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 December 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

 

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)   

Federal		32-0330122
(State of Other Jurisdiction of Incorporation)		(I.R.S Employer Identification Number)
201 East North Second Street, Seneca, South Carolina		29678
(Address of Principal Executive Officers)		(Zip Code)

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

As of February 5, 2021, the registrant had 5,604,298 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	35
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4.	CONTROLS AND PROCEDURES	45
PART II.		45
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	INDEX TO EXHIBITS	47
SIGNATURES		47
EXHIBITS		48

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

PART I  

ITEM 1.

FINANCIAL STATEMENTS

 

		December 31, 2020 (unaudited)				June 30, 2020
ASSETS
Cash and due from banks		$	3,910			$	4,673
Interest-earning deposits			32,532				29,843
Fed funds sold			24				66
Total cash and cash equivalents			36,466				34,582
Securities available-for-sale			105,612				90,726
Loans			347,673				355,667
Allowance for loan losses			(1,339	)			(1,346	)
Net loans			346,334				354,321
Loans held for sale, at fair value			232				92
Premises and equipment, net			9,216				9,367
Real estate owned, net			190				159
Accrued interest receivable
Loans			1,096				1,074
Investments			403				364
Restricted equity securities, at cost			1,249				1,249
Bank owned life insurance			19,706				19,482
Goodwill			2,593				2,593
Core deposit intangible			169				211
Loan servicing rights			386				458
Deferred tax assets			435				365
Other assets			461				539
Total assets		$	524,548			$	515,582
LIABILITIES
Deposits
Noninterest - bearing		$	43,140			$	43,995
Interest - bearing			386,424				377,097
Total deposits			429,564				421,092
Federal Home Loan Bank advances			5,000				5,000
Accrued interest payable and other liabilities			568				1,185
Total liabilities			435,132				427,277
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized;
6,538,783 and 6,530,074 shares outstanding, respectively			65				65
Treasury stock, at par, 934,485 and 924,618 shares, respectively			(9	)			(9	)
Additional paid-in capital			7,272				7,342
Retained earnings			80,315				79,071
Accumulated other comprehensive income			2,087				2,243
Unearned ESOP shares			(314	)			(407	)
Total shareholders’ equity			89,416				88,305
Total liabilities and shareholders’ equity		$	524,548			$	515,582

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

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

 

		Three Months Ended								Six Months Ended
		December 31, 2020				December 31, 2019				December 31, 2020				December 31, 2019
Interest and dividend income:
Loans, including fees		$	3,822			$	4,143			$	7,849			$	8,260
Securities, taxable			284				373				575				781
Securities, tax-exempt			91				95				182				200
Other interest-earning assets			32				151				59				338
Total interest income			4,229				4,762				8,665				9,579
Interest expense:
Deposits			460				1,025				1,010				2,085
Other borrowings			19				59				38				186
Total interest expense			479				1,084				1,048				2,271
Net interest income			3,750				3,678				7,617				7,308
Provision for loan losses			—				—				—				—
Net interest income after provision for loan losses			3,750				3,678				7,617				7,308
Noninterest income:
Service charges on deposit accounts			93				105				175				227
Income on bank owned life insurance			112				113				224				226
Mortgage servicing income			38				48				78				97
Gain on sale of mortgage loans			66				50				101				82
ATM & debit card income			97				84				195				173
Change in fair value of equity securities, net			32				(48	)			9				32
Gain on sale of securities, net			47				—				109				12
Gain on payoff of purchase credit impaired loans			—				32				195				32
Other			2				1				4				4
Total noninterest income			487				385				1,090				885
Noninterest expense:
Salaries and employee benefits			1,692				1,578				3,297				3,168
Occupancy and equipment			410				459				869				927
Data processing			236				215				483				437
ATM & debit card expense			76				62				145				121
Professional and supervisory fees			144				181				265				328
Office expense			69				64				110				108
Advertising			61				70				112				127
FDIC deposit insurance			32				1				63				2
Foreclosed assets, net			24				100				32				144
Change in loan servicing asset			29				34				72				87
Other			178				190				349				406
Total noninterest expense			2,951				2,954				5,797				5,855
Income before income taxes			1,286				1,109				2,910				2,338
Income tax expense			215				19				566				314
Net income		$	1,071			$	1,090			$	2,344			$	2,024
Other comprehensive income
Unrealized gains/(losses) on securities available-for-sale		$	63			$	(84	)		$	(88	)		$	398
Tax effect			(14	)			17				18				(84	)
Reclassification adjustment for gains realized in net income			(47	)			—				(109	)			(12	)
Tax effect			10				—				23				3
Total other comprehensive income/(loss)			12				(67	)			(156	)			305
Comprehensive income		$	1,083			$	1,023			$	2,188			$	2,329
Basic net income per share: (Note 3)		$	0.19			$	0.19			$	0.42			$	0.36
Diluted net income per share: (Note 3)		$	0.19			$	0.19			$	0.42			$	0.35
Dividends declared per share:		$	0.10			$	0.10			$	0.20			$	0.20

 

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 December 31, 2020 and December 31, 2019

 

																		Accumulated
										Additional								Other				Unearned
		Common				Treasury				Paid-In				Retained				Comprehensive				ESOP
		Stock				Stock				Capital				Earnings				Income (loss)				Shares				Total
Balance at  September 30, 2019		$	65			$	(8	)		$	10,254			$	77,823			$	766			$	(555	)		$	88,345
Net income			—				—				—				1,090				—				—				1,090
Other comprehensive loss			—				—				—				—				(67	)			—				(67	)
Purchase of 5,699 shares of treasury stock (1)			—				—				(131	)			—				—				—				(131	)
Stock-based compensation expense			—				—				20				—				—				—				20
Dividends (2)			—				—				29				(521	)			—				—				(492	)
ESOP shares earned			—				—				43				—				—				48				91
Balance at  December 31, 2019		$	65			$	(8	)		$	10,215			$	78,392			$	699			$	(507	)		$	88,856
Balance at  September 30, 2020		$	65			$	(9	)		$	7,371			$	79,783			$	2,075			$	(357	)		$	88,928
Net income			—				—				—				1,071				—				—				1,071
Other comprehensive income			—				—				—				—				12				—				12
Purchase of 8,591 shares of treasury stock (3)			—				—				(218	)			—				—				—				(218	)
Stock-based compensation expense			—				—				20				—				—				—				20
Common Stock Issued			—				—				1				—				—				—				1
Dividends (4)			—				—				21				(539	)			—				—				(518	)
ESOP shares earned			—				—				77				—				—				43				120
Balance at  December 31, 2020		$	65			$	(9	)		$	7,272			$	80,315			$	2,087			$	(314	)		$	89,416

 

(1)	The weighted average cost of treasury shares purchased during the three months ended was $23.02 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

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 7,200 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,900 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2019.

(3)	The weighted average cost of treasury shares purchased during the three months ended was $23.50 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

Approximately $76 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 $56 and resulting release of approximately 5,000 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $21 and resulting release of approximately 2,100 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2020.

 

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 six months ended December 31, 2020 and December 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, 2019		$	65			$	(8	)		$	10,986			$	77,464			$	394			$	(604	)		$	88,297
Net income			—				—				—				2,024				—				—				2,024
Other comprehensive income			—				—				—				—				305				—				305
Purchase of 40,079 shares of treasury stock (1)			—				—				(927	)			—				—				—				(927	)
Stock-based compensation expense			—				—				39				—				—				—				39
Dividends (2)			—				—				29				(1,096	)			—				—				(1,067	)
ESOP shares earned			—				—				88				—				—				97				185
Balance at  December 31, 2019		$	65			$	(8	)		$	10,215			$	78,392			$	699			$	(507	)		$	88,856
Balance at  June 30, 2020		$	65			$	(9	)		$	7,342			$	79,071			$	2,243			$	(407	)		$	88,305
Net income			—				—				—				2,344				—				—				2,344
Other comprehensive loss			—				—				—				—				(156	)			—				(156	)
Purchase of 9,867 shares of treasury stock (3)			—				—				(249	)			—				—				—				(249	)
Stock-based compensation expense			—				—				41				—				—				—				41
Common Stock Issued			—				—				6				—				—				—				6
Dividends (4)			—				—				21				(1,100	)			—				—				(1,079	)
ESOP shares earned			—				—				111				—				—				93				204
Balance at  December 31, 2020		$	65			$	(9	)		$	7,272			$	80,315			$	2,087			$	(314	)		$	89,416

 

(1)	The weighted average cost of treasury shares purchased during the six months ended was $23.14 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

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 7,200 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,900 shares, and was accounted for as additional compensation expense for the six months ended December 31, 2019.

(3)	The weighted average cost of treasury shares purchased during the six months ended was $23.64 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

Approximately $76 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 $55 and resulting release of approximately 5,000 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $21 and resulting release of approximately 2,100 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2020.

 

See accompanying notes to the consolidated financial statements

 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

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

 

		Six Months Ended
		December 31, 2020				December 31, 2019
Cash Flows From Operating Activities
Net income		$	2,344			$	2,024
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for real estate owned			21				117
Depreciation and amortization, net			870				613
Net accretion of purchase accounting adjustments			(124	)			(39	)
Deferred income tax expense			(40	)			162
Change in loan servicing asset			72				87
Net gain on sales of securities			(109	)			(12	)
Mortgage loans originated for sale			(6,320	)			(6,214	)
Mortgage loans sold			6,281				6,296
Gain on sales of mortgage loans			(101	)			(82	)
Change in fair value of equity securities			(9	)			(32	)
Increase in cash surrender value of bank owned life insurance			(224	)			(227	)
Gain on payoff of purchased credit impaired loans			(195	)			(32	)
ESOP compensation expense			204				185
Stock based compensation expense			41				39
Net change in operating assets and liabilities:
Accrued interest receivable and other assets			17				269
Accrued interest payable and other liabilities			(617	)			526
Net cash provided by operating activities			2,111				3,680
Cash Flows From Investing Activities
Purchases of premises and equipment			(175	)			(1,680	)
Purchases of securities available-for-sale			(35,124	)			(7,644	)
Proceeds from maturities, paydowns and calls of securities available-for-sale			11,745				12,205
Proceeds from sales of securities available-for-sale			7,923				5,268
Redemption of restricted equity securities			—				808
Proceeds from sale of real estate owned			—				77
Loan originations and repayments, net			8,254				(85	)
Net cash (used)/provided in investing activities			(7,377	)			8,949
Cash Flows from Financing Activities
Net change in deposits			8,472				(6,704	)
Repayment of notes payable to FHLB			—				(19,000	)
Dividends paid			(1,079	)			(1,067	)
Purchase of treasury stock			(249	)			(927	)
Proceeds from sale of common stock, net of issuance costs			6				—
Net cash provided/(used) by financing activities			7,150				(27,698	)
Change in cash and cash equivalents			1,884				(15,069	)
Cash and cash equivalents, beginning of period			34,582				36,690
Cash and cash equivalents, end of period		$	36,466			$	21,621

 

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 (74.31%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2020 and June 30, 2020 and the results of operations and cash flows for the interim periods ended December 31, 2020 and 2019. All interim amounts are unaudited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 2021 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020. 

 

Reclassifications:

 

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

 

Cash Flows:

 

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

 

Use of Estimates:

 

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

 

Risks and Uncertainties:

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(2)	NEW ACCOUNTING STANDARDS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has determined that it will continue to prepare its credit loss allowance internally. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. In November 2019, the FASB issued guidance delaying the implementation schedule and 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 has no changes in its assessment since filing the Annual Report on Form 10-K.

 

 

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								Six Months Ended
		December 31, 2020				December 31, 2019				December 31, 2020				December 31, 2019
Earnings per share
Net income		$	1,071			$	1,090			$	2,344			$	2,024
Less:  distributed earnings allocated to participating securities			—				(1	)			(1	)			(2	)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities			(1	)			(1	)			(1	)			(1	)
Net earnings available to common shareholders		$	1,070			$	1,088			$	2,342			$	2,021
Weighted average common shares outstanding including participating securities			5,604,358				5,719,941				5,604,395				5,729,799
Less:  participating securities			(5,800	)			(8,800	)			(5,800	)			(8,800	)
Less: average unearned ESOP shares			(28,870	)			(50,412	)			(32,280	)			(43,880	)
Weighted average common shares outstanding			5,569,688				5,660,729				5,566,315				5,677,119
Basic earnings per share		$	0.19			$	0.19			$	0.42			$	0.36
Weighted average common shares outstanding			5,569,688				5,660,729				5,566,315				5,677,119
Add:  dilutive effects of assumed exercises of stock options			69,893				66,874				71,531				65,850
Average shares and dilutive potential common shares			5,639,581				5,727,603				5,637,846				5,742,969
Diluted earnings per share		$	0.19			$	0.19			$	0.42			$	0.35

  

For the three and six months ended December 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 six months ended December 31, 2019, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(4)	SECURITIES AVAILABLE-FOR-SALE

 

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

 

						Gross				Gross				Change in
		Amortized				Unrealized				Unrealized				Fair Value				Fair
December 31, 2020		Cost				Gains				Losses				Equity Securities				Value
Available-for-sale:
FHLMC common stock		$	20			$	—			$	—			$	167			$	187
Certificates of deposit			2,493				79				—				—				2,572
Municipal securities			19,298				902				—				—				20,200
CMOs			9,169				326				(13	)			—				9,482
U.S. Government agency mortgage-backed securities			64,559				1,386				(47	)			—				65,898
U.S. Government agency bonds			7,263				28				(18	)			—				7,273
Total available-for-sale		$	102,802			$	2,721			$	(78	)		$	167			$	105,612
						Gross				Gross				Change in
		Amortized				Unrealized				Unrealized				Fair Value				Fair
June 30, 2020		Cost				Gains				Losses				Equity Securities				Value
Available-for-sale:
FHLMC common stock		$	20			$	—			$	—			$	158			$	178
Certificates of deposit			2,493				99				—				—				2,592
Municipal securities			20,821				822				—				—				21,643
CMOs			9,723				383				—				—				10,106
U.S. Government agency mortgage-backed securities			53,660				1,538				(25	)			—				55,173
U.S. Government agency bonds			1,011				23				—				—				1,034
Total available-for-sale		$	87,728			$	2,865			$	(25	)		$	158			$	90,726

 

Securities pledged at December 31, 2020 and June 30, 2020 had fair values of $12,667 and $12,524, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.

 

At December 31, 2020 and June 30, 2020, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

 

 

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 December 31, 2020 and June 30, 2020. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

		Less than 12 Months												12 Months or More												Total
		Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)
December 31, 2020
Available-for-sale:
CMOs		$	994			$	(13	)			1			$	—			$	—				—			$	994			$	(13	)			1
U.S. Government agency mortgage-backed securities			11,393				(47	)			7				—				—				—				11,393				(47	)			7
U.S. Government agency bonds			3,926				(18	)			1				—				—				—				3,926				(18	)			1
		$	16,313			$	(78	)			9			$	—			$	—				—			$	16,313			$	(78	)			9
		Less than 12 Months												12 Months or More												Total
		Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)				Fair Value				Unrealized Loss				Number in Unrealized Loss(1)
June 30, 2020
Available-for-sale:
U.S. Government agency mortgage-backed securities		$	6,342			$	(25	)			4			$	—			$	—				—				6,342				(25	)			4
		$	6,342			$	(25	)			4			$	—			$	—				—			$	6,342			$	(25	)			4

 

(1)	Actual amounts.

  

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

 

None of the unrealized losses at December 31, 2020 were recognized into net income for the three or six months ended December 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, 2020 were recognized as having OTTI during the year ended June 30, 2020.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

		December 31, 2020								June 30, 2020
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Less than one year		$	1,505			$	1,529			$	499			$	503
Due from one to five years			6,733				6,954				7,759				8,044
Due after five years to ten years			13,658				14,138				10,707				11,152
Due after ten years			7,158				7,424				5,360				5,570
Mortgage-backed securities, CMOs and FHLMC stock(1)			73,748				75,567				63,403				65,457
Total available for sale		$	102,802			$	105,612			$	87,728			$	90,726

 

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

 

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

 

		Three Months Ended								Six Months Ended
Available-for-sale:		December 31, 2020				December 31, 2019				December 31, 2020				December 31, 2019
Proceeds		$	6,051			$	—			$	7,923			$	5,268
Gross gains			47				—				109				15
Gross losses			—				—				—				(3	)

  

The tax provision related to the net realized gain for the three months ended December 31, 2020 was $10. The tax provision related to the net realized gain for the six months ended December 31, 2020 and December 31, 2019 was $23 and $3, respectively.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(5)

LOANS

 

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

 

		December 31, 2020				June 30, 2020
Real estate loans:
One-to-four family		$	283,099			$	283,931
Multi-family			681				704
Home equity			5,473				5,763
Nonresidential			20,282				20,083
Agricultural			1,086				1,187
Construction and land			25,739				29,096
Total real estate loans			336,360				340,764
Commercial and industrial (1)			5,041				8,135
Consumer and other loans			6,272				6,768
Total loans		$	347,673			$	355,667

  

(1)	Includes $1,316 and $4,094 of 100% Small Business Administration (“SBA”) guaranteed Paycheck Protection Program (“PPP”) loans as of December 31, 2020 and June 30, 2020, respectively.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

Three months ended December 31, 2020		Beginning Balance				Provision				Charge-offs				Recoveries				Ending  Balance
Real estate loans:
One-to-four family		$	989			$	38			$	—			$	—			$	1,027
Multi-family			4				—				—				—				4
Home equity			40				1				(5	)			—				36
Nonresidential			108				9				—				—				117
Agricultural			4				—				—				—				4
Construction and land			96				(2	)			—				—				94
Total real estate loans			1,241				46				(5	)			—				1,282
Commercial and industrial			74				(46	)			—				—				28
Consumer and other loans			29				—				—				—				29
Total loans		$	1,344			$	—			$	(5	)		$	—			$	1,339
Six months ended December 31, 2020		Beginning Balance				Provision				Charge-offs				Recoveries				Ending Balance
Real estate loans:
One-to-four family		$	1,032			$	(3	)		$	(2	)		$	—			$	1,027
Multi-family			4				—				—				—				4
Home equity			34				7				(5	)			—				36
Nonresidential			75				42				—				—				117
Agricultural			4				—				—				—				4
Construction and land			105				(11	)			—				—				94
Total real estate loans			1,254				35				(7	)			—				1,282
Commercial and industrial			65				(37	)			—				—				28
Consumer and other loans			27				2				—				—				29
Total loans		$	1,346			$	—			$	(7	)		$	—			$	1,339

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

		Ending Allowance on Loans:								Loans:
At December 31, 2020		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Individually Evaluated for Impairment				Collectively Evaluated for Impairment
Real estate loans:
One-to-four family		$	—			$	1,027			$	1,785			$	281,314
Multi-family			—				4				—				681
Home equity			—				36				—				5,473
Nonresidential			—				117				—				20,282
Agricultural			—				4				—				1,086
Construction and land			—				94				—				25,739
Total real estate loans			—				1,282				1,785				334,575
Commercial and industrial (1)			—				28				—				5,041
Consumer and other loans			—				29				—				6,272
Total loans		$	—			$	1,339			$	1,785			$	345,888

 

(1)	Includes $1,316 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2019 by portfolio segment:

 

Three months ended December 31, 2019		Beginning Balance				Provision				Charge-offs				Recoveries				Ending Balance
Real estate loans:
One-to-four family		$	993			$	—			$	—			$	—			$	993
Multi-family			4				—				—				—				4
Home equity			29				4				—				—				33
Nonresidential			85				(8	)			—				—				77
Agricultural			4				—				—				—				4
Construction and land			87				7				—				—				94
Total real estate loans			1,202				3				—				—				1,205
Commercial and industrial			70				(4	)			—				—				66
Consumer and other loans			25				1				(1	)			—				25
Total loans		$	1,297			$	—			$	(1	)		$	—			$	1,296

Six months ended December 31, 2019		Beginning Balance				Provision				Charge-offs				Recoveries				Ending Balance
Real estate loans:
One-to-four family		$	995			$	(2	)		$	—			$	—			$	993
Multi-family			4				—				—				—				4
Home equity			24				9				—				—				33
Nonresidential			87				(10	)			—				—				77
Agricultural			3				1				—				—				4
Construction and land			94				—				—				—				94
Total real estate loans			1,207				(2	)			—				—				1,205
Commercial and industrial			67				(1	)			—				—				66
Consumer and other loans			23				3				(1	)			—				25
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 June 30, 2020:

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2020 and June 30, 2020, including the average recorded investment balance and interest earned for the six months ended December 31, 2020 and the year ended June 30, 2020:

 

		December 31, 2020
		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family		$	1,806			$	1,785			$	—			$	1,809			$	17
Multi-family			—				—				—				—				—
Home equity			—				—				—				—				—
Nonresidential			—				—				—				281				—
Agricultural			—				—				—				—				—
Construction and land			—				—				—				—				—
Total real estate loans			1,806				1,785				—				2,090				17
Commercial and industrial			—				—				—				—				—
Consumer and other loans			—				—				—				—				—
Total		$	1,806			$	1,785			$	—			$	2,090			$	17
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		$	1,806			$	1,785			$	—			$	2,090			$	17
Consumer and other loans			—				—				—				—				—
Total		$	1,806			$	1,785			$	—			$	2,090			$	17

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

 

 

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 December 31, 2020:

 

																														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		$	2,695			$	1,490			$	816			$	5,001			$	278,098			$	283,099			$	2,125			$	—
Multi-family			220				—				—				220				461				681				—				—
Home equity			45				—				—				45				5,428				5,473				—				—
Nonresidential			173				—				—				173				20,109				20,282				542				—
Agricultural			—				—				—				—				1,086				1,086				—				—
Construction and land			52				8				—				60				25,679				25,739				8				—
Total real estate loans			3,185				1,498				816				5,499				330,861				336,360				2,675				—
Commercial and industrial			—				—				—				—				5,041				5,041				—				—
Consumer and other loans			—				—				—				—				6,272				6,272				—				—
Total		$	3,185			$	1,498			$	816			$	5,499			$	342,174			$	347,673			$	2,675			$	—

 

In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Included in the table above are $14,438 in loans that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. Of this amount, there were $10,316 in one-to-four family loans, $3,711 in non-residential loans and $411 in multi-family loans. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” which was extended by the Consolidated Appropriations Act for the fiscal year ending September 30, 2021 provides banks the option to temporarily suspend certain requirements under ASC 340-10 troubled debt restructuring classifications for a limited period of time to account for the effects of COVID-19. The Federal Reserve and the other banking agencies and regulators have also issued a joint statement encouraging banks to work prudently with borrowers and to describe the agencies’ interpretations of how accounting rules under ASC 310-40 apply to certain COVID-19 related modifications. We have not considered any of the COVID-19 related modifications performed to date to be troubled debt restructurings. As of December 31, 2020, $13,597 of such loans were current and $841 were 30 days or more past due. As of December 31, 2020, $13,843 of these are no longer in deferral.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

																														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		$	2,055			$	407			$	561			$	3,023			$	280,908			$	283,931			$	1,969			$	—
Multi-family			—				—				—				—				704				704				—				—
Home equity			—				—				40				40				5,723				5,763				40				—
Nonresidential			179				—				—				179				19,904				20,083				732				—
Agricultural			—				—				—				—				1,187				1,187				—				—
Construction and land			—				10				—				10				29,086				29,096				—				—
Total real estate loans			2,234				417				601				3,252				337,512				340,764				2,741				—
Commercial and industrial			—				—				—				—				8,135				8,135				—				—
Consumer and other loans			—				—				—				—				6,768				6,768				—				—
Total		$	2,234			$	417			$	601			$	3,252			$	352,415			$	355,667			$	2,741			$	—

  

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

 

Troubled Debt Restructurings:

 

At December 31, 2020 and June 30, 2020, total loans that have been modified as troubled debt restructurings were $1,738 and $1,985, respectively, which consisted of one non-residential real estate loan and three one-to-four family first lien loans at December 31, 2020, and two non-residential real estate loans and four one-to-four family first lien loans at June 30, 2020. There was no specific allowance for loss established for these loans at December 31, 2020 or June 30, 2020. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. No loans have been modified as troubled debt restructurings during the six months ended December 31, 2020. No loans modified as troubled debt restructurings during the twelve months ended December 31, 2020 have defaulted since restructuring. All of these loans are on nonaccrual at December 31, 2020 and June 30, 2020. At December 31, 2020 and June 30, 2020, $1,161 and $1,774, respectively, were individually evaluated for impairment.

 

Allowance for Loan Loss:

 

There have been no changes to our allowance for loan loss methodology during the quarter ended December 31, 2020. We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become present. After such adjustments to the calculation, we have determined that the recorded allowance is believed to be adequate at this time and as a result no additional provision for loan losses has been recorded during the quarter ended December 31, 2020.  However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and the country continues to fully reopen. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three and six months ended December 31, 2020 and December 31, 2019.

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Loan Grades:

 

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

 

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

 

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

 

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

 

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

 

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

  

Portfolio Segments:

 

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

 

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

 

The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of 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.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

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

 

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

 

Within this category for the six months ended December 31, 2020 and the year ended June 30, 2020 are PPP loans that were authorized under the CARES Act. PPP loans are originated by the Association, are 100% guaranteed by the SBA and qualify to be forgiven based on certain criteria as determined by the SBA. The Association received a fee, with the percentage depending on the size of the loan, for originating these loans and earn 1% on the outstanding balance for the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA. As of December 31, 2020 $2.9 million of the original $4.2 million of PPP loans have been forgiven.

 

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

 

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

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Total loans by risk grade and portfolio segment at December 31, 2020:

 

		Pass				Pass-Watch				Special Mention				Substandard				Doubtful				Total
Real estate loans:
One-to-four family		$	273,092			$	3,612			$	2,893			$	3,502			$	—			$	283,099
Multi-family			681				—				—				—				—				681
Home equity			5,228				237				—				8				—				5,473
Nonresidential			19,288				—				866				128				—				20,282
Agricultural			1,086				—				—				—				—				1,086
Construction and land			25,298				400				—				41				—				25,739
Total real estate loans			324,673				4,249				3,759				3,679				—				336,360
Commercial and industrial			5,041				—				—				—				—				5,041
Consumer and other loans			6,272				—				—				—				—				6,272
Total		$	335,986			$	4,249			$	3,759			$	3,679			$	—			$	347,673

 

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

 

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

 

At December 31, 2020, one loan for $19 was in formal foreclosure proceedings and is included in the one-to-four family loan category.

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(6)

BORROWINGS

 

At December 31, 2020 and June 30, 2020, advances from the Federal Home Loan Bank were as follows:

 

		December 31, 2020
		Balance				Stated Interest Rate
FHLB advances due February 2023 through January 2025		$	5,000			1.40% - 1.59%
Total		$	5,000

 

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

 

Payments over the next five years are as follows:

 

2023			$	2,500
2025			$	2,500

 

The average interest rate of all outstanding FHLB advances was 1.50% on December 31, 2020 and June 30, 2020, respectively.

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $8,675 and $10,786 of investment securities at December 31, 2020 and June 30, 2020, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $130,533 at December 31, 2020.

 

There were no overnight borrowings at December 31, 2020 or June 30, 2020. 

 

(7)

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

Investment Securities:

 

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

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Impaired Loans:

 

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

 

Real Estate Owned:

 

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

 

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

 

Loan Servicing Rights:    

 

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

 

Assets measured at fair value on a recurring basis at December 31, 2020 and June 30, 2020 are summarized below:

 

Fair Value Measurements

December 31, 2020