UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the Quarterly Period ended December 31, 2020
Or
For transition period from to
Commission File Number 001-35033
Oconee Federal Financial Corp.
(Exact Name of Registrant as Specified in Charter)
(State of Other Jurisdiction
of Incorporation)
(I.R.S Employer
Identification Number)
(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:
Trading
Symbol(s)
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.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 5, 2021, the registrant had 5,604,298 shares of common stock, $0.01 par value per share, outstanding.
OCONEE FEDERAL FINANCIAL CORP.
Form 10-Q Quarterly Report
Table of Contents
1
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
PART I
See accompanying notes to the consolidated financial statements
2
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the three months ended December 31, 2020 and December 31, 2019
4
For the six months ended December 31, 2020 and December 31, 2019
5
CONSOLIDATED STATEMENTS OF CASH FLOW
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation:
The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (74.31%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2020 and June 30, 2020 and the results of operations and cash flows for the interim periods ended December 31, 2020 and 2019. All interim amounts are unaudited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 2021 or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.
Reclassifications:
Certain amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders’ equity as previously reported.
Cash Flows:
Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-earning deposits and amounts due from other depository institutions.
Use of Estimates:
To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.
Risks and Uncertainties:
On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19") a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses continue to disrupt global supply chains and adversely impact many industries. The outbreak may continue to have a material adverse impact on economic and market conditions and could trigger a period of global economic slowdown. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation during 2020 to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the COVID-19 outbreak with regard to capital, liquidity, loan loss reserves, etc. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results.
7
Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848)”. Issued in March 2020, ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information difficult for investors to understand. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13.
ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. Issued in November 2019, ASU 2019-10 provides guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies (such as the Company) applying standards on current expected credit losses (CECL), derivatives, hedging and leases. For the Company, the new effective date for Credit Losses (CECL) will be for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. For the Company, the effective dates for Derivatives, Hedging and Leases were not deferred under this guidance.
ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief". Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.
ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments". Issued in April 2019, ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures. The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.
8
ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January 2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this standard on July 1, 2020. This pronouncement did not have a material effect on the financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has determined that it will continue to prepare its credit loss allowance internally. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. In November 2019, the FASB issued guidance delaying the implementation schedule and allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.
There have been no accounting standards that have been issued or proposed by the FASB or other standards-setting bodies during this quarter that are expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company continues to evaluate the impact of standards previously issued and not yet effective, and has no changes in its assessment since filing the Annual Report on Form 10-K.
9
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:
For the three and six months ended December 31, 2020, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and six months ended December 31, 2019, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price.
10
Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at December 31, 2020 and June 30, 2020 are as follows:
Securities pledged at December 31, 2020 and June 30, 2020 had fair values of $12,667 and $12,524, respectively. These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances.
At December 31, 2020 and June 30, 2020, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.
11
The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for twelve months or more at December 31, 2020 and June 30, 2020. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.
Number in
Unrealized
Loss(1)
The Company evaluates securities for other-than-temporary impairments (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which the fair value has been less than amortized cost and the financial condition and near-term prospects of the issuer. Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
None of the unrealized losses at December 31, 2020 were recognized into net income for the three or six months ended December 31, 2020 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2020 were recognized as having OTTI during the year ended June 30, 2020.
12
The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2020 and June 30, 2020 by contractual maturity.
The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and six months ended December 31, 2020 and 2019:
The tax provision related to the net realized gain for the three months ended December 31, 2020 was $10. The tax provision related to the net realized gain for the six months ended December 31, 2020 and December 31, 2019 was $23 and $3, respectively.
13
The components of loans at December 31, 2020 and June 30, 2020 were as follows:
14
The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2020 by portfolio segment:
15
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2020:
16
The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2019 by portfolio segment:
17
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2020:
18
The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2020 and June 30, 2020, including the average recorded investment balance and interest earned for the six months ended December 31, 2020 and the year ended June 30, 2020:
19
20
The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or individually for impairment.
Total past due loans and nonaccrual loans at December 31, 2020:
In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Included in the table above are $14,438 in loans that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. Of this amount, there were $10,316 in one-to-four family loans, $3,711 in non-residential loans and $411 in multi-family loans. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” which was extended by the Consolidated Appropriations Act for the fiscal year ending September 30, 2021 provides banks the option to temporarily suspend certain requirements under ASC 340-10 troubled debt restructuring classifications for a limited period of time to account for the effects of COVID-19. The Federal Reserve and the other banking agencies and regulators have also issued a joint statement encouraging banks to work prudently with borrowers and to describe the agencies’ interpretations of how accounting rules under ASC 310-40 apply to certain COVID-19 related modifications. We have not considered any of the COVID-19 related modifications performed to date to be troubled debt restructurings. As of December 31, 2020, $13,597 of such loans were current and $841 were 30 days or more past due. As of December 31, 2020, $13,843 of these are no longer in deferral.
21
Total past due and nonaccrual loans by portfolio segment at June 30, 2020:
Included in the table above are $15,024 in loans that were modified to defer principal payments or principal and interest payments from three to six months based on the affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification. Of this amount, there were $10,993 in one-to-four family loans, $3,615 in non-residential loans and $416 in multi-family loans. As of June 30, 2020, $14,781 were current and $243 were 30 days or more past due.
Troubled Debt Restructurings:
At December 31, 2020 and June 30, 2020, total loans that have been modified as troubled debt restructurings were $1,738 and $1,985, respectively, which consisted of one non-residential real estate loan and three one-to-four family first lien loans at December 31, 2020, and two non-residential real estate loans and four one-to-four family first lien loans at June 30, 2020. There was no specific allowance for loss established for these loans at December 31, 2020 or June 30, 2020. Additionally, there were no commitments to lend any additional amounts on any loan after the modification. No loans have been modified as troubled debt restructurings during the six months ended December 31, 2020. No loans modified as troubled debt restructurings during the twelve months ended December 31, 2020 have defaulted since restructuring. All of these loans are on nonaccrual at December 31, 2020 and June 30, 2020. At December 31, 2020 and June 30, 2020, $1,161 and $1,774, respectively, were individually evaluated for impairment.
Allowance for Loan Loss:
There have been no changes to our allowance for loan loss methodology during the quarter ended December 31, 2020. We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become present. After such adjustments to the calculation, we have determined that the recorded allowance is believed to be adequate at this time and as a result no additional provision for loan losses has been recorded during the quarter ended December 31, 2020. However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate material adverse impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and the country continues to fully reopen. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three and six months ended December 31, 2020 and December 31, 2019.
22
Loan Grades:
The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.
Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.
Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.
Special Mention: Loan assets of this grade have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loan assets of this grade are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Portfolio Segments:
One-to-four family: One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. The Company currently originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.
For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.
The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of 2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered. The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the Company’s permission. Such homes must be “de-titled” by the State of South Carolina or Georgia so that they are taxed and must be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such homes are affixed.
Multi-family: Multi-family real estate loans generally have a maximum term of five years with a 30 year amortization period and a final balloon payment and are secured by properties containing five or more units in the Company’s market area. These loans are generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio. The Company’s underwriting analysis includes considering the borrower’s expertise and requires verification of the borrower’s credit history, income and financial statements, banking relationships, independent appraisals, references and income projections for the property. The Company generally obtains personal guarantees on these loans.
23
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.
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Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.
The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only two such loans at a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans is 85%.
Commercial and Industrial Loans: Commercial and industrial loans are offered to businesses and professionals in the Company’s market area. These loans generally have short and medium terms on both a collateralized and uncollateralized basis. The structure of these loans are largely determined by the loan purpose and collateral. Sources of collateral can include a lien on furniture, fixtures, equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.
Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases.
Within this category for the six months ended December 31, 2020 and the year ended June 30, 2020 are PPP loans that were authorized under the CARES Act. PPP loans are originated by the Association, are 100% guaranteed by the SBA and qualify to be forgiven based on certain criteria as determined by the SBA. The Association received a fee, with the percentage depending on the size of the loan, for originating these loans and earn 1% on the outstanding balance for the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA. As of December 31, 2020 $2.9 million of the original $4.2 million of PPP loans have been forgiven.
Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Based on the most recent analysis performed, the risk grade of loans by portfolio segment are presented in the following tables.
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Total loans by risk grade and portfolio segment at December 31, 2020:
Total loans by risk grade and portfolio segment at June 30, 2020:
At December 31, 2020, one loan for $19 was in formal foreclosure proceedings and is included in the one-to-four family loan category.
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At December 31, 2020 and June 30, 2020, advances from the Federal Home Loan Bank were as follows:
Payments over the next five years are as follows:
The average interest rate of all outstanding FHLB advances was 1.50% on December 31, 2020 and June 30, 2020, respectively.
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by $8,675 and $10,786 of investment securities at December 31, 2020 and June 30, 2020, respectively. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $130,533 at December 31, 2020.
There were no overnight borrowings at December 31, 2020 or June 30, 2020.
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).
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Impaired Loans:
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Loan Servicing Rights:
Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data and results in a Level 3 classification.
Assets measured at fair value on a recurring basis at December 31, 2020 and June 30, 2020 are summarized below:
There are no liabilities measured at fair value on a recurring basis.
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Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at December 31, 2020 and June 30, 2020:
Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned at December 31, 2020 and June 30, 2020 was $190 and $159, respectively. The valuation allowance associated with these properties at December 31, 2020 was $21. There were no valuation allowances associated with these properties at June 30, 2020.
The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended December 31, 2020 and 2019:
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The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2020 and June 30, 2020.
December 31, 2020
Fair Value
June 30, 2020
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Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheets approximate fair value. These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2020 and June 30, 2020 are summarized below:
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 2020 or 2019. Total ESOP compensation expense for the three and six months ended December 31, 2020 was $120 and $204, respectively, and for the three and six months ended December 31, 2019 was $91 and $185, respectively.
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Shares held by the ESOP at December 31, 2020 and June 30, 2020 were as follows:
On April 5, 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 435,472 shares of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.
On September 22, 2020, the compensation committee of the board of directors approved the issuance of 250 shares of restricted stock to a non-executive officer with immediate vesting. There are no performance-based conditions or any other material conditions applicable to the award issued. There were no stock options or restricted stock issued in fiscal 2020.
The following table summarizes stock option activity for the six months ended December 31, 2020:
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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 3,272 and 2,470 options that were earned during the six months ended December 31, 2020 and 2019, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2020 was $5 and $11, respectively, and for the three and six months ended December 31, 2019 was $6 and $10, respectively. Total unrecognized compensation cost related to stock options was $44 at December 31, 2020 and is expected to be recognized over a weighted-average period of 2.4 years.
The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2020:
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 six months ended December 31, 2020 was $15 and $30, respectively, and for the three and six months ended December 31, 2019 was $15 and $30, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $60 at December 31, 2020 and is expected to be recognized over a weighted-average period of 1.2 years.
Mortgage loans serviced for others are not reported as assets; however, the underlying mortgage servicing rights associated with servicing these mortgage loans serviced for others is recorded as an asset in the consolidated balance sheet.
The principal balances of those loans at December 31, 2020 and June 30, 2020 are as follows:
Custodial escrow balances maintained in connection with serviced loans were $337 and $702 at December 31, 2020 and June 30, 2020.
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Activity for loan servicing rights for the three and six months ended December 31, 2020 and 2019 is as follows:
Fair value at December 31, 2020 was determined using a discount rate of 8.25%, prepayment speed assumptions ranging from 12.58% to 26.42% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.18%. Fair value at December 31, 2019 was determined using a discount rate of 9.25%, prepayment speed assumptions ranging from 5.9% to 14.2% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.29%.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended December 31, 2020 and 2019 is as follows:
(12) SUBSEQUENT EVENTS
Dividend Declared
On January 28, 2021, 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 February 11, 2021, and will be paid on or about February 25, 2021.
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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:
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Novel Coronavirus Pandemic (COVID-19)
On March 10, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses continue to disrupt global supply chains and adversely impact many industries. The outbreak may continue to have a material adverse impact on economic and market conditions and could trigger a period of global economic slowdown. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation during 2020 to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We 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. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results. As a 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.
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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, 2020, as filed with the Securities and Exchange Commission.
Comparison of Financial Condition at December 31, 2020 and June 30, 2020
Our total assets increased by $8.9 million, or 1.74%, to $524.5 million at December 31, 2020 from $515.6 million at June 30, 2020. Total cash and cash equivalents increased $1.9 million, or 5.5%, to $36.5 million at December 31, 2020 from $34.6 million at June 30, 2020. The increase in cash and cash equivalents was due to normal periodic fluctuations during the six month period. Our available-for-sale securities portfolio increased by $14.9 million from $90.7 million at June 30, 2020 to $105.6 million at December 31, 2020. The Association began actively replenishing security repayments and maturities with purchases due to increased liquidity. Gross loans decreased $8.0 million, or 2.3%, to $347.7 million at December 31, 2020 from $355.7 million at June 30, 2020. This decrease was due to normal repayments and a decrease in new loan demand during the six months ended December 31, 2020.
Deposits increased $8.5 million, or 2.0%, to $429.6 million at December 31, 2020 from $421.1 million at June 30, 2020. The increase in our deposits reflected an increase of $6.0 million in interest bearing demand deposit accounts, $4.0 million in money market accounts and $3.0 million in savings deposits, partially offset by a decrease of $3.7 million in certificates of deposit and $842 thousand in non-interest bearing 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 six months ended December 31, 2020.
Federal Home Loan Bank advances remained stable at $5.0 million. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of December 31, 2020, or approximately $130.5 million. We had no federal funds purchased as of December 31, 2020 or as of June 30, 2020.
Total shareholders’ equity increased $1.1 million, or 1.3%, to $89.4 million at December 31, 2020 compared to $88.3 million at June 30, 2020. This was primarily due to our net income during the period of $2.3 million and the increase of $204 thousand in ESOP shares earned, partially offset by our payment of dividends of $1.1 million, an increase in after-tax unrealized losses in our investment portfolio of $156 thousand and $249 thousand used for the repurchase of treasury stock. The Company and the Association exceeded all regulatory capital requirements at December 31, 2020 and June 30, 2020.
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Nonperforming Assets
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
Nonperforming assets decreased $35 thousand from $2.90 million as of June 30, 2020 to $2.87 million as of December 31, 2020. Nonaccrual loans decreased $66 thousand to $2.7 million as of December 31, 2020 and real estate owned increased $31 thousand to $190 thousand as of December 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 0.55% and 0.82%, respectively, at December 31, 2020 compared to 0.56% and 0.82%, respectively at June 30, 2020.
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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.
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Comparison of Operating Results for the Three Months Ended December 31, 2020 and December 31, 2019
General. We reported net income of $1.1 million for the three months ended December 31, 2020 as compared to net income of $1.1 million for the three months ended December 31, 2019. Interest income decreased $533 thousand for the three months ended December 31, 2020 compared to December 31, 2019 and interest expense decreased $605 thousand resulting in a net increase to net interest income of $72 thousand. Noninterest income increased $102 thousand for the three months ended December 31, 2020 compared to December 31, 2019. Total noninterest expense decreased $3 thousand. Tax expense increased $196 thousand.
Interest Income. Interest income decreased by $533 thousand to $4.2 million from $4.8 million for the three months ended December 31, 2020 and December 31, 2019, respectively. The yield on interest-earning assets decreased 50 basis points from 3.97% for the three months ended December 31, 2019 to 3.47% for the three months ended December 31, 2020. Total average interest-earning assets increased by $7.1 million to $483.4 million for the three months ended December 31, 2020 from $476.3 million for the three months ended December 31, 2019.
Interest income on loans decreased by $321 thousand to $3.8 million from $4.1 million for the three months ended December 31, 2020 and December 31, 2019, respectively. The yield on loans decreased 28 basis points from 4.56% for the three months ended December 31, 2019 to 4.28% for the three months ended December 31, 2020. The average balance of loans decreased by $5.8 million, or 1.62%, to $354.4 million for the three months ended December 31, 2020 from $360.2 million for the three months ended December 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 $93 thousand, or 19.9%, to $375 thousand for the three months ended December 31, 2020 from $468 thousand for the three months ended December 31, 2019. The decrease reflected a decrease in the yield on securities to 1.54% for the three months ended December 31, 2020 from 2.14% for the three months ended December 31, 2019 offset by an increase in the average balance of securities of $9.6 million, or 11.0%, to $97.1 million for the three months ended December 31, 2020 from $87.5 million for the three months ended December 31, 2019. The increase in the average balances of our securities reflected our efforts during fiscal 2021 to invest in higher yielding assets.
Income on other interest earning assets decreased by $119 thousand, or 78.8%, to $32 thousand for the three months ended December 31, 2020 from $151 thousand for the three months ended December 31, 2019. The average balance of other interest-earning assets increased $3.4 million from the three months ended December 31, 2019 to the three months ended December 31, 2020 and the yield decreased 170 basis points over the same period. The increase in the average balance was due to normal periodic fluctuations. The decrease in yield was primarily the result of an overall decline in rates on money market accounts, the balance of which comprised 69.0% of this category during the three months ended December 31, 2020.
Interest Expense. Interest expense decreased by $605 thousand, or 55.8%, to $479 thousand for the three months ended December 31, 2020 from $1.1 million for the three months ended December 31, 2019. This decrease was attributable to a general decrease in retail and wholesale borrowing rates due to overall market decreases. The decrease reflected a decrease of 61 basis points in the average rate paid on interest-bearing deposits for the three months ended December 31, 2020 to 0.47% from 1.07% for the three months ended December 31, 2019. The decrease in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible in the current declining rate market while remaining competitive in our market. Average interest-bearing deposits were $384.8 million for the three months ended December 31, 2020 compared to $381.2 million for the three months ended December 31, 2019.
The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased $434 thousand, or 53.6%, to $375 thousand for the three months ended December 31, 2020 from $809 thousand for the three months ended December 31, 2019. The average rate paid on certificates of deposit decreased by 69 basis points from 1.46% for the three months ended December 31, 2019 to 0.77% for the three months ended December 31, 2020 and the average balances decreased by $26.4 million from $219.9 million for the three-month period ended December 31, 2019 to $193.5 million for the three-month period ended December 31, 2020. The decrease in the average balance of certificates of deposit is reflective of normal deposit fluctuation. The decrease in the average rate paid on our certificates of deposit is reflective of an overall decline in market rates.
The second largest decrease in deposit interest expense was related to expense on money market deposits, which decreased $105 thousand, or 72.4%, to $40 thousand for the three months ended December 31, 2020 from $145 thousand for the three months ended December 31, 2019. The average rate paid on money market deposits decreased by 57 basis points from 0.76% for the three months ended December 31, 2019 to 0.19% for the three months ended December 31, 2020 and the average balances increased by $7.1 million from $75.9 million for the three-month period ended December 31, 2019 to $83.0 million for the three-month period ended December 31, 2020. The increase in the average balance of money market deposits is reflective of normal deposit fluctuation. The decrease in the average rate paid on our money market deposits is reflective of an overall decline in market rates.
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Interest expense for other borrowings decreased by $40 thousand, or 67.8%, to $19 thousand for the three months ended December 31, 2020 from $59 thousand for the three months ended December 31, 2019. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $5.0 million for the three months ended December 31, 2020 compared to $8.4 million for the three months ended December 31, 2019. The average rate was 1.51% and 2.80% for the three months ended December 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 $72 thousand, or 2.0%, to $3.8 million for the three months ended December 31, 2020. Our interest rate spread and net interest margin increased to 2.98% and 3.08%, respectively, from 2.87% and 3.07%, respectively, for the three months ended December 31, 2020 and December 31, 2019, respectively. The decreasing yield on earning assets offset by the lower cost of interest bearing liabilities contributed to the increase in net interest margin for the three months ended December 31, 2020.
Provision for Loan Losses. We recorded no provision for loan losses for the three months ended December 31, 2020 or for the three months ended December 31, 2019. There were $5 thousand in charge-offs for the three months ended December 31, 2020 and $1 thousand in charge-offs for the three months ended December 31, 2019. The lack of provision for the three months ended December 31, 2020 is primarily due to a decrease in the loan portfolio balance.
Our total allowance for loan losses was $1.3 million, or 0.39% of total gross loans as of December 31, 2020 and $1.3 million, or 0.38% of total gross loans as of June 30, 2020. Our total allowance for loan losses was 0.39% and 0.38% of total gross loans, net of PPP loans, as of December 31, 2020 and June 30, 2020, respectively. PPP loans are not allocated any allowance due to the 100% SBA guarantee. There were no specifically identified impaired loans at December 31, 2020 or June 30, 2020. Total loans individually evaluated for impairment decreased $609 thousand, or 25.4%, to $1.8 million at December 31, 2020 compared to $2.4 million at June 30, 2020.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2020 and 2019. There have been no changes to our allowance for loan loss methodology during three months ended December 31, 2020.
Noninterest Income. Noninterest income increased $102 thousand, or 26.5%, to $487 thousand for the three months ended December 31, 2020 from $385 thousand for the three months ended December 31, 2019. Mortgage servicing income decreased $10 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $66 thousand and $50 thousand for the three months ended December 31, 2020 and 2019, respectively. The change in fair value of equity securities was a gain of $32 thousand for the three months ended December 31, 2020 compared to a loss of $48 thousand for the three months ended December 31, 2019. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $47 thousand gain for the three months ended December 31, 2020. There were no gains on the sale of securities for the three months ended December 31, 2019. Gains or losses on the sale of securities are largely market driven. Securities were sold during the quarter ended December 31, 2020 to realize market gains and adjust the investment portfolio so that funds could be more beneficially used to yield higher net earnings going forward. There were no payoffs of purchase credit impaired loans for the three months ended December 31, 2020. The net gain on payoff of purchase credit impaired loans was $32 thousand for the three months ended December 31, 2019 due to the liquidation of one loan. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense for the three months ended December 31, 2020 decreased by $3 thousand, or 0.1%, to $3.0 million for three months ended December 31, 2020. Salaries and employee benefits increased $114 thousand due to routine increases. Occupancy and equipment decreased $49 thousand due to normal periodic fluctuations. Data processing increased $21 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $37 thousand primarily due to reduced legal expenses. FDIC deposit insurance increased $31 thousand. The three months ended December 31, 2020 is reflective of the standard FDIC assessed rate. The prior year period reflected an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of September 30, 2019. Foreclosed asset expenses decreased $76 thousand. This is reflective of the three months ended December 31, 2020 not having REO write downs, whereas the three months ended December 31, 2019 had $89 thousand in REO write downs. The change in the value of the loan servicing portfolio decreased $5 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.
Income Tax Expense. Tax expense increased $196 thousand, or 1031.6%, to $215 thousand for the three months ended December 31, 2020 from $19 thousand for the three months ended December 31, 2019. This was primarily due to smaller permanent tax benefits being recognized during the three months ended December 31, 2020 as compared to the three months ended December 31, 2019, which were a result of fewer nonqualified stock options being exercised during the three months ended December 31, 2020 as compared to the three months ended December 31, 2019. Our effective income tax rate was 16.7% and 1.7% for the three months ended December 31, 2020 and 2019, respectively.
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Comparison of Operating Results for the Six Months Ended December 31, 2020 and December 31, 2019
General. We reported net income of $2.3 million for the six months ended December 31, 2020 as compared to net income of $2.0 million for the six months ended December 31, 2019. Interest income decreased $914 thousand for the six months ended December 31, 2020 compared to December 31, 2019 and interest expense decreased $1.2 million resulting in a net increase to net interest income of $309 thousand. Noninterest income increased $205 thousand for the six months ended December 31, 2020 compared to December 31, 2019. Total noninterest expense decreased $58 thousand. Tax expense increased $252 thousand.
Interest Income. Interest income decreased by $914 thousand to $8.7 million from $9.6 million for the six months ended December 31, 2020 and December 31, 2019, respectively. The yield on interest-earning assets decreased 38 basis points from 3.96% for the six months ended December 31, 2019 to 3.58% for the six months ended December 31, 2020. Total average interest-earning assets decreased by $501 thousand to $480.3 million for the six months ended December 31, 2020 from $480.8 million for the six months ended December 31, 2019.
Interest income on loans decreased by $411 thousand to $7.8 million from $8.3 million for the six months ended December 31, 2020 and December 31, 2019, respectively. The yield on loans decreased 16 basis points from 4.54% for the six months ended December 31, 2019 to 4.38% for the six months ended December 31, 2020. The average balance of loans decreased by $5.3 million, or 1.48%, to $355.8 million for the six months ended December 31, 2020 from $361.1 million for the six months ended December 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 $224 thousand, or 22.8%, to $757 thousand for the six months ended December 31, 2020 from $981 thousand for the six months ended December 31, 2019. The decrease reflected a decrease in the yield on securities to 1.64% for the six months ended December 31, 2020 from 2.17% for the six months ended December 31, 2019 offset by an increase in the average balance of securities of $2.2 million, or 2.3%, to $92.5 million for the six months ended December 31, 2020 from $90.3 million for the six months ended December 31, 2019. The increase in the average balances of our securities reflected our efforts during fiscal 2021 to invest in higher yielding assets.
Income on other interest earning assets decreased by $279 thousand, or 82.5%, to $59 thousand for the six months ended December 31, 2020 from $338 thousand for the six months ended December 31, 2019. The average balance of other interest-earning assets increased $2.7 million from the six months ended December 31, 2019 to the six months ended December 31, 2020 and the yield decreased 192 basis points over the same period. The increase in the average balance was due to normal periodic fluctuations. The decrease in yield was primarily the result of an overall decline in rates on money market accounts, the balance of which comprised 68.8% of this category during the six months ended December 31, 2020.
Interest Expense. Interest expense decreased by $1.3 million, or 53.9%, to $1.0 million for the six months ended December 31, 2020 from $2.3 million for the six months ended December 31, 2019. This decrease was attributable to a general decrease in retail and wholesale borrowing rates due to overall market decreases. The decrease reflected a decrease of 57 basis points in the average rate paid on interest-bearing deposits for the six months ended December 31, 2020 to 0.52% from 1.09% for the six months ended December 31, 2019. The decrease in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible in the current declining rate market while remaining competitive in our market. Average interest-bearing deposits were $382.5 million for the six months ended December 31, 2020 compared to $381.1 million for the six months ended December 31, 2019.
The largest decrease in deposit interest expense was related to expense on certificates of deposit, which decreased $792 thousand, or 48.8%, to $832 thousand for the six months ended December 31, 2020 from $1.6 million for the six months ended December 31, 2019. The average rate paid on certificates of deposit decreased by 61 basis points from 1.46% for the six months ended December 31, 2019 to 0.85% for the six months ended December 31, 2020 and the average balances decreased by $26.1 million from $221.1 million for the six-month period ended December 31, 2019 to $195.0 million for the six-month period ended December 31, 2020. The decrease in the average balance of certificates of deposit is reflective of normal deposit fluctuation. The decrease in the average rate paid on our certificates of deposit is reflective of an overall decline in market rates.
The second largest decrease in deposit interest expense was related to expense on money market deposits, which decreased $239 thousand, or 73.5%, to $86 thousand for the six months ended December 31, 2020 from $325 thousand for the six months ended December 31, 2019. The average rate paid on money market deposits decreased by 64 basis points from 0.85% for the six months ended December 31, 2019 to 0.21% for the six months ended December 31, 2020 and the average balances increased by $6.2 million from $75.6 million for the six-month period ended December 31, 2019 to $81.8 million for the six-month period ended December 31, 2020. The increase in the average balance of money market deposits is reflective of normal deposit fluctuation. The decrease in the average rate paid on our money market deposits is reflective of an overall decline in market rates.
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Interest expense for other borrowings decreased by $148 thousand, or 79.6%, to $38 thousand for the six months ended December 31, 2020 from $186 thousand for the six months ended December 31, 2019. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $5.0 million for the six months ended December 31, 2020 compared to $13.2 million for the six months ended December 31, 2019. The average rate was 1.51% and 2.80% for the six months ended December 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 $309 thousand, or 4.2%, to $7.6 million for the six months ended December 31, 2020. Our interest rate spread and net interest margin increased to 3.04% and 3.15%, respectively, from 2.82% and 3.02%, respectively, for the six months ended December 31, 2020 and December 31, 2019, respectively. The decreasing yield on earning assets offset by the lower cost of interest bearing liabilities contributed to the increase in net interest margin for the six months ended December 31, 2020.
Provision for Loan Losses. We recorded no provision for loan losses for the six months ended December 31, 2020 or for the six months ended December 31, 2019. There were $7 thousand in charge-offs for the six months ended December 31, 2020 and $1 thousand in charge-offs for the six months ended December 31, 2019. The lack of provision for the six months ended December 31, 2020 is primarily due to a decrease in the loan portfolio balance.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2020 and 2019. There have been no changes to our allowance for loan loss methodology during the six months ended December 31, 2020.
Noninterest Income. Noninterest income increased $205 thousand, or 23.2%, to $1.1 million for the six months ended December 31, 2020 from $885 thousand for the six months ended December 31, 2019. Mortgage servicing income decreased $19 thousand due to a decline in the servicing portfolio balance. Gain on sale of mortgage loans was $101 thousand and $82 thousand for the six months ended December 31, 2020 and 2019, respectively. The change in fair value of equity securities was a gain of $9 thousand for the six months ended December 31, 2020 and a gain of $32 thousand for the six months ended December 31, 2019. Gains or losses on the fair value of equity securities are market driven. The sale of securities resulted in a $109 thousand gain for the six months ended December 31, 2020. There were $12 thousand in gains on the sale of securities for the six months ended December 31, 2019. Gains or losses on the sale of securities are largely market driven. Securities were sold during the six months ended December 31, 2020 to realize market gains and adjust the investment portfolio 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 $195 thousand for the six months ended December 31, 2019 due to the liquidation of two loans. The net gain on payoff of purchase credit impaired loans was $32 thousand for the six months ended December 31, 2019 due to the liquidation of one loan. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense for the six months ended December 31, 2020 decreased by $58 thousand, or 1.0%, to $5.8 million for six months ended December 31, 2020. Salaries and employee benefits increased $129 thousand due to routine increases. Occupancy and equipment decreased $58 thousand due to normal periodic fluctuations. Data processing increased $46 thousand due to routine upgrades and volume increases in the current period. Professional and supervisory fees decreased $63 thousand primarily due to reduced legal expenses. FDIC deposit insurance increased $61 thousand. The six months ended December 31, 2020 is reflective of the standard FDIC assessed rate. The prior year period reflected an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of June 30, 2019 and September 30, 2019. Foreclosed asset expenses decreased $112 thousand. This is reflective of the six months ended December 31, 2020 having $21 thousand in REO write downs, whereas the six months ended December 31, 2019 had $117 thousand in REO write downs. The change in the value of the loan servicing portfolio decreased $15 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.
Income Tax Expense. Tax expense increased $252 thousand, or 80.3%, to $566 thousand for the six months ended December 31, 2020 from $314 thousand for the six months ended December 31, 2019. This was primarily due to smaller permanent tax benefits being recognized during the six months ended December 31, 2020 as compared to the six months ended December 31, 2019, which were a result of fewer nonqualified stock options being exercised during the six months ended December 31, 2020 as compared to the six months ended December 31, 2019. Our effective income tax rate was 19.5% and 13.4% for the six months ended December 31, 2020 and 2019, respectively.
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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. 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. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets (as of December 31, 2020), or approximately $130.5 million as of that date, with a remaining availability of $125.5 million as of December 31, 2020.
Common Stock Dividends. On August 20, 2020 and November 19, 2020, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.
Equity Compensation Plans.During the three months ended December 31, 2020, no shares of restricted stock or common stock 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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 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 December 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
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is periodically involved incidental to the Company’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
ITEM 1A. RISK FACTORS
Disclosures of risk factors are not required of smaller reporting companies, such as the Company.
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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 December 31, 2020:
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
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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 December 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 12, 2021
/s/ Curtis T. Evatt
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