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EX-32 - EXHIBIT 32 - Oconee Federal Financial Corp.t1700323_ex32.htm
EX-31 - EXHIBIT 31 - Oconee Federal Financial Corp.t1700323_ex31.htm
EX-10.2 - EXHIBIT 10.2 - Oconee Federal Financial Corp.t1700323_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - Oconee Federal Financial Corp.t1700323_ex10-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the Quarterly Period ended December 31, 2016

 

Or

 

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

 

For transition period from              to

 

Commission File Number 001-35033

 

 

 

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Federal   32-0330122

(State of Other Jurisdiction

of Incorporation)

 

(I.R.S Employer

Identification Number)

   
201 East North Second Street, Seneca, South Carolina   29678
(Address of Principal Executive Officers)   (Zip Code)

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

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

 

Large accelerated filer   ¨   Accelerated filer   ¨
         
Non-accelerated filer   ¨   Smaller reporting company   x

 

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

 

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

 

There were 5,790,965 shares of Common Stock, par value $0.01 per share, outstanding as of February 9, 2017.

 

 

 

 

 

 

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 31
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 41
     
ITEM 4. CONTROLS AND PROCEDURES 41
     
PART II.   41
     
ITEM 1. LEGAL PROCEEDINGS 41
     
ITEM 1A. RISK FACTORS 41
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 42
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 42
     
ITEM 4. MINE SAFETY DISCLOSURES 42
     
ITEM 5. OTHER INFORMATION 42
     
ITEM 6. EXHIBITS 42
     
SIGNATURES 43
     
INDEX TO EXHIBITS 44

 

1 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

PART I

 

ITEM 1.          FINANCIAL STATEMENTS

 

   December 31,
2016
   June 30,
2016
 
   (Unaudited)   (Audited) 
ASSETS          
Cash and due from banks  $5,504   $4,874 
Interest-earning deposits   20,174    22,802 
Total cash and cash equivalents   25,678    27,676 
Securities available-for-sale   120,654    132,084 
Loans   301,537    292,063 
Allowance for loan losses   (996)   (922)
Net loans   300,541    291,141 
Loans held for sale, at fair value   -    129 
Premises and equipment, net   6,665    6,811 
Real estate owned, net   752    1,354 
Accrued interest receivable          
Loans   937    1,016 
Investments   557    492 
Restricted equity securities, at cost   1,021    1,021 
Bank owned life insurance   17,811    17,558 
Goodwill   2,593    2,593 
Core deposit intangible   664    744 
Loan servicing rights   1,219    1,046 
Deferred tax assets   2,585    1,128 
Other assets   401    847 
Total assets  $482,078   $485,640 
           
LIABILITIES          
Deposits          
Noninterest bearing  $26,058   $23,356 
Interest bearing   370,355    376,278 
Total deposits   396,413    399,634 
Accrued interest payable and other liabilities   1,758    605 
Total liabilities   398,171    400,239 
           
SHAREHOLDERS' EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,463,039 shares issued and outstanding, respectively   65    65 
Treasury stock, at par, 672,074 and 634,131 shares, respectively   (7)   (6)
Additional paid-in capital   12,423    12,882 
Retained earnings   73,393    71,909 
Accumulated other comprehensive (loss) income   (860)   1,808 
Unearned ESOP shares   (1,107)   (1,257)
Total shareholders' equity   83,907    85,401 
Total liabilities and shareholders' equity  $482,078   $485,640 

 

See accompanying notes to the consolidated financial statements

 

2 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   December 31,
2016
   December 31,
2015
   December 31,
2016
   December 31,
2015
 
Interest and dividend income:                    
Loans, including fees  $3,639   $3,850   $7,376   $7,734 
Securities, taxable   388    430    831    820 
Securities, tax-exempt   180    119    358    208 
Interest-earning deposits and other   36    26    77    42 
Total interest income   4,243    4,425    8,642    8,804 
Interest expense:                    
Deposits   323    295    643    584 
Total interest expense   323    295    643    584 
Net interest income   3,920    4,130    7,999    8,220 
Provision for loan losses   24    277    89    422 
Net interest income after provision for loan losses   3,896    3,853    7,910    7,798 
Noninterest income:                    
Service charges on deposit accounts   107    121    211    240 
Income on bank owned life insurance   127    132    253    240 
Mortgage banking income   82    95    175    191 
Gain on sales of securities   57    -    125    9 
Gain on disposition of purchase credit impaired loans   120    90    196    809 
Other   2    14    3    19 
Total noninterest income   495    452    963    1,508 
Noninterest expense:                    
Salaries and employee benefits   1,629    1,857    3,141    3,346 
Occupancy and equipment   370    354    738    714 
Data processing   140    110    270    258 
Professional and supervisory fees   249    167    456    417 
Office expense   44    58    96    99 
Advertising   46    63    77    100 
FDIC deposit insurance   35    53    91    108 
Foreclosed assets, net   2    47    37    222 
Change in loan servicing asset   (196)   22    (173)   86 
Other   136    173    316    328 
Total noninterest expense   2,455    2,904    5,049    5,678 
Income before income taxes   1,936    1,401    3,824    3,628 
Income tax expense   618    452    1,233    1,237 
Net income  $1,318   $949   $2,591   $2,391 
                     
Other comprehensive income                    
Unrealized (losses) gains on securities available-for-sale  $(3,524)  $(579)  $(4,043)  $204 
Tax effect   1,268    209    1,455    (74)
Reclassification adjustment for gains realized in net income   (57)   -    (125)   (9)
Tax effect   21    -    45    3 
Total other comprehensive (loss) income   (2,292)   (370)   (2,668)   124 
Comprehensive (loss) income  $(974)  $579   $(77)  $2,515 
                     
Basic net income per share: (Note 3)  $0.23   $0.17   $0.46   $0.42 
Diluted net income per share: (Note 3)  $0.23   $0.16   $0.45   $0.41 
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 SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

                   Accumulated         
           Additional       Other   Unearned     
   Common   Treasury   Paid-In   Retained   Comprehensive   ESOP     
   Stock   Stock   Capital   Earnings   Income (loss)   Shares   Total 
                             
Balance at July 1, 2015  $65   $(6)  $13,354   $68,950   $(26)  $(1,547)  $80,790 
Net income   -    -    -    2,391    -    -    2,391 
Other comprehensive income   -    -    -    -    124    -    124 
Purchase of 1,800 shares of treasury stock (1)   -    -    (32)   -    -    -    (32)
Stock-based compensation expense   -    -    151    -    -    -    151 
Dividends (2)   -    -    35    (1,128)   -    -    (1,093)
ESOP shares earned   -    -    156    -    -    184    340 
Balance at December 31, 2015  $65   $(6)  $13,664   $70,213   $98   $(1,363)  $82,671 
                                    
Balance at July 1, 2016  $65   $(6)  $12,882   $71,909   $1,808   $(1,257)  $85,401 
Net income   -    -    -    2,591    -    -    2,591 
Other comprehensive loss   -    -    -    -    (2,668)   -    (2,668)
Purchase of 37,943 shares of treasury stock (3)   -    (1)   (777)   -    -    -    (778)
Stock-based compensation expense   -    -    151    -    -    -    151 
Dividends (4)   -    -    44    (1,107)   -    -    (1,063)
ESOP shares earned   -    -    123    -    -    150    273 
Balance at December 31, 2016  $65   $(7)  $12,423   $73,393   $(860)  $(1,107)  $83,907 

 

 

(1)The weighted average cost of treasury shares purchased during the six months ended was $18.34 per share. Treasury stock repurchases were accounted for using the par value method.
(2)Approximately $99 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,891 additional shares. The portion of the dividend paid on allocated shares of approximately $35 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 7,891 shares was accounted for as additional compensation expense of approximately $64 for the six months ended December 31, 2015.
(3)The weighted average cost of treasury shares purchased during the six months ended was $20.48 per share. Treasury stock repurchases were accounted for using the par value method.
(4)Approximately $99 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 8,938 additional shares. The portion of the dividend paid on allocated shares of approximately $44 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 8,938 shares was accounted for as additional compensation expense of approximately $55 for the six months ended December 31, 2016.

 

See accompanying notes to the consolidated financial statements

 

4 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

 

   Six Months Ended 
   December 31,
2016
   December 31,
2015
 
Cash Flows From Operating Activities          
Net income  $2,591   $2,391 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   89    422 
Provision for real estate owned   103    110 
Depreciation and amortization, net   745    557 
Net amortization (accretion) of purchase accounting adjustments   119    (78)
Deferred income tax expense   44    848 
Net (gain) loss on sale of real estate owned   (86)   59 
Change in loan servicing asset   (173)   86 
Gain on sales of securities   (125)   (9)
Mortgage loans originated for sale   (1,543)   (2,532)
Mortgage loans sold   1,707    2,690 
Gain on sales of mortgage loans   (35)   (40)
Increase in cash surrender value of bank owned life insurance   (253)   (240)
Gain on disposition of purchased credit impaired loans   (196)   (809)
ESOP compensation expense   273    340 
Stock based compensation expense   151    151 
Net change in operating assets and liabilities:          
Accrued interest receivable and other assets   460    (60)
Accrued interest payable and other liabilities   1,153    787 
Net cash provided by operating activities   5,024    4,673 
           
Cash Flows From Investing Activities          
Purchases of premises and equipment   (71)   (57)
Purchases of securities available-for-sale   (19,779)   (23,465)
Proceeds from maturities, paydowns and calls of securities available-for-sale   11,069    9,142 
Proceeds from sales of securities available-for-sale   15,648    1,164 
Purchases of bank owned life insurance   -    (8,000)
Proceeds from sale of real estate owned   739    1,448 
Dispositions of purchased credit impaired loans   566    2,648 
Loan originations and repayments, net   (10,132)   8,535 
Net cash used in investing activities   (1,960)   (8,585)
           
Cash Flows from Financing Activities          
Net change in deposits   (3,221)   3,075 
Dividends paid   (1,063)   (1,093)
Purchase of treasury stock   (778)   (32)
Net cash (used in) provided by financing activities   (5,062)   1,950 
           
Change in cash and cash equivalents   (1,998)   (1,962)
           
Cash and cash equivalents, beginning of period   27,676    26,192 
Cash and cash equivalents, end of period  $25,678   $24,230 

 

See accompanying notes to the consolidated financial statements

 

5 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(1)BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (71.91%) 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, 2016 and June 30, 2016 and the results of operations and cash flows for the interim periods ended December 31, 2016 and 2015. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year 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, 2016.

 

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

 

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

 

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

 

(2)NEW ACCOUNTING STANDARDS

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing ASU 2016-15 but does not expect that it will have a significant impact on its accounting and disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The provisions of ASU 2016-13 were issued to provide 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.

 

6 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

 

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its accounting and disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company does not believe that this new guidance will have a material effect on the consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

(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,
2016
   December 31,
2015
   December 31,
2016
   December 31,
2015
 
Earnings per share                    
Net income  $1,318   $949   $2,591   $2,391 
Less: distributed earnings allocated to participating securities   (3)   (6)   (7)   (13)
Less: (undistributed income) dividends in excess of earnings  allocated to participating securities   (6)   (4)   (11)   (12)
Net earnings available to common shareholders  $1,309   $939   $2,573   $2,366 
                     
Weighted average common shares outstanding including participating securities   5,793,350    5,881,847    5,802,651    5,881,993 
Less: participating securities   (40,905)   (62,502)   (40,905)   (62,502)
Less: average unearned ESOP shares   (111,218)   (141,676)   (115,104)   (144,160)
Weighted average common shares outstanding   5,641,227    5,677,669    5,646,642    5,675,331 
                     
Basic earnings per share  $0.23   $0.17   $0.46   $0.42 
                     
Weighted average common shares outstanding   5,641,227    5,677,669    5,646,642    5,675,331 
Add: dilutive effects of assumed exercises of stock options   96,097    71,507    89,680    71,221 
Average shares and dilutive potential common shares   5,737,324    5,749,176    5,736,322    5,746,552 
                     
Diluted earnings per share  $0.23   $0.16   $0.45   $0.41 

 

7 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

During the three months ended December 31, 2016, no shares were considered anti-dilutive. During the six months ended December 31, 2016, 28,700 shares were considered anti-dilutive as the exercise price was below the average market price for the respective periods. During the three and six months ended December 31, 2015, 15,400 shares were considered anti-dilutive as the exercise price was below the average market price for the respective periods.

 

(4)SECURITIES AVAILABLE-FOR-SALE

 

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consist of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at December 31, 2016 and June 30, 2016 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2016  Cost   Gains   Losses   Value 
Available-for-sale:                    
FHLMC common stock  $20   $284   $-   $304 
Certificates of deposit   7,723    30    (16)   7,737 
Corporate debt securities   -    -    -    - 
Municipal securities   36,016    18    (830)   35,204 
SBA loan pools   627    4    -    631 
U.S. Government agency mortgage-backed securities   65,559    192    (822)   64,929 
U.S. Government agency bonds   12,052    18    (221)   11,849 
Total available-for-sale  $121,997   $546   $(1,889)  $120,654 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2016  Cost   Gains   Losses   Value 
Available-for-sale:                    
FHLMC common stock  $20   $131   $-   $151 
Certificates of deposit   7,470    64    -    7,534 
Corporate debt securities   8,932    186    (2)   9,116 
Municipal securities   33,508    989    (16)   34,481 
SBA loan pools   1,268    8    (3)   1,273 
U.S. Government agency mortgage-backed securities   68,103    1,331    (31)   69,403 
U.S. Government agency bonds   9,957    169    -    10,126 
Total available-for-sale  $129,258   $2,878   $(52)  $132,084 

 

Securities pledged at December 31, 2016 and June 30, 2016 had fair values of $5,990 and $6,114, respectively. These securities were pledged to secure public deposits.

 

At December 31, 2016 and June 30, 2016, 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.

 

8 

 

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 more than twelve months at December 31, 2016 and June 30, 2016. 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, 2016                                             
Available-for-sale:                                             
Certificates of deposit  $1,731   $(16)   7   $-   $-    -   $1,731   $(16)   7 
Municipal securities   31,019    (808)   76    697    (22)   2    31,716    (830)   78 
U.S. Government agency  mortgage-backed securities   46,597    (743)   47    2,542    (79)   4    49,139    (822)   51 
U.S. Government agency bonds   9,830    (221)   9    -    -    -    9,830    (221)   9 
   $89,177   $(1,788)   139   $3,239   $(101)   6   $92,416   $(1,889)   145 

 

   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, 2016                                             
Available-for-sale:                                             
Municipal securities  $2,574   $(11)   5   $716   $(5)   2   $3,290   $(16)   7 
Corporate debt securities   1,018    (2)   2    -    -    -    1,018    (2)   2 
SBA loan pools   -    -    -    508    (3)   1    508    (3)   1 
U.S. Government agency  mortgage-backed securities   1,057    (1)   1    2,982    (30)   4    4,039    (31)   5 
   $4,649   $(14)   8   $4,206   $(38)   7   $8,855   $(52)   15 

 

 

(1)Actual amounts.

 

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

 

None of the unrealized losses at December 31, 2016 were recognized into net income for the three or six months ended December 31, 2016 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is likely 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, 2016 were recognized as having OTTI during the year ended June 30, 2016.

 

9 

 

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, 2016 and June 30, 2016 by contractual maturity. FHLMC common stock is not presented in this table.

 

   December 31, 2016   June 30, 2016 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
Less than one year  $3,237   $3,244   $3,740   $3,751 
Due from one to five years   13,147    13,102    16,819    17,086 
Due from five to ten years   30,648    29,970    30,778    31,622 
Due after ten years   8,759    8,474    8,530    8,798 
Mortgage-backed securities (1)   66,186    65,560    69,371    70,676 
Total  $121,977   $120,350   $129,238   $131,933 

 

 

(1)Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty.

 

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, 2016 and 2015:

 

   Three Months Ended   Six Months Ended 
Available-for-sale:  December 31,
2016
   December 31,
2015
   December 31,
2016
   December 31,
2015
 
Proceeds  $12,495   $-   $15,648   $1,164 
Gross gains   57    -    125    9 
Gross losses   -    -    -    - 

 

The tax provision related to these net realized gains for the three and six months ended December 31, 2016 was $21 and $45, respectively, and for the three and six months ended December 31, 2015 was $0 and $3, respectively.

 

(5)LOANS

 

The components of loans at December 31, 2016 and June 30, 2016 were as follows:

 

   December 31,
2016
   June 30,
2016
 
Real estate loans:        
One-to-four family  $254,216   $242,067 
Multi-family   1,933    1,996 
Home equity   5,722    6,433 
Nonresidential   19,343    20,310 
Agricultural   1,535    2,958 
Construction and land   14,355    14,332 
Total real estate loans   297,104    288,096 
Commercial and industrial   167    176 
Consumer and other loans   5,335    4,915 
Total loans   302,606    293,187 
Deferred net loan fees   (1,069)   (1,124)
Total loans net of deferred loan fees  $301,537   $292,063 

 

10 

 

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, 2016 by portfolio segment:

 

Three Months Ended December 31, 2016  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Real estate loans:                         
One-to-four family  $785   $10   $-   $-   $795 
Multi-family   4    -    -    -    4 
Home equity   2    -    -    -    2 
Nonresidential   132    (8)   -    -    124 
Agricultural   5    (3)   -    -    2 
Construction and land   35    4    -    -    39 
Total real estate loans   963    3    -    -    966 
Commercial and industrial   6    (1)   -    -    5 
Consumer and other loans   3    22    -    -    25 
Total loans  $972   $24   $-   $-   $996 

 

Six Months Ended December 31, 2016  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $733   $62   $-   $-   $795 
Multi-family   4    -    -    -    4 
Home equity   2    -    -    -    2 
Nonresidential   130    9    (15)   -    124 
Agricultural   5    (3)   -    -    2 
Construction and land   39    -    -    -    39 
Total real estate loans   913    68    (15)   -    966 
Commercial and industrial   6    (1)   -    -    5 
Consumer and other loans   3    22    -    -    25 
Total loans  $922   $89   $(15)  $-   $996 

 

11 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2016:

 

   Ending Allowance on Loans:   Loans: 
  Individually Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
At December 31, 2016   Non-PCI   PCI (1)       Non-PCI   PCI (1)     
Real estate loans:                              
One-to-four family  $34   $74   $687   $993   $1,933   $250,337 
Multi-family   -    -    4    -    -    1,932 
Home equity   -    -    2    -    -    5,722 
Nonresidential   -    68    56    453    903    17,974 
Agricultural   -    -    2    448    -    1,086 
Construction and land   -    9    30    -    509    13,759 
Total real estate loans   34    151    781    1,894    3,345    290,810 
Commercial and industrial   -    -    5    -    -    167 
Consumer and other loans   -    -    25    -    -    5,321 
Total loans  $34   $151   $811   $1,894   $3,345   $296,298 

 

 

(1)“Purchase Credit Impaired” (or “PCI”) loans include all loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

 

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2015 by portfolio segment:

 

Three Months Ended December 31, 2015  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $881   $148   $(68)  $-   $961 
Multi-family   4    -    -    -    4 
Home equity   20    53    (72)   -    1 
Nonresidential   68    (1)   -    -    67 
Agricultural   4    -    -    -    4 
Construction and land   19    67    -    -    86 
Total real estate loans   996    267    (140)   -    1,123 
Commercial and industrial   8    -    -    -    8 
Consumer and other loans   7    10    -    -    17 
Total loans  $1,011   $277   $(140)  $-   $1,148 

 

12 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Six Months Ended December 31, 2015  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $910   $259   $(208)  $-   $961 
Multi-family   4    -    -    -    4 
Home equity   1    72    (72)   -    1 
Nonresidential   55    12    -    -    67 
Agricultural   4    -    -    -    4 
Construction and land   25    61    -    -    86 
Total real estate loans   999    404    (280)   -    1,123 
Commercial and industrial   -    8    -    -    8 
Consumer and other loans   9    10    (2)   -    17 
Total loans  $1,008   $422   $(282)  $-   $1,148 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2016:

 

   Ending Allowance on Loans:   Loans: 
  Individually Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
At June 30, 2016   Non-PCI   PCI (1)       Non-PCI   PCI (1)     
Real estate loans:                              
One-to-four family  $55   $46   $632   $1,014   $1,904   $238,161 
Multi-family   -    -    4    -    -    1,994 
Home equity   -    -    2    -    -    6,575 
Nonresidential   -    72    58    -    1,492    18,807 
Agricultural   -    -    5    448    -    2,509 
Construction and land   -    11    28    -    525    13,558 
Total real estate loans   55    129    729    1,462    3,921    281,604 
Commercial and industrial   -    -    6    -    -    176 
Consumer and other loans   -    -    3    -    -    4,900 
Total loans  $55   $129   $738   $1,462   $3,921   $286,680 

 

 

(1)PCI loans include all loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

 

13 

 

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, 2016 and June 30, 2016, including the average recorded investment balance and interest earned for the six months ended December 31, 2016 and year ended June 30, 2016:

 

   December 31, 2016 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $688   $489   $-   $741   $24 
Multi-family   -    -    -    -    - 
Home equity   50    -    -    -    - 
Nonresidential   1,479    907    -    1,009    26 
Agricultural   997    448    -    448    18 
Construction and land   818    478    -    332    19 
Total real estate loans   4,032    2,322    -    2,530    87 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $4,032   $2,322   $-   $2,530   $87 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $3,058   $2,437   $108   $2,178   $111 
Multi-family   -    -    -    -    - 
Home equity   -    -    -    -    - 
Nonresidential   558    449    68    416    20 
Agricultural   -    -    -    -    - 
Construction and land   185    31    9    189    11 
Total real estate loans   3,801    2,917    185    2,783    142 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $3,801   $2,917   $185   $2,783   $142 
                          
Totals:                         
Real estate loans  $7,833   $5,239   $185   $5,313   $229 
Consumer and other loans   -    -    -    -    - 
Total  $7,833   $5,239   $185   $5,313   $229 

 

The unpaid principal balance and recorded investment includes PCI loans of $5,365 and $3,345, respectively, at December 31, 2016.

 

14 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   June 30, 2016 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $1,787   $992   $-   $2,198   $113 
Multi-family   -    -    -    -    - 
Home equity   185    -    -    -    - 
Nonresidential   2,192    1,111    -    1,209    72 
Agricultural   997    448    -    945    - 
Construction and land   359    185    -    392    35 
Total real estate loans   5,520    2,736    -    4,744    220 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $5,520   $2,736   $-   $4,744   $220 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $2,021   $1,918   $101   $1,980   $89 
Multi-family   -    -    -    -    - 
Home equity   -    -    -    -    - 
Nonresidential   404    382    72    851    25 
Agricultural   -    -    -    -    - 
Construction and land   767    347    11    174    61 
Total real estate loans   3,192    2,647    184    3,005    175 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $3,192   $2,647   $184   $3,005   $175 
                          
Totals:                         
Real estate loans  $8,712   $5,383   $184   $7,749   $395 
Consumer and other loans   -    -    -    -    - 
Total  $8,712   $5,383   $184   $7,749   $395 

 

The unpaid principal balance and recorded investment in PCI loans was $6,546 and $3,921, respectively, at June 30, 2016.

 

15 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the carrying amount of those loans at December 31, 2016 and June 30, 2016:

 

   December 31,
2016
   June 30,
2016
 
Real estate loans:        
One-to-four family  $1,859   $1,858 
Multi-family   -    - 
Home equity   -    - 
Nonresidential   835    1,420 
Agricultural   -    - 
Construction and land   500    514 
Total real estate loans   3,194    3,792 
Commercial and industrial   -    - 
Consumer and other loans   -    - 
Total loans  $3,194   $3,792 

 

Carrying amounts listed above are net of an allowance for loan losses of $151 and $129 at December 31, 2016 and June 30, 2016, respectively.

 

The following table presents the changes in the carrying value and the accretable yield on purchased credit impaired loans for the three and six months ended December 31, 2016 and 2015.

 

   Three Months Ended
December 31, 2016
   Three Months Ended
December 31, 2015
 
   Accretable
Yield
   Carrying Value   Accretable
Yield
   Carrying
Value
 
Balance at beginning of period  $(1,312)  $3,694   $(500)  $6,250 
Payments and other exit events   (40)   (414)   (94)   (1,069)
Accretion   95    (95)   98    (98)
Reclassification from nonaccretable to accretable   -   -    (22)   - 
Change in the allowance   -    9    -    (31)
Balance at end of period  $(1,257)  $3,194   $(518)  $5,052 

 

16 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   Six Months Ended
December 31, 2016
   Six Months Ended
December 31, 2015
 
   Accretable
Yield
   Carrying Value   Accretable
Yield
   Carrying
Value
 
Balance at beginning of year  $(1,340)  $3,792   $(694)  $7,429 
Payments and other exit events   (75)   (418)   (104)   (2,043)
Accretion   158    (158)   302    (302)
Reclassification from nonaccretable to accretable   -   -    (22)   - 
Change in the allowance   -    (22)   -    (32)
Balance at end of period  $(1,257)  $3,194   $(518)  $5,052 

 

Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amount of such loans at December 31, 2016 and 2015 is as follows:

 

   December 31,
2016
   December 31,
2015
 
Balance at beginning of year  $1,139   $2,798 
Additions   275    132 
Reductions from payments and liquidations   (607)   (963)
Balance at end of period  $807   $1,967 

 

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. Separate tables are presented to show the aging of total past due loans and the aging of past due PCI loans only.

 

Total past due loans and nonaccrual loans at December 31, 2016:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
   Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $6,782   $1,591   $1,160   $9,533   $243,730   $253,263   $2,420   $- 
Multi-family   -    -    -    -    1,932    1,932    -    - 
Home equity   100    96    83    279    5,443    5,722    133    - 
Nonresidential   -    50    813    863    18,467    19,330    813    - 
Agricultural   448    -    -    448    1,086    1,534    529    - 
Construction and land   -    14    -    14    14,254    14,268    282    - 
Total real estate loans   7,330    1,751    2,056    11,137    284,912    296,049    4,177    - 
Commercial and industrial   -    -    -    -    167    167    -    - 
Consumer and other loans   1    -    -    1    5,320    5,321    -    - 
Total  $7,331   $1,751   $2,056   $11,138   $290,399   $301,537   $4,177   $- 

 

17 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI past due and nonaccrual loans at December 31, 2016:

 

                               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  $147   $398   $19   $564   $1,369   $1,933   $165   $- 
Nonresidential   -    50    360    410    493    903    360    - 
Construction and land   -    -    -    -    509    509    282    - 
Total loans  $147   $448   $379   $974   $2,371   $3,345   $807   $- 

 

PCI loans for which the Company cannot reasonably estimate the amount and timing of future cash flows are classified as nonaccrual.

 

Total past due and nonaccrual loans by portfolio segment at June 30, 2016:

 

                               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  $7,086   $1,001   $863   $8,950   $232,129   $241,079   $2,133   $- 
Multi-family   -    -    -    -    1,994    1,994    -    - 
Home equity   94    22    84    200    6,375    6,575    126    - 
Nonresidential   -    48    942    990    19,309    20,299    942    - 
Agricultural   -    -    -    -    2,957    2,957    531    - 
Construction and land   93    -    25    118    13,965    14,083    25    - 
Total real estate loans   7,273    1,071    1,914    10,258    276,729    286,987    3,757    - 
Commercial and industrial   -    -    -    -    176    176    -    - 
Consumer and other loans   -    -    -    -    4,900    4,900    -    - 
Total  $7,273   $1,071   $1,914   $10,258   $281,805   $292,063   $3,757   $- 

 

PCI past due and nonaccrual loans at June 30, 2016:

 

                               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  $-   $389   $21   $410   $1,494   $1,904   $172   $- 
Nonresidential   -    48    942    990    502    1,492    942    - 
Construction and land   -    -    25    25    500    525    25    - 
Total loans  $-   $437   $988   $1,425   $2,496   $3,921   $1,139   $- 

 

18 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI loans for which the Company cannot reasonably estimate the amount and timing of future cash flows are classified as nonaccrual.

 

Troubled Debt Restructurings:

 

At December 31, 2016 and June 30, 2016, total loans that have been modified as troubled debt restructurings were $1,585 and $1,588, respectively, which consisted of two agricultural loans, two home equity lines of credit, and one one-to-four family first liens at June 30, 2016 and an additional one-to-four family loan at December 31, 2016. All loans were acquired and initially recorded at fair value. An additional allowance of $34 and $55 at December 31, 2016 and June 30, 2016, respectively, has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts under either loan or any payment default on any loan after the modification. The one troubled debt restructuring during the six months ended December 31, 2016 involved renewal of a loan at a higher loan-to-value ratio than is offered on similar loans. No reductions of principal or interest rates were granted. No loans restructured during the twelve months ended December 31, 2016 defaulted.

 

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. For example, the Company currently offers mortgages of up to $95 with loan-to-value ratios of up to 95% to low- to moderate-income borrowers solely for the purchase of their primary residence. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.

 

19 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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

 

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

 

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

 

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

 

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

 

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

 

20 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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.

 

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.

 

21 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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. Separate tables are presented to show the risk grade of loans that have been acquired.

 

Total loans by risk grade and portfolio segment at December 31, 2016:

 

   Pass   Pass- Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $238,160   $6,701   $2,230   $6,172   $-   $253,263 
Multi-family   1,932    -    -    -    -    1,932 
Home equity   5,081    299    259    83    -    5,722 
Nonresidential   12,956    3,636    1,382    1,356    -    19,330 
Agricultural   340    387    278    529    -    1,534 
Construction and land   12,626    863    234    545    -    14,268 
Total real estate loans   271,095    11,886    4,383    8,685    -    296,049 
Commercial and industrial   167    -    -    -    -    167 
Consumer and other loans   5,317    -    1    3    -    5,321 
Total  $276,579   $11,886   $4,384   $8,688   $-   $301,537 

 

Total loans by risk grade and portfolio segment at June 30, 2016:

 

   Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $226,899   $6,805   $1,890   $5,485   $-   $241,079 
Multi-family   1,994    -    -    -    -    1,994 
Home equity   6,083    106    260    126    -    6,575 
Nonresidential   13,218    4,095    1,494    1,492    -    20,299 
Agricultural   1,352    398    676    531    -    2,957 
Construction and land   12,397    878    239    569    -    14,083 
Total real estate loans   261,943    12,282    4,559    8,203    -    286,987 
Commercial and industrial   157    19    -    -    -    176 
Consumer and other loans   4,892    -    3    5    -    4,900 
Total  $266,992   $12,301   $4,562   $8,208   $-   $292,063 

 

22 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

At December 31, 2016, consumer mortgage loans secured by residential real estate properties totaling $488 were in formal foreclosure proceedings and are included in one-to-four family loans.

 

(6)FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

Investment Securities:

 

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

 

Impaired Loans:

 

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

 

Real Estate Owned:

 

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

 

23 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 and liabilities measured at fair value on a recurring basis at December 31, 2016 and June 30, 2016 are summarized below:

 

   Fair Value Measurements 
   December 31, 2016   June 30, 2016 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
Financial assets:                    
Securities available-for-sale:                    
FHLMC common stock  $304   $-   $151   $- 
Certificates of deposit   7,737    -    7,534    - 
Corporate debt securities   -    -    9,116    - 
Municipal securities   35,204    -    34,481    - 
SBA loan pools   631    -    1,273    - 
U.S. Government agency mortgage-backed securities   64,929    -    69,403    - 
U.S. Government agency bonds   11,849    -    10,126    - 
Total securities available-for-sale   120,654    -    132,084    - 
Loan servicing rights   -    1,219    -    1,046 
Total financial assets  $120,654   $1,219   $132,084   $1,046 

 

24 

 

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, 2016 and June 30, 2016:

 

   Fair Value Measurements 
   December 31,
2016
   June 30,
2016
 
   (Level 3)   (Level 3) 
Financial assets:          
Impaired loans, with specific allocations:          
One-to-four family  $2,329   $1,817 
Nonresidential   381    310 
Construction and land   22    336 
Total financial assets   2,732    2,463 
Non-financial assets:          
Real estate owned, net:          
One-to-four family   752    899 
Nonresidential   -    267 
Construction and land   -    188 
Total non-financial assets   752    1,354 
Total assets measured at fair value on a non-recurring basis  $3,484   $3,817 

 

The Company's impaired loans at December 31, 2016 and June 30, 2016 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of these loans were $2,732 and $2,463, respectively, which consisted of valuation allowances of $185 and $184, respectively. The impact to the provision for loan losses from the change in the valuation allowance for the three and six months ended December 31, 2016 was a decrease of $22 and an increase of $1, respectively, and for the three and six months ended December 31, 2015 was an increase of $262 and $292, respectively.

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned and their respective valuation allowances at December 31, 2016 and June 30, 2016 were $752 and $1,354 and $102 and $102, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and six months ended December 31, 2016, were $0 and $103, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and six months ended December 31, 2015, were $15 and $110, respectively.

 

The tables below present a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended December 31, 2016 and 2015:

 

   Fair Value Measurements 
   (Level 3) 
   Three Months Ended   Six Months Ended 
   December 31,
 2016
   December 31,
 2015
   December 31,
 2016
   December 31,
 2015
 
   Loan Servicing
Rights
   Loan Servicing
Rights
   Loan Servicing
Rights
   Loan Servicing
Rights
 
Balance at beginning of year:  $1,023   $1,332   $1,046   $1,396 
Purchases   -    -    -    - 
Change in fair value   196    (22)   173    (86)
Balance at end of period:  $1,219   $1,310   $1,219   $1,310 

 

25 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2016 and June 30, 2016.

 

   Level 3 Quantitative Information
   December 31,
 2016
   June 30,
 2016
   Valuation
Technique
  Unobservable
Inputs
  Range
   Fair Value   Fair Value          
Loan servicing rights  $1,219   $1,046    Discounted cash flows  Discount rate, estimated timing of cash flows   9% to 10%
Impaired real estate loans net,
with specific allocations:
                   
One-to-four family  $2,329   $1,817    Sales comparison approach   Adjustment for differences between the comparable sales   0% to 30%
Nonresidential   381    310   Discounted cash flows  Discount rate, estimated timing of cash flows  2% to 28%
Construction and land   22    336    Sales comparison approach   Adjustment for differences between the comparable sales   0% to 30%
Real estate owned net:                   
One-to-four family  $752   $899    Sales comparison approach   Adjustment for differences between the comparable sales   0% to 20%
Nonresidential   -    267    Sales comparison approach   Adjustment for differences between the comparable sales   0% to 20%
Construction and land   -    188    Sales comparison approach   Adjustment for differences between the comparable sales   0% to 20%

 

26 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2016 and June 30, 2016 are summarized below:

 

   December 31, 2016 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $120,654   $-   $120,654   $-   $120,654 
Loans, net   300,541    -    -    305,807    305,807 
Loan servicing rights   1,219    -    -    1,219    1,219 
Restricted equity securities   1,021    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $396,413   $178,789   $210,488   $-   $389,277 

 

   June 30, 2016 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $132,084   $-   $132,084   $-   $132,084 
Loans, net   291,141    -    -    296,203    296,203 
Loans held for sale (1)   129    -    -    129    129 
Loan servicing rights   1,046    -    -    1,046    1,046 
Restricted equity securities   1,021    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $399,634   $175,652   $224,037   $-   $399,689 

 

 

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

 

(7)EMPLOYEE STOCK OWNERSHIP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10 per share during 2011. The Company makes discretionary contributions to the ESOP and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

 

Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. In December 2016, $50 of discretionary contributions were made to the ESOP for debt retirement, which resulted in the release of additional shares and recognition of additional compensation expense of $88 for both the three and six months ended December 31, 2016. In December 2015, $100 of discretionary contributions were made to the ESOP for debt retirement, which resulted in the release of additional shares and recognition of additional compensation expense of $160 for both the three and six months ended December 31, 2015. Total ESOP compensation expense for the three and six months ended December 31, 2016 was $181 and $273, respectively, and for the three and six months ended December 31, 2015 was $250 and $340, respectively.

 

27 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Shares held by the ESOP at December 31, 2016 and June 30, 2016 were as follows:

 

   December 31,
 2016
   June 30,
2016
 
Committed to be released to participants   25,793    10,602 
Allocated to participants   112,043    112,043 
Unearned   104,010    126,197 
Total ESOP shares   241,846    248,842 
           
Fair value of unearned shares  $2,444   $2,470 

 

(8)STOCK BASED COMPENSATION

 

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

 

On February 5, 2016, the compensation committee of the board of directors approved the issuance of 21,000 stock options to purchase Company stock and 7,000 shares of restricted stock were granted to officers. Stock options and restricted stock have vesting periods of five years or seven years, a percentage of which vests annually on each anniversary of the grant date. The weighted average vesting period of stock options and restricted stock granted was 5.7 years and 6.0 years, respectively. Stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

 

The following table summarizes stock option activity for the six months ended December 31, 2016:

 

   Options   Weighted-
Average
Exercise
Price/Share
   Weighted-
Average
Remaining
Contractual
Life (in years)
   Aggregate
Intrinsic
Value (1)
 
Outstanding - July 1, 2016   261,986   $12.46           
Granted   -    -           
Exercised   -    -           
Forfeited   -    -           
Outstanding - December 31, 2016   261,986   $12.46    2.40   $2,892,325 
Fully vested and exercisable at December 31, 2016   169,954   $11.65    2.40   $2,013,955 
Expected to vest in future periods   92,032                
Fully vested and expected to vest - December 31, 2016   261,986   $12.46    2.40   $2,892,325 

 

 

(1)The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based on the closing price of common stock of $23.50 per share on December 31, 2016.

 

28 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the SNL Financial Index of Thrifts. The expected life of the options is calculated based on the “simplified” method as provided for under generally accepted accounting principles.

 

The weighted-average fair value of options granted and assumptions used in the Black-Scholes-Merton option pricing model in the fiscal years are listed below:

 

   Fiscal Years Granted 
   2016 
Risk-free interest rate   1.67%
Expected dividend yield   2.06%
Expected stock volatility   16.1 
Expected life (years)   8 
Fair value  $2.75 

 

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. There were 23,750 and 21,835 options that were earned during the six months ended December 31, 2016 and 2015, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2016 was $14 and $28, respectively, and for the three and six months ended December 31, 2015 was $12 and $24, respectively. Total unrecognized compensation cost related to stock options was $97 at December 31, 2016 and is expected to be recognized over a weighted-average period of 2.4 years.

 

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2016:

 

   December 31,
 2016
 
Balance - beginning of year   40,905 
Granted   - 
Forfeited   - 
Vested   - 
Balance - end of period   40,905 
Weighted average grant date fair value  $13.09 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The weighted-average grant date fair value of restricted stock granted on January 23, 2015 was $20.01 per share or $252. The weighted-average grant date fair value of restricted stock granted on February 5, 2016 was $19.40 per share or $136. Stock-based compensation expense for restricted stock included in noninterest expense for the three and six months ended December 31, 2016 was $62 and $123, respectively, and for the three and six months ended December 31, 2015 was $64 and $127, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $424 at December 31, 2016 and is expected to be recognized over a weighted-average period of 2.9 years.

 

29 

 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(9)LOAN SERVICING RIGHTS

 

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

 

The principal balances of those loans at December 31, 2016 and June 30, 2016 are as follows:

 

   December 31,
2016
   June 30,
2016
 
Mortgage loan portfolio serviced for:          
FHLMC  $117,682   $125,812 

 

Custodial escrow balances maintained in connection with serviced loans were $811 and $1,007 at December 31, 2016 and June 30, 2016.

 

Activity for loan servicing rights for the three and six months ended December 31, 2016 and 2015 is as follows:

 

   Three Months Ended   Six Months Ended 
   December 31,
 2016
   December 31,
 2015
   December 31,
 2016
   December 31,
 2015
 
Loan servicing rights:                    
Beginning of period:  $1,023   $1,332   $1,046   $1,396 
Additions   -    -    -    - 
Change in fair value   196    (22)   173    (86)
End of period:  $1,219   $1,310   $1,219   $1,310 

 

Fair value at December 31, 2016 was determined using a discount rate of 9.63%, prepayment speed assumptions ranging from 5.1% to 12.7% Conditional Prepayment Rate (“CPR”) depending on the loans coupon, term and seasoning, and a weighted average default rate of 0.61%.  Fair value at December 31, 2015 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 5.2% to 17.5% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.61%.

 

(10)SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the six months ended December 31, 2016 and 2015 is as follows:

 

   December 31,
2016
   December 31,
2015
 
Cash paid during the period for:          
Interest paid  $641   $591 
Income taxes paid  $510   $117 
Supplemental noncash disclosures:          
Transfers from loans to real estate owned  $154   $1,443 

 

(11)SUBSEQUENT EVENTS

 

On January 26, 2017, the Board of Directors of Oconee Federal Financial Corp. (the “Company”) declared a quarterly cash dividend of $0.10 per share of the Company’s common stock. The dividend is payable to stockholders of record as of February 9, 2017, and will be paid on or about February 23, 2017.

 

30 

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

 

·statements of our goals, intentions and expectations;

 

·statements regarding our business plans and prospects and growth and operating strategies;

 

·statements regarding the asset quality of our loan and investment portfolios; and

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

·our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and employment levels) nationally and in our market areas;

 

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

 

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

 

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

 

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

 

·increased competition among depository and other financial institutions;

 

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

 

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

 

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

 

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

 

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

 

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

 

·changes in the level of government support of housing finance;

 

31 

 

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

 

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

 

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

 

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

 

·our reliance on a small executive staff;

 

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

 

·changes in consumer spending, borrowing and savings habits;

 

·changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

·our ability to control costs and expenses, particularly those related to operating as a publicly traded company;

 

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

 

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

 

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

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2016, as filed with the Securities and Exchange Commission.

 

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

 

Our total assets decreased by $3.6 million, or 0.7%, to $482.1 million at December 31, 2016 from $485.6 million at June 30, 2016. Total cash and cash equivalents decreased $2.0 million, or 7.2%, to $25.7 million at December 31, 2016 from $27.7 million at June 30, 2016. Our available-for-sale securities portfolio also decreased from $132.1 million at June 30, 2016 to $120.7 million at December 31, 2016. Proceeds from sales and calls of securities and excess cash was used to fund loan growth. Gross loans increased $9.5 million, or 3.2%, to $301.5 million at December 31, 2016 from $292.1 million at June 30, 2016. This increase is a result of increased loan demand experienced during the six months ended December 31, 2016.

 

Deposits decreased $3.2 million, or 0.8%, to $396.4 million at December 31, 2016 from $399.6 million at June 30, 2016. The decrease in our deposits reflected a decrease of $8.9 million in certificates of deposit and $387 thousand in savings deposits, offset by an increase in money market deposits of $3.2 million and NOW and demand deposits of $2.9 million. The increase in money market deposits reflects an increase in rate on certain money market accounts during the six months ended December 31, 2016 and increased efforts to offer and market our deposit products. We believe the decline in our certificates of deposit reflects depositors moving their deposits into higher yielding investments in the market.

 

32 

 

Oconee Federal, MHC’s cash is held on deposit with the Company. We generally do not accept brokered deposits and no brokered deposits were accepted during the six months ended December 31, 2016.

 

We had no advances from the Federal Home Loan Bank of Atlanta as of December 31, 2016 or June 30, 2016. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of December 31, 2016, or approximately $120.6 million.

 

Total shareholders’ equity decreased $1.5 million, or 1.8%, to $83.9 million at December 31, 2016 compared to $85.4 million at June 30, 2016. Our net income of $2.6 million was fully offset by our other comprehensive loss of $2.7 for the six months ended December 31, 2016. The increase in other comprehensive loss was a result of the rising interest rate environment relative to the interest rate environment in which the investment securities were purchased. Management did not believe the unrealized losses represented an other-than-temporary impairment. Dividends of $1.1 million and share repurchases of $778 thousand also contributed to the decrease in shareholders’ equity during the period. The Company and the Bank exceeded all minimum regulatory capital requirements for the period.

 

Nonperforming Assets

 

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

 

   December 31,
2016
   June 30,
 2016
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $2,420   $2,133 
Multi-family   -    - 
Home equity   133    126 
Nonresidential   813    942 
Agricultural   529    531 
Construction and land   282    25 
Total real estate loans   4,177    3,757 
Commercial and industrial   -    - 
Consumer and other loans   -    - 
Total nonaccrual loans (1)  $4,177   $3,757 
Accruing loans past due 90 days or more:          
Real estate loans:          
Total accruing loans past due 90 days or more  $-   $- 
Total of nonaccrual and 90 days or more past due loans(2)  $4,177   $3,757 
Real estate owned, net:          
One-to-four family  $752   $899 
Nonresidential   -    267 
Construction and land   -    188 
Other nonperforming assets   -    - 
Total nonperforming assets  $4,929   $5,111 
           
Accruing troubled debt restructurings   -    - 
Troubled debt restructurings and total nonperforming assets  $4,929   $5,111 
           
Total nonperforming loans to total loans   1.39%   1.29%
Total nonperforming assets to total assets   1.02%   1.05%
Total nonperforming assets to loans and real estate owned   1.63%   1.74%

 

 

(1)Nonaccrual troubled debt restructurings included in the totals above were $1,585 and $1,588, at December 31 and June 30, 2016, respectively.
(2)There were no loans past due 90 days or more and still accruing at December 31, 2016 and June 30, 2016.

 

33 

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $127 thousand and $97 thousand for the six months ended December 31, 2016 and 2015, respectively. Interest of $45 thousand and $31 thousand, respectively, was recognized on these loans and is included in net income for the six months ended December 31, 2016 and 2015, respectively.

 

Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $66 thousand and $37 thousand, respectively, for the six months ended December 31, 2016 and 2015.

 

Nonperforming assets decreased $182 thousand from June 30, 2016 to December 31, 2016. Nonaccrual loans increased $420 thousand while real estate owned decreased $602 thousand. There were no accruing loans past due 90 days or more at either date. The increase in nonaccrual loans primarily related to seasonal fluctuations and an increase in our TDRs as we continue to work with borrowers to avoid foreclosure. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 1.02% and 1.63%, respectively, at December 31, 2016 compared to 1.05% and 1.74%, respectively at June 30, 2016.

 

34 

 

Analysis of Net Interest Margin

 

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

 

   For the Three Months Ended 
   December 31, 2016   December 31, 2015 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $298,374   $3,639    4.88%  $300,351   $3,850    5.13%
Investment securities   92,930    388    1.67    98,791    430    1.74 
Investment securities, tax-free   33,145    180    2.17    21,600    119    2.20 
Interest-earning deposits   16,917    36    0.85    19,555    26    0.53 
Total interest-earning assets   441,366    4,243    3.85    440,297    4,425    4.02 
Noninterest-earning assets   39,150              41,661           
Total assets  $480,516             $481,958           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $48,313   $12    0.10%  $50,029   $10    0.08%
Money market deposits   79,244    72    0.36    62,139    49    0.32 
Regular savings and other deposits   28,410    10    0.14    24,298    6    0.10 
Certificates of deposit   213,853    229    0.43    239,525    230    0.39 
Total interest-bearing deposits   369,820    323    0.35    375,991    295    0.31 
Total interest-bearing liabilities   369,820    323    0.35    375,991    295    0.31 
Noninterest bearing deposits   24,648              20,641           
Other noninterest-bearing liabilities   1,421              2,262           
Total liabilities   395,889              398,894           
Equity   84,627              83,064           
Total liabilities and equity  $480,516             $481,958           
                               
Net interest income       $3,920             $4,130      
Interest rate spread             3.50%             3.71%
Net interest margin             3.55%             3.75%
Average interest-earning assets to average interest-bearing liabilities   1.19x             1.17x          

 

35 

 

   For the Six Months Ended 
   December 31, 2016   December 31, 2015 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $295,733   $7,376    4.99%  $303,389   $7,734    5.10%
Investment securities   95,753    831    1.74    97,359    820    1.68 
Investment securities, tax-free   32,929    358    2.17    18,779    208    2.22 
Interest-earning deposits   17,975    77    0.86    17,106    42    0.49 
Total interest-earning assets   442,390    8,642    3.91    436,633    8,804    4.03 
Noninterest-earning assets   39,919              40,710           
Total assets  $482,309             $477,343           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $48,051   $30    0.12%  $49,684   $19    0.08%
Money market deposits   78,284    134    0.34    50,610    67    0.26 
Regular savings and other deposits   28,296    19    0.13    25,788    9    0.07 
Certificates of deposit   217,306    460    0.42    245,130    489    0.40 
Total interest-bearing deposits   371,937    643    0.34    371,212    584    0.31 
Total interest-bearing liabilities   371,937    643    0.34    371,212    584    0.31 
Noninterest bearing deposits   24,436              21,809           
Other noninterest-bearing liabilities   972              1,969           
Total liabilities   397,345              394,990           
Equity   84,964              82,353           
Total liabilities and equity  $482,309             $477,343           
                               
Net interest income       $7,999             $8,220      
Interest rate spread             3.57%             3.72%
Net interest margin             3.62%             3.77%
Average interest-earning assets to average interest-bearing liabilities   1.19x             1.18x          

 

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Comparison of Operating Results for the Three Months Ended December 31, 2016 and December 31, 2015

 

General. We reported net income of $1.3 million for the three months ended December 31, 2016 compared to $949 thousand for the three months ended December 31, 2015. Interest income decreased $182 thousand for the three months ended December 31, 2016 while interest expense increased $28 thousand resulting in a net decrease to net interest income of $210 thousand. Noninterest income increased $43 thousand for the three months ended December 31, 2016 compared to December 31, 2015 due primarily to gains recognized on the sales of securities available-for-sale and PCI loans. Total noninterest expense decreased $449 thousand due to lower salaries and employee benefits expenses and the net change in the loan servicing asset.

 

Interest Income. Interest income decreased by $182 thousand, or 4.1%, to $4.2 million for the three months ended December 31, 2016. The yield on interest earning-assets decreased 17 basis points from 4.02% for the three months ended December 31, 2015 to 3.85% for the three months ended December 31, 2016. The decrease was slightly offset by an increase in total average interest-earning assets of $1.1 million to $441.4 million for the three months ended December 31, 2016 from $440.3 million for the three months ended December 31, 2015.

 

Interest income on loans was $3.6 million for the three months ended December 31, 2016 compared to $3.9 million for the three months ended December 31, 2015. The yield on loans decreased 25 basis points from 5.13% for the three months ended December 31, 2015 to 4.88% for the three months ended December 31, 2016. The average balance of loans also decreased by $2.0 million, or 0.7%, to $298.4 million for the three months ended December 31, 2016 from $300.4 million for the three months ended December 31, 2015. The decrease in the average balance of our loans is reflective of the run-off in the months following the acquisition of Stephens Federal Bank in December 2014. As a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield.

 

Interest income on investment securities increased by $19 thousand, or 3.5%, to $568 thousand for the three months ended December 31, 2016 from $549 thousand for the three months ended December 31, 2015. The increase reflected an increase in the average balance of securities of $5.7 million, or 4.7%, to $126.1 million for the three months ended December 31, 2016 from $120.4 million for the three months ended December 31, 2015 offset by a decrease of two basis points in the yield on securities to 1.80% from 1.82%. The increase in the average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during periods of low loan demand.

 

The average balance of interest-earning deposits decreased $2.6 million from the three months ended December 31, 2015 to the three months ended December 31, 2015 while the yield increased 32 basis points over the same period.

 

Interest Expense. Interest expense increased by $28 thousand, or 9.5%, to $323 thousand for the three months ended December 31, 2016 from $295 thousand for the three months ended December 31, 2015. The increase reflected an increase of four basis points in the average rate paid on deposits for the three months ended December 31, 2016 to 0.35% from 0.31% for the three months ended December 31, 2015. The increase in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions. Average interest-bearing deposits were $369.8 million for the three months ended December 31, 2016 compared to $376.0 million for the three months ended December 31, 2015.

 

The largest increase in interest expense related to expense on money market deposits, which increased $23 thousand, or 46.9%, to $72 thousand for the three months ended December 31, 2016 from $49 thousand for the three months ended December 31, 2015. Average money market deposit balances increased $17.1 million from $62.1 million for the three months ended December 31, 2015 to $79.2 million for the three months ended December 31, 2016. The increase resulted from a successful money market campaign during the year ended June 30, 2016.

 

The average rate paid on certificates of deposit increased from 0.39% at December 31, 2015 to 0.43% for the three months ended December 31, 2016 while average balances decreased from $239.5 million for the three-month period ended December 31, 2015 to $213.9 million for the three-month period ended December 31, 2016. Lower volume resulted in a decrease in interest expense of $1 thousand for certificates of deposit.

 

The average balance of NOW and demand deposits decreased by $1.7 million while the average rate increased two basis points and the average balance of savings deposits increased $4.1 million and average rates increased four basis points.

 

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Net Interest Income. Net interest income before the provision for loan losses decreased by $210 thousand, or 5.1%, to $3.9 million for the three months ended December 31, 2016. Our interest rate spread and net interest margin for the three months ended December 31, 2016 decreased to 3.50% and 3.55%, respectively, from 3.71% and 3.75%, respectively, for the three months ended December 31, 2015. The lower yield and lower average balance of loans primarily contributed to the decrease in net interest margin for the three months ended December 31, 2016.

 

Provision for Loan Losses. We recorded a provision for loan losses of $24 thousand for the three months ended December 31, 2016 compared with $277 thousand for the three months ended December 31, 2015. There were no net charge-offs for the three months ended December 31, 2016 compared to $140 thousand for the three months ended December 31, 2015. Primarily all of the charge-offs for the three months ended December 31, 2015 were related to loans we acquired. The lower provision is due to lower net charge-offs, a smaller balance of PCI loans and the length of time that the PCI loans have been on the books.

 

Our total allowance for loan losses was $996 thousand, or 0.33%, of total gross loans, at December 31, 2016 and $922 thousand, or 0.32%, of total gross loans at June 30, 2016. The ending allowance for specifically identified impaired loans was $185 thousand at December 31, 2016 compared to $184 thousand at June 30, 2016. The recorded investment in impaired loans at December 31, 2016 was $5.2 million compared to $5.4 million at June 30, 2016. The allowance for specifically identified impaired loans at December 31, 2016 and June 30, 2016 includes an allowance of $151 thousand and $129 thousand, respectively for PCI loans.

 

The general valuation allowance at December 31, 2016 and June 30, 2016 was $811 thousand and $738 thousand, respectively. Total loans evaluated collectively for impairment increased $9.6 million, or 3.3%, to $296.3 million at December 31, 2016 compared to $286.7 million at June 30, 2016. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2016 and 2015. There have been no changes to our allowance for loan loss methodology.

 

Noninterest Income. Noninterest income increased $43 thousand, or 9.5%, to $495 thousand for the three months ended December 31, 2016 from $452 thousand for the three months ended December 31, 2015. Gains on the disposition of PCI loans of $120 thousand were recognized for the three months ended December 31, 2016 compared to $90 thousand for the three months ended December 31, 2015. Gains on sales of investment securities available for sale were $57 thousand for the three months ended December 31, 2016. There were no gains on sales of investment securities for the three months ended December 31, 2015. Gains on sales of securities are largely market driven, as we generally have no need to sell securities and would only expect to do so if a gain will be realized. Service charges and mortgage banking income declined for comparable periods as a result of decreased activity.

 

Noninterest Expense. Noninterest expense for the three months ended December 31, 2016 decreased by $449 thousand, or 15.5%, to $2.5 million from $2.9 million for the same period in 2015. Salaries and employee benefits decreased $228 thousand from $1.9 million for the three months ended December 31, 2015 to $1.6 million for the three months ended December 31, 2016 due to decreases in the discretional contributions to the ESOP and profit sharing plans in 2016.

 

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value. These servicing rights are then measured at each reporting date and changes are recorded as “change in loan servicing asset” on the consolidated statements of income and comprehensive income. For the three months ended December 31, 2016, we recognized income for the increase in the loan servicing asset of $196 thousand compared to an expense of $21 thousand for the three months ended December 31, 2015. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

 

Expenses related to foreclosed assets decreased from $47 thousand for the three months ended December 31, 2015 to $2 thousand for the three months ended December 31, 2016. Expenses related to foreclosed assets for the three months ended December 31, 2015 included a provision for potential losses of $15 thousand. There were also more properties held in real estate owned at December 31, 2015 compared to December 31, 2016 resulting in higher expenses. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold.

 

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Income Tax Expense. Income tax expense for the three months ended December 31, 2016 was $618 thousand compared with $452 thousand for the three months ended December 31, 2015. Our effective income tax rate was 31.9% and 32.3% for the same periods, respectively. The slight decrease in our effective tax rate is primarily due to a higher volume of tax-free investment securities.

 

Comparison of Operating Results for the Six Months Ended December 31, 2016 and December 31, 2015

 

General. We reported net income of $2.6 million for the six months ended December 31, 2016 compared to $2.4 million for the six months ended December 31, 2015. Interest income decreased $162 thousand for the six months ended December 31, 2016 while interest expense increased $59 thousand resulting in a net decrease to net interest income of $221 thousand. A provision for loan losses of $89 thousand was recognized for the six months ended December 31, 2016 compared to $422 thousand for the six months ended December 31, 2015. Noninterest income decreased $545 thousand for the six months ended December 31, 2016 compared to December 31, 2015 primarily due to a reduction in gains recognized on the disposition of PCI loans. Total noninterest expense decreased $629 thousand as a result of decreased foreclosed asset expenses, lower salaries and employee benefits and the change in the loan servicing asset.

 

Interest Income. Interest income decreased by $162 thousand, or 1.8%, to $8.6 million for the six months ended December 31, 2016. The yield on interest earning-assets decreased twelve basis points from 4.03% for the six months ended December 31, 2015 to 3.91% for the six months ended December 31, 2016. The decrease was slightly offset by an increase in total average interest-earning assets of $5.8 million to $442.4 million for the six months ended December 31, 2016 from $436.6 million for the six months ended December 31, 2015.

 

Interest income on loans was $7.4 million for the six months ended December 31, 2016 compared to $7.7 million for the six months ended December 31, 2015. The yield on loans decreased 11 basis points from 5.10% for the six months ended December 31, 2015 to 4.99% for the six months ended December 31, 2016, and the average balance of loans decreased by $7.7 million, or 2.5%, to $295.7 million for the six months ended December 31, 2016 from $303.4 million for the six months ended December 31, 2015. The decrease in the average balance of our loans is reflective of the run-off in the months following the acquisition of Stephens Federal Bank in December 2014. As a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield.

 

Interest income on investment securities increased by $161 thousand, or 15.7%, to $1.2 million for the six months ended December 31, 2016 from $1.0 million for the six months ended December 31, 2015. The increase reflected an increase in the average balance of securities of $12.6 million, or 10.9%, to $128.7 million for the six months ended December 31, 2016 from $116.1 million for the six months ended December 31, 2015 and an increase of eight basis points in the yield on securities to 1.85% from 1.77%. The increase in the average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during periods of low loan demand. The increase in the yield on our investment securities is reflective of our efforts to shift our portfolio concentration to investments in municipal securities, which give us slightly higher yields and in some cases provide tax-exempt income.

 

Interest Expense. Interest expense increased by $59 thousand, or 10.1%, to $643 thousand for the six months ended December 31, 2016 from $584 thousand for the six months ended December 31, 2015. The increase reflected an increase of three basis points in the average rate paid on deposits for the six months ended December 31, 2016 to 0.34% from 0.31% for the six months ended December 31, 2015. The increase in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions. Average interest-bearing deposits were $371.9 million for the six months ended December 31, 2016 compared to $371.2 million for the six months ended December 31, 2015.

 

The largest increase in interest expense related to expense on money market deposits, which increased $67 thousand, or 100.0%, to $134 thousand for the six months ended December 31, 2016 from $67 thousand for the six months ended December 31, 2015. Average money market deposit balances increased $27.7 million from $50.6 million for the six months ended December 31, 2015 to $78.3 million for the six months ended December 31, 2016. The increases resulted from a successful money market campaign during the year ended June 30, 2016.

 

The average rate paid on certificates of deposit was 0.42% for the six months ended December 31, 2016 compared to 0.40% for the six months ended December 31, 2015. Average balances decreased from $245.1 million for the six-month period ended December 31, 2015 to $217.3 million for the six-month period ended December 31, 2016. Lower volume resulted in a decrease in interest expense of $29 thousand for certificates of deposit.

 

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The average balance of NOW and demand deposits decreased by $1.6 million while the average rate increased four basis points and the average balance of savings deposits increased $2.5 million and the average rate increased six basis points.

 

Net Interest Income. Net interest income before the provision for loan losses decreased by $221 thousand, or 2.7%, to $8.0 million for the six months ended December 31, 2016. Our interest rate spread and net interest margin for the six months ended December 31, 2016 decreased to 3.57% and 3.62%, respectively, from 3.72% and 3.77%, respectively, for the six months ended December 31, 2015. Average loan volume, which has the highest yield, decreased by $7.7 million, significantly contributing to the decrease in net interest margin for the six months ended December 31, 2016.

 

Provision for Loan Losses. We recorded a provision for loan losses of $89 thousand for the six months ended December 31, 2016 compared with $422 thousand for the six months ended December 31, 2015. Net charge-offs for the six months ended December 31, 2016 were $15 thousand compared to $282 thousand for the six months ended December 31, 2015. Primarily all of the charge-offs for the six months ended December 31, 2016 and 2015 were related to loans we acquired. The lower provision is due to lower net charge-offs, a smaller balance of PCI loans and the length of time that the PCI loans have been on the books.

 

Our total allowance for loan losses was $996 thousand, or 0.33%, of total gross loans, at December 31, 2016 and $922 thousand, or 0.32%, of total gross loans at June 30, 2016. The ending allowance for specifically identified impaired loans was $185 thousand at December 31, 2016 compared to $184 thousand at June 30, 2016. The recorded investment in impaired loans at December 31, 2016 was $5.2 million compared to $5.4 million at June 30, 2016. The allowance for specifically identified impaired loans at December 31, 2016 and June 30, 2016 includes an allowance of $151 thousand and $129 thousand, respectively for PCI loans.

 

The general valuation allowance at December 31, 2016 and June 30, 2016 was $811 thousand and $738 thousand, respectively. Total loans evaluated collectively for impairment increased $9.6 million, or 3.3%, to $296.3 million at December 31, 2016 compared to $286.7 million at June 30, 2016. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2016 and 2015. There have been no changes to our allowance for loan loss methodology.

 

Noninterest Income. Noninterest income decreased $545 thousand, or 36.1%, to $963 thousand for the six months ended December 31, 2016 from $1.5 million for the six months ended December 31, 2015. Gains on the disposition of PCI loans of $809 thousand were recognized for the six months ended December 31, 2015 compared to $196 thousand for the six months ended December 31, 2016. Gains on sales of investment securities available for sale increased from $9 thousand for the six months ended December 31, 2015 to $125 thousand for the six months ended December 31, 2016. Gains on sales of securities are largely market driven, as we generally have no need to sell securities and would only expect to do so if a gain will be realized.

 

Noninterest Expense. Noninterest expense for the six months ended December 31, 2016 decreased by $629 thousand, or 11.1%, to $5.0 million from $5.7 million for the same period in 2015. Expenses related to foreclosed assets decreased from $222 thousand for the six months ended December 31, 2015 to $37 thousand for the six months ended December 31, 2016. Total expenses related to foreclosed assets were offset by net gains realized on sales of real estate owned of $86 thousand for the six months ended December 31, 2016. A net loss of $69 thousand was recognized on sales of real estate owned for the six months ended December 31, 2015. There were also more properties held in real estate owned at December 31, 2015 compared to December 31, 2016 resulting in higher expenses. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold.

 

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value. These servicing rights are then measured at each reporting date and changes are recorded as “change in loan servicing asset” on the consolidated statements of income and comprehensive income. For the six months ended December 31, 2016, we recognized income for the increase in the loan servicing asset of $173 thousand compared to an expense of $86 thousand for the six months ended December 31, 2015. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

 

Salaries and employee benefits decreased $205 thousand from the six months ended December 31, 2015 to the six months ended December 31, 2016 due to decreases in the discretional contributions to the ESOP and profit sharing plans in 2016.

 

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Income Tax Expense. Income tax expense for both the six month periods ended December 31, 2016 and 2015 was $1.2 million. Our effective income tax rate was 32.2% and 34.1% for the same periods, respectively. The decrease in our effective tax rate is primarily due to a higher volume of tax-free investment securities.

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

 

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets (as of December 31, 2016), or approximately $120.6 million.

 

Common Stock Dividends. On August 25, 2016 and November 25, 2016, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.

 

Equity Compensation Plans. During the three months ended December 31, 2016, no shares of restricted stock or stock options were issued to management.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended December 31, 2016, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

There are various claims and lawsuits in which the Company is periodically involved incidental to the Company’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

 

ITEM 1A. RISK FACTORS

 

Disclosures of risk factors are not required of smaller reporting companies, such as the Company.

 

41 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)  None.

 

(b)  Not applicable.

 

(c)  Issuer Repurchases. On November 24, 2015, the Board of Directors authorized the repurchase of up to 175,000 of the Company’s common stock, which represents approximately 10.2% of the Company’s issued and outstanding shares (excluding shares that Oconee Federal, MHC currently holds).

 

In connection with the authorization of this stock repurchase program, the Board of Directors terminated the Company’s existing stock repurchase program, which had authorized the Company to purchase up to 150,000 shares of its issued and outstanding common stock. The Company had previously purchased a total of 113,400 shares of its common stock at a weighted average price of $16.04 per share under the existing stock repurchase program.

 

The following table sets forth information in connection with repurchases of the Company’s common stock for the period October 1, 2016 through December 31, 2016.

 

               Approximate Maximum 
   Total       Total Number of   Dollar Value or Number 
   Number of   Average Price   Shares Purchased   of Shares That May Yet 
   Shares   Paid Per   as Part of Publicly   be Purchased Under 
   Purchased   Share   Announced Plan   Publicly Announced Plan 
October 1 - October 31, 2016   -   $-    -    89,169 
November 1 - November 30, 2016   2,315    23.05    2,315    86,854 
December 1 - December 31, 2016   1,029    23.05    1,029    85,825(2)
Total   3,344   $23.05    3,344(1)     

 

 

(1)All shares were purchased pursuant to a publicly announced repurchase program that was approved by the Board of Directors on November 24, 2015.
(2)Represents the maximum number of shares available for repurchase under the November 24, 2015 plan at December 31, 2016.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed in the “Index to Exhibits” immediately following the Signatures.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Oconee Federal Financial Corp.
   
Date: February 10, 2017  
   
  /s/ Curtis T. Evatt
  Curtis T. Evatt
  President, Chief Executive Officer and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit
number
  Description
     
10.1   Amended and Restated Employment Agreement by and between Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp. and T. Rhett Evatt
     
10.2   Amended and Restated Employment Agreement by and between Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp. and Curtis T. Evatt
     
31   Certification of Curtis T. Evatt, President, Chief Executive Officer and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
     
32   Certification of Curtis T. Evatt, President, Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, formatted in XBRL (Extensible Business Reporting Language):

(i)Consolidated Balance Sheets
(ii)Consolidated Statements of Income and Comprehensive Income
(iii)Consolidated Statements of Changes In Shareholders’ Equity
(iv)Consolidated Statements of Cash Flows, and
(v)Notes to The Consolidated Financial Statements

 

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