UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

 

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

 

For the Quarterly Period ended March 31, 2020

 

Or

 

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

 

For transition period from           to

 

Commission File Number 001-35033

 

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Oconee Federal Financial Corp.  

(Exact Name of Registrant as Specified in Charter)

 

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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)

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		OFED		The NASDAQ Stock Market, LLC

 

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

 

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

 

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

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

 

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

 

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

 

As of May 7, 2020, the registrant had 5,675,281 shares of common stock, $0.01 par value per share, outstanding.

 

 

OCONEE FEDERAL FINANCIAL CORP.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I.		2
ITEM 1.	FINANCIAL STATEMENTS	2
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 4.	CONTROLS AND PROCEDURES	42
PART II.		43
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	MINE SAFETY DISCLOSURES	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	44
SIGNATURES		45
EXHIBITS

 

 

OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)

 

PART I

ITEM 1.

FINANCIAL STATEMENTS

 

		March 31, 2020				June 30, 2019
		(unaudited)
ASSETS
Cash and due from banks		$	5,114			$	5,678
Interest-earning deposits			20,854				30,946
Fed funds sold			144				66
Total cash and cash equivalents			26,112				36,690
Securities available-for-sale			86,885				95,429
Loans			353,164				360,088
Allowance for loan losses			(1,296	)			(1,297	)
Net loans			351,868				358,791
Loans held for sale, at fair value			1,083				—
Premises and equipment, net			9,489				8,134
Real estate owned, net			295				811
Accrued interest receivable
Loans			1,055				1,137
Investments			329				447
Restricted equity securities, at cost			1,249				1,854
Bank owned life insurance			19,370				19,022
Goodwill			2,593				2,593
Core deposit intangible			233				305
Loan servicing rights			590				868
Deferred tax assets			604				1,187
Other assets			469				558
Total assets		$	502,224			$	527,826
LIABILITIES
Deposits
Noninterest - bearing		$	37,012			$	36,232
Interest - bearing			369,351				382,874
Total deposits			406,363				419,106
Federal Home Loan Bank advances			5,000				19,000
Accrued interest payable and other liabilities			1,422				1,423
Total liabilities			412,785				439,529
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,530,074 and 6,530,074 shares outstanding, respectively			65				65
Treasury stock, at par, 854,068 and 771,008 shares, respectively			(9	)			(8	)
Additional paid-in capital			9,192				10,986
Retained earnings			78,745				77,464
Accumulated other comprehensive income			1,903				394
Unearned ESOP shares			(457	)			(604	)
Total shareholders’ equity			89,439				88,297
Total liabilities and shareholders’ equity		$	502,224			$	527,826

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Amounts in thousands, except share and per share data)

 

			Three Months Ended								Nine Months Ended
			March 31, 2020				March 31, 2019				March 31, 2020				March 31, 2019
Interest and dividend income:
Loans, including fees		$	4,174			$	4,123			$	12,436			$	11,942
Securities, taxable			368				396				1,149				1,211
Securities, tax-exempt			93				173				292				587
Other interest-earning assets			84				94				422				167
Total interest income			4,719				4,786				14,299				13,907
Interest expense:
Deposits			905				837				2,991				2,058
Other borrowings			13				178				198				424
Total interest expense			918				1,015				3,189				2,482
Net interest income			3,801				3,771				11,110				11,425
Provision for loan losses			—				85				—				234
Net interest income after provision for loan losses			3,801				3,686				11,110				11,191
Noninterest income:
Service charges on deposit accounts			104				113				330				327
Income on bank owned life insurance			121				126				348				355
Mortgage servicing income			44				51				141				161
Gain on sale of mortgage loans			21				37				103				86
ATM & debit card income			82				72				255				225
Change in fair value of equity securities, net			(130	)			132				(98	)			90
Gain/(loss) on sale of securities, net			113				(51	)			125				(50	)
Gain on payoff of purchase credit impaired loans			277				42				309				64
Other			1				6				5				49
Total noninterest income			633				528				1,518				1,307
Noninterest expense:
Salaries and employee benefits			1,628				1,779				4,796				5,192
Occupancy and equipment			556				463				1,483				1,340
Data processing			230				221				667				677
ATM & debit card expense			60				50				182				155
Professional and supervisory fees			132				112				460				513
Office expense			57				46				165				149
Advertising			72				68				199				177
FDIC deposit insurance			1				32				3				95
Foreclosed assets, net			123				31				267				56
Change in loan servicing asset			191				67				278				143
Other			196				191				601				611
Total noninterest expense			3,246				3,060				9,101				9,108
Income before income taxes			1,188				1,154				3,527				3,390
Income tax expense			242				202				556				649
Net income		$	946			$	952			$	2,971			$	2,741
Other comprehensive income
Unrealized gains on securities available-for-sale		$	1,635			$	1,450			$	2,034			$	2,350
Tax effect			(341	)			(289	)			(426	)			(469	)
Reclassification adjustment for (gains)/losses realized in net income			(113	)			51				(125	)			50
Tax effect			23				(11	)			26				(11	)
Total other comprehensive income			1,204				1,201				1,509				1,920
Comprehensive income		$	2,150			$	2,153			$	4,480			$	4,661
Basic net income per share: (Note 3)		$	0.17			$	0.17			$	0.52			$	0.48
Diluted net income per share: (Note 3)		$	0.17			$	0.16			$	0.52			$	0.47
Dividends declared per share:		$	0.10			$	0.30			$	0.30			$	0.30

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share and per share data)

For the three months ended March 31, 2020 and March 31, 2019

 

																		Accumulated
										Additional								Other				Unearned
		Common				Treasury				Paid-In				Retained				Comprehensive				ESOP
		Stock				Stock				Capital				Earnings				Income (loss)				Shares				Total
Balance at December 31, 2018		$	65			$	(7	)		$	11,625			$	76,819			$	(1,809	)		$	(702	)		$	85,991
Net income			—				—				—				952				—				—				952
Other comprehensive income			—				—				—				—				1,201				—				1,201
Reclassification of unrealized gain on equity securities			—				—				—				109				(109	)			—				—
Purchase of 30,438 shares of treasury stock(1)			—				(1	)			(812	)			—				—				—				(813	)
Stock-based compensation expense			—				—				40				—				—				—				40
Dividends			—				—				—				(575	)			—				—				(575	)
ESOP shares earned			—				—				43				—				—				49				92
Balance at March 31, 2019		$	65			$	(8	)		$	10,896			$	77,305			$	(717	)		$	(653	)		$	86,888
Balance at December 31, 2019		$	65			$	(8	)		$	10,215			$	78,392			$	699			$	(507	)		$	88,856
Net income			—				—				—				946				—				—				946
Other comprehensive income			—				—				—				—				1,204				—				1,204
Purchase of 42,981 shares of treasury stock(2)			—				(1	)			(1,109	)			—				—				—				(1,110	)
Stock-based compensation expense			—				—				20				—				—				—				20
Dividends			—				—				—				(593	)			—				—				(593	)
ESOP shares earned			—				—				66				—				—				50				116
Balance at March 31, 2020		$	65			$	(9	)		$	9,192			$	78,745			$	1,903			$	(457	)		$	89,439

 

(1)

The weighted average cost of treasury shares purchased during the three months ended was $26.71 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 $25.81 per share. Treasury stock repurchases were accounted for using the par value method.

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 

(Unaudited) 

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

For the nine months ended March 31, 2020 and March 31, 2019

 

																		Accumulated
										Additional								Other				Unearned
		Common				Treasury				Paid-In				Retained				Comprehensive				ESOP
		Stock				Stock				Capital				Earnings				Income (loss)				Shares				Total
Balance at June 30, 2018		$	65			$	(7	)		$	12,000			$	76,136			$	(2,528	)		$	(801	)		$	84,865
Net income			—				—				—				2,741				—				—				2,741
Other comprehensive income			—				—				—				—				1,920				—				1,920
Reclassification of unrealized gain on equity securities			—				—				—				109				(109	)			—				—
Purchase of 49,877 shares of treasury stock(1)			—				(1	)			(1,427	)			—				—				—				(1,428	)
Stock-based compensation expense			—				—				106				—				—				—				106
Dividends(2)			—				—				42				(1,681	)			—				—				(1,639	)
ESOP shares earned			—				—				175				—				—				148				323
Balance at March 31, 2019		$	65			$	(8	)		$	10,896			$	77,305			$	(717	)		$	(653	)		$	86,888
Balance at June 30, 2019		$	65			$	(8	)		$	10,986			$	77,464			$	394			$	(604	)		$	88,297
Net income			—				—				—				2,971				—				—				2,971
Other comprehensive income			—				—				—				—				1,509				—				1,509
Purchase of 83,060 shares of treasury stock(3)			—				(1	)			(2,036	)			—				—				—				(2,037	)
Stock-based compensation expense			—				—				59				—				—				—				59
Dividends(4)			—				—				29				(1,690	)			—				—				(1,661	)
ESOP shares earned			—				—				154				—				—				147				301
Balance at March 31, 2020		$	65			$	(9	)		$	9,192			$	78,745			$	1,903			$	(457	)		$	89,439

 

(1)

The weighted average cost of treasury shares purchased during the nine months ended was $26.88 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

Approximately $85 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $49 and resulting release of approximately 4,500 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $36 and resulting release of approximately 2,600 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2019.

(3)

The weighted average cost of treasury shares purchased during the six months ended was $24.52 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

Approximately $79 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,300 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,400 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,800 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2020.

  

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

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

 

		Nine Months Ended
			March 31, 2020				March 31, 2019
Cash Flows From Operating Activities
Net income		$	2,971			$	2,741
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			—				234
Provision for real estate owned			117				18
Depreciation and amortization, net			932				879
Net accretion of purchase accounting adjustments			(50	)			(159	)
Deferred income tax expense/(income)			403				(46	)
Net loss on sale of real estate owned			120				9
Net gain on sale of premises and equipment			—				(29	)
Change in loan servicing asset			278				143
Net gain/(loss) on sales of securities			(125	)			50
Mortgage loans originated for sale			(9,603	)			(4,160	)
Mortgage loans sold			8,623				4,246
Gain on sales of mortgage loans			(103	)			(86	)
Change in fair value of equity securities			98				(90	)
Increase in cash surrender value of bank owned life insurance			(348	)			(354	)
Gain on payoff of purchased credit impaired loans			(309	)			(64	)
ESOP compensation expense			301				323
Stock based compensation expense			59				106
Net change in operating assets and liabilities:
Accrued interest receivable and other assets			289				72
Accrued interest payable and other liabilities			(1	)			622
Net cash provided by operating activities			3,652				4,455
Cash Flows From Investing Activities
Purchases of premises and equipment			(1,798	)			(1,145	)
Disposal of premises and equipment			—				29
Purchases of securities available-for-sale			(21,627	)			(4,184	)
Proceeds from maturities, paydowns and calls of securities available-for-sale			16,708				8,546
Proceeds from sales of securities available-for-sale			14,762				12,228
Purchases of restricted equity securities			(213	)			(366	)
Sales of restricted equity securities			818				151
Proceeds from sale of real estate owned			279				541
Loan originations and repayments, net			7,282				(32,720	)
Net cash provided/(used) in investing activities			16,211				(16,920	)
Cash Flows from Financing Activities
Net change in deposits			(12,743	)			16,417
Proceeds from notes payable to FHLB			5,000				54,100
Repayment of notes payable to FHLB			(19,000	)			(49,600	)
Dividends paid			(1,661	)			(1,639	)
Purchase of treasury stock			(2,037	)			(1,428	)
Net cash (used)/provided by financing activities			(30,441	)			17,850
Change in cash and cash equivalents			(10,578	)			5,385
Cash and cash equivalents, beginning of period			36,690				9,910
Cash and cash equivalents, end of period		$	26,112			$	15,295

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(1)	BASIS OF PRESENTATION, RISKS AND UNCERTAINTIES

 

Basis of Presentation:

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (73.37%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2020 and June 30, 2019 and the results of operations and cash flows for the interim periods ended March 31, 2020 and 2019. 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, 2020 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, 2019.

 

Reclassifications:

 

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

 

Cash Flows:

 

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

 

Use of Estimates:

 

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

 

Risks and Uncertainties:

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(2)	NEW ACCOUNTING STANDARDS

 

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

 

ASU 2020-03, “Codification Improvements to Financial Instruments”. Issued in March 2020, ASU 2020-03 provides guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the current expected credit losses (CECL) guidance issued in 2016. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)”. Issued in February 2020, ASU 2020-02 provides guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

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

 

ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.

 

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

 

ASU 2019-07, “Codification Updates to SEC Sections”. Issued in July 2019, ASU 2019-07 updates various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

 

ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief”. Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

ASU 2019-01, Leases (Topic 842): Codification Improvements. Issued in March 2019, ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Accounting Standards Codification (ASC) 842, Leases, with that of the existing guidance (ASC 820, Fair Value Measurement). As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply and costs incurred to acquire the asset, as per ASC 842, Leases. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of ASC 942, Financial Services—Depository and Lending, to present all principal payments received under leases within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The amendment is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the new guidance effective July 1, 2019. This pronouncement will not have a material impact on the Company’s consolidated financial statements as the Company does not have any significant leases.

 

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 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 were 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 adopted this standard on June 30, 2019 as reflected by a $245 adjustment to retained earnings.

 

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.

  

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

(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								Nine Months Ended
		March 31, 2020				March 31, 2019				March 31, 2020				March 31, 2019
Earnings per share
Net income		$	946			$	952			$	2,971			$	2,741
Less: distributed earnings allocated to participating securities			(1	)			(2	)			(3	)			(4	)
Less: (undistributed income) dividends in excess of earnings allocated to participating securities			—				—				(2	)			(3	)
Net earnings available to common shareholders		$	945			$	950			$	2,966			$	2,734
Weighted average common shares outstanding including participating securities			5,705,937				5,759,840				5,721,903				5,765,601
Less: participating securities			(8,800	)			(15,355	)			(8,800	)			(15,355	)
Less: average unearned ESOP shares			(51,990	)			(71,107	)			(54,778	)			(73,799	)
Weighted average common shares outstanding			5,645,147				5,673,378				5,658,325				5,676,447
Basic earnings per share		$	0.17			$	0.17			$	0.52			$	0.48
Weighted average common shares outstanding			5,645,147				5,673,378				5,658,325				5,676,447
Add: dilutive effects of assumed exercises of stock options			71,002				123,144				67,598				123,526
Average shares and dilutive potential common shares			5,716,149				5,796,522				5,725,923				5,799,973
Diluted earnings per share		$	0.17			$	0.16			$	0.52			$	0.47

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

 

For the three and nine months ended March 31, 2020, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and nine months ended March 31, 2019, 22,400 shares were considered anti-dilutive as the exercise price was in excess of the average market price.

 

(4)       SECURITIES AVAILABLE-FOR-SALE

 

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at March 31, 2020 and June 30, 2019 are as follows:

 

						Gross				Gross				Change in
		Amortized				Unrealized				Unrealized				Fair Value				Fair
March 31, 2020		Cost				Gains				Losses				Equity Securities				Value
Available-for-sale:
FHLMC common stock		$	20			$	—			$	—			$	94			$	114
Certificates of deposit			2,493				52				—				—				2,545
Municipal securities			21,102				476				(4	)			—				21,574
SBA loan pools			15				—				—				—				15
CMOs			10,733				345				(1	)			—				11,077
U.S. Government agency mortgage-backed securities			48,007				1,514				—				—				49,521
U.S. Government agency bonds			2,013				26				—				—				2,039
Total available-for-sale		$	84,383			$	2,413			$	(5	)		$	94			$	86,885

 

						Gross				Gross				Change in
		Amortized				Unrealized				Unrealized				Fair Value				Fair
June 30, 2019		Cost				Gains				Losses				Equity Securities				Value
Available-for-sale:
FHLMC common stock		$	20			$	—			$	—			$	192			$	212
Certificates of deposit			2,493				11				(5	)			—				2,499
Municipal securities			24,968				295				(38	)			—				25,225
SBA loan pools			22				—				—				—				22
CMOs			14,889				111				(30	)			—				14,970
U.S. Government agency mortgage-backed securities			40,366				228				(52	)			—				40,542
U.S. Government agency bonds			11,980				10				(31	)			—				11,959
Total available-for-sale		$	94,738			$	655			$	(156	)		$	192			$	95,429

 

Securities pledged at March 31, 2020 and June 30, 2019 had fair values of $14,404 and $26,029, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

 

At March 31, 2020 and June 30, 2019, 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.

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at March 31, 2020 and June 30, 2019. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

		Less than 12 Months												12 Months or More												Total
		Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)
March 31, 2020
Available-for-sale:
Municipal securities			1,149				(4	)			2				—				—				—				1,149				(4	)			2
CMOs			573				(1	)			1				—				—				—				573				(1	)			1
U.S. Government agency			—				—				—				—				—				—
mortgage-backed securities			—				—				—				—				—				—				—				—				—
U.S. Government agency bonds			—				—				—				—				—				—				—				—				—
		$	1,725			$	(5	)			3			$	—			$	—				—			$	1,725			$	(5	)			3

 

		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, 2019
Available-for-sale:
Certificates of deposit		$	991			$	(5	)			4			$	—			$	—				—			$	991			$	(5	)			4
Municipal securities			745				(10	)			2				3,750				(28	)			7				4,495				(38	)			9
CMOs			—				—				—				3,059				(30	)			7				3,059				(30	)			7
U.S. Government agency mortgage-backed securities			5,377				(9	)			5				11,198				(43	)			18				16,575				(52	)			23
U.S. Government agency bonds			4,475				(23	)			4				2,013				(8	)			2				6,488				(31	)			6
		$	11,588			$	(47	)			15			$	20,020			$	(109	)			34			$	31,608			$	(156	)			49

 

(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 March 31, 2020 were recognized into net income for the three or nine months ended March 31, 2020 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2019 were recognized as having OTTI during the year ended June 30, 2019.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2020 and June 30, 2019 by contractual maturity. 

 

		March 31, 2020								June 30, 2019
			Amortized				Fair				Amortized				Fair
			Cost				Value				Cost				Value
Less than one year		$	251			$	250			$	2,000			$	1,994
Due from one to five years			8,525				8,697				11,627				11,663
Due after five years to ten years			11,284				11,538				18,817				18,955
Due after ten years			5,563				5,688				7,019				7,093
Mortgage-backed securities, CMOs and FHLMC stock(1)			58,760				60,712				55,275				55,724
Total available for sale		$	84,383			$	86,885			$	94,738			$	95,429

 

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

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended March 31, 2020 and 2019:

 

		Three Months Ended								Nine Months Ended
		March 31, 2020				March 31, 2019				March 31, 2020				March 31, 2019
Available-for-sale:
Proceeds		$	9,494			$	11,035			$	14,762			$	12,228
Gross gains			122				10				137				13
Gross losses			(9	)			(61	)			(12	)			(63	)

 

The tax provision related to the net realized gain for the nine months ended March 31, 2020 was $26, and the tax benefit related to the net realized loss for the nine months ended March 31, 2019 was $11.

 

(5)     LOANS

 

The components of loans at March 31, 2020 and June 30, 2019 were as follows:

 

		March 31, 2020				June 30, 2019
Real estate loans:
One-to-four family		$	284,226			$	289,077
Multi-family			1,506				1,605
Home equity			6,458				5,191
Nonresidential			14,671				19,350
Agricultural			1,525				1,510
Construction and land			34,194				33,651
Total real estate loans			342,580				350,384
Commercial and industrial			3,738				4,390
Consumer and other loans			6,846				5,314
Total loans		$	353,164			$	360,088

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2020 by portfolio segment:

 

Three months ended March 31, 2020		Beginning Balance				Provision				Charge-offs				Recoveries				Ending  Balance
Real estate loans:
One-to-four family		$	993			$	6			$	—			$	—			$	999
Multi-family			4				—				—				—				4
Home equity			33				3				—				—				36
Nonresidential			77				(14	)			—				—				63
Agricultural			4				—				—				—				4
Construction and land			94				10				—				—				104
Total real estate loans			1,205				5				—				—				1,210
Commercial and industrial			66				(7	)			—				—				59
Consumer and other loans			25				2				—				—				27
Total loans		$	1,296			$	—			$	—			$	—			$	1,296

 

  

Nine months ended March 31, 2020		Beginning Balance				Provision				Charge-offs				Recoveries				Ending Balance
Real estate loans:
One-to-four family		$	995			$	4			$	—			$	—			$	999
Multi-family			4				—				—				—				4
Home equity			24				12				—				—				36
Nonresidential			87				(24	)			—				—				63
Agricultural			3				1				—				—				4
Construction and land			94				10				—				—				104
Total real estate loans			1,207				3				—				—				1,210
Commercial and industrial			67				(8	)			—				—				59
Consumer and other loans			23				5				(1	)			—				27
Total loans		$	1,297			$	—			$	(1	)		$	—			$	1,296

 

 

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2020:

 

		Ending Allowance on Loans:								Loans:
At  March 31, 202		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Individually Evaluated for Impairment				Collectively Evaluated for Impairment
Real estate loans:
One-to-four family		$	—			$	999			$	2,473			$	281,753
Multi-family			—				4				—				1,506
Home equity			—				36				—				6,458
Nonresidential			—				63				575				14,096
Agricultural			—				4				320