10-Q 1 ofed-10q_123120.htm QUARTERLY REPORT
 

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

 

1

 

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

 

2

 

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

 

3

 

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

 

4

 

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

 

5

 

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

 

6

 

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.

 

7

 

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.

 

8

 

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.

 

9

 

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.

 

10

 

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.

 

11

 

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.

 

12


 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the 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.

 

13

 

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.

 

14

 

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 

 

15

 

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.

 

16

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables present the 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 

 

17

 

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.

 

18

 

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 

 

19

 

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 

 

20

 

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.

 

21

 

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.

 

22

 

 

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.

 

23

 

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.

 

24

 

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.

 

25

 

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.

 

26

 

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).

 

 

27

 

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   June 30, 2020 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
Financial assets:                    
Securities available-for-sale:                    
FHLMC common stock  $187   $   $178   $ 
Certificates of deposit   2,572        2,592     
Municipal securities   20,200        21,643     
CMOs   9,482        10,106     
U.S. Government agency mortgage-backed securities   65,898        55,173     
U.S. Government agency bonds   7,273        1,034     
Total securities available-for-sale   105,612        90,726     
Loan servicing rights       386        458 
Total financial assets  $105,612   $386   $90,726   $458 

 

There are no liabilities measured at fair value on a recurring basis.

 

28

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at December 31, 2020 and June 30, 2020:

 

   Fair Value Measurements 
   December 31,
2020
   June 30,
2020
 
   (Level 3)   (Level 3) 
Non-financial assets:          
Real estate owned, net:          
One-to-four family  $52   $ 
Nonresidential   138    159 
Total non-financial assets   190    159 
Total assets measured at fair value on a non-recurring basis  $190   $159 

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned at December 31, 2020 and June 30, 2020 was $190 and $159, respectively. The valuation allowance associated with these properties at December 31, 2020 was $21. There were no valuation allowances associated with these properties at June 30, 2020.

 

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended December 31, 2020 and 2019:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended   Six Months Ended 
   December 31,
 2020
   December 31,
 2019
   December 31,
 2020
   December 31,
 2019
 
   Loan Servicing
Rights
   Loan Servicing
Rights
   Loan Servicing
Rights
   Loan Servicing
Rights
 
Balance at beginning of period:  $415   $815   $458   $868 
Purchases                
Unrealized net losses included in net income   (29)   (34)   (72)  $(87)
Balance at end of period:  $386   $781   $386   $781 

  

29

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2020 and June 30, 2020.

 

    Level 3 Quantitative Information  
    

December 31,
2020

Fair Value

    

June 30,
2020

Fair Value

   Valuation Technique  Unobservable Inputs    Range 
Loan servicing rights  $386   $458    Discounted cash flows  Discount rate, estimated timing of cash flows    8.63% to 8.25% 
                      
Real estate owned net:               Adjustment for     
 One-to-four family  $52   $    Sales comparison approach  differences between the comparable sales    0% to 20% 
                      
       Nonresidential  $138   $159    Sales comparison approach   Adjustment for differences between the comparable sales    0% to 20% 


 

30

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheets approximate fair value. These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2020 and June 30, 2020 are summarized below: