102    125 
Foreclosed assets, net   31    6    59    43 
Change in loan servicing asset   (75)   3    42    (170)
Other   251    275    679    762 
  Total noninterest expense   2,949    2,715    8,763    7,768 
Income before income taxes   1,184    1,915    3,593    5,735 
Income tax expense/(benefit)   (124)   527    1,486    1,759 
                     
         Net income  $1,308   $1,388   $2,107   $3,976 
                     
Other comprehensive income/(loss)                    
Unrealized gains/(losses) on securities available-for-sale  $(1,991)  $458   $(2,578)  $(3,585)
Tax effect   558    (164)   683    1,291 
Reclassification adjustment for gains realized in net income       (3)   (10)   (128)
Tax effect       1    3    46 
Total other comprehensive income/(loss)   (1,433)   292    (1,902)   (2,376)
                     
Comprehensive income/(loss)  $(125)  $1,680   $205   $1,600 
                     
Basic net income per share: (Note 3)  $0.23   $0.24   $0.37   $0.70 
Diluted net income per share: (Note 3)  $0.22   $0.24   $0.36   $0.69 
Dividends declared per share:  $0.10   $0.10   $0.30   $0.30 

 

See accompanying notes to the consolidated financial statements.

 

3

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ 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 June 30, 2016  $65   $(6)  $12,882   $71,909   $1,808   $(1,257)  $85,401 
Net income               3,976            3,976 
Other comprehensive loss                   (2,376)       (2,376)
Purchase of 55,381 shares of treasury stock(1)       (1)   (1,209)               (1,210)
Stock-based compensation expense           225                225 
Dividends(2)           44    (1,684)           (1,640)
ESOP shares earned           178            202    380 
Balance at March 31, 2017  $65   $(7)  $12,120   $74,201   $(568)  $(1,055)  $84,756 
                                    
Balance at June 30, 2017  $65   $(7)  $11,940   $75,169   $(202)  $(1,004)  $85,961 
Net income               2,107            2,107 
Other comprehensive loss                   (1,902)       (1,902)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act               191    (191)        
Purchase of 15,041 shares of treasury stock(3)           (428)               (428)
Stock-based compensation expense           99                99 
Dividends(4)           48    (1,682)           (1,634)
ESOP shares earned           225            154    379 
Balance at March 31, 2018  $65   $(7)  $11,884   $75,785   $(2,295)  $(850)  $84,582 

 

(1)The weighted average cost of treasury shares purchased during the nine months ended was $21.84 per share. Treasury stock repurchases were accounted for using the par value method.

(2)Approximately $99 of cash dividends paid on shares in the ESOP was used as an 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 $44 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 6,600 shares was accounted for as additional compensation expense of approximately $55 for the nine months ended March 31, 2017.

(3)The weighted average cost of treasury shares purchased during the six months ended was $28.45 per share. Treasury stock repurchases were accounted for using the par value method.

(4)Approximately $93 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 8,400 additional shares. The portion of the dividend paid on allocated shares of approximately $48 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 6,600 shares was accounted for as additional compensation expense of approximately $44 for the nine months ended March 31, 2018.

 

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)

 

   Nine Months Ended 
   March 31,
2018
   March 31,
2017
 
Cash Flows From Operating Activities          
Net income  $2,107   $3,976 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   75    193 
Provision for real estate owned   26    103 
Depreciation and amortization, net   995    1,095 
Net (accretion)/amortization of purchase accounting adjustments   220    (35)
Deferred income tax expense   943    214 
Net gain on sale of real estate owned   (62)   (95)
Change in loan servicing asset   42    (170)
Net gain on sales of securities   (10)   (128)
Mortgage loans originated for sale   (3,346)   (1,769)
Mortgage loans sold   3,441    1,695 
Gain on sales of mortgage loans   (28)   (23)
Increase in cash surrender value of bank owned life insurance   (367)   (390)
Gain on disposition of purchased credit impaired loans       (678)
ESOP compensation expense   379    380 
Stock based compensation expense   99    225 
Net change in operating assets and liabilities:          
Accrued interest receivable and other assets   270    556 
Accrued interest payable and other liabilities   (37)   372 
Net cash provided by operating activities   4,747    5,521 
           
Cash Flows From Investing Activities          
Purchases of premises and equipment   (511)   (152)
Purchases of securities available-for-sale   (18,288)   (21,521)
Proceeds from maturities, paydowns and calls of securities available-for-sale   10,387    12,950 
Proceeds from sales of securities available-for-sale   3,997    20,848 
Purchases of restricted equity securities   (1,083)   (2)
Redemptions of restricted equity securities   531     
Proceeds from sale of real estate owned   281    812 
Dispositions of purchased credit impaired loans       1,009 
Loan originations and repayments, net   (12,400)   (14,520)
Net cash used in investing activities   (17,086)   (576)
           
Cash Flows from Financing Activities          
Net change in deposits   (10,430)   (4,732)
Proceeds from notes payable to FHLB   33,500     
Repayment of notes payable to FHLB   (20,500)    
Dividends paid   (1,634)   (1,640)
Purchase of treasury stock   (428)   (1,210)
Net cash (used in)/provided by financing activities   508    (7,582)
Change in cash and cash equivalents   (11,831)   (2,637)
Cash and cash equivalents, beginning of period   20,745    27,676 
Cash and cash equivalents, end of period  $8,914   $25,039 

 

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 (72.12%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2018 and June 30, 2017 and the results of operations and cash flows for the interim periods ended March 31, 2018 and 2017. 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 ending June 30, 2018 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.

 

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

 

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

 

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

 

(2)NEW ACCOUNTING STANDARDS

 

Accounting Standards Update (“ASU”) 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. Issued in February 2018, ASU 2018-02 provides guidance with regard to the reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years; early adoption is permitted. The Company has adopted this standard effective March 31, 2018 and elected to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings.

 

ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”. Issued in May 2017, ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments should be applied prospectively to an award modified on or after the adoption date. The Company is assessing the impact of ASU 2017-08 on its consolidated financial statements.

 

6

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. Issued in March 2017, ASU 2017-08 amends the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is assessing the impact of ASU 2017-08 on its consolidated financial statements.

 

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

 

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

 

(3)EARNINGS PER SHARE (“EPS”)

 

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

 

7

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   Three Months Ended   Nine Months Ended 
   March 31,
2018
   March 31,
2017
   March 31,
2018
   March 31,
2017
 
Earnings per share                
Net income/(loss)  $1,308   $1,388   $2,107   $3,976 
Less:  distributed earnings allocated to participating securities   (2)   (4)   (5)   (11)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities   2    (5)   (2)   (15)
Net earnings/(loss) available to common shareholders  $1,308   $1,379   $2,100   $3,950 
                     
Weighted average common shares outstanding including participating securities   5,786,109    5,786,109    5,797,217    5,797,217 
Less: participating securities   (18,910)   (37,905)   (18,910)   (37,905)
Less: average unearned ESOP shares   (74,198)   (100,211)   (86,338)   (111,304)
Weighted average common shares outstanding   5,693,001    5,647,993    5,691,969    5,648,008 
                     
Basic earnings/(loss) per share  $0.23   $0.24   $0.37   $0.70 
                     
Weighted average common shares outstanding   5,693,001    5,647,993    5,691,969    5,648,008 
Add:  dilutive effects of assumed exercises of stock options   129,343    100,972    128,338    93,534 
Average shares and dilutive potential common shares   5,822,344    5,748,965    5,820,307    5,741,542 
                     
Diluted earnings/(loss) per share  $0.22   $0.24   $0.36   $0.69 

 

During the three and nine months ended March 31, 2018, 22,400 shares were considered anti-dilutive as the exercise price was in excess of the average market price for the respective periods. During the three and nine months ended March 31, 2017 no shares were considered anti-dilutive.

 

8

 

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 March 31, 2018 and June 30, 2017 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
March 31, 2018  Cost   Gains   Losses   Value 
Available-for-sale:                
FHLMC common stock  $20   $90   $   $110 
Certificates of deposit   5,983        (67)   5,916 
Municipal securities   43,830    12    (1,046)   42,796 
SBA loan pools   427    2        429 
CMOs   10,905        (391)   10,514 
U.S. Government agency mortgage-backed securities   46,798    16    (1,067)   45,747 
U.S. Government agency bonds   14,031        (453)   13,578 
Total available-for-sale  $121,994   $120   $(3,024)  $119,090 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2017  Cost   Gains   Losses   Value 
Available-for-sale:                
FHLMC common stock  $20   $162   $   $182 
Certificates of deposit   6,230    16    (18)   6,228 
Municipal securities   39,847    296    (344)   39,799 
SBA loan pools   563    2        565 
CMOs   13,024        (239)   12,785 
U.S. Government agency mortgage-backed securities   44,884    185    (244)   44,825 
U.S. Government agency bonds   14,082    15    (147)   13,950 
Total available-for-sale  $118,650   $676   $(992)  $118,334 

 

Securities pledged at March 31, 2018 and June 30, 2017 had fair values of $44,010 and $6,069, respectively. These securities were pledged to secure public deposits and FHLB advances.

 

At March 31, 2018 and June 30, 2017, 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.

 

9

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at March 31, 2018 and June 30, 2017. 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) 
March 31, 2018                                    
Available-for-sale:                                    
Certificates of deposit  $5,667   $(67)   23   $   $       $5,667   $(67)   23 
Municipal securities   30,789    (656)   81    8,689    (390)   20    39,478    (1,046)   101 
CMOs   2,332    (77)   3    8,182    (314)   13    10,514    (391)   16 
U.S. Government agency mortgage-backed securities   35,690    (764)   45    8,582    (303)   11    44,272    (1,067)   56 
U.S. Government agency bonds   6,789    (178)   8    6,788    (275)   6    13,577    (453)   14 
   $81,267   $(1,742)   160   $32,241   $(1,282)   50   $113,508   $(3,024)   210 

 

   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, 2017                                    
Available-for-sale:                                    
Certificates of deposit  $2,227   $(18)   9   $   $       $2,227   $(18)   9 
Municipal securities   18,331    (276)   41    2,221    (68)   5    20,552    (344)   46 
CMOs   7,833    (136)   9    4,952    (103)   7    12,785    (239)   16 
U.S. Government agency mortgage-backed securities   29,057    (244)   31                29,057    (244)   31 
U.S. Government agency bonds   8,027    (78)   8    1,931    (69)   1    9,958    (147)   9 
   $65,475   $(752)   98   $9,104   $(240)   13   $74,579   $(992)   111 

 

 
(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 March 31, 2018 were recognized into net income for the three or nine months ended March 31, 2018 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2017 were recognized as having OTTI during the year ended June 30, 2017.

 

10

 

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 March 31, 2018 and June 30, 2017 by contractual maturity.

 

   March 31, 2018   June 30, 2017 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
Less than one year  $1,502   $1,501   $2,989   $2,990 
Due from one to five years   19,004    18,688    17,196    17,183 
Due after five years to ten years   32,300    31,431    30,084    30,045 
Due after ten years   11,465    11,099    10,453    10,324 
Mortgage-backed securities, CMOs and FHLMC stock(1)   57,723    56,371    57,928    57,792 
        Total available for sale  $121,994   $119,090   $118,650   $118,334 

 

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

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended March 31, 2018 and 2017:

 

   Three Months Ended   Nine Months Ended 
Available-for-sale:  March 31,
2018
   March 31,
2017
   March 31,
2018
   March 31,
2017
 
Proceeds  $   $5,200   $3,997   $20,848 
Gross gains       3    11    128 
Gross losses           (1)    

 

The tax provision related to these net realized gains for the nine months ended March 31, 2018 was $3, and for the three and nine months ended March 31, 2017 was $22 and $46, respectively.

 

(5)LOANS

 

The components of loans at March 31, 2018 and June 30, 2017 were as follows:

 

   March 31,
2018
   June 30,
2017
 
Real estate loans:          
One-to-four family  $262,354   $260,114 
Multi-family   1,771    1,864 
Home equity   3,992    4,900 
Nonresidential   17,447    18,916 
Agricultural   1,315    1,441 
Construction and land   26,964    15,254 
Total real estate loans   313,843    302,489 
Commercial and industrial   402    51 
Consumer and other loans   5,224    5,018 
     Total loans  $319,469   $307,558 

 

11

 

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 nine months ended March 31, 2018 by portfolio segment:

 

Three Months Ended March 31, 2018  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $888   $15   $   $   $903 
Multi-family   4                4 
Home equity   4    2            6 
Nonresidential   59    4            63 
Agricultural       1            1 
Construction and land   73    (2)           71 
         Total real estate loans   1,028    20            1,048 
Commercial and industrial   4                4 
Consumer and other loans                    
 Total loans  $1,032   $20   $   $   $1,052 

 

Nine Months Ended March 31, 2018  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $900   $3   $   $   $903 
Multi-family   4                4 
Home equity   2    17    (13)       6 
Nonresidential   63                63 
Agricultural   1                1 
Construction and land   35    61    (25)       71 
         Total real estate loans   1,005    81    (38)       1,048 
Commercial and industrial   4                4 
Consumer and other loans   7    (6)   (1)        
 Total loans  $1,016   $75   $(39)  $   $1,052 

 

12

 

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 March 31, 2018:

 

   Ending Allowance on Loans:   Loans: 
At March 31, 2018  Individually Evaluated
for Impairment
   Collectively Evaluated for Impairment   Individually Evaluated for Impairment   Collectively Evaluated for Impairment 
                 
Real estate loans:                    
One-to-four family  $   $903   $2,458   $259,896 
Multi-family       4        1,771 
Home equity       6        3,992 
Nonresidential       63    685    16,762 
Agricultural       1    427    888 
Construction and land       71    270    26,694 
Total real estate loans       1,048    3,840    310,003 
Commercial and industrial       4        402 
Consumer and other loans               5,224 
Total loans  $   $1,052   $3,840   $315,629 

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2017 by portfolio segment:

 

Three Months ended March 31, 2017  Beginning Balance   Provision   Charge-offs   Recoveries   Ending Balance 
Real estate loans:                         
One-to-four family  $795   $88   $(33)  $   $850 
Multi-family   4                4 
Home equity   2                2 
Nonresidential   124    5            129 
Agricultural   2    (1)           1 
Construction and land   39    9            48 
Total real estate loans   966    101    (33)       1,034 
Commercial and industrial   5                5 
Consumer and other loans   25    4    (1)       28 
Total loans  $996   $105   $(34)  $   $1,067 

 

Nine Months ended March 31, 2017  Beginning Balance   Provision   Charge-offs   Recoveries   Ending Balance 
Real estate loans:                         
One-to-four family  $733   $150   $(33)  $   $850 
Multi-family   4                4 
Home equity   2                2 
Nonresidential   130    13    (14)       129 
Agricultural   5    (4)           1 
Construction and land   39    9            48 
Total real estate loans   913    168    (47)       1,034 
Commercial and industrial   6    (1)           5 
Consumer and other loans   3    26    (1)       28 
Total loans  $922   $193   $(48)  $   $1,067 

 

13

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2017:

 

   Ending Allowance on Loans:   Loans: 
At June 30, 2017  Individually Evaluated
for Impairment
   Collectively Evaluated for Impairment   Individually Evaluated for Impairment   Collectively Evaluated for Impairment 
                 
Real estate loans:                    
One-to-four family  $8   $892   $3,034   $257,080 
Multi-family       4        1,864 
Home equity       2        4,900 
Nonresidential       63        18,916 
Agricultural       1    448    993 
Construction and land       35    262    14,992 
Total real estate loans   8    997    3,744    298,745 
Commercial and industrial       4        51 
Consumer and other loans       7        5,018 
Total loans  $8   $1,008   $3,744   $303,814 

 

The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 2018 and June 30, 2017, including the average recorded investment balance and interest earned for the nine months ended March 31, 2018 and the year ended June 30, 2017:

 

   March 31, 2018 
   Unpaid Principal Balance   Recorded Investment   Related Allowance   Average Recorded Investment   Interest Income Recognized 
With no recorded allowance:                    
Real estate loans:                         
One-to-four family  $2,547   $2,458   $   $2,263   $51 
Multi-family                    
Home equity                    
Nonresidential   721    685        343    3 
Agricultural   976    427        438    7 
Construction and land   455    270        266    13 
Total real estate loans   4,699    3,840        3,310    74 
Commercial and industrial                    
Consumer and other loans                    
Total  $4,699   $3,840   $   $3,310   $74 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $   $   $   $484   $ 
Multi-family                    
Home equity                    
Nonresidential                    
Agricultural                    
Construction and land                    
Total real estate loans               484     
Commercial and industrial                    
Consumer and other loans                    
Total  $   $   $   $484   $ 
                          
Totals:                         
Real estate loans  $4,699   $3,840   $   $3,794   $74 
Consumer and other loans                    
Total  $4,699   $3,840   $   $3,794   $74 

 

14

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   June 30, 2017 
   Unpaid Principal Balance   Recorded Investment   Related Allowance   Average Recorded Investment   Interest Income Recognized 
With no recorded allowance:                    
Real estate loans:                         
One-to-four family  $2,539   $2,067   $   $1,534   $225 
Multi-family                    
Home equity                    
Nonresidential               555     
Agricultural   997    448        448    34 
Construction and land   457    262        220    13 
Total real estate loans   3,993    2,777        2,757    272 
Commercial and industrial                    
Consumer and other loans                    
Total  $3,993   $2,777   $   $2,757   $272 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $989   $967   $8   $1,443   $ 
Multi-family                    
Home equity                    
Nonresidential               191     
Agricultural                    
Construction and land               174     
Total real estate loans   989    967    8    1,808     
Commercial and industrial                    
Consumer and other loans                    
Total  $989   $967   $8   $1,808   $ 
                          
Totals:                         
Real estate loans  $4,982   $3,744   $8   $4,565   $272 
Consumer and other loans                    
Total  $4,982   $3,744   $8   $4,565   $272 

 

15

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

Total past due loans and nonaccrual loans at March 31, 2018:

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
   Total
Past Due
   Current   Total
Loans
   Nonaccrual
Loans
   Accruing
Loans
Past Due 90
 Days or More
 
Real estate loans:                                        
One-to-four family  $5,174   $1,586   $482   $7,242   $255,112   $262,354   $3,487   $ 
Multi-family                   1,771    1,771         
Home equity   159    11    40    210    3,782    3,992    80     
Nonresidential   351            351    17,096    17,447    930     
Agricultural                   1,315    1,315    463     
Construction and land   130    35    270    435    26,529    26,964    292     
Total real estate loans   5,814    1,632    792    8,238    305,605    313,843    5,252     
Commercial and industrial                   402    402         
Consumer and other loans       2        2    5,222    5,224         
Total  $5,814   $1,634   $792   $8,240   $311,229   $319,469   $5,252   $ 

 

Total past due and nonaccrual loans by portfolio segment at June 30, 2017: 

 

   30-59
Days
Past Due
   60-89
Days
Past Due
   90 Days
or More
Past Due
   Total
Past Due
   Current   Total
Loans
   Nonaccrual
Loans
   Accruing
Loans
Past Due 90
Days or More
 
Real estate loans:                                        
One-to-four family  $6,143   $1,109   $1,100   $8,352   $251,762   $260,114   $2,762   $ 
Multi-family                   1,864    1,864         
Home equity   161        40    201    4,699    4,900    89     
Nonresidential       43        43    18,873    18,916    43     
Agricultural       448        448    993    1,441    514     
Construction and land   40        35    75    15,179    15,254    75     
Total real estate loans   6,344    1,600    1,175    9,119    293,370    302,489    3,483     
Commercial and industrial                   51    51         
Consumer and other loans   10    1        11    5,007    5,018         
Total  $6,354   $1,601   $1,175   $9,130   $298,428   $307,558   $3,483   $ 

 

Troubled Debt Restructurings:

 

At March 31, 2018 and June 30, 2017, total loans that have been modified as troubled debt restructurings were $3,096 and $1,619, respectively, which consisted of one construction loan, two agricultural loans, two nonresidential and four one-to-four family first liens at March 31, 2018 and one construction loan, two agricultural loans, one home equity line of credit, and two one-to-four family first liens at June 30, 2017. An allowance of $0 and $8 at March 31, 2018 and June 30, 2017, respectively, has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. The two one-to-four family first lien troubled debt restructurings during the nine months ended March 31, 2018 involved renewing existing loans with fee concessions. The two nonresidential troubled debt restructurings during the nine months ended March 31, 2018 involved renewing existing loans, one with a potential principal reduction and one with a change of terms to temporarily require only payments of interest. No loans modified as troubled debt restructurings during the twelve months ended March 31, 2018 have defaulted since restructuring.

 

16

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Loan Grades:

 

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

 

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

 

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

 

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

 

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

 

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

 

Portfolio Segments:

 

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

 

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

 

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

 

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

 

17

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

18

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.

 

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

 

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

 

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

 

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.

 

19

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Based on the most recent analysis performed, the risk grade of loans by portfolio segment are presented in the following tables.

 

Total loans by risk grade and portfolio segment at March 31, 2018:

 

   Pass   Pass- Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $247,571   $5,501   $2,926   $6,356   $   $262,354 
Multi-family   1,771                    1,771 
Home equity   3,404    282    213    93        3,992 
Nonresidential   13,251    1,829    1,312    1,055        17,447 
Agricultural   232    356    264    463        1,315 
Construction and land   25,519    809    116    520        26,964 
Total real estate loans   291,748    8,777    4,831    8,487        313,843 
Commercial and industrial   402                    402 
Consumer and other loans   5,224                    5,224 
Total  $297,374   $8,777   $4,831   $8,487   $   $319,469 

 

Total loans by risk grade and portfolio segment at June 30, 2017:

 

   Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $245,179   $5,914   $2,573   $6,448   $   $260,114 
Multi-family   1,864                    1,864 
Home equity   4,272    233    300    95        4,900 
Nonresidential   13,801    3,610    1,356    149        18,916 
Agricultural   281    374    272    514        1,441 
Construction and land   13,727    846    120    561        15,254 
 Total real estate loans   279,124    10,977    4,621    7,767        302,489 
Commercial and industrial   51                    51 
Consumer and other loans   5,017            1        5,018 
Total  $284,192   $10,977   $4,621   $7,768   $   $307,558 

 

At March 31, 2018, consumer mortgage loans secured by residential real estate properties totaling $375 were in formal foreclosure proceedings and are included in one-to-four family and land loans.

 

(6)   BORROWINGS

 

At March 31, 2018, long term borrowings consisted of fixed rate FHLB advances of $13,000 at a weighted average stated rate of 1.67% all of which mature in less than three months. There were no overnight borrowings at March 31, 2018 or June 30, 2017. We have credit available under a loan agreement with the FHLB with a remaining availability of $107,707 as of March 31, 2018.

 

The Bank has pledged as collateral FHLB stock and certain investment securities and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained.

 

(7)   FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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:

 

20

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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).

 

Impaired Loans:

 

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

 

Real Estate Owned:

 

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

 

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

 

Loan Servicing Rights:

 

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

 

21

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and June 30, 2017 are summarized below:

 

   Fair Value Measurements 
   March 31, 2018   June 30, 2017 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
Financial assets:                    
Securities available-for-sale:                    
FHLMC common stock  $110   $   $182   $ 
Certificates of deposit   5,916        6,228     
Municipal securities   42,796        39,799     
SBA loan pools   429        565     
CMOs   10,514        12,785     
U.S. Government agency mortgage-backed securities   45,747        44,825     
U.S. Government agency bonds   13,578        13,950     
Total securities available-for-sale   119,090        118,334     
Loan servicing rights       1,099        1,141 
Total financial assets  $119,090   $1,099   $118,334   $1,141 

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at March 31, 2018 and June 30, 2017:

 

   Fair Value Measurements 
   March 31,
2018
   June 30,
2017
 
   (Level 3)   (Level 3) 
Financial assets:          
Impaired loans, with specific allocations:          
One-to-four family  $   $959 
Nonresidential        
Construction and land        
Total financial assets       959 
Non-financial assets:          
Real estate owned, net:          
One-to-four family   137    152 
Nonresidential   713    713 
Construction and land        
Total non-financial assets   850    865 
Total assets measured at fair value on a non-recurring basis  $850   $1,824 

 

The Company’s impaired loans at March 31, 2018 and June 30, 2017 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. There were no such loans as of March 31, 2018. The carrying amounts of these loans was $959 as of June 30, 2017, which reflected a valuation allowance of $4.

 

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 March 31, 2018 and June 30, 2017 were $850 and $865 and $0 and $24, respectively.

 

22

 

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 Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended March 31, 2018 and 2017:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended   Nine Months Ended 
   March 31,
 2018
   March 31,
 2017
   March 31,
 2018
   March 31,
 2017
 
    Loan Servicing Rights    Loan Servicing Rights    Loan Servicing Rights    Loan Servicing Rights 
Balance at beginning of period:  $1,024   $1,219   $1,141   $1,046 
Purchases                
Change in fair value   75    (3)   (42)   170 
Balance at end of period:  $1,099   $1,216   $1,099   $1,216 

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2018 and June 30, 2017.

 

    Level 3 Quantitative Information 
    March 31,
2018
    June 30,
2017
   Valuation Technique  Unobservable Inputs   Range 
    Fair Value    Fair Value            
Loan servicing rights  $1,099   $1,141    Discounted cash flows  Discount rate, estimated timing of cash flows    9% to 11% 
                      

Impaired real estate loans net, with specific allocations:

 

One-to-four family

  $   $959   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 30% 
                      

Real estate owned net:

 

One-to-four family

  $137   $152   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 20% 
                      
Nonresidential  $713   $713    Sales comparison approach   Adjustment for differences between the comparable sales    0% to 20% 

 

23

 

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 March 31, 2018 and June 30, 2017 are summarized below:

 

   March 31, 2018 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $119,090   $   $119,090   $   $119,090 
Loans, net   318,417            314,322    314,322 
Loans held for sale(1)   178            178    178 
Loan servicing rights   1,099            1,099    1,099 
Restricted equity securities   1,575     N/A     N/A     N/A     N/A 
                          
Financial liabilities                         
Deposits  $384,075   $172,575   $207,252   $   $379,827 
Fed Funds Purchased                    
FHLB Advances   13,000        12,996        12,996 

 

   June 30, 2017 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $118,334   $   $118,334   $   $118,334 
Loans, net   306,542            307,624    307,624 
Loans held for sale(1)   245            245    245 
Loan servicing rights   1,141            1,141    1,141 
Restricted equity securities   1,023     N/A     N/A     N/A     N/A 
                          
Financial liabilities                         
Deposits  $394,505   $190,968   $203,656   $   $394,624 
Fed Funds Purchased                    
FHLB Advances                    

 

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

 

(8)   EMPLOYEE STOCK OWNERSHIP PLAN

 

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

 

Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. There were no discretionary contributions made to the ESOP for debt retirement in 2017. In December 2016, $50 of discretionary contributions were made to the ESOP for debt retirement, which resulted in the release of additional shares and recognition of additional compensation expense of $0 and $88, respectively, for the three and nine months ended March 31, 2017. Total ESOP compensation expense for the three and nine months ended March 31, 2018 was $76 and $379, respectively, and for the three and nine months ended March 31, 2017 was $107 and $380, respectively.

 

24

 

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 March 31, 2018 and June 30, 2017 were as follows:

 

   March 31,
 2018
   June 30,
2017
 
Committed to be released to participants  $5,384   $11,441 
Allocated to participants   130,249    130,952 
Unearned   83,056    89,620 
Total ESOP shares   218,689    232,013 
           
Fair value of unearned shares  $2,393   $2,465 

 

(9)   STOCK BASED COMPENSATION

 

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

 

On December 22, 2017, the compensation committee of the board of directors approved the issuance of 22,400 stock options to purchase Company stock to officers. There were no stock options or restricted stock issued in fiscal 2017. Stock options and restricted stock have vesting periods of five years or seven years, a percentage of which vests annually on each anniversary of the grant date. The weighted average vesting period of stock options granted in 2017 was seven years. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

 

The following table summarizes stock option activity for the nine months ended March 31, 2018:

 

   Options   Weighted- Average Exercise Price/Share   Aggregate Intrinsic
Value(1)
 
Outstanding - June 30, 2017   261,986   $12.46      
Granted   22,400    29.33      
Exercised             
Forfeited             
Outstanding - March 31, 2018   284,386   $13.79   $4,272 
Fully vested and exercisable at March 31, 2018   221,968   $11.97   $3,737 
Expected to vest in future periods   62,418           
Fully vested and expected to vest - March 31, 2018   284,386   $13.79   $4,272 

 

 
(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 $28.81 per share on March 31, 2018.

 

25

 

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 Thrift MHCs. 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 
   2018 
Risk-free interest rate   2.43%
Expected dividend yield   1.36%
Expected stock volatility   15.03%
Expected life (years)   8 
Fair value  $5.41 

 

There were no stock options granted in fiscal year 2017.

 

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 12,018 and 35,367 options that were earned during the nine months ended March 31, 2018 and 2017, respectively. Stock-based compensation expense for stock options for the three and nine months ended March 31, 2018 was $10 and $23, respectively, and for the three and nine months ended March 31, 2017 was $14 and $42, respectively. Total unrecognized compensation cost related to stock options was $175 at March 31, 2018 and is expected to be recognized over a weighted-average period of 3.8 years.

 

The following table summarizes non-vested restricted stock activity for the nine months ended March 31, 2018:

 

   March 31,
 2018
 
Balance - beginning of year   21,910 
Granted    
Forfeited    
Vested   (3,000)
Balance - end of period   18,910 
Weighted average grant date fair value  $13.09 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense for the three and nine months ended March 31, 2018 was $25 and $75, respectively, and for the three and nine months ended March 31, 2017 was $60 and $183, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $264 at March 31, 2018 and is expected to be recognized over a weighted-average period of 3.0 years.

 

26

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(10)    LOAN SERVICING RIGHTS

 

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

 

The principal balances of those loans at March 31, 2018 and June 30, 2017 are as follows:

 

   March 31,
2018
   June 30,
2017
 
Mortgage loan portfolio serviced for:          
FHLMC  $99,851   $110,171 

 

Custodial escrow balances maintained in connection with serviced loans were $607 and $893 at March 31, 2018 and June 30, 2017.

 

Activity for loan servicing rights for the three and nine months ended March 31, 2018 and 2017 is as follows:

 

   Three Months Ended   Nine Months Ended 
   March 31,
2018
   March 31,
 2017
   March 31,
2018
   March 31,
 2017
 
Loan servicing rights:                    
Beginning of period:  $1,024   $1,219   $1,141   $1,046 
Additions                
Change in fair value   75    (3)   (42)   170 
End of period:  $1,099   $1,216   $1,099   $1,216 

 

Fair value at March 31, 2018 was determined using a discount rate of 10.13%, prepayment speed assumptions ranging from 4.7% to 9.8% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.50%. Fair value at March 31, 2017 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 5.0% to 11.8% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.61%.

 

(11)   SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the nine months ended March 31, 2018 and 2017 is as follows:

 

   March 31,
2018
   March 31,
2017
 
Cash paid during the period for:          
Interest paid  $1,266   $970 
Income taxes paid  $328   $1,280 
Supplemental noncash disclosures:          
Transfers from loans to real estate owned  $230   $277 

 

27

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(12)   SUBSEQUENT EVENTS

 

On April 26, 2018, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of May 10, 2018, and will be paid on or about May 24, 2018.

 

28

 

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 of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

increased competition among depository and other financial institutions;

 

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

 

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

 

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

 

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

 

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

 

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

 

changes in the level of government support of housing finance;

 

29

 

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

 

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

 

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

 

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

 

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

 

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;

 

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

 

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

 

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

 

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

 

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, 2017, as filed with the Securities and Exchange Commission.

 

Comparison of Financial Condition at March 31, 2018 and June 30, 2017

 

Our total assets increased by $1.2 million, or 0.24%, to $482.5 million at March 31, 2018 from $481.3 million at June 30, 2017. Total cash and cash equivalents decreased $11.8 million, or 57.0%, to $8.9 million at March 31, 2018 from $20.7 million at June 30, 2017. The decrease in cash and cash equivalents was primarily due to an anticipated withdrawal from a single customer’s deposit account that had been invested by the Association in a money market account. Our available-for-sale securities portfolio increased by $756 thousand from $118.3 million at June 30, 2017 to $119.1 million at March 31, 2018. Gross loans increased $11.9 million, or 3.9%, to $319.5 million at March 31, 2018 from $307.6 million at June 30, 2017. This increase is a result of increased construction and land loan demand experienced during the nine months ended March 31, 2018. Proceeds from FHLB advances were used to fund the loan and investment growth.

 

30

 

Deposits decreased $10.4 million, or 2.6%, to $384.1 million at March 31, 2018 from $394.5 million at June 30, 2017. The decrease in our deposits reflected a decrease of $22.1 million in money market deposits and a decrease of $1.2 million in savings deposits, offset by an increase of $8.0 million in certificates of deposit, an increase of $2.7 million in NOW accounts and an increase of $2.2 million in non-interest bearing checking. The decrease in money market deposits was due to an anticipated withdrawal from a single customer, half of which was moved into a certificate of deposit.

 

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 nine months ended March 31, 2018.

 

We had no advances from the Federal Home Loan Bank of Atlanta as of June 30, 2017 but did have $13.0 million as of March 31, 2018. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of March 31, 2018, or approximately $120.7 million. We had no federal funds purchased as of March 31, 2018 or as of June 30, 2017.

 

Total shareholders’ equity decreased $1.4 million, or 1.6%, to $84.6 million at March 31, 2018 compared to $86.0 million at June 30, 2017. This was primarily due to our net income during the period of $2.1 million being offset by an increase in after tax unrealized losses in our investment portfolio of $2.1 million and our payment of dividends of $1.7 million. The Company and the Bank exceeded all minimum regulatory capital requirements at March 31, 2018 and June 30, 2017.

 

Nonperforming Assets

 

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

 

   March 31,
2018
   June 30,
 2017
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $3,487   $2,762 
Multi-family        
Home equity   80    89 
Nonresidential   930    43 
Agricultural   463    514 
Construction and land   292    75 
Total real estate loans   5,252    3,483 
Commercial and industrial        
Consumer and other loans        
Total nonaccrual loans(1)  $5,252   $3,483 
Accruing loans past due 90 days or more:          
Real estate loans:          
Total accruing loans past due 90 days or more  $   $ 
Total of nonaccrual and 90 days or more past due loans(2)  $5,252   $3,483 
Real estate owned, net:          
One-to-four family  $137   $152 
Nonresidential   713    713 
Construction and land        
Other nonperforming assets        
Total nonperforming assets  $6,102   $4,348 
           
Accruing troubled debt restructurings  $   $ 
Troubled debt restructurings and total nonperforming assets  $6,102   $4,348 
           
Total nonperforming loans to total loans   1.64%   1.13%
Total nonperforming assets to total assets   1.26%   0.90%
Total nonperforming assets to loans and real estate owned   1.90%   1.41%

 

 

(1)Nonaccrual troubled debt restructurings included in the totals above were $3.1 million and $1.6 million, at March 31, 2018 and June 30, 2017, respectively.

(2)There were no loans past due 90 days or more and still accruing at March 31, 2018 and June 30, 2017.

 

31

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $233 thousand and $159 thousand for the nine months ended March 31, 2018 and 2017, respectively. Interest of $39 thousand and $118 thousand was recognized on these loans and is included in net income for the nine months ended March 31, 2018 and 2017, respectively.

 

Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $140 thousand and $98 thousand for the nine months ended March 31, 2018 and 2017, respectively.

 

Nonperforming assets increased $1.8 million from $4.3 million as of June 30, 2017 to $6.1 million as of March 31, 2018. Nonaccrual loans increased $1.8 million to $5.3 million as of March 31, 2018 and real estate owned decreased $15 thousand to $850 thousand as of March 31, 2018. There were no accruing loans past due 90 days or more at either date. The increase in nonaccrual loans is primarily related to several large loans in both the one-to-four family and non-residential categories. These did not result in specific reserve allocations or charge-offs during the period. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 1.26% and 1.90%, respectively, at March 31, 2018 compared to 0.90% and 1.41%, respectively at June 30, 2017.

 

Analysis of Net Interest Margin

 

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

  

   For the Three Months Ended 
   March 31, 2018   March 31, 2017 
   Average Balance    Interest and Dividends    Yield/ Cost    Average Balance    Interest and Dividends    Yield/ Cost  
    (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $318,275   $3,635    4.57%  $303,678   $3,633    4.79%
Investment securities   84,455    414    1.96    86,340    382    1.77 
Investment securities, tax-free   38,733    215    2.22    34,093    186    2.18 
Interest-earning deposits   6,409    24    1.50    17,257    57    1.32 
Total interest-earning assets   447,872    4,288    3.83    441,368    4,258    3.86 
Noninterest-earning assets   34,519              38,213           
Total assets  $482,391             $479,581           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $49,103   $14    0.12%  $49,067   $11    0.09%
Money market deposits   67,261    53    0.32    83,171    79    0.38 
Regular savings and other deposits   27,681    10    0.15    29,179    11    0.15 
Certificates of deposit   201,266    309    0.62    208,405    228    0.44 
Total interest-bearing deposits   345,311    386    0.45    369,822    329    0.36 
Other Borrowings   24,153    94    1.58             
Total interest-bearing liabilities   369,464    480    0.53    369,822    329    0.36 
Noninterest bearing deposits   29,000              23,982           
Other noninterest-bearing liabilities   1,263              1,531           
Total liabilities   399,727              395,335           
Equity   82,664              84,246           
Total liabilities and equity  $482,391             $479,581           
                               
Net interest income       $3,808             $3,929      
Interest rate spread             3.30%             3.50%
Net interest margin             3.40%             3.56%
Average interest-earning assets to average interest-bearing liabilities   1.21x             1.19x          

 

32

  

    For the Nine Months Ended  
    March 31, 2018     March 31, 2017  
    Average Balance     Interest and Dividends     Yield/ Cost     Average Balance     Interest and Dividends     Yield/ Cost  
    (Dollars in Thousands)  
Assets:                                    
Interest-earning assets:                                                
Loans   $ 314,506     $ 10,811       4.58 %   $ 298,382     $ 11,009