UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2020
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number 001-35033
Oconee Federal Financial Corp.
(Exact Name of Registrant as Specified in Charter)
Federal
32-0330122
(State of Other Jurisdiction
of Incorporation)
(I.R.S Employer
Identification Number)
201 East North Second Street, Seneca, South Carolina
29678
(Address of Principal Executive Officers)
(Zip Code)
(864) 882-2765
Registrant’s telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
OFED
The NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 7, 2020, the registrant had 5,675,281 shares of common stock, $0.01 par value per share, outstanding.
OCONEE FEDERAL FINANCIAL CORP.
Form 10-Q Quarterly Report
Table of Contents
PART I.
2
FINANCIAL STATEMENTS
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
33
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
42
ITEM 4.
CONTROLS AND PROCEDURES
PART II.
43
ITEM 1.
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
44
SIGNATURES
45
1
OCONEE FEDERAL FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS(Amounts in thousands, except share and per share data)
PART I
March 31,2020
June 30,2019
ASSETS
Cash and due from banks
$
5,114
5,678
Interest-earning deposits
20,854
30,946
Fed funds sold
144
66
Total cash and cash equivalents
26,112
36,690
Securities available-for-sale
86,885
95,429
Loans
353,164
360,088
Allowance for loan losses
(1,296
)
(1,297
Net loans
351,868
358,791
Loans held for sale, at fair value
1,083
—
Premises and equipment, net
9,489
8,134
Real estate owned, net
295
811
Accrued interest receivable
1,055
1,137
Investments
329
447
Restricted equity securities, at cost
1,249
1,854
Bank owned life insurance
19,370
19,022
Goodwill
2,593
Core deposit intangible
233
305
Loan servicing rights
590
868
Deferred tax assets
604
1,187
Other assets
469
558
Total assets
502,224
527,826
LIABILITIES
Deposits
Noninterest - bearing
37,012
36,232
Interest - bearing
369,351
382,874
Total deposits
406,363
419,106
Federal Home Loan Bank advances
5,000
19,000
Accrued interest payable and other liabilities
1,422
1,423
Total liabilities
412,785
439,529
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,530,074 and 6,530,074 shares outstanding, respectively
65
Treasury stock, at par, 854,068 and 771,008 shares, respectively
(9
(8
Additional paid-in capital
9,192
10,986
Retained earnings
78,745
77,464
Accumulated other comprehensive income
1,903
394
Unearned ESOP shares
(457
(604
Total shareholders’ equity
89,439
88,297
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (Unaudited)(Amounts in thousands, except share and per share data)
March 31, 2020
March 31, 2019
Interest and dividend income:
Loans, including fees
4,174
4,123
12,436
11,942
Securities, taxable
368
396
1,149
1,211
Securities, tax-exempt
93
173
292
587
Other interest-earning assets
84
94
422
167
Total interest income
4,719
4,786
14,299
13,907
Interest expense:
905
837
2,991
2,058
Other borrowings
13
178
198
424
Total interest expense
918
1,015
3,189
2,482
Net interest income
3,801
3,771
11,110
11,425
Provision for loan losses
85
234
Net interest income after provision for loan losses
3,686
11,191
Noninterest income:
Service charges on deposit accounts
104
113
330
327
Income on bank owned life insurance
121
126
348
355
Mortgage servicing income
51
141
161
Gain on sale of mortgage loans
21
37
103
86
ATM & debit card income
82
72
255
225
Change in fair value of equity securities, net
(130
132
(98
90
Gain/(loss) on sale of securities, net
(51
125
(50
Gain on payoff of purchase credit impaired loans
277
309
64
Other
6
5
49
Total noninterest income
633
528
1,518
1,307
Noninterest expense:
Salaries and employee benefits
1,628
1,779
4,796
5,192
Occupancy and equipment
556
463
1,483
1,340
Data processing
230
221
667
677
ATM & debit card expense
60
50
182
155
Professional and supervisory fees
112
460
513
Office expense
57
46
165
149
Advertising
68
199
177
FDIC deposit insurance
32
3
95
Foreclosed assets, net
123
31
267
56
Change in loan servicing asset
191
67
278
143
196
601
611
Total noninterest expense
3,246
3,060
9,101
9,108
Income before income taxes
1,188
1,154
3,527
3,390
Income tax expense
242
202
649
Net income
946
952
2,971
2,741
Other comprehensive income
Unrealized gains on securities available-for-sale
1,635
1,450
2,034
2,350
Tax effect
(341
(289
(426
(469
Reclassification adjustment for (gains)/losses realized
in net income
(113
(125
23
(11
26
Total other comprehensive income
1,204
1,201
1,509
1,920
Comprehensive income
2,150
2,153
4,480
4,661
Basic net income per share: (Note 3)
0.17
0.52
0.48
Diluted net income per share: (Note 3)
0.16
0.47
Dividends declared per share:
0.10
0.30
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)(Amounts in thousands, except share and per share data)
For the three months ended March 31, 2020 and March 31, 2019
Accumulated
Additional
Unearned
Common
Treasury
Paid-In
Retained
Comprehensive
ESOP
Stock
Capital
Earnings
Income (loss)
Shares
Total
Balance at December 31, 2018
(7
11,625
76,819
(1,809
(702
85,991
Reclassification of unrealized gain on equity
securities
109
(109
Purchase of 30,438 shares of treasury stock(1)
(1
(812
(813
Stock-based compensation expense
40
Dividends
(575
ESOP shares earned
92
Balance at March 31, 2019
10,896
77,305
(717
(653
86,888
Balance at December 31, 2019
10,215
78,392
699
(507
88,856
Purchase of 42,981 shares of treasury stock(2)
(1,109
(1,110
20
(593
116
Balance at March 31, 2020
(1)
The weighted average cost of treasury shares purchased during the three months ended was $26.71 per share. Treasury stock repurchases were accounted for using the par value method.
(2)
The weighted average cost of treasury shares purchased during the three months ended was $25.81 per share. Treasury stock repurchases were accounted for using the par value method.
4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share and per share data)
For the nine months ended March 31, 2020 and March 31, 2019
Balance at June 30, 2018
12,000
76,136
(2,528
(801
84,865
Purchase of 49,877 shares of treasury stock(1)
(1,427
(1,428
106
Dividends(2)
(1,681
(1,639
175
148
323
Balance at June 30, 2019
Purchase of 83,060 shares of treasury stock(3)
(2,036
(2,037
59
Dividends(4)
29
(1,690
(1,661
154
147
301
The weighted average cost of treasury shares purchased during the nine months ended was $26.88 per share. Treasury stock repurchases were accounted for using the par value method.
Approximately $85 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $49 and resulting release of approximately 4,500 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $36 and resulting release of approximately 2,600 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2019.
(3)
The weighted average cost of treasury shares purchased during the six months ended was $24.52 per share. Treasury stock repurchases were accounted for using the par value method.
(4)
Approximately $79 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,300 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,400 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,800 shares, and was accounted for as additional compensation expense for the nine months ended March 31, 2020.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Cash Flows From Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for real estate owned
117
18
Depreciation and amortization, net
932
879
Net accretion of purchase accounting adjustments
(159
Deferred income tax expense/(income)
403
(46
Net loss on sale of real estate owned
120
9
Net gain on sale of premises and equipment
(29
Net gain/(loss) on sales of securities
Mortgage loans originated for sale
(9,603
(4,160
Mortgage loans sold
8,623
4,246
Gain on sales of mortgage loans
(103
(86
Change in fair value of equity securities
98
(90
Increase in cash surrender value of bank owned life insurance
(348
(354
Gain on payoff of purchased credit impaired loans
(309
(64
ESOP compensation expense
Stock based compensation expense
Net change in operating assets and liabilities:
Accrued interest receivable and other assets
289
622
Net cash provided by operating activities
3,652
4,455
Cash Flows From Investing Activities
Purchases of premises and equipment
(1,798
(1,145
Disposal of premises and equipment
Purchases of securities available-for-sale
(21,627
(4,184
Proceeds from maturities, paydowns and calls of securities available-for-sale
16,708
8,546
Proceeds from sales of securities available-for-sale
14,762
12,228
Purchases of restricted equity securities
(213
(366
Sales of restricted equity securities
818
151
Proceeds from sale of real estate owned
279
541
Loan originations and repayments, net
7,282
(32,720
Net cash provided/(used) in investing activities
16,211
(16,920
Cash Flows from Financing Activities
Net change in deposits
(12,743
16,417
Proceeds from notes payable to FHLB
54,100
Repayment of notes payable to FHLB
(19,000
(49,600
Dividends paid
Purchase of treasury stock
Net cash (used)/provided by financing activities
(30,441
17,850
Change in cash and cash equivalents
(10,578
5,385
Cash and cash equivalents, beginning of period
9,910
Cash and cash equivalents, end of period
15,295
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION, RISKS AND UNCERTAINTIES
Basis of Presentation:
The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (73.37%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2020 and June 30, 2019 and the results of operations and cash flows for the interim periods ended March 31, 2020 and 2019. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 2020 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019.
Reclassifications:
Certain amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.
Cash Flows:
Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-earning deposits and amounts due from other depository institutions.
Use of Estimates:
To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.
Risks and Uncertainties:
On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses are creating disruption in global supply chains and adversely impacting many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have certain employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak with regard to capital, liquidity, loan loss reserves, etc. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results.
7
NEW ACCOUNTING STANDARDS
Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848)”. Issued in March 2020, ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2020-03, “Codification Improvements to Financial Instruments”. Issued in March 2020, ASU 2020-03 provides guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the current expected credit losses (CECL) guidance issued in 2016. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)”. Issued in February 2020, ASU 2020-02 provides guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. Issued in November 2019, ASU 2019-10 provides guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies (such as the Company) applying standards on current expected credit losses (CECL), derivatives, hedging and leases. For the Company, the new effective date for Credit Losses (CECL) will be for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. For the Company, the effective dates for Derivatives, Hedging and Leases were not deferred under this guidance. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-07, “Codification Updates to SEC Sections”. Issued in July 2019, ASU 2019-07 updates various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.
ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief”. Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.
8
ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”. Issued in April 2019, ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-01, Leases (Topic 842): Codification Improvements. Issued in March 2019, ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Accounting Standards Codification (ASC) 842, Leases, with that of the existing guidance (ASC 820, Fair Value Measurement). As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply and costs incurred to acquire the asset, as per ASC 842, Leases. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of ASC 942, Financial Services—Depository and Lending, to present all principal payments received under leases within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The amendment is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the new guidance effective July 1, 2019. This pronouncement will not have a material impact on the Company’s consolidated financial statements as the Company does not have any significant leases.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures. The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years; early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. Issued in March 2017, ASU 2017-08 amends the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments were applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this standard on June 30, 2019 as reflected by a $245 adjustment to retained earnings.
ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January 2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not believe that this new guidance will have a material effect on its consolidated financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has determined that it will continue to prepare its credit loss allowance internally. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.
There have been no accounting standards that have been issued or proposed by the FASB or other standards-setting bodies during this quarter that are expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company continues to evaluate the impact of standards previously issued and not yet effective, and have no changes in our assessment to disclose since filing of the Annual Report on Form 10-K.
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
Earnings per share
Less: distributed earnings allocated to participating
(2
(3
(4
Less: (undistributed income) dividends in excess of earnings allocated to participating securities
Net earnings available to common shareholders
945
950
2,966
2,734
Weighted average common shares outstanding including participating securities
5,705,937
5,759,840
5,721,903
5,765,601
Less: participating securities
(8,800
(15,355
Less: average unearned ESOP shares
(51,990
(71,107
(54,778
(73,799
Weighted average common shares outstanding
5,645,147
5,673,378
5,658,325
5,676,447
Basic earnings per share
Add: dilutive effects of assumed exercises of stock options
71,002
123,144
67,598
123,526
Average shares and dilutive potential common shares
5,716,149
5,796,522
5,725,923
5,799,973
Diluted earnings per share
10
For the three and nine months ended March 31, 2020, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and nine months ended March 31, 2019, 22,400 shares were considered anti-dilutive as the exercise price was in excess of the average market price.
(4) SECURITIES AVAILABLE-FOR-SALE
Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at March 31, 2020 and June 30, 2019 are as follows:
Gross
Change in
Amortized
Unrealized
Fair Value
Fair
Cost
Gains
Losses
Equity Securities
Value
Available-for-sale:
FHLMC common stock
114
Certificates of deposit
2,493
52
2,545
Municipal securities
21,102
476
21,574
SBA loan pools
15
CMOs
10,733
345
11,077
U.S. Government agency mortgage-backed
48,007
1,514
49,521
U.S. Government agency bonds
2,013
2,039
Total available-for-sale
84,383
2,413
(5
June 30, 2019
192
212
11
2,499
24,968
(38
25,225
22
14,889
111
(30
14,970
40,366
228
(52
40,542
11,980
(31
11,959
94,738
655
(156
Securities pledged at March 31, 2020 and June 30, 2019 had fair values of $14,404 and $26,029, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.
At March 31, 2020 and June 30, 2019, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.
The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at March 31, 2020 and June 30, 2019. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.
Less than 12 Months
12 Months or More
UnrealizedLoss
Number in Unrealized Loss(1)
573
U.S. Government agency
mortgage-backed securities
bonds
1,725
991
745
(10
3,750
(28
4,495
3,059
5,377
11,198
(43
16,575
4,475
(23
6,488
11,588
(47
20,020
34
31,608
Actual amounts.
The Company evaluates securities for other-than-temporary impairments (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which the fair value has been less than amortized cost and the financial condition and near-term prospects of the issuer. Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
None of the unrealized losses at March 31, 2020 were recognized into net income for the three or nine months ended March 31, 2020 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2019 were recognized as having OTTI during the year ended June 30, 2019.
12
The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2020 and June 30, 2019 by contractual maturity.
Less than one year
251
250
2,000
1,994
Due from one to five years
8,525
8,697
11,627
11,663
Due after five years to ten years
11,284
11,538
18,817
18,955
Due after ten years
5,563
5,688
7,019
7,093
Mortgage-backed securities, CMOs and FHLMC stock(1)
58,760
60,712
55,275
55,724
Total available for sale
Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty. FHLMC common stock is not scheduled because it has no contractual maturity date.
The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended March 31, 2020 and 2019:
Proceeds
9,494
11,035
Gross gains
122
137
Gross losses
(61
(12
(63
The tax provision related to the net realized gain for the nine months ended March 31, 2020 was $26, and the tax benefit related to the net realized loss for the nine months ended March 31, 2019 was $11.
(5) LOANS
The components of loans at March 31, 2020 and June 30, 2019 were as follows:
Real estate loans:
One-to-four family
284,226
289,077
Multi-family
1,506
1,605
Home equity
6,458
5,191
Nonresidential
14,671
19,350
Agricultural
1,525
1,510
Construction and land
34,194
33,651
Total real estate loans
342,580
350,384
Commercial and industrial
3,738
4,390
Consumer and other loans
6,846
5,314
Total loans
The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2020 by portfolio segment:
Three months ended March 31, 2020
Beginning Balance
Provision
Charge-offs
Recoveries
Ending Balance
993
999
36
77
(14
63
1,205
1,210
25
27
1,296
Nine months ended March 31, 2020
995
24
87
(24
1,207
1,297
14
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2020:
Ending Allowance on Loans:
Loans:
At March 31, 202
Individually Evaluated for Impairment
Collectively Evaluated for Impairment
2,473
281,753
575
14,096
320
3,368
339,212
349,796
The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2019 by portfolio segment:
16
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2019:
At June 30, 2019
Individually
Evaluated for
Impairment
Collectively
Evaluated for Impairment
2,291
286,786
613
18,737
356
3,260
347,124
356,828
17
The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 2020 and June 30, 2019, including the average recorded investment balance and interest earned for the nine months ended March 31, 2020 and the year ended June 30, 2019:
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Interest
Income
Recognized
With no recorded allowance:
2,553
2,382
608
594
869
338
4,030
3,314
With recorded allowance:
Totals:
Real estate loans
OCONEE FEDERAL FINANCIAL CORP.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(Amounts in thousands, except share and per share data)
Unpaid Principal Balance
Recorded Investment
Related Allowance
Average Recorded Investment
Interest Income Recognized
2,375
2,363
53
648
642
390
3,928
3,395
19
The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or individually for impairment.
Total past due loans and nonaccrual loans at March 31, 2020:
Accruing
30-59
60-89
90 Days
Days
or More
Nonaccrual
Past Due 90
Past Due
Current
Days or More
4,053
1,503
766
6,322
277,904
2,687
222
1,284
6,409
445
184
629
14,042
758
28
55
34,139
5,076
1,715
806
7,597
334,983
3,834
345,567
Total past due and nonaccrual loans by portfolio segment at June 30, 2019:
5,879
1,486
229
7,594
281,483
2,674
1,377
5,087
458
18,892
816
308
339
33,312
6,937
1,517
269
8,723
341,661
3,917
5,306
6,945
8,731
351,357
Troubled Debt Restructurings:
At March 31, 2020 and June 30, 2019, total loans that have been modified as troubled debt restructurings were $2,400 and $2,675, respectively, which consisted of one agricultural loan, two non-residential real estate loans and four one-to-four family first lien loans at March 31, 2020 and June 30, 2019. There was no specific allowance for loss established for these loans at March 31, 2020 or June 30, 2019. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. No loans have been modified as troubled debt restructurings during the nine months ended March 31, 2020. No loans modified as troubled debt restructurings during the twelve months ended March 31, 2020 have defaulted since restructuring. All of these loans are on nonaccrual at March 31, 2020 and June 30, 2019. At March 31, 2020 and June 30, 2019, $2,133 and $2,291, respectively, were individually evaluated for impairment.
Allowance for Loan Loss:
There have been no changes to our allowance for loan loss methodology during the quarter ended March 31, 2020. We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become present. After such adjustments to the calculation, we have determined that the recorded allowance is believed to be adequate at this time and as a result no additional provision for loan losses has been recorded during the quarter ended March 31, 2020. However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and the country reopens. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three and nine months ended March 31, 2020 and March 31, 2019, respectively.
Loan Grades:
The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.
Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.
Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.
Special Mention: Loan assets of this grade have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loan assets of this grade are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Portfolio Segments:
One-to-four family: One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. The Company currently originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.
For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.
The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of December 1, 2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered. The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the Company’s permission. Such homes must be “de-titled” by the State of South Carolina or Georgia so that they are taxed and must be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such homes are affixed.
Multi-family: Multi-family real estate loans generally have a maximum term of five years with a 30 year amortization period and a final balloon payment and are secured by properties containing five or more units in the Company’s market area. These loans are generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio. The Company’s underwriting analysis includes considering the borrower’s expertise and requires verification of the borrower’s credit history, income and financial statements, banking relationships, independent appraisals, references and income projections for the property. The Company generally obtains personal guarantees on these loans.
Multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project.
Home Equity: The Company offers home equity loans and lines of credit secured by first or second deeds of trust on primary residences in our market area. The Company’s home equity loans and lines of credit are limited to an 80% loan-to-value ratio (including all prior liens). Standard residential mortgage underwriting requirements are used to evaluate these loans. The Company offers adjustable-rate and fixed-rate options for these loans with a maximum term of 10 years. The repayment terms on lines of credit are interest only monthly with principle due at maturity. Home equity loans have a more traditional repayment structure with principal and interest due monthly. The maximum term on home equity loans is 10 years with an amortization schedule not exceed 20 years.
Nonresidential Real Estate: Nonresidential loans include those secured by real estate mortgages on churches, owner-occupied and non-owner-occupied commercial buildings of various types, retail and office buildings, hotels, and other business and industrial properties. The nonresidential real estate loans that the Company originates generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75%.
Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions. Our nonresidential real estate lending includes a significant amount of loans to churches. Because a church’s financial stability often depends on donations from congregation members rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other nonresidential real estate.
The Company considers a number of factors in originating nonresidential real estate loans. The Company evaluates the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions. In evaluating the property securing the loan, the factors the Company considers include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current operating budgets. The collateral underlying all nonresidential real estate loans is appraised by outside independent appraisers approved by our board of directors. Personal guarantees may be obtained from the principals of nonresidential real estate borrowers, and in the case of church loans, guarantees from the applicable denomination may be obtained.
Agricultural: These loans are secured by farmland and related improvements in the Company’s market area. These loans generally have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of these loans is generally 75%. The Company is managing a small number of these loans in our portfolio. We continue to closely monitor our existing relationships.
Loans secured by agricultural real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Agricultural real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.
Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.
The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only two such loans at a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans is 85%.
Commercial and Industrial Loans: Commercial and industrial loans are offered to businesses and professionals in the Company’s market area. These loans generally have short and medium terms on both a collateralized and uncollateralized basis. The structure of these loans are largely determined by the loan purpose and collateral. Sources of collateral can include a lien on furniture, fixtures, equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.
Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases.
Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Based on the most recent analysis performed, the risk grade of loans by portfolio segment are presented in the following tables.
Total loans by risk grade and portfolio segment at March 31, 2020:
Pass
Pass- Watch
Special Mention
Substandard
Doubtful
272,432
4,285
2,858
4,651
5,954
400
13,485
340
846
33,700
423
71
328,282
5,448
2,913
5,937
338,866
Total loans by risk grade and portfolio segment at June 30, 2019:
Pass-Watch
276,141
5,316
3,217
4,403
4,733
313
69
76
17,951
491
908
33,130
446
75
334,714
6,566
3,286
5,818
344,418
At March 31, 2020, loans totaling $109 were in formal foreclosure proceedings and are included in the one-to-four family loan category.
(6) BORROWINGS
At March 31, 2020 and June 30, 2019, advances from the Federal Home Loan Bank were as follows:
Stated Interest Rate
FHLB advances due February 2023 through January 2025
1.40% - 1.59%
FHLB advances due September 2019 through December 2019
2.62% - 2.78%
Payments over the next five years are as follows:
2023
2,500
2025
The average interest rate of all outstanding FHLB advances was 1.50% and 2.75% on March 31, 2020 and June 30, 2019, respectively.
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $12,499 and $22,632 of investment securities at March 31, 2020 and June 30, 2019, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $126,142 at March 31, 2020.
There were no overnight borrowings at March 31, 2020 or June 30, 2019.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Investment Securities:
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Impaired Loans:
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Loan Servicing Rights:
Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data and results in a Level 3 classification.
Assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and June 30, 2019 are summarized below:
Fair Value Measurements
(Level 2)
(Level 3)
Financial assets:
Securities available-for-sale:
U.S. Government agency mortgage-backed securities
Total securities available-for-sale
Total financial assets
Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at March 31, 2020 and June 30, 2019:
Non-financial assets:
Real estate owned, net:
136
226
159
585
Total non-financial assets
Total assets measured at fair value on a non-recurring basis
Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned at March 31, 2020 and June 30, 2019 was $295 and $811, respectively. The valuation allowances associated with these properties at March 31, 2020 and June 30, 2019 was $89 and $38, respectively.
The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended March 31, 2020 and 2019:
Loan Servicing Rights
Balance at beginning of period:
781
1,017
1,093
Purchases
Unrealized net losses included in net income
(191
(67
(278
(143
Balance at end of period:
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2020 and June 30, 2019.
Level 3 Quantitative Information
Valuation Technique
Unobservable Inputs
Range
Discounted cash flows
Discount rate, estimated timing of cash flows
9.00% to 9.75%
Real estate owned net:
Sales comparison approach
Adjustment for differences between the comparable sales
0% to 20%
Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheets approximate fair value. These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at March 31, 2020 and June 30, 2019 are summarized below:
Carrying
Amount
(Level 1)
Financial assets
Loans, net(1)
353,115
Loans held for sale(2)
Restricted equity securities
N/A
Financial liabilities
201,353
201,876
403,229
FHLB Advances
Loans, net (1)
358,473
196,466
218,985
415,451
Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of March 31, 2020 and June 30, 2019 was measured using an exit price notion.
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.
(8) EMPLOYEE STOCK OWNERSHIP PLAN
Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10.00 per share during 2011. The Company makes discretionary contributions to the ESOP and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.
Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. There were no discretionary contributions made to the ESOP for debt retirement in 2019 or 2018. Total ESOP compensation expense for the three and nine months ended March 31, 2020 was $93 and $301, respectively, and for the three and nine months ended March 31, 2019 was $98 and $323, respectively.
Shares held by the ESOP at March 31, 2020 and June 30, 2019 were as follows:
Committed to be released to participants
6,417
11,983
Allocated to participants
141,548
127,257
44,736
59,245
Total ESOP shares
192,701
198,485
Fair value of unearned shares
851
1,360
(9) STOCK BASED COMPENSATION
On April 5, 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 435,472 shares of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.
There have been no stock options or restricted stock issued in fiscal 2020 or fiscal 2019.
The following table summarizes stock option activity for the nine months ended March 31, 2020:
Options
Weighted- Average Exercise Price/Share
Aggregate Intrinsic Value(1)
Outstanding - June 30, 2019
169,519
14.65
Granted
Exercised
Forfeited
(5,200
29.33
Outstanding - March 31, 2020
164,319
14.18
796
Fully vested and exercisable at March 31, 2020
148,319
13.08
883
Expected to vest in future periods
16,000
Fully vested and expected to vest - March 31, 2020
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 $19.03 per share on March 31, 2020.
30
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 3,681 and 11,873 options that were earned during the nine months ended March 31, 2020 and 2019, respectively. Stock-based compensation expense for stock options for the three and nine months ended March 31, 2020 was $5 and $15, respectively, and for the three and nine months ended March 31, 2019 was $10 and $31, respectively. Total unrecognized compensation cost related to stock options was $61 at March 31, 2020 and is expected to be recognized over a weighted-average period of 3.3 years.
The following table summarizes non-vested restricted stock activity for the nine months ended March 31, 2020:
Balance - beginning of year
8,800
Vested
Balance - end of period
Weighted average grant date fair value
19.77
The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense for the three and nine months ended March 31, 2020 was $15 and $44, respectively, and for the three and nine months ended March 31, 2019 was $24 and $75, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $104 at March 31, 2020 and is expected to be recognized over a weighted-average period of 2.0 years.
(10) LOAN SERVICING RIGHTS
Mortgage loans serviced for others are not reported as assets; however, the underlying mortgage servicing rights associated with servicing these mortgage loans serviced for others is recorded as an asset in the consolidated balance sheet.
The principal balances of those loans at March 31, 2020 and June 30, 2019 are as follows:
Mortgage loan portfolio serviced for:
FHLMC
69,622
83,938
Custodial escrow balances maintained in connection with serviced loans were $558 and $771 at March 31, 2020 and June 30, 2019.
Activity for loan servicing rights for the three and nine months ended March 31, 2020 and 2019 is as follows:
Loan servicing rights:
Beginning of period:
Additions
Change in fair value
End of period:
Fair value at March 31, 2020 was determined using a discount rate of 9.00%, prepayment speed assumptions ranging from 7.43% to 30.79% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.26%. Fair value at March 31, 2019 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 5.1% to 13.6% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.37%.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended March 31, 2020 and 2019 is as follows:
Cash paid during the period for:
Interest paid
3,187
2,480
Income taxes paid
140
543
Supplemental noncash disclosures:
Transfers from loans to real estate owned
273
Change in unrealized gain/loss on securities available-for-sale
1,909
(12) SUBSEQUENT EVENTS
Dividend Declared
On April 23, 2020, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of May 7, 2020, and will be paid on or about May 21, 2020.
This Quarterly Report on Form 10-Q 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:
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 on Form 10-Q.
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:
Novel Coronavirus Pandemic (COVID-19)
The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results. As the result we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
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, 2019, as filed with the Securities and Exchange Commission.
Comparison of Financial Condition at March 31, 2020 and June 30, 2019
Our total assets decreased by $25.6 million, or 4.9%, to $502.2 million at March 31, 2020 from $527.8 million at June 30, 2019. Total cash and cash equivalents decreased $10.6 million, or 28.8%, to $26.1 million at March 31, 2020 from $36.7 million at June 30, 2019. The decrease in cash and cash equivalents was primarily due to the repayment of outstanding Federal Home Loan Bank advances during the nine month period, and also reflected our funding deposit withdrawals. Our available-for-sale securities portfolio decreased by $8.5 million from $95.4 million at June 30, 2019 to $86.9 million at March 31, 2020. The Association is not actively replenishing security repayments and maturities with purchases due to the funding needs of the Company. Gross loans decreased $6.9 million, or 1.9%, to $353.2 million at March 31, 2020 from $360.1 million at June 30, 2019. This decrease was primarily a result of loan originations generally not matching loan repayments during the nine months ended March 31, 2020.
Deposits decreased $12.7 million, or 3.0%, to $406.4 million at March 31, 2020 from $419.1 million at June 30, 2019. The decrease in our deposits reflected a decrease of $17.6 million in certificates of deposit and $135 thousand in money market deposits, offset by an increase of $1.8 million in NOW accounts, $857 thousand in non-interest bearing checking accounts and $2.4 million in savings deposits.
Oconee Federal, MHC’s cash is held on deposit with the Association. We generally do not accept brokered deposits and no brokered deposits were accepted during the nine months ended March 31, 2020.
Federal Home Loan Bank advances decreased by $14.0 million, or 73.7%. 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 March 31, 2020, or approximately $126.1 million. We had no federal funds purchased as of March 31, 2020 or as of June 30, 2019.
Total shareholders’ equity increased $1.1 million, or 1.3%, to $89.4 million at March 31, 2020 compared to $88.3 million at June 30, 2019. This was due to our net income during the period of $3.0 million, the increase of $301 thousand in ESOP shares earned and an increase in after-tax unrealized gains in our investment portfolio of $1.5 million being offset by our payment of dividends of $1.7 million and $2.0 million used for the repurchase of treasury stock. The Company and the Association exceeded all regulatory capital requirements at March 31, 2020 and June 30, 2019.
35
Nonperforming Assets
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $201 thousand and $236 thousand for the nine months ended March 31, 2020 and 2019, respectively. There was no interest recognized on these loans for the nine months ended March 31, 2020 and March 31, 2019.
Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $92 thousand and $114 thousand for the nine months ended March 31, 2020 and 2019, respectively. There was no interest recognized on troubled debt restructured loans for the nine months ended March 31, 2020 and March 31, 2019.
Nonperforming assets decreased $599 thousand from $4.7 million as of June 30, 2019 to $4.1 million as of March 31, 2020. Nonaccrual loans decreased $83 thousand to $3.8 million as of March 31, 2020 and real estate owned decreased $516 thousand to $295 thousand as of March 31, 2020. There were no accruing loans past due 90 days or more at either date. The decrease in nonaccrual loans primarily related to normal monthly fluctuations. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.82% and 1.17%, respectively, at March 31, 2020 compared to 0.90% and 1.31%, respectively at June 30, 2019.
Analysis of Net Interest Margin
The following tables set 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.
Comparison of Operating Results for the Three Months Ended March 31, 2020 and March 31, 2019
General. We reported net income of $946 thousand for the three months ended March 31, 2020 as compared to net income of $952 thousand for the three months ended March 31, 2019. Interest income decreased $67 thousand for the three months ended March 31, 2020 compared to March 31, 2019 and interest expense decreased $97 thousand resulting in a net increase to net interest income of $30 thousand. Noninterest income increased $105 thousand for the three months ended March 31, 2020 compared to March 31, 2019. Total noninterest expense increased $186 thousand. Tax expense increased $40 thousand.
Interest Income. Interest income decreased by $67 thousand to $4.7 million from $4.8 million for the three months ended March 31, 2020 and March 31, 2019, respectively. The yield on interest-earning assets increased eight basis points from 4.01% for the three months ended March 31, 2019 to 4.09% for the three months ended March 31, 2020. Total average interest-earning assets decreased by $16.0 million to $461.6 million for the three months ended March 31, 2020 from $477.6 million for the three months ended March 31, 2019.
38
Interest income on loans increased by $51 thousand to $4.2 million from $4.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively. The yield on loans increased 10 basis points from 4.58% for the three months ended March 31, 2019 to 4.68% for the three months ended March 31, 2020. The average balance of loans decreased by $3.7 million, or 1.0%, to $356.4 million for the three months ended March 31, 2020 from $360.1 million for the three months ended March 31, 2019. The decrease in the average balance of our loans is reflective of reduced originations and normal loan repayments.
Interest income on investment securities decreased by $108 thousand, or 19.0%, to $461 thousand for the three months ended March 31, 2020 from $569 thousand for the three months ended March 31, 2019. The decrease reflected the combination of a decrease in the average balance of securities of $19.6 million, or 18.9%, to $84.1 million for the three months ended March 31, 2020 from $103.7 million for the three months ended March 31, 2019 and a decrease in the yield on securities to 2.19% from 2.20% for the respective periods. The decrease in the average balances of our investment securities reflected our efforts during fiscal 2019 and 2020 to reduce investment purchases, which allowed us to use those funds as well as investment repayments and maturities to fund loan growth and repay FHLB advances.
Income on other interest earning assets decreased by $10 thousand, or 10.6%, to $84 thousand for the three months ended March 31, 2020 from $94 thousand for the three months ended March 31, 2019. The average balance of other interest-earning assets increased $7.4 million from the three months ended March 31, 2019 to the three months ended March 31, 2020 and the yield decreased 114 basis points over the same period. The increase in the average balance was due to funds being held in money market accounts pending repayment of FHLB advances. The decrease in yield was primarily the result of an overall decline in market rates.
Interest Expense. Interest expense decreased by $97 thousand, or 9.6%, to $918 thousand for the three months ended March 31, 2020 from $1.0 million for the three months ended March 31, 2019. This decrease was attributable to general decreases in wholesale borrowing rates offset by increases in deposit rates required due to the competitive economic environment. The decrease reflected an increase of five basis points in the average rate paid on interest-bearing deposits for the three months ended March 31, 2020 to 0.97% from 0.92% for the three months ended March 31, 2019. The increase in the average rate paid on deposits reflects 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 $372.5 million for the three months ended March 31, 2020 compared to $368.2 million for the three months ended March 31, 2019.
The largest increase in deposit interest expense was related to expense on money market deposits, which increased $31 thousand, or 32.3%, to $127 thousand for the three months ended March 31, 2020 from $96 thousand for the three months ended March 31, 2019. The average rate paid on money market deposits increased by four basis points from 0.62% for the three months ended March 31, 2019 to 0.66% for the three months ended March 31, 2020 and the average balances increased by $13.9 million from $62.9 million for the three-month period ended March 31, 2019 to $76.8 million for the three-month period ended March 31, 2020. The increase in the average balance of our money market deposits is reflective of normal deposit growth along with a large customer deposit transfer from the certificates of deposit category. The increase in the average rate paid on our money market deposits is reflective of the competitive economic environment.
Interest expense for other borrowings decreased by $165 thousand, or 92.7%, to $13 thousand for the three months ended March 31, 2020 from $178 thousand for the three months ended March 31, 2019. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $3.3 million for the three months ended March 31, 2020 compared to $26.7 million for the three months ended March 31, 2019. The average rate was 1.58% and 2.71% for the three months ended March 31, 2020 and 2019, respectively, due to a decrease in market interest rates.
Net Interest Income. Net interest income before the provision for loan losses increased by $30 thousand, or 0.80%, to $3.8 million for the three months ended March 31, 2020. Our interest rate spread and net interest margin increased to 3.11% and 3.29%, respectively, from 2.97% and 3.15%, respectively, for the three months ended March 31, 2020 and March 31, 2019, respectively. The increasing yield on earning assets and the lower cost of other borrowings contributed to the increase in net interest margin for the three months ended March 31, 2020.
Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2020 compared with $85 thousand for the three months ended March 31, 2019. There were no charge-offs for the three months ended March 31, 2020 and March 31, 2019. The lack of provision for the three months ended March 31, 2020 is primarily due to a decline in the size of the loan portfolio during the three months ended March 31, 2020.
Our total allowance for loan losses was $1.3 million, or 0.37% of total gross loans as of March 31, 2020 and $1.3 million, or 0.36% of total gross loans as of June 30, 2019. There were no specifically identified impaired loans at March 31, 2020 or June 30, 2019. Total loans individually evaluated for impairment increased $108 thousand, or 3.3%, to $3.4 million at March 31, 2020 compared to $3.3 million at June 30, 2019.
39
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended March 31, 2020 and 2019. There have been no changes to our allowance for loan loss methodology during the quarter.
Noninterest Income. Noninterest income increased $105 thousand, or 19.9%, to $633 thousand for the three months ended March 31, 2020 from $528 thousand for the three months ended March 31, 2019. Mortgage servicing income decreased $7 thousand due to a declining servicing portfolio balance. Gain on sale of mortgage loans was $21 thousand and $37 thousand for the three months ended March 31, 2020 and 2019, respectively. The change in fair value of equity securities was a loss of $130 thousand for the three months ended March 31, 2020 compared to a gain of $132 thousand for the three months ended March 31, 2019. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $113 thousand gain and a $51 thousand loss for the three months ended March 31, 2020 and 2019, respectively. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarter ended March 31, 2020 to realize market gains. Securities were sold at a loss during the quarter ended March 31, 2019 so that funds could be more beneficially used to yield higher net earnings going forward. The net gain on payoff of purchase credit impaired loans was $277 thousand and $42 thousand for the three months ended March 31, 2020 and March 31, 2019, respectively, due to the liquidation of two loans for the three months ended March 31, 2020 and March 31, 2019, respectively. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense for the three months ended March 31, 2020 increased by $186 thousand, or 6.1%, to $3.2 million from $3.1 million for the same period in 2019. Salaries and employee benefits decreased $151 thousand due a reduction in personnel related to the closing of a loan production office. Occupancy and equipment increased $93 thousand due to routine upgrades and improvements as well as the opening of a new branch office in January 2020. Data processing increased $9 thousand due to routine upgrades in the current period. Professional and supervisory fees increased $20 thousand due to normal periodic fluctuations in legal fees. FDIC deposit insurance decreased $31 thousand due to an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of December 31, 2019. Foreclosed asset expenses increased $92 thousand primarily due to a $120 thousand loss on the sale of REO property during the three months ended March 31, 2020. The change in the value of the loan servicing portfolio increased $124 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.
Income Tax Expense. Tax expense increased $40 thousand, or 19.8%, to $242 thousand for the three months ended March 31, 2020 from a $202 thousand for the three months ended March 31, 2019. The increase is primarily due to a higher taxable income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Our effective income tax rate was 20.4% and 17.5% for the three months ended March 31, 2020 and 2019, respectively.
Comparison of Operating Results for the Nine Months Ended March 31, 2020 and March 31, 2019
General. We reported net income of $3.0 million for the nine months ended March 31, 2020 as compared to net income of $2.7 million for the nine months ended March 31, 2019. Interest income increased $392 thousand for the nine months ended March 31, 2020 compared to March 31, 2019 and interest expense increased $707 thousand resulting in a net decrease to net interest income of $315 thousand. Noninterest income increased $211 thousand for the nine months ended March 31, 2020 compared to March 31, 2019. Total noninterest expense decreased $7 thousand. Tax expense decreased $93 thousand.
Interest Income. Interest income increased by $392 thousand to $14.3 million from $13.9 million for the nine months ended March 31, 2020 and March 31, 2019, respectively. The yield on interest-earning assets increased six basis points from 3.96% for the nine months ended March 31, 2019 to 4.02% for the nine months ended March 31, 2020. Total average interest-earning assets increased by $6.4 million to $474.4 million for the nine months ended March 31, 2020 from $468.0 million for the nine months ended March 31, 2019.
Interest income on loans increased by $494 thousand to $12.4 million from $11.9 million for the nine months ended March 31, 2020 and March 31, 2019, respectively. The yield on loans increased five basis points from 4.56% for the nine months ended March 31, 2019 to 4.61% for the nine months ended March 31, 2020. The average balance of loans increased by $10.7 million, or 3.06%, to $359.6 million for the nine months ended March 31, 2020 from $348.9 million for the nine months ended March 31, 2019. The increase in the average balance of our loans is reflective of normal loan growth.
Interest income on investment securities decreased by $357 thousand, or 19.9%, to $1.4 million for the nine months ended March 31, 2020 from $1.8 million for the nine months ended March 31, 2019. The decrease reflected a decrease in the average balance of securities of $23.2 million, or 20.8%, to $88.3 million for the nine months ended March 31, 2020 from $111.5 million for the nine months ended March 31, 2019, offset by an increase in the yield on securities to 2.18% from 2.15% for the respective periods. The decrease in the average balances of our investment securities reflected our efforts during fiscal 2019 and 2020 to reduce investment purchases, which allowed us to use those funds as well as investment repayments and maturities to fund loan growth and repay FHLB advances.
Income on other interest earning assets increased by $255 thousand, or 152.7%, to $422 thousand for the nine months ended March 31, 2020 from $167 thousand for the nine months ended March 31, 2019. The average balance of other interest-earning assets increased $19.0 million from the nine months ended March 31, 2019 to the nine months ended March 31, 2020 and the yield decreased 81 basis points over the same period. The increase in the average balance was due to funds being held in money market accounts pending repayment of FHLB advances. The decrease in yield was primarily the result of an overall decline in market rates.
Interest Expense. Interest expense increased by $707 thousand, or 28.5%, to $3.2 million for the nine months ended March 31, 2020 from $2.5 million for the nine months ended March 31, 2019. This increase was attributable to general increases in deposit rates due to the competitive economic environment. The increase reflected an increase of 29 basis points in the average rate paid on interest-bearing deposits for the nine months ended March 31, 2020 to 1.05% from 0.76% for the nine months ended March 31, 2019. The increase in the average rate paid on deposits reflects 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 $378.3 million for the nine months ended March 31, 2020 compared to $362.3 million for the nine months ended March 31, 2019.
The largest increase in deposit interest expense was related to expense on certificates of deposit, which increased $612 thousand, or 35.5%, to $2.3 million for the nine months ended March 31, 2020 from $1.7 million for the nine months ended March 31, 2019. The average rate paid on certificates of deposit increased by 39 basis points from 1.04% for the nine months ended March 31, 2019 to 1.43% for the nine months ended March 31, 2020. The average balances decreased by $3.2 million from $220.1 million for the nine-month period ended March 31, 2019 to $216.9 million for the nine-month period ended March 31, 2020. The decrease in the average balance of our certificates of deposit is reflective of normal deposit growth offset by a large customer deposit transfer from certificates of deposit to the money market category. The increase in the average rate paid on our certificates of deposit is reflective of the normal competitive economic environment.
Interest expense for other borrowings decreased by $226 thousand, or 53.3%, to $198 thousand for the nine months ended March 31, 2020 from $424 thousand for the nine months ended March 31, 2019. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $9.9 million for the nine months ended March 31, 2020 compared to $22.2 million for the nine months ended March 31, 2019. The average rate was 2.66% and 2.54% for the nine months ended March 31, 2020 and 2019, respectively, due to an increase in market interest rates.
Net Interest Income. Net interest income before the provision for loan losses decreased by $315 thousand, or 2.8%, to $11.1 million for the nine months ended March 31, 2020. Our interest rate spread and net interest margin decreased to 2.93% and 3.13%, respectively, from 3.10% and 3.26%, respectively, for the nine months ended March 31, 2020 and March 31, 2019, respectively. The increasing yield on earning assets was offset by the higher cost of certificates of deposit and other borrowings which contributed to the decrease in net interest margin for the nine months ended March 31, 2020.
Provision for Loan Losses. We recorded no provision for loan losses for the nine months ended March 31, 2020 compared with $234 thousand for the nine months ended March 31, 2019. There was $1 thousand in charge-offs for the nine months ended March 31, 2020. There were $18 thousand in charge-offs for the nine months ended March 31, 2019. The lack of provision for the nine months ended March 31, 2020 is primarily due to a decline in the size of the loan portfolio during the nine months ended March 31, 2020 combined with improved portfolio performance.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the nine months ended March 31, 2020 and 2019. There have been no changes to our allowance for loan loss methodology during the nine months ended March 31, 2020.
Noninterest Income. Noninterest income increased $211 thousand, or 16.1%, to $1.5 million for the nine months ended March 31, 2020 from $1.3 million for the nine months ended March 31, 2019. Mortgage servicing income decreased $20 thousand due to a declining servicing portfolio balance. Gain on sale of mortgage loans was $103 thousand and $86 thousand for the nine months ended March 31, 2020 and 2019, respectively. The change in fair value of equity securities was a loss of $98 thousand for the nine months ended March 31, 2020 compared to a gain of $90 thousand for the nine months ended March 31, 2019. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $125 thousand gain and a $50 thousand loss for the nine months ended March 31, 2020 and 2019, respectively. Gains or losses on the sale of securities are largely market driven. Securities were sold during the nine months ended March 31, 2020 to realize market gains. Securities were sold at a loss during the nine months ended March 31, 2019 so that funds could be more beneficially used to yield higher net earnings going forward. The net gain on payoff of purchase credit impaired loans was $309 thousand and $64 thousand for the nine months ended March 31, 2020 and March 31, 2019, respectively, due to the liquidation of three loans in each period. Changes in all other noninterest income items were due to normal periodic fluctuations.
41
Noninterest Expense. Noninterest expense decreased by $7 thousand, or 0.1%, remaining at $9.1 million for the nine months ended March 31, 2020 and March 31, 2019. Salaries and employee benefits decreased $396 thousand primarily due a reduction in personnel related to the closing of a loan production office. Occupancy and equipment increased $143 thousand due to routine upgrades and improvements as well as the opening of a new branch office in January 2020. Data processing decreased $10 thousand due to fewer routine upgrades in the current period as well as more favorable third party service pricing. Professional and supervisory fees decreased $53 thousand primarily due to reduced audit and legal fees. FDIC deposit insurance decreased $92 thousand due to an assessment credits received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of June 30, 2019, September 30, 2019 and December 31, 2019. Foreclosed asset expenses increased $211 thousand primarily due to an $89 thousand write down and a $120 thousand loss on sale of REO properties during the nine months ended March 31, 2020. The change in the value of the loan servicing portfolio increased $135 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.
Income Tax Expense. Tax expense decreased $93 thousand, or 14.3%, to $556 thousand for the nine months ended March 31, 2020 from a $649 thousand for the nine months ended March 31, 2019. The decrease is primarily due to the recognition of a permanent tax benefit as a result of non-qualified stock options being exercised during the period ended March 31, 2020. Our effective income tax rate was 15.8% and 19.1% for the nine months ended March 31, 2020 and 2019, respectively.
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 March 31, 2020), or approximately $126.1 million as of that date, with a remaining availability of $121.1 million as of March 31, 2020.
Our liquidity monitoring process is designed to contend with changing economic situations, which would include the current COVID-19 pandemic. We have therefore not changed our daily or long-term liquidity management procedures.
Common Stock Dividends. On August 22, 2019, November 21, 2019 and February 20, 2020, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.7 million.
Equity Compensation Plans. During the three months ended March 31, 2020, no shares of restricted stock or common stock options were issued.
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.
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 March 31, 2020. 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 March 31, 2020, 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
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.
Disclosures of risk factors are not required of smaller reporting companies, such as the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended March 31, 2020:
Number of
Purchased
Average Price
Paid Per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
Approximate Maximum
Dollar Value or Number
of Shares That May Yet
be Purchased Under
Publicly Announced Plans
(1) All shares were purchased pursuant to a publicly announced repurchase program that was approved by the Board of Directors on March 20, 2019. The repurchase program has no expiration date.
(2) Represents the maximum number of shares available for repurchase under the March 20, 2019 plan at March 31, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed below.
Exhibitnumber
Description
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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
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.
/s/ Curtis T. Evatt