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EX-32 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - Oconee Federal Financial Corp.ex32.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Oconee Federal Financial Corp.ex31-2.htm
EX-31.1 - CERTIFICATION OF 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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

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

 

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

 

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

 

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

 

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

 

There were 5,762,245 shares of Common Stock, par value $0.01 per share, outstanding as of November 5, 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 32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 4. CONTROLS AND PROCEDURES 38
PART II.   38
ITEM 1. LEGAL PROCEEDINGS 38
ITEM 1A. RISK FACTORS 38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 39
ITEM 4. MINE SAFETY DISCLOSURES 39
ITEM 5. OTHER INFORMATION 39
ITEM 6. EXHIBITS 39
SIGNATURES 40
INDEX TO EXHIBITS 41

 

 1

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

PART I  

 

ITEM 1.FINANCIAL STATEMENTS

 

  

September 30,
2018

   June 30,
2018
 
   (unaudited)     
ASSETS          
Cash and due from banks  $3,538   $3,681 
Interest-earning deposits   3,405    6,193 
Fed funds sold   114    36 
Total cash and cash equivalents   7,057    9,910 
Securities available-for-sale   111,479    115,146 
Loans   341,960    327,758 
Allowance for loan losses   (1,151)   (1,097)
Net loans   340,809    326,661 
Loans held for sale, at fair value   69     
Premises and equipment, net   7,658    6,817 
Real estate owned, net   775    1,074 
Accrued interest receivable          
Loans   1,050    961 
Investments   543    615 
Restricted equity securities, at cost   1,745    1,639 
Bank owned life insurance   18,668    18,554 
Goodwill   2,593    2,593 
Core deposit intangible   387    417 
Loan servicing rights   1,050    1,093 
Deferred tax assets   2,153    1,982 
Other assets   444    497 
Total assets  $496,480   $487,959 
           
LIABILITIES          
Deposits          
Noninterest - bearing  $34,273   $31,189 
Interest - bearing   360,147    356,399 
Total deposits   394,420    387,588 
FHLB advances   17,000    14,500 
Accrued interest payable and other liabilities   783    1,006 
Total liabilities   412,203    403,094 
           
SHAREHOLDERS’ EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized;          
6,495,066 and 6,488,975 shares outstanding, respectively   65    65 
Treasury stock, at par, 730,168 and 714,386 shares, respectively   (7)   (7)
Additional paid-in capital   11,582    12,000 
Retained earnings   76,442    76,136 
Accumulated other comprehensive loss   (3,053)   (2,528)
Unearned ESOP shares   (752)   (801)
Total shareholders’ equity   84,277    84,865 
Total liabilities and shareholders’ equity  $496,480   $487,959 

 

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 
   September 30,
2018
   September 30,
2017
 
Interest and dividend income:          
Loans, including fees  $3,767   $3,555 
Securities, taxable   414    369 
Securities, tax-exempt   209    206 
Other interest-earning assets   31    35 
Total interest income   4,421    4,165 
           
Interest expense:          
Deposits   565    362 
Other borrowings   85    11 
Total interest expense   650    373 
           
Net interest income   3,771    3,792 
           
Provision for loan losses   72    46 
          
Net interest income after provision for loan losses   3,699    3,746 
           
Noninterest income:          
Service charges on deposit accounts   100    108 
Income on bank owned life insurance   114    119 
Mortgage servicing income   58    68 
Gain on sale of mortgage loans   26     
ATM & debit card income   73    68 
Gain on sale of securities, net   1    10 
Other   36    31 
Total noninterest income   408    404 
           
Noninterest expense:          
Salaries and employee benefits   1,686    1,556 
Occupancy and equipment   415    397 
Data processing   255    230 
ATM & debit card expense   54    44 
Professional and supervisory fees   196    206 
Office expense   45    42 
Advertising   50    45 
FDIC deposit insurance   33    34 
Foreclosed assets, net   13    50 
Change in loan servicing asset   43    52 
Other   207    211 
Total noninterest expense   2,997    2,867 
           
Income before income taxes   1,110    1,283 
Income tax expense   226    426 
           
Net income  $884   $857 
           
Other comprehensive income/(loss)          
Unrealized ains/(losses) on securities available-for-sale  $(665)  $136 
Tax effect   141    (50)
Reclassification adjustment for (gains)/losses realized in net income   (1)   (10)
Tax effect       4 
Total other comprehensive income/(loss)   (525)   80 
           
Comprehensive income  $359   $937 
           
           
Basic net income per share: (Note 3)  $0.16   $0.15 
Diluted net income per share: (Note 3)  $0.15   $0.15 
Dividends declared per share:  $0.10   $0.10 

 

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, 2017  $65   $(7)  $11,940   $75,169   $(202)  $(1,004)  $85,961 
Net income               857            857 
Other comprehensive income                   80        80 
Purchase of 7,576 shares of treasury stock(1)           (208)               (208)
Stock-based compensation expense           6                6 
Dividends               (575)           (575)
ESOP shares earned           96            52    148 
Balance at September 30, 2017  $65   $(7)  $11,834   $75,451   $(122)  $(952)  $86,269 
                                    
Balance at June 30, 2018  $65   $(7)  $12,000   $76,136   $(2,528)  $(801)  $84,865 
Net income               884            884 
Other comprehensive loss                   (525)       (525)
Purchase of 15,782 shares of treasury stock(2)           (521)               (521)
Stock-based compensation expense           36                36 
Dividends           1    (578)           (577)
ESOP shares earned           66            49    115 
Balance at September 30, 2018  $65   $(7)  $11,582   $76,442   $(3,053)  $(752)  $84,277 

 

 
(1)The weighted average cost of treasury shares purchased during the three months ended was $27.46 per share. Treasury stock repurchases were accounted for using the par value method.
(2)The weighted average cost of treasury shares purchased during the three months ended was $27.44 per share. Treasury stock repurchases were accounted for using the par value method.

 

See accompanying notes to the consolidated financial statements.

 

 4

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

 

   Three Months Ended 
   September 30,
2018
   September 30,
2017
 
Cash Flows From Operating Activities          
Net income  $884   $857 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   72    46 
Provision for real estate owned   18    26 
Depreciation and amortization, net   298    345 
Net (accretion)/amortization of purchase accounting adjustments   (56)   (39)
Deferred income tax expense/(benefit)   (30)   (19)
Net gain on sale of real estate owned   (12)   (4)
Net gain on sale of fixed assets   (29)    
Change in loan servicing asset   43    52 
Net gain on sales of securities   (1)   (10)
Mortgage loans originated for sale   (1,723)   (1,082)
Mortgage loans sold   1,680    1,337 
Gain on sales of mortgage loans   (26)   (10)
Increase in cash surrender value of bank owned life insurance   (114)   (120)
ESOP compensation expense   115    148 
Stock based compensation expense   36    6 
Net change in operating assets and liabilities:          
Accrued interest receivable and other assets   36    192 
Accrued interest payable and other liabilities   (223)   (102)
Net cash provided by operating activities   968    1,623 
           
Cash Flows From Investing Activities          
Purchases of premises and equipment   (957)   (103)
Disposal of premises and equipment   29     
Purchases of securities available-for-sale   (1,173)   (10,624)
Proceeds from maturities, paydowns and calls of securities available-for-sale   2,830    4,186 
Proceeds from sales of securities available-for-sale   1,193    3,997 
Purchases of restricted equity securities   (106)   (2)
Redemptions of restricted equity securities       (422)
Proceeds from sale of real estate owned   293    42 
Loan originations and repayments, net   (14,164)   (5,410)
Net cash used in investing activities   (12,055)   (8,336)
           
Cash Flows from Financing Activities          
Net change in deposits   6,832    (16,827)
Proceeds from notes payable to FHLB   2,500    10,000 
Dividends paid   (577)   (575)
Purchase of treasury stock   (521)   (208)
Net cash (used in)/provided by financing activities   8,234    (7,610)
           
Change in cash and cash equivalents   (2,853)   (14,323)
           
Cash and cash equivalents, beginning of period   9,910    20,745 
Cash and cash equivalents, end of period  $7,057   $6,422 

 

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 (72.24%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2018 and June 30, 2018 and the results of operations and cash flows for the interim periods ended September 30, 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, 2019 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, 2018.

 

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”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures. The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years; early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

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 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.

 

 6

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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. The amendments should be applied prospectively to an award modified on or after the adoption date. The Company has determined that this guidance does not have a material effect on its consolidated financial statements.

 

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 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January 2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not believe that this new guidance will have a material effect on its consolidated financial statements.

 

ASU 2016-15, “Statement of Cash Flows (Topic 230)”. Issued in August 2016, ASU 2016-15 provides guidance on the classification of certain cash receipts and cash payments for presentation in the statement of cash flows. The amendment is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those years. The amendments will be applied using a retrospective transition method to each period presented unless impracticable. The Company has determined that this guidance does not have a material effect 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 has formed a management committee to address this issue, including consideration of third party vendor support. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

 

 7

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. Issued in January 2016, ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. This ASU is now effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has determined that this guidance does not have a material effect on its consolidated financial statements. However, the Company measured the fair value of its loan portfolio as of September 30, 2018 using an exit price notion.

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Issued in May 2014, ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the Financial Accounting Standards Board (“FASB”) approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March and April 2016, the FASB issued final amendments (ASU 2016-08 and ASU 2016-10) to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. In May 2016, the FASB issued final amendments (ASU-11) to clarify guidance related to collectability, noncash considerations, presentation of sales tax, and transition. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. The Company adopted the new guidance effective July 1, 2018 and intends to utilize the modified retrospective method.  Under the modified retrospective method the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company has completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including deposit related fees, interchange fees, and merchant income. Based on this assessment, the Company concluded that ASU 2014-09 does not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related revenues should change (i.e., revenue previously recorded as contra-expense will be recorded as revenue). These classification changes are expected to result in an immaterial net increase of both revenue and expense. This change is not expected to have a material effect to noninterest income or expense. The Company adopted ASU 2014-09 on its required effective date of July 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The Company did reclassify prior period amounts for the debit and credit card costs noted above.

 

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

 

 8

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(3) EARNINGS PER SHARE (“EPS”)

 

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

 

   Three Months Ended 
   September 30,
2018
   September 30,
2017
 
Earnings per share        
Net income  $884   $857 
Less:  distributed earnings allocated to participating securities   (2)   (2)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities       (1)
Net earnings available to common shareholders  $882   $854 
           
Weighted average common shares outstanding including participating securities   5,774,160    5,786,109 
Less:  participating securities   (15,355)   (21,910)
Less: average unearned ESOP shares   (74,939)   (83,090)
Weighted average common shares outstanding   5,683,866    5,681,109 
           
Basic earnings per share  $0.16   $0.15 
           
Weighted average common shares outstanding   5,683,866    5,681,109 
Add:  dilutive effects of assumed exercises of stock options   127,375    119,447 
Average shares and dilutive potential common shares   5,811,241    5,800,556 
           
Diluted earnings per share  $0.15   $0.15 

 

 9

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

During the three months ended September 30, 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 months ended September 30, 2017 no shares were considered anti-dilutive.

 

(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 September 30, 2018 and June 30, 2018 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
September 30, 2018  Cost   Gains   Losses   Value 
Available-for-sale:                
FHLMC common stock  $20   $94   $   $114 
Certificates of deposit   5,735        (88)   5,647 
Municipal securities   42,080    1    (1,366)   40,715 
SBA loan pools   375    2        377 
CMOs   9,828        (493)   9,335 
U.S. Government agency mortgage-backed securities   43,284        (1,412)   41,872 
U.S. Government agency bonds   14,022        (603)   13,419 
Total available-for-sale  $115,344   $97   $(3,962)  $111,479 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2018  Cost   Gains   Losses   Value 
Available-for-sale:                
FHLMC common stock  $20   $109   $   $129 
Certificates of deposit   5,485        (94)   5,391 
Municipal securities   43,393    14    (1,069)   42,338 
SBA loan pools   401    2        403 
CMOs   10,529        (445)   10,084 
U.S. Government agency mortgage-backed securities   44,490    6    (1,206)   43,290 
U.S. Government agency bonds   14,027        (516)   13,511 
Total available-for-sale  $118,345   $131   $(3,330)  $115,146 

 

Securities pledged at September 30, 2018 and June 30, 2018 had fair values of $40,217 and $42,098, respectively. These securities were pledged to secure public deposits and FHLB advances.

 

At September 30, 2018 and June 30, 2018, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

 

 10

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at September 30, 2018 and June 30, 2018. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Loss
   Number in Unrealized Loss(1)   Fair Value   Unrealized
Loss
   Number in Unrealized Loss(1)   Fair Value   Unrealized
Loss
   Number in Unrealized Loss(1) 
September 30, 2018                                    
Available-for-sale:                                    
Certificates of deposit  $5,398   $(88)   22   $   $       $5,398   $(88)   22 
Municipal securities   20,953    (411)   58    19,307    (955)   46    40,260    (1,366)   104 
CMOs               9,335    (493)   16    9,335    (493)   16 
U.S. Government agency mortgage-backed securities   13,761    (308)   22    28,111    (1,104)   37    41,872    (1,412)   59 
U.S. Government agency bonds   3,326    (123)   4    10,093    (480)   10    13,419    (603)   14 
   $43,438   $(930)   106   $66,846   $(3,032)   109   $110,284   $(3,962)   215 

 

   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, 2018                                    
Available-for-sale:                                    
Certificates of deposit  $5,391   $(94)   22   $   $       $5,391   $(94)   22 
Municipal securities   28,305    (587)   75    10,789    (482)   25    39,094    (1,069)   100 
CMOs   1,334    (38)   2    8,750    (407)   14    10,084    (445)   16 
U.S. Government agency mortgage-backed securities   30,997    (773)   43    10,887    (433)   13    41,884    (1,206)   56 
U.S. Government agency bonds   5,789    (177)   7    7,722    (339)   7    13,511    (516)   14 
   $71,816   $(1,669)   149   $38,148   $(1,661)   59   $109,964   $(3,330)   208 

 

 

(1)Actual amounts.

 

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

 

None of the unrealized losses at September 30, 2018 were recognized into net income for the three months ended September 30, 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, 2018 were recognized as having OTTI during the year ended June 30, 2018.

 

 11

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2018 and June 30, 2018 by contractual maturity.

                 
   September 30, 2018   June 30, 2018 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
Less than one year  $2,503   $2,488   $1,004   $1,003 
Due from one to five years   20,880    20,392    19,415    19,049 
Due after five years to ten years   29,142    28,037    33,186    32,230 
Due after ten years   9,687    9,241    9,701    9,361 
Mortgage-backed securities, CMOs and FHLMC stock (1)   53,132    51,321    55,039    53,503 
Total available for sale  $115,344   $111,479   $118,345   $115,146 

 

 

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

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three months ended September 30, 2018 and 2017:

         
   Three Months Ended 
Available-for-sale:  September 30,
2018
   September 30,
2017
 
Proceeds  $1,193   $3,997 
Gross gains   3    11 
Gross losses   (2)   (1)

 

The tax provision related to these net realized gains for the three months ended September 30, 2018 was less than $1, and for the three months ended September 30, 2017 was $3. 

 

(5)       LOANS

 

The components of loans at September 30, 2018 and June 30, 2018 were as follows:

         
   September 30,
2018
   June 30,
2018
 
Real estate loans:         
One-to-four family  $275,577   $269,868 
Multi-family   1,712    1,735 
Home equity   4,303    3,914 
Nonresidential   17,807    17,591 
Agricultural   1,215    1,272 
Construction and land   35,311    27,513 
Total real estate loans   335,925    321,893 
Commercial and industrial   302    326 
Consumer and other loans   5,733    5,539 
Total loans  $341,960   $327,758 

 

 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 activity in the allowance for loan losses for the three months ended September 30, 2018 by portfolio segment:

 

Three Months Ended September 30, 2018  Beginning Balance   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Real estate loans:                         
One-to-four family  $939   $35   $(18)  $   $956 
Multi-family   4                4 
Home equity   8    5            13 
Nonresidential   66    3            69 
Agricultural   1                1 
Construction and land   74    24            98 
Total real estate loans   1,092    67    (18)       1,141 
Commercial and industrial   4    (1)           3 
Consumer and other loans   1    6            7 
Total loans  $1,097   $72   $(18)  $   $1,151 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 30, 2018: 

 

   Ending Allowance on Loans:   Loans: 
At September 30, 2018  Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
   Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
 
Real estate loans:                    
One-to-four family  $   $956   $2,403   $273,174 
Multi-family       4        1,712 
Home equity       13        4,303 
Nonresidential       69    656    17,151 
Agricultural       1    413    802 
Construction and land       98        35,311 
Total real estate loans       1,141    3,472    332,453 
Commercial and industrial       3        302 
Consumer and other loans       7        5,733 
Total loans  $   $1,151   $3,472   $338,488 

 

 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 activity in the allowance for loan losses for the three months ended September 30, 2017 by portfolio segment: 

 

Three Months ended September 30, 2017  Beginning Balance   Provision   Charge-offs   Recoveries   Ending Balance 
Real estate loans:                         
One-to-four family  $900   $(11)  $   $   $889 
Multi-family   4                4 
Home equity   2    14    (13)       3 
Nonresidential   63    (3)           60 
Agricultural   1                1 
Construction and land   35    45    (25)       55 
Total real estate loans   1,005    45    (38)       1,012 
Commercial and industrial   4    2            6 
Consumer and other loans   7    (1)           6 
Total loans  $1,016   $46   $(38)  $   $1,024 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2018:

 

   Ending Allowance on Loans:   Loans: 
At June 30, 2018  Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
   Individually Evaluated for Impairment   Collectively
Evaluated for
Impairment
 
Real estate loans:                    
One-to-four family  $   $939   $2,434   $267,434 
Multi-family       4        1,735 
Home equity       8        3,914 
Nonresidential       66    671    16,920 
Agricultural       1    424    848 
Construction and land       74        27,513 
Total real estate loans       1,092    3,529    318,364 
Commercial and industrial       4        326 
Consumer and other loans       1        5,539 
Total loans  $   $1,097   $3,529   $324,229 

 

 14

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

   September 30, 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  $2,481   $2,403   $   $2,419   $15 
Multi-family                    
Home equity                    
Nonresidential   692    656        664     
Agricultural   962    413        419     
Construction and land                    
Total real estate loans   4,135    3,472        3,502    15 
Commercial and industrial                    
Consumer and other loans                    
Total  $4,135   $3,472   $   $3,502   $15 

 

With recorded allowance:                   
Real estate loans:                       
One-to-four family  $    $    $    $    $  
Multi-family                 
Home equity                 
Nonresidential                 
Agricultural                 
Construction and land                 
Total real estate loans               
Commercial and industrial              
Consumer and other loans                    
Total  $   $   $   $   $ 
                          
Totals:                         
Real estate loans  $4,135   $3,472   $   $3,502   $15 
Consumer and other loans                    
Total  $4,135   $3,472   $   $3,502   $15 

 

 15

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   June 30, 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  $2,516   $2,434   $   $2,251   $67 
Multi-family                    
Home equity                    
Nonresidential   707    671        336    3 
Agricultural   972    424        436    7 
Construction and land               131     
Total real estate loans   4,195    3,529        3,154    77 
Commercial and industrial                    
Consumer and other loans                    
Total  $4,195   $3,529   $   $3,154   $77 

 

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  $4,195   $3,529   $   $3,638   $77 
Consumer and other loans                    
Total  $4,195   $3,529   $   $3,638   $77 

 

 16

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

Total past due loans and nonaccrual loans at September 30, 2018:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
   Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $6,772   $1,806   $865   $9,443   $266,134   $275,577   $3,682   $ 
Multi-family                   1,712    1,712         
Home equity   84    39    40    163    4,140    4,303    40     
Nonresidential   384    154        538    17,269    17,807    884     
Agricultural       413        413    802    1,215    413     
Construction and land   175    49        224    35,087    35,311    11     
Total real estate loans   7,415    2,461    905    10,781    325,144    335,925    5,030     
Commercial and industrial                   302    302         
Consumer and other loans           4    4    5,729    5,733    4     
Total  $7,415   $2,461   $909   $10,785   $331,175   $341,960   $5,034   $ 

 

Total past due and nonaccrual loans by portfolio segment at June 30, 2018:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
   Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $5,180   $1,787   $897   $7,864   $262,004   $269,868   $3,969   $ 
Multi-family                   1,735    1,735         
Home equity   106    84    40    230    3,684    3,914    40     
Nonresidential   376    179        555    17,036    17,591    908     
Agricultural       424        424    848    1,272    445     
Construction and land   50    34        84    27,429    27,513    19     
Total real estate loans   5,712    2,508    937    9,157    312,736    321,893    5,381     
Commercial and industrial                   326    326         
Consumer and other loans                   5,539    5,539    1     
Total  $5,712   $2,508   $937   $9,157   $318,601   $327,758   $5,382   $ 

 

 17

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Troubled Debt Restructurings:

 

At September 30, 2018 and June 30, 2018, total loans that have been modified as troubled debt restructurings were $3,082 and $3,016, respectively, which consisted of one construction loan, two agricultural loans, two nonresidential real estate and five one-to-four family first lien loans at September 30, 2018 and one construction loan, two agricultural loans, two non-residential real estate loans and four one-to-four family first lien loans at June 30, 2018. There was no specific allowance for loss established for these loans at September 30, 2018 or June 30, 2018. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. The one-to-four family first lien troubled debt restructured during the three months ended September 30, 2018 involved renewing an existing loan with a term concession. No loans modified as troubled debt restructurings during the twelve months ended September 30, 2018 have defaulted since restructuring. All of these loans are on non-accrual at September 30, 2018 and June 30, 2018. At September 30, 2018 and June 30, 2018, $2,470 and $2,521, respectively, were individually evaluated for impairment.

 

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%.

 

 18

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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.

 

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.

 

 19

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the 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.

 

 20

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

Total loans by risk grade and portfolio segment at September 30, 2018:

 

    Pass    Pass-Watch   
Special
Mention
    Substandard    Doubtful    Total 
Real estate loans:                              
One-to-four family  $260,581   $5,171   $3,164   $6,661   $   $275,577 
Multi-family   1,712                    1,712 
Home equity   3,658    344    127    174        4,303 
Nonresidential   13,759    1,771    1,128    1,149        17,807 
Agricultural   201    343    258    413        1,215 
Construction and land   34,368    761    113    69        35,311 
 Total real estate loans   314,279    8,390    4,790    8,466        335,925 
Commercial and industrial   302                    302 
Consumer and other loans   5,729            4        5,733 
Total  $320,310   $8,390   $4,790   $8,470   $   $341,960 

 

Total loans by risk grade and portfolio segment at June 30, 2018:

 

    Pass    Pass-Watch    Special
Mention
    Substandard    Doubtful    Total 
Real estate loans:                              
One-to-four family  $254,721   $5,051   $3,350   $6,746   $   $269,868 
Multi-family   1,735                    1,735 
Home equity   3,298    311    129    176        3,914 
Nonresidential   13,462    1,802    1,143    1,184        17,591 
Agricultural   217    349    261    445        1,272 
Construction and land   26,551    771    115    76        27,513 
 Total real estate loans   299,984    8,284    4,998    8,627        321,893 
Commercial and industrial   326                    326 
Consumer and other loans   5,539                    5,539 
Total  $305,849   $8,284   $4,998   $8,627   $   $327,758 

 

At September 30, 2018, consumer mortgage loans secured by residential real estate properties totaling $524 were in formal foreclosure proceedings and are included in one-to-four family and land loans.

 

 21

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(6)        BORROWINGS

 

At September 30, 2018 and June 30, 2018, advances from the Federal Home Loan Bank were as follows:

 

   September 30, 2018
   Balance   Stated Interest Rate
FHLB advances due October 2018 through September 2019  $17,000   2.17% - 2.73%
                   Total  $17,000    

 

   June 30, 2018
   Balance   Stated Interest Rate
FHLB advances due September 2018 through November 2018  $14,500   2.09% - 2.23%
                   Total  $14,500    

 

The average interest rate of all outstanding FHLB advances was 2.41% and 2.14% on September 30, 2018 and June 30, 2018, respectively.

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $40,217 and $36,248 of investment securities at September 30, 2018 and June 30, 2018, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $122,406 at September 30, 2018.

 

Payments over the next five years are as follows: 

 

2018 $7,500
2019 $9,500

 

There were no overnight borrowings at September 30, 2018 or June 30, 2018.

 

(7)       FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

 22

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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.

 

 23

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

                 
   Fair Value Measurements 
   September 30, 2018   June 30, 2018 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
Financial assets:                    
Securities available-for-sale:                    
FHLMC common stock  $114   $   $129   $ 
Certificates of deposit   5,647        5,391     
Municipal securities   40,715        42,338     
SBA loan pools   377        403     
CMOs   9,335        10,084     
U.S. Government agency mortgage-backed securities   41,872        43,290     
U.S. Government agency bonds   13,419        13,511     
Total securities available-for-sale   111,479        115,146     
Loan servicing rights       1,050        1,093 
Total financial assets  $111,479   $1,050   $115,146   $1,093 

 

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

 

   Fair Value Measurements 
   September 30,
2018
   June 30,
2018
 
   (Level 3)   (Level 3) 
Financial assets:          
Impaired loans, with specific allocations:          
One-to-four family  $   $ 
Nonresidential        
Construction and land        
Total financial assets        
Non-financial assets:          
Real estate owned, net:          
One-to-four family   41    91 
Nonresidential   464    983 
Construction and land   270     
Total non-financial assets   775    1,074 
Total assets measured at fair value on a non-recurring basis  $775   $1,074 

 

The Company’s impaired loans at September 30, 2018 and June 30, 2018 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 September 30, 2018 or June 30, 2018.

 

 24

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned at September 30, 2018 and June 30, 2018 were $775 and $1,074, respectively. There was no valuation allowances associated with these properties at September 30, 2018 or June 30, 2018. 

 

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three months ended September 30, 2018 and 2017:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended 
   September 30
 2018
   September 30,
 2017
 
    Loan
Servicing
Rights
    Loan
Servicing
Rights
 
Balance at beginning of period:  $1,093   $1,141 
Purchases        
Unrealized net gains (losses) included in net income   (43)   (52)
Balance at end of period:  $1,050   $1,089 

 

 25

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited) 

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

 

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

 

   Level 3 Quantitative Information  
   September 30,
 2018
   June 30,
 2018
 Valuation Technique  Unobservable Inputs   Range 
   Fair Value   Fair Value            
Loan servicing rights  $1,050   $1,093    Discounted cash flows  Discount rate, estimated timing of cash flows    10.13% to 10.38%  
                      
                      
Impaired real estate loans net, with specific allocations:
    One-to-four family
  $   $    Sales comparison approach   Adjustment for differences between the comparable sales     0% to 30%  
                      
Real estate owned net:
    One-to-four family
  $41   $91    Sales comparison approach   Adjustment for differences between the comparable sales     0% to 20%  
Nonresidential  $464   $983    Sales comparison approach   Adjustment for differences between the comparable sales    0% to 20%  
Construction and land  $270   $     Sales comparison approach   Adjustment for differences between the comparable sales    0% to 20%  

 

 26

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

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

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at September 30, 2018 and June 30, 2018 are summarized below:

 

   September 30, 2018 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $111,479   $   $111,479   $   $111,479 
Loans, net (1)(2)   340,809            330,407    330,407 
Loan servicing rights   1,050            1,050    1,050 
Restricted equity securities   1,745     N/A      N/A      N/A      N/A  
                          
Financial liabilities                         
Deposits  $394,420   $177,813   $209,945   $   $387,758 
FHLB Advances   17,000        16,993        16,993 

 

   June 30, 2018 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $115,146   $   $115,146   $   $115,146 
Loans, net (1)(2)   326,661            319,958    319,958 
Loans held for sale                    
Loan servicing rights   1,093            1,093    1,093 
Restricted equity securities   1,639     N/A      N/A      N/A      N/A  
                          
Financial liabilities                         
Deposits  $387,588   $174,192   $208,967   $   $383,159 
FHLB Advances   14,500        14,494        14,494 

 

 

(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.
(2)Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of June 30, 2018 was measured using an entry price notion.

 

(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, therefore no contributions were made during the three months ended September 30, 2018. Total ESOP compensation expense for the three months ended September 30, 2018 was $115, and for the three months ended September 30, 2017 was $122.

 

 27

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

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

 

Shares held by the ESOP at September 30, 2018 and June 30, 2018 were as follows:

 

   September 30,
 2018
   June 30,
2018
 
Committed to be released to participants   15,504    10,095 
Allocated to participants   127,985    127,985 
Unearned   75,200    80,609 
Total ESOP shares   218,689    218,689 
           
Fair value of unearned shares  $1,994   $2,333 

 

(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 three months ended September 30, 2018:

 

   Options   Weighted- Average Exercise Price/Share   Aggregate Intrinsic
Value(1)
 
Outstanding - June 30, 2018   241,209   $14.18      
Granted             
Exercised   (15,552)         
Forfeited             
Outstanding - September 30, 2018   225,657   $14.36   $2,745 
Fully vested and exercisable at September 30, 2018   174,348   $12.08   $2,518 
Expected to vest in future periods   51,309           
Fully vested and expected to vest - September 30, 2018   225,657   $14.36   $2,745 

 

 

(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 $26.52 per share on September 30, 2018.

 

 28

 

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:

 

There have been no stock options granted in fiscal year 2019.

 

   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 

 

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 4,035 and 4,036 options that were earned during the three months ended September 30, 2018 and 2017, respectively. Stock-based compensation expense for stock options for the three months ended September 30, 2018 and 2017 was $11 and $6, respectively. Total unrecognized compensation cost related to stock options was $154 at September 30, 2018 and is expected to be recognized over a weighted-average period of 3.9 years.

 

The following table summarizes non-vested restricted stock activity for the three months ended September 30, 2018:

 

   Septmber 30,
 2018
 
Balance - beginning of year   15,355 
Granted    
Forfeited    
Vested    
Balance - end of period   15,355 
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 months ended September 30, 2018 and 2017 was $25 and $25, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $213 at September 30, 2018 and is expected to be recognized over a weighted-average period of 2.7 years.

 

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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 September 30, 2018 and June 30, 2018 are as follows:

 

   September 30,
2018
   June 30,
2018
 
Mortgage loan portfolio serviced for:          
FHLMC  $91,459   $94,779 

 

Custodial escrow balances maintained in connection with serviced loans were $1,014 and $799 at September 30, 2018 and June 30, 2018.

 

Activity for loan servicing rights for the three months ended September 30, 2018 and 2017 is as follows:

 

   Three Months  Ended 
   September 30,
2018
   September 30,
 2017
 
Loan servicing rights:          
Beginning of period:  $1,093   $1,141 
Additions        
Change in fair value   (43)   (52)
End of period:  $1,050   $1,089 

 

Fair value at September 30, 2018 was determined using a discount rate of 10.38%, prepayment speed assumptions ranging from 4.6% to 13.1% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.43%.  Fair value at September 30, 2017 was determined using a discount rate of 9.50%, prepayment speed assumptions ranging from 5.2% to 15.6% 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 three months ended September 30, 2018 and 2017 is as follows:

 

   September 30,
2018
   September 30,
2017
 
Cash paid during the period for:          
Interest paid  $648   $371 
Income taxes paid  $101   $68 
Supplemental noncash disclosures:          
Transfers from loans to real estate owned  $   $93 

 

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OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

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

 

(12)SUBSEQUENT EVENTS

 

On October 25, 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 November 8, 2018, and will be paid on or about November 21, 2018.

 

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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;

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

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

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

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

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

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

our reliance on a small executive staff;

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

changes in consumer spending, borrowing and savings habits;

 

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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, 2018, as filed with the Securities and Exchange Commission.

 

Comparison of Financial Condition at September 30, 2018 and June 30, 2018

 

Our total assets increased by $8.5 million, or 1.7%, to $496.5 million at September 30, 2018 from $488.0 million at June 30, 2018. Total cash and cash equivalents decreased $2.9 million, or 28.8%, to $7.1 million at September 30, 2018 from $9.9 million at June 30, 2018. The decrease in cash and cash equivalents was due to normal fluctuations in cash. Our available-for-sale securities portfolio decreased by $3.7 million from $115.1 million at June 30, 2018 to $111.5 million at September 30, 2018. Gross loans increased $14.2 million, or 4.3%, to $342.0 million at September 30, 2018 from $327.8 million at June 30, 2018. This increase is a result of increased one-to-four family, construction and land loan demand experienced during the three months ended September 30, 2018. Proceeds from FHLB advances and investment repayments and maturities were used to fund the loan growth.

 

Deposits increased $6.8 million, or 1.8%, to $394.4 million at September 30, 2018 from $387.6 million at June 30, 2018. The increase in our deposits reflected an increase of $491 thousand in money market deposits, $3.2 million in certificates of deposit, $515 thousand in NOW accounts and $3.1 million in non-interest bearing checking, offset by a decrease of $469 thousand in savings deposits.

 

Oconee Federal, MHC’s cash is held on deposit with the Association. We generally do not accept brokered deposits and no brokered deposits were accepted during the three months ended September 30, 2018.

 

Federal Home Loan Bank advances increased by $2.5 million, or 17.2%, to $17.0 million at September 30, 2018 from $14.5 million at June 30, 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 September 30, 2018, or approximately $122.4 million. We had no federal funds purchased as of September 30, 2018 or as of June 30, 2018.

 

Total shareholders’ equity decreased $588 thousand, or 0.7%, to $84.3 million at September 30, 2018 compared to $84.9 million at June 30, 2018. This was primarily due to our net income during the period of $884 thousand being offset by an increase in after tax unrealized losses in our investment portfolio of $525 thousand, our payment of dividends of $577 thousand, and $521 thousand used for the repurchase of treasury stock. The Company and the Bank exceeded all minimum regulatory capital requirements at September 30, 2018 and June 30, 2018.

 

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Nonperforming Assets

 

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

 

   September 30,
2018
   June 30,
 2018
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $3,682   $3,969 
Multi-family        
Home equity   40    40 
Nonresidential   884    908 
Agricultural   413    445 
Construction and land   11    19 
Total real estate loans   5,030    5,381 
Commercial and industrial        
Consumer and other loans   4    1 
Total nonaccrual loans(1)  $5,034   $5,382 
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)  $5,034   $5,382 
Real estate owned, net:          
One-to-four family  $41   $91 
Nonresidential   464    983 
Construction and land   270     
Other nonperforming assets