UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period ended
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
(Exact Name of Registrant as Specified in Charter)
(State of Other Jurisdiction of Incorporation) |
(I.R.S Employer Identification Number) | |
| (Address of Principal Executive Officers) | (Zip Code) | |
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 | ||
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.
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).
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 | ☐ | |||
| ☒ | 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 ☐
As of May 5, 2023, the registrant had shares of common stock, $0.01 par value per share, outstanding.
OCONEE FEDERAL FINANCIAL CORP.
Form 10-Q Quarterly Report
Table of Contents
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
PART I
| ITEM 1. | FINANCIAL STATEMENTS |
| March 31, 2023 (unaudited) | June 30, 2022 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-earning deposits | ||||||||
| Fed funds sold | ||||||||
| Total cash and cash equivalents | ||||||||
| Securities available-for-sale | ||||||||
| Loans | ||||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Net loans | ||||||||
| Loans held for sale, at fair value | ||||||||
| Premises and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Loans | ||||||||
| Investments | ||||||||
| Restricted equity securities, at cost | ||||||||
| Bank owned life insurance | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Loan servicing rights | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits | ||||||||
| Noninterest - bearing | $ | $ | ||||||
| Interest - bearing | ||||||||
| Total deposits | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Accrued interest payable and other liabilities | ||||||||
| Total liabilities | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized; and shares outstanding, respectively |
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| Treasury stock, at par, and shares, respectively | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Unearned ESOP shares | ( | ) | ||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to the consolidated financial statements
1
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
(Amounts in thousands, except share and per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| Interest and dividend income: | ||||||||||||||||
| Loans, including fees | $ | $ | $ | $ | ||||||||||||
| Securities, taxable | ||||||||||||||||
| Securities, tax-exempt | ||||||||||||||||
| Other interest-earning assets | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | ||||||||||||||||
| Other borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| Noninterest income: | ||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||
| Income on bank owned life insurance | ||||||||||||||||
| Mortgage servicing income | ||||||||||||||||
| Gain on sale of mortgage loans | ||||||||||||||||
| ATM & debit card income | ||||||||||||||||
| Change in fair value of equity securities, net | ( | ) | ( | ) | ||||||||||||
| Loss on sale of securities, net | ( | ) | ||||||||||||||
| Gain on payoff of purchase credit impaired loans | ||||||||||||||||
| Other | ||||||||||||||||
| Total noninterest income | ||||||||||||||||
| Noninterest expense: | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Occupancy and equipment | ||||||||||||||||
| Data processing | ||||||||||||||||
| ATM & debit card expense | ||||||||||||||||
| Professional and supervisory fees | ||||||||||||||||
| Office expense | ||||||||||||||||
| Advertising | ||||||||||||||||
| FDIC deposit insurance | ||||||||||||||||
| Foreclosed assets, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in loan servicing asset | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other | ||||||||||||||||
| Total noninterest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income/(loss) | ||||||||||||||||
| Unrealized gains/(losses) on securities available-for-sale | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Tax effect | ( | ) | ||||||||||||||
| Reclassification adjustment for losses realized in net income | ||||||||||||||||
| Tax effect | ( | ) | ||||||||||||||
| Total other comprehensive income/(loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income/(loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Basic net income per share: (Note 3) | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share: (Note 3) | $ | $ | $ | $ | ||||||||||||
| Dividends declared per share: | $ | $ | $ | $ | ||||||||||||
See accompanying notes to the consolidated financial statements
2
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share and per share data)
For the three months ended March 31, 2023 and March 31, 2022
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Unearned | ||||||||||||||||||||||||||
| Common | Treasury | Paid-In | Retained | Comprehensive | ESOP | |||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Income (loss) | Shares | Total | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Purchase of shares of treasury stock(1) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Dividends | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
| ESOP shares earned | ||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Dividends | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| (1) |
See accompanying notes to the consolidated financial statements
3
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands, except share and per share data)
For the nine months ended March 31, 2023 and March 31, 2022
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Unearned | ||||||||||||||||||||||||||
| Common | Treasury | Paid-In | Retained | Comprehensive | ESOP | |||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Income (loss) | Shares | Total | ||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Purchase of shares of treasury stock(1) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Dividends(2) | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
| ESOP shares earned | ||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||||
| Dividends(3) | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||
| ESOP shares earned | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| (1) |
| (2) |
| (3) |
See accompanying notes to the consolidated financial statements
4
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands, except share and per share data)
| Nine Months Ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Depreciation and amortization, net | ||||||||
| Net amortization/(accretion) of purchase accounting adjustments | ( | ) | ||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||
| Net gain on sale of real estate owned | ( | ) | ||||||
| Change in loan servicing asset | ( | ) | ( | ) | ||||
| Net loss on sales of securities | ||||||||
| Mortgage loans originated for sale | ( | ) | ( | ) | ||||
| Mortgage loans sold | ||||||||
| Gain on sales of mortgage loans | ( | ) | ( | ) | ||||
| Change in fair value of equity securities | ||||||||
| Increase in cash surrender value of bank owned life insurance | ( | ) | ( | ) | ||||
| Gain on payoff of purchased credit impaired loans | ( | ) | ( | ) | ||||
| ESOP shares earned | ||||||||
| Stock based compensation expense | ||||||||
| Net change in operating assets and liabilities: | ||||||||
| Accrued interest receivable and other assets | ( | ) | ||||||
| Accrued interest payable and other liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of premises and equipment | ( | ) | ( | ) | ||||
| Purchases of securities available-for-sale | ( | ) | ( | ) | ||||
| Proceeds from maturities, paydowns and calls of securities available-for-sale | ||||||||
| Proceeds from sales of securities available-for-sale | ||||||||
| Sales of restricted equity securities | ||||||||
| Purchases of restricted equity securities | ( | ) | ( | ) | ||||
| Proceeds from sale of real estate owned | ||||||||
| Loan originations and repayments, net | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Net change in deposits | ||||||||
| Proceeds from notes payable to FHLB | ||||||||
| Repayment of notes payable to FHLB | ( | ) | ( | ) | ||||
| Dividends paid | ( | ) | ( | ) | ||||
| Purchase of treasury stock | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
See accompanying notes to the consolidated financial statements
5
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (1) | BASIS OF PRESENTATION, 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 (
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, 2023 and June 30, 2022 and the results of operations and cash flows for the interim periods ended March 31, 2023 and 2022. 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, 2023 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, 2022.
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.
6
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (2) | NEW ACCOUNTING STANDARDS |
Accounting Standards Update (“ASU”) 2023-01, “Leases (Topic 842): Common Control Arrangements”. Issued in March 2023, the FASB amended the Leases topic in the Accounting Standards Codification to provide a practical expedient for private companies and not-for-profit entities that are not conduit bond obligors to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease. The amendments also change the guidance for public and private companies to require that leasehold improvements be amortized over the useful life of those improvements to the common control group regardless of the lease term. The amendments are effective for fiscal years beginning after December 15, 2023, 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 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. Issued in December 2022, the FASB issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are effective immediately for all entities and applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. Issued in June 2022, ASU 2022-03 provides guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. The amendments are effective for financial statements issued for annual periods beginning after December 15, 2023, 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 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”. Issued in March 2022, ASU 2022-02 provides guidance to improve the decision usefulness of information provided to investors about certain loan re-financings, restructurings, and write-offs. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”. Issued in November 2021, ASU 2021-10 requires certain annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted this standard on July 1, 2022. This pronouncement did not have a material effect on the financial statements.
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 2019-11, “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.
7
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (2) | NEW ACCOUNTING STANDARDS (continued) |
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 is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements by running a parallel loss model. 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 the quarter ended March 31, 2023 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.
8
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (3) | EARNINGS PER SHARE (“EPS”) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| Earnings per share | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less: distributed earnings allocated to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: (undistributed income) dividends in excess of earnings allocated to participating securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Net earnings available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding including participating securities | ||||||||||||||||
| Less: participating securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: average unearned ESOP shares | ( | ) | ( | ) | ( | ) | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Add: dilutive effects of assumed exercises of stock options | ||||||||||||||||
| Average shares and dilutive potential common shares | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
For the three and the nine months ended March 31, 2023 and 2022, options were considered anti-dilutive as the exercise price was in excess of the average market price.
9
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (4) | SECURITIES AVAILABLE-FOR-SALE |
Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at March 31, 2023 and June 30, 2022 are as follows:
| March 31, 2023 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Change
in Fair Value Equity Securities | Fair Value | |||||||||||||||
| Available-for-sale: | ||||||||||||||||||||
| FHLMC common stock | $ | $ | — | $ | — | $ | $ | |||||||||||||
| Municipal securities | — | ( | ) | — | ||||||||||||||||
| CMOs | — | ( | ) | — | ||||||||||||||||
| U.S. Government agency mortgage-backed securities | — | ( | ) | — | ||||||||||||||||
| U.S. Treasury and Government agency bonds | — | ( | ) | — | ||||||||||||||||
| Total available-for-sale | $ | $ | — | $ | ( | ) | $ | $ | ||||||||||||
| June 30, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Change
in Fair Value Equity Securities | Fair Value | |||||||||||||||
| Available-for-sale: | ||||||||||||||||||||
| FHLMC common stock | $ | $ | — | $ | — | $ | $ | |||||||||||||
| Certificates of deposit | — | — | ||||||||||||||||||
| Municipal securities | ( | ) | — | |||||||||||||||||
| CMOs | — | ( | ) | — | ||||||||||||||||
| U.S. Government agency mortgage-backed securities | — | ( | ) | — | ||||||||||||||||
| U.S. Treasury and Government agency bonds | — | ( | ) | — | ||||||||||||||||
| Total available-for-sale | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
Securities
pledged at March 31, 2023 and June 30, 2022 had fair values of $
At March 31, 2023 and June 30, 2022, 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 % of shareholders’ equity.
10
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (4) | SECURITIES AVAILABLE-FOR-SALE (continued) |
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, 2023 and June 30, 2022. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | ||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||||||||||||
| Municipal securities | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| CMOs | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| U.S. Government agency mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| U.S. Treasury and Government agency bonds | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | Fair Value | Unrealized Loss | Number in Unrealized Loss(1) | ||||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||||||||||||||
| Municipal securities | $ | $ | ( | ) | $ | — | $ | — | — | $ | $ | ( | ) | |||||||||||||||||||||||
| CMOs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| U.S. Government agency mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| U.S. Treasury and Government agency bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||
| (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 March 31, 2023 were recognized into net income for the three or nine months ended March 31, 2023 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, 2022 were recognized as having OTTI during the year ended June 30, 2022.
11
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (4) | SECURITIES AVAILABLE-FOR-SALE (continued) |
The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2023 and June 30, 2022 by contractual maturity.
| March 31, 2023 | June 30, 2022 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| Less than one year | $ | — | $ | — | $ | $ | ||||||||||
| Due from one to five years | ||||||||||||||||
| Due after five years to ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Mortgage-backed securities, CMOs and FHLMC stock(1) | ||||||||||||||||
| Total available for sale | $ | $ | $ | $ | ||||||||||||
| (1) |
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, 2023 and 2022:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Available-for-sale: | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | ||||||||||||
| Proceeds | $ | $ | $ | $ | ||||||||||||
| Gross gains | ||||||||||||||||
| Gross losses | ( | ) | ||||||||||||||
The
tax benefit related to the net realized loss for the nine months ended March 31, 2023 was $
12
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
(5) LOANS
The components of loans at March 31, 2023 and June 30, 2022 were as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Real estate loans: | ||||||||
| One-to-four family | $ | $ | ||||||
| Multi-family | ||||||||
| Home equity | ||||||||
| Nonresidential | ||||||||
| Agricultural | ||||||||
| Construction and land | ||||||||
| Total real estate loans | ||||||||
| Commercial and industrial | ||||||||
| Consumer and other loans | ||||||||
| Total loans | $ | $ | ||||||
The table above includes net deferred loan
fees of $
13
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
(5) LOANS (continued)
The following table presents the activity in the allowance for loan losses for the three and nine months ended March 31, 2023 by portfolio segment:
| Three months March 31, 2023 | Beginning Balance | Provision | Charge-offs | Recoveries | Ending Balance | |||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | ( | ) | $ | — | $ | — | $ | |||||||||||
| Multi-family | — | — | — | |||||||||||||||||
| Home equity | — | — | ||||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | |||||||||||||||||
| Construction and land | — | — | ||||||||||||||||||
| Total real estate loans | — | — | ||||||||||||||||||
| Commercial and industrial | — | — | ||||||||||||||||||
| Consumer and other loans | — | — | — | |||||||||||||||||
| Total loans | $ | $ | $ | — | $ | — | $ | |||||||||||||
| Nine months ended March 31, 2023 | Beginning Balance | Provision | Charge-offs | Recoveries | Ending Balance | |||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | — | $ | |||||||||||||
| Multi-family | ( | ) | — | — | ||||||||||||||||
| Home equity | — | — | ||||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | |||||||||||||||||
| Construction and land | — | — | ||||||||||||||||||
| Total real estate loans | — | — | ||||||||||||||||||
| Commercial and industrial | — | — | ||||||||||||||||||
| Consumer and other loans | — | — | — | |||||||||||||||||
| Total loans | $ | $ | $ | — | $ | — | $ | |||||||||||||
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2023:
| Ending Allowance on Loans: | Loans: | |||||||||||||||
| At March 31, 2023 | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | ||||||||||||
| Real estate loans: | ||||||||||||||||
| One-to-four family | $ | — | $ | $ | — | $ | ||||||||||
| Multi-family | — | — | ||||||||||||||
| Home equity | — | — | ||||||||||||||
| Nonresidential | — | |||||||||||||||
| Agricultural | — | — | ||||||||||||||
| Construction and land | — | — | ||||||||||||||
| Total real estate loans | — | |||||||||||||||
| Commercial and industrial | — | — | ||||||||||||||
| Consumer and other loans | — | — | ||||||||||||||
| Total loans | $ | — | $ | $ | $ | |||||||||||
14
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
(5) LOANS (continued)
The following table presents the activity in the allowance for loan losses for the three and nine months ended March 31, 2022 by portfolio segment:
| Three months ended March 31, 2022 | Beginning Balance | Provision | Charge-offs | Recoveries | Ending Balance | |||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | — | $ | |||||||||||||
| Multi-family | — | — | — | |||||||||||||||||
| Home equity | ( | ) | — | — | ||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | |||||||||||||||||
| Construction and land | ( | ) | — | — | ||||||||||||||||
| Total real estate loans | — | — | ||||||||||||||||||
| Commercial and industrial | — | — | — | |||||||||||||||||
| Consumer and other loans | ( | ) | — | — | ||||||||||||||||
| Total loans | $ | $ | — | $ | — | $ | — | $ | ||||||||||||
| Nine months ended March 31, 2022 | Beginning Balance | Provision | Charge-offs | Recoveries | Ending Balance | |||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | — | $ | |||||||||||||
| Multi-family | — | — | — | |||||||||||||||||
| Home equity | ( | ) | — | — | ||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | |||||||||||||||||
| Construction and land | ( | ) | — | — | ||||||||||||||||
| Total real estate loans | — | — | ||||||||||||||||||
| Commercial and industrial | — | — | ||||||||||||||||||
| Consumer and other loans | ( | ) | — | — | ||||||||||||||||
| Total loans | $ | $ | — | $ | — | $ | — | $ | ||||||||||||
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2022:
| Ending Allowance on Loans: | Loans: | |||||||||||||||
| At June 30, 2022 | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Individually Evaluated for Impairment | Collectively Evaluated for Impairment | ||||||||||||
| Real estate loans: | ||||||||||||||||
| One-to-four family | $ | — | $ | $ | $ | |||||||||||
| Multi-family | — | — | ||||||||||||||
| Home equity | — | — | ||||||||||||||
| Nonresidential | — | |||||||||||||||
| Agricultural | — | — | ||||||||||||||
| Construction and land | — | — | ||||||||||||||
| Total real estate loans | — | |||||||||||||||
| Commercial and industrial | — | — | ||||||||||||||
| Consumer and other loans | — | — | ||||||||||||||
| Total loans | $ | — | $ | $ | $ | |||||||||||
15
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
(5) LOANS (continued)
The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 2023 and June 30, 2022, including the average recorded investment balance and interest earned for the nine months ended March 31, 2023 and the year ended June 30, 2022:
| March 31, 2023 | ||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
| With no recorded allowance: | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | $ | ||||||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Home equity | — | — | — | — | — | |||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | — | — | |||||||||||||||
| Construction and land | — | — | — | — | — | |||||||||||||||
| Total real estate loans | — | — | ||||||||||||||||||
| Commercial and industrial | — | — | — | — | — | |||||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | $ | $ | — | $ | $ | — | |||||||||||||
| With recorded allowance: | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Home equity | — | — | — | — | — | |||||||||||||||
| Nonresidential | — | — | — | — | — | |||||||||||||||
| Agricultural | — | — | — | — | — | |||||||||||||||
| Construction and land | — | — | — | — | — | |||||||||||||||
| Total real estate loans | — | — | — | — | — | |||||||||||||||
| Commercial and industrial | — | — | — | — | — | |||||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Totals: | ||||||||||||||||||||
| Real estate loans | $ | $ | $ | — | $ | $ | — | |||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | $ | $ | — | $ | $ | — | |||||||||||||
16
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
(5) LOANS (continued)
| June 30, 2022 | ||||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
| With no recorded allowance: | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | $ | $ | — | $ | $ | ||||||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Home equity | — | — | — | — | — | |||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||
| Agricultural | — | — | — | — | — | |||||||||||||||
| Construction and land | — | — | — | — | — | |||||||||||||||
| Total real estate loans | — | |||||||||||||||||||
| Commercial and industrial | — | — | — | — | — | |||||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | $ | $ | — | $ | $ | ||||||||||||||
| With recorded allowance: | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| One-to-four family | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Multi-family | — | — | — | — | — | |||||||||||||||
| Home equity | — | — | — | — | — | |||||||||||||||
| Nonresidential | — | — | — | — | — | |||||||||||||||
| Agricultural | — | — | — | — | — | |||||||||||||||
| Construction and land | — | — | — | — | — | |||||||||||||||
| Total real estate loans | — | — | — | — | — | |||||||||||||||
| Commercial and industrial | — | — | — | — | — | |||||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Totals: | ||||||||||||||||||||
| Real estate loans | $ | $ | $ | — | $ | $ | ||||||||||||||
| Consumer and other loans | — | — | — | — | — | |||||||||||||||
| Total | $ | $ | $ | — | $ | $ | ||||||||||||||
17
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (5) | LOANS (continued) |
The
following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due
Total past due loans and nonaccrual loans at March 31, 2023:
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total Loans | Nonaccrual Loans | Accruing Loans Past Due 90 Days or More | |||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | $ | $ | $ | — | |||||||||||||||||||||||
| Multi-family | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Home equity | — | — | ||||||||||||||||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||||||||||||||
| Agricultural | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Construction and land | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Total real estate loans | — | |||||||||||||||||||||||||||||||
| Commercial and industrial | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Consumer and other loans | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | — | |||||||||||||||||||||||
Total past due and nonaccrual loans by portfolio segment at June 30, 2022:
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total Loans | Nonaccrual Loans | Accruing Loans Past Due 90 Days or More | |||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | $ | $ | $ | — | |||||||||||||||||||||||
| Multi-family | — | — | — | |||||||||||||||||||||||||||||
| Home equity | — | — | — | — | ||||||||||||||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||||||||||||||
| Agricultural | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Construction and land | — | — | — | — | ||||||||||||||||||||||||||||
| Total real estate loans | — | |||||||||||||||||||||||||||||||
| Commercial and industrial | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Consumer and other loans | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | — | |||||||||||||||||||||||
18
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (5) | LOANS (continued) |
Troubled Debt Restructurings:
At
March 31, 2023 and June 30, 2022, total loans that have been modified as troubled debt restructurings were $
Allowance for Loan Loss:
There
have been no changes to our allowance for loan loss methodology during the quarter ended March 31, 2023. Due to the increase in
the size of the loan portfolio, a $
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.
19
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (5) | LOANS (continued) |
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
For
traditional homes, the Company may originate loans with loan-to-value ratios in excess of
Multi-family:
Multi-family real estate loans generally have a maximum term of
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
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 to
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.
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). 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.
20
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (5) | LOANS (continued) |
Agricultural:
These loans are secured by farmland and related improvements in the Company’s market area. These loans generally have
terms of to
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
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
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
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.
21
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (5) | LOANS (continued) |
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, 2023:
| Pass | Pass-Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
| Multi-family | — | — | — | — | ||||||||||||||||||||
| Home equity | — | — | ||||||||||||||||||||||
| Nonresidential | — | — | — | |||||||||||||||||||||
| Agricultural | — | — | — | — | ||||||||||||||||||||
| Construction and land | — | — | ||||||||||||||||||||||
| Total real estate loans | — | |||||||||||||||||||||||
| Commercial and industrial | — | — | — | — | ||||||||||||||||||||
| Consumer and other loans | — | — | — | — | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
Total loans by risk grade and portfolio segment at June 30, 2022:
| Pass | Pass-Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||
| One-to-four family | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
| Multi-family | — | — | — | |||||||||||||||||||||
| Home equity | — | — | ||||||||||||||||||||||
| Nonresidential | — | — | ||||||||||||||||||||||
| Agricultural | — | — | — | — | ||||||||||||||||||||
| Construction and land | — | — | ||||||||||||||||||||||
| Total real estate loans | — | |||||||||||||||||||||||
| Commercial and industrial | — | — | — | — | ||||||||||||||||||||
| Consumer and other loans | — | — | — | — | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | — | $ | |||||||||||||||||
22
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (6) | BORROWINGS |
At March 31, 2023 and June 30, 2022, advances from the Federal Home Loan Bank were as follows:
| March 31, 2023 | ||||||
| Balance | Stated Interest Rate | |||||
| FHLB advances due April 2023 through January 2025 | $ | | ||||
| Total | $ | |||||
| June 30, 2022 | ||||||
| Balance | Stated Interest Rate | |||||
| FHLB advances due September 2021 through January 2025 | $ | | ||||
| Total | $ | |||||
Payments over the next five fiscal years are as follows:
| 2023 | $ | ||||
| 2025 | $ |
The
weighted average interest rate of all outstanding FHLB advances was
Each
advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances are collateralized by
$
There were no overnight borrowings at March 31, 2023 or June 30, 2022.
| (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). We invest in the common stock of the Federal Home Loan Bank of Atlanta and in preferred and common stock of First National Bankers Bancshares, Inc. The stock is classified as restricted equity securities and is carried at cost.
23
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (7) | FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
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. There were no impaired loans with specific allocations at March 31, 2023 or June 30, 2022.
Loans Held for Sale:
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.
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.
Deposits:
The fair values disclosed for demand deposit, money market and savings accounts are equal to the amount payable on demand at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
FHLB Advances:
The fair values of the Company’s FHLB advances are estimated using discounted cash flow analysis based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
24
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (7) | FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
Assets measured at fair value on a recurring basis at March 31, 2023 and June 30, 2022 are summarized below:
| Fair Value Measurements | ||||||||||||||||
| March 31, 2023 | June 30, 2022 | |||||||||||||||
| (Level 2) | (Level 3) | (Level 2) | (Level 3) | |||||||||||||
| Financial assets: | ||||||||||||||||
| Securities available-for-sale: | ||||||||||||||||
| FHLMC common stock | $ | $ | — | $ | $ | — | ||||||||||
| Certificates of deposit | — | — | — | |||||||||||||
| Municipal securities | — | — | ||||||||||||||
| CMOs | — | — | ||||||||||||||
| U.S. Government agency mortgage-backed securities | — | — | ||||||||||||||
| U.S. Treasury and Government agency bonds | — | — | ||||||||||||||
| Total securities available-for-sale | — | — | ||||||||||||||
| Loan servicing rights | — | — | ||||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||||||
There are no liabilities measured at fair value on a recurring basis.
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, 2023 and 2022:
| Fair Value Measurements | ||||||||||||||||
| (Level 3) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| Loan Servicing Rights | Loan Servicing Rights | Loan Servicing Rights | Loan Servicing Rights | |||||||||||||
| Balance at beginning of period: | $ | $ | $ | $ | ||||||||||||
| Unrealized net gains included in net income | ||||||||||||||||
| Balance at end of period: | $ | $ | $ | $ | ||||||||||||
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value at March 31, 2023 and June 30, 2022.
| Level 3 Quantitative Information | ||||||||||||||||
| March 31, 2023 | June 30, 2022 | Valuation | Unobservable | |||||||||||||
| Fair Value | Fair Value | Technique | Inputs | Range | ||||||||||||
| Loan servicing rights | $ | $ | Discounted cash flows | Discount rate, estimated timing of cash flows | | |||||||||||
There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2023 or June 30, 2022.
25
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (7) | FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) |
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, 2023 and June 30, 2022 are summarized below:
| March 31, 2023 | ||||||||||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| Amount | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||||
| Financial assets | ||||||||||||||||||||
| Securities available-for-sale | $ | $ | — | $ | $ | — | $ | |||||||||||||
| Loans, net (1) | — | — | ||||||||||||||||||
| Loan servicing rights | — | — | ||||||||||||||||||
| Restricted equity securities | N/A | N/A | N/A | N/A | ||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | — | $ | $ | — | $ | |||||||||||||
| FHLB Advances | — | — | ||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||
| Carrying | Fair Value | |||||||||||||||||||
| Amount | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||||
| Financial assets | ||||||||||||||||||||
| Securities available-for-sale | $ | $ | — | $ | $ | — | $ | |||||||||||||
| Loans, net (1) | — | — | ||||||||||||||||||
| Loans held for sale(2) | — | — | ||||||||||||||||||
| Loan servicing rights | — | — | ||||||||||||||||||
| Restricted equity securities | N/A | N/A | N/A | N/A | ||||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Deposits | $ | $ | — | $ | $ | — | $ | |||||||||||||
| FHLB Advances | — | — | ||||||||||||||||||
| (1) |
| (2) |
| (8) | EMPLOYEE STOCK OWNERSHIP PLAN |
Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase shares of the Company’s common stock at $ 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.
26
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (8) | EMPLOYEE STOCK OWNERSHIP PLAN (continued) |
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 2022 or 2021. There was
Shares held by the ESOP at March 31, 2023 and June 30, 2022 were as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Committed to be released to participants | ||||||||
| Allocated to participants | ||||||||
| Unearned | ||||||||
| Total ESOP shares | ||||||||
| Fair value of unearned shares | $ | $ | ||||||
| (9) | STOCK BASED COMPENSATION |
In 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 shares of the Company’s common stock, with no more than of shares as restricted stock awards and as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan could not be less than the fair market value on the date the stock option was granted. The compensation committee of the board of directors had sole discretion to determine the amount and to whom equity incentive awards were granted. The Plan remains in effect as long as any awards or options are outstanding. However, the ability to grant awards or options ceased as of April 5, 2022.
| Options | Weighted- Average Exercise Price/Share | Aggregate Intrinsic Value(1) | ||||||||||
| Outstanding - June 30, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | — | — | ||||||||||
| Outstanding - March 31, 2023 | $ | $ | ||||||||||
| Fully vested and exercisable at March 31, 2023 | $ | $ | ||||||||||
| Expected to vest in future periods | ||||||||||||
| Fully vested and expected to vest - March 31, 2023 | $ | $ | ||||||||||
| (1) |
27
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (9) | STOCK BASED COMPENSATION (continued) |
The following table summarizes stock option activity for the nine months ended March 31, 2022:
| Options | Weighted- Average Exercise Price/Share | Aggregate Intrinsic Value(1) | ||||||||||
| Outstanding - June 30, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | — | — | ||||||||||
| Outstanding - March 31, 2022 | $ | $ | ||||||||||
| Fully vested and exercisable at March 31, 2022 | $ | $ | ||||||||||
| Expected to vest in future periods | ||||||||||||
| Fully vested and expected to vest - March 31, 2022 | $ | $ | ||||||||||
| (1) |
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 and options that were earned during the nine months ended March 31, 2023 and 2022, respectively. Stock-based compensation expense for stock options for the three and nine months ended March 31, 2023 was $ and $, respectively, and for the three and nine months ended March 31, 2022 was $ and $, respectively. Total unrecognized compensation cost related to stock options was $ at March 31, 2023 and is expected to be recognized over a weighted-average period of years.
| March 31, 2023 | March 31, 2022 | |||||||
| Balance - beginning of year | ||||||||
| Granted | ||||||||
| Forfeited | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Balance - end of period | ||||||||
| Weighted average grant date fair value | $ | $ | ||||||
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, 2023 was $ and $, respectively, and for the three and nine months ended March 31, 2022 was $ and $, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $ at March 31, 2023 and is expected to be recognized over a weighted-average period of years.
28
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (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, 2023 and June 30, 2022 are as follows:
| March 31, 2023 | June 30, 2022 | |||||||
| Mortgage loan portfolio serviced for: | ||||||||
| FHLMC | $ | $ | ||||||
Custodial
escrow balances maintained in connection with serviced loans were $
Activity for loan servicing rights for the three and nine months ended March 31, 2023 and 2022 is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| Loan servicing rights: | ||||||||||||||||
| Beginning of period: | $ | $ | $ | $ | ||||||||||||
| Change in fair value | ||||||||||||||||
| End of period: | $ | $ | $ | $ | ||||||||||||
Fair
value at March 31, 2023 was determined using a discount rate of
| (11) | SUPPLEMENTAL CASH FLOW INFORMATION |
Supplemental cash flow information for the nine months ended March 31, 2023 and 2022 is as follows:
| March 31, 2023 | March 31, 2022 | |||||||
| Cash paid during the period for: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Supplemental noncash disclosures: | ||||||||
| Transfers from loans to real estate owned | $ | $ | ||||||
| Change in unrealized gain/loss on securities available-for-sale | $ | ( | ) | $ | ( | ) | ||
29
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)
| (12) | SUBSEQUENT EVENTS |
Dividend Declared
On
April 27, 2023, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $ per share
of Oconee Federal Financial Corp.’s common stock. The dividend is payable to stockholders of record as of
30
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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:
| ● | statements of our goals, intentions and expectations; |
| ● | statements regarding our business plans and prospects and growth and operating strategies; |
| ● | statements regarding the asset quality of our loan and investment portfolios; and |
| ● | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report 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:
| ● | our ability to manage our operations in response to changes in economic conditions (including real estate values, loan demand, inflation, commodity prices and employment levels) nationally and in our market areas; |
| ● | the effects of the recent turmoil in the banking industry (including the failure of three financial institutions); |
| ● | adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values); |
| ● | significant increases in our delinquencies and loan losses, including as a result of our inability to resolve classified assets, changes in the underlying cash flows of our borrowers, and management’s assumptions in determining the adequacy of the allowance for loan losses; |
| ● | credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance and provision for loan losses; |
| ● | changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio; |
| ● | use of estimates for determining the fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations; |
| ● | increased competition among depository and other financial institutions; |
| ● | our ability to attract and maintain deposits, including introducing new deposit products; |
| ● | inflation and changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources; |
| ● | fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area; |
| ● | declines in the yield on our assets resulting from the current low interest rate environment; |
| ● | our ability to successfully implement our business strategies, including attracting and maintaining deposits and introducing new financial products; |
| ● | risks related to high concentration of loans secured by real estate located in our market areas; |
| ● | changes in the level of government support of housing finance; |
| ● | the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings; |
| ● | our ability to enter new markets successfully and capitalize on growth opportunities; |
| ● | changes in laws or government regulations or policies affecting financial institutions, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes; |
| ● | changes in the ability of third-party providers to perform their obligations to us; |
| ● | technological changes that may be more difficult or expensive than expected; |
| ● | cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; |
| ● | the effect of any global or national war, conflict or act of terrorism; |
| ● | our reliance on a small executive staff; |
31
| ● | changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs to implement our strategic plan; |
| ● | the social and economic effects of any pandemic; |
| ● | changes in consumer spending, borrowing and savings habits; |
| ● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; |
| ● | our ability to control costs and expenses, particularly those related to operating as a publicly traded company; |
| ● | the effects of actual government shutdowns; |
| ● | the ability of the U.S. government to manage federal debt limits; |
| ● | other changes in our financial condition or results of operations that reduce capital available to pay dividends; |
| ● | other changes in the financial condition or future prospects of issuers of securities that we own, including our stock in the FHLB of Atlanta; and |
| ● | other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services. |
Critical Accounting Policies
There were no material changes to the critical accounting policies as disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2022, as filed with the Securities and Exchange Commission.
Comparison of Financial Condition at March 31, 2023 and June 30, 2022
Our total assets increased by $43.4 million, or 8.0%, to $588.1 million at March 31, 2023 from $544.8 million at June 30, 2022.
Total cash and cash equivalents decreased $2.1 million, or 21.2%, to $7.7 million at March 31, 2023 from $9.7 million at June 30, 2022. The decrease in cash and cash equivalents was due to normal periodic fluctuations.
Our available-for-sale securities portfolio decreased by $13.3 million from $151.3 million at June 30, 2022 to $138.0 million at March 31, 2023. The decrease in securities classified as available-for-sale was primarily a result of unrealized losses in the portfolio due to the rising interest rate environment.
Gross loans increased $56.6 million, or 16.4%, to $401.7 million at March 31, 2023 from $345.1 million at June 30, 2022. This increase was primarily a result of loan originations generally outpacing loan repayments during the nine months ended March 31, 2023.
Restricted equity securities increased by $1.5 million from $1.2 million at June 30, 2022 to $2.7 million at March 31, 2023. The increase was a result of an increase in FHLB stock associated with increased FHLB borrowings.
Deferred tax assets increased by $868 thousand from $4.7 million at June 30, 2022 to $5.5 million at March 31, 2023. The increase was primarily a result of the unrealized losses in the securities portfolio due to the rising interest rate environment.
Deposits increased $11.3 million, or 2.5%, to $471.0 million at March 31, 2023 from $459.7 million at June 30, 2022. The increase in deposits was due to normal periodic fluctuations. 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, 2023.
FHLB advances increased $33.0 million, or 366.7%, to $42.0 million at March 31, 2023 from $9.0 million at June 30, 2022. The increase was due to funding needs for loan growth. 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, 2023, or approximately $141.6 million. We had no federal funds purchased as of March 31, 2023 or as of June 30, 2022.
Total shareholders’ equity decreased $1.7 million, or 2.2%, to $73.6 million at March 31, 2023 compared to $75.3 million at June 30, 2022. The decrease was primarily the result of net income for the nine months ended March 31, 2023 of $3.1 million being offset by $3.1 million in other comprehensive loss, and $1.7 million in dividends distributed. The other comprehensive loss is attributed to unrecognized losses in the investment portfolio due to rising market rates. The Association exceeded all regulatory capital requirements at March 31, 2023 and June 30, 2022.
32
Nonperforming Assets
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.
| March 31, 2023 | June 30, 2022 | |||||||
| (Dollars in thousands) | ||||||||
| Nonaccrual loans: | ||||||||
| Real estate loans: | ||||||||
| One-to-four family | $ | 416 | $ | 1,401 | ||||
| Multi-family | — | 208 | ||||||
| Home equity | 46 | — | ||||||
| Nonresidential | 523 | 478 | ||||||
| Agricultural | — | — | ||||||
| Construction and land | — | — | ||||||
| Total real estate loans | 985 | 2,087 | ||||||
| Commercial and industrial | — | — | ||||||
| Consumer and other loans | — | — | ||||||
| Total nonaccrual loans | $ | 985 | $ | 2,087 | ||||
| Accruing loans past due 90 days or more: | ||||||||
| Real estate loans | $ | — | $ | — | ||||
| Commercial and industrial | — | — | ||||||
| Consumer and other loans | — | — | ||||||
| Total accruing loans past due 90 days or more | — | — | ||||||
| Total of nonaccrual and 90 days or more past due loans | $ | 985 | $ | 2,087 | ||||
| Real estate owned, net: | ||||||||
| One-to-four family | $ | — | $ | — | ||||
| Nonresidential | — | — | ||||||
| Construction and land | — | — | ||||||
| Other nonperforming assets | — | — | ||||||
| Total nonperforming assets | $ | 985 | $ | 2,087 | ||||
| Accruing troubled debt restructurings | $ | — | $ | — | ||||
| Troubled debt restructurings and total nonperforming assets | $ | 985 | $ | 2,087 | ||||
| Total nonperforming loans to total loans | 0.25 | % | 0.60 | % | ||||
| Total nonperforming assets to total assets | 0.17 | % | 0.38 | % | ||||
| Total nonperforming assets to loans and real estate owned | 0.25 | % | 0.60 | % | ||||
All nonperforming loans in the table above were classified either as substandard or doubtful. There were no other loans that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Nonperforming assets, which were comprised entirely of nonaccrual loans, decreased $1.1 million from $2.1 million as of June 30, 2022 to $1.0 million as of March 31, 2023. 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 combined with payoffs. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.17% and 0.25%, respectively, at March 31, 2023 compared to 0.38% and 0.60%, respectively at June 30, 2022.
33
Analysis of Net Interest Margin
The following table sets forth average balance sheets, average annualized yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to income.
| For the Three Months Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Average Balance | Interest and Dividends(1) | Yield/ Cost | Average Balance | Interest and Dividends(1) | Yield/ Cost | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans | $ | 386,825 | $ | 4,069 | 4.21 | % | $ | 336,536 | $ | 3,392 | 4.03 | % | ||||||||||||
| Investment securities | 154,063 | 762 | 1.98 | 145,151 | 543 | 1.50 | ||||||||||||||||||
| Investment securities, tax-free | 6,651 | 38 | 2.29 | 15,000 | 86 | 2.29 | ||||||||||||||||||
| Interest bearing deposits in other banks | 5,099 | 57 | 4.53 | 6,205 | 4 | 0.27 | ||||||||||||||||||
| Federal funds sold | 147 | 2 | 4.43 | 31 | 0 | 0.17 | ||||||||||||||||||
| Other interest-earning assets | 2,317 | 22 | 3.85 | 1,034 | 3 | 0.99 | ||||||||||||||||||
| Total interest-earning assets | 555,102 | 4,950 | 3.57 | 503,957 | 4,028 | 3.20 | ||||||||||||||||||
| Noninterest-earning assets | 20,557 | 35,946 | ||||||||||||||||||||||
| Total assets | $ | 575,659 | $ | 539,903 | ||||||||||||||||||||
| Liabilities and equity: | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| NOW and demand deposits | $ | 84,750 | $ | 48 | 0.23 | % | $ | 83,264 | $ | 26 | 0.13 | % | ||||||||||||
| Money market deposits | 91,592 | 252 | 1.12 | 89,241 | 29 | 0.13 | ||||||||||||||||||
| Regular savings | 44,460 | 6 | 0.05 | 47,689 | 7 | 0.06 | ||||||||||||||||||
| Certificates of deposit | 191,101 | 878 | 1.86 | 174,026 | 166 | 0.39 | ||||||||||||||||||
| Total interest-bearing deposits | 411,903 | 1,184 | 1.17 | 394,220 | 228 | 0.23 | ||||||||||||||||||
| Federal funds purchased | 76 | 1 | 5.40 | 2 | 0 | 0.26 | ||||||||||||||||||
| Short term FHLB borrowings | 32,017 | 361 | 4.57 | 888 | 3 | 1.40 | ||||||||||||||||||
| Long term FHLB borrowings | 2,413 | 10 | 1.65 | 4,112 | 16 | 1.54 | ||||||||||||||||||
| Total interest-bearing liabilities | 446,409 | 1,556 | 1.41 | 399,222 | 247 | 0.25 | ||||||||||||||||||
| Noninterest bearing deposits | 54,387 | 54,258 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities | 1,213 | 854 | ||||||||||||||||||||||
| Total liabilities | 502,009 | 454,334 | ||||||||||||||||||||||
| Equity | 73,650 | 85,569 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 575,659 | $ | 539,903 | ||||||||||||||||||||
| Net interest income | $ | 3,394 | $ | 3,781 | ||||||||||||||||||||
| Interest rate spread | 2.16 | % | 2.95 | % | ||||||||||||||||||||
| Net interest margin | 2.43 | % | 3.00 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 1.24 | x | 1.26 | x | ||||||||||||||||||||
(1) - Categories that show zero are below $1 thousand.
34
| For the Nine Months Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Average Balance | Interest and Dividends(1) | Yield/ Cost | Average Balance | Interest and Dividends(1) | Yield/ Cost | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Loans | $ | 370,236 | $ | 11,521 | 4.15 | % | $ | 337,344 | $ | 10,560 | 4.17 | % | ||||||||||||
| Investment securities | 156,620 | 2,290 | 1.95 | 139,421 | 1,336 | 1.28 | ||||||||||||||||||
| Investment securities, tax-free | 6,818 | 117 | 2.29 | 15,029 | 257 | 2.28 | ||||||||||||||||||
| Interest bearing deposits in other banks | 2,908 | 79 | 3.62 | 11,357 | 15 | 0.17 | ||||||||||||||||||
| Federal funds sold | 90 | 3 | 3.97 | 51 | 0 | 0.10 | ||||||||||||||||||
| Other interest-earning assets | 1,852 | 50 | 3.60 | 1,148 | 23 | 2.67 | ||||||||||||||||||
| Total interest-earning assets | 538,524 | 14,060 | 3.48 | 504,350 | 12,191 | 3.22 | ||||||||||||||||||
| Noninterest-earning assets | 21,286 | 37,560 | ||||||||||||||||||||||
| Total assets | $ | 559,810 | $ | 541,910 | ||||||||||||||||||||
| Liabilities and equity: | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| NOW and demand deposits | $ | 90,089 | $ | 132 | 0.20 | % | $ | 80,072 | $ | 78 | 0.13 | % | ||||||||||||
| Money market deposits | 92,506 | 384 | 0.55 | 85,655 | 92 | 0.14 | ||||||||||||||||||
| Regular savings | 48,806 | 22 | 0.06 | 46,392 | 27 | 0.08 | ||||||||||||||||||
| Certificates of deposit | 172,088 | 1,267 | 0.98 | 179,568 | 605 | 0.45 | ||||||||||||||||||
| Total interest-bearing deposits | 403,489 | 1,805 | 0.60 | 391,687 | 802 | 0.27 | ||||||||||||||||||
| Federal funds purchased | 398 | 10 | 3.24 | 1 | 0 | 0.26 | ||||||||||||||||||
| Short term FHLB borrowings | 22,130 | 645 | 3.88 | 3,348 | 7 | 0.27 | ||||||||||||||||||
| Long term FHLB borrowings | 2,500 | 30 | 1.59 | 4,708 | 54 | 1.53 | ||||||||||||||||||
| Total interest-bearing liabilities | 428,517 | 2,490 | 0.77 | 399,744 | 863 | 0.29 | ||||||||||||||||||
| Noninterest bearing deposits | 56,650 | 54,010 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities | 1,128 | 891 | ||||||||||||||||||||||
| Total liabilities | 486,295 | 454,645 | ||||||||||||||||||||||
| Equity | 73,515 | 87,265 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 559,810 | $ | 541,910 | ||||||||||||||||||||
| Net interest income | $ | 11,570 | $ | 11,328 | ||||||||||||||||||||
| Interest rate spread | 2.71 | % | 2.93 | % | ||||||||||||||||||||
| Net interest margin | 2.87 | % | 2.99 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 1.26 | x | 1.26 | x | ||||||||||||||||||||
(1) - Categories that show zero are below $1 thousand.
35
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. There are no out-of-period items or adjustments to exclude from this table.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| March 31, 2023 Compared to 2022 | March 31, 2023 Compared to 2022 | |||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Loans | $ | 524 | $ | 153 | $ | 677 | $ | 1,023 | $ | (62 | ) | $ | 961 | |||||||||||
| Investment securities | 2 | 169 | 171 | 97 | 717 | 814 | ||||||||||||||||||
| Interest bearing deposits in other banks | (1 | ) | 54 | 53 | (3 | ) | 67 | 64 | ||||||||||||||||
| Federal funds sold | — | 2 | 2 | — | 3 | 3 | ||||||||||||||||||
| Other interest-earning assets | 6 | 13 | 19 | 17 | 10 | 27 | ||||||||||||||||||
| Total | 531 | 391 | 922 | 1,134 | 735 | 1,869 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits | 11 | 945 | 956 | 25 | 978 | 1,003 | ||||||||||||||||||
| Federal Funds Purchased | 1 | — | 1 | 10 | — | 10 | ||||||||||||||||||
| Short term FHLB borrowings | 336 | 22 | 358 | 188 | 450 | 638 | ||||||||||||||||||
| Long term FHLB borrowings | (7 | ) | 1 | (6 | ) | (26 | ) | 2 | (24 | ) | ||||||||||||||
| Total | 341 | 968 | 1,309 | 197 | 1,430 | 1,627 | ||||||||||||||||||
| Increase/(decrease) in net interest income | $ | 190 | $ | (577 | ) | $ | (387 | ) | $ | 937 | $ | (695 | ) | $ | 242 | |||||||||
Contractual Maturities and Interest Rate Sensitivity
The following table summarizes the scheduled repayments of our loan portfolio at March 31, 2023. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Loans are presented net of loans in process.
| Real Estate Loans | ||||||||||||||||||||||||||||||||||||
| One-to-Four Family | Multi-family | Home Equity | Non-Residential | Agricultural | Construction and Land | Commercial and Industrial | Consumer and Other | Total | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Amounts due in: | ||||||||||||||||||||||||||||||||||||
| One year or less | $ | 1,432 | $ | — | $ | 58 | $ | 476 | $ | — | $ | 4,152 | $ | 962 | $ | 487 | $ | 7,567 | ||||||||||||||||||
| More than one to five years | 9,735 | — | 368 | 18,231 | 2,022 | 16,920 | 2,284 | 577 | 50,137 | |||||||||||||||||||||||||||
| More than five to fifteen years | 42,003 | 144 | 7,273 | 6,969 | 463 | 3,002 | 80 | 80 | 60,014 | |||||||||||||||||||||||||||
| More than fifteen years | 257,177 | 197 | 279 | 107 | — | 26,187 | — | 62 | 284,009 | |||||||||||||||||||||||||||
| Total | $ | 310,347 | $ | 341 | $ | 7,978 | $ | 25,783 | $ | 2,485 | $ | 50,261 | $ | 3,326 | $ | 1,206 | $ | 401,727 | ||||||||||||||||||
| Variable rate loans with greater than one year maturity | $ | 78,020 | ||
| Fixed rate loans with greater than one year maturity | 316,140 | |||
| $ | 394,160 |
36
Comparison of Operating Results for the Three Months Ended March 31, 2023 and March 31, 2022
General. We reported net income of $628 thousand for the three months ended March 31, 2023 as compared to net income of $1.0 million for the three months ended March 31, 2022. Interest income increased $922 thousand for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 and interest expense increased $1.3 million, resulting in a net decrease to net interest income of $387 thousand. Noninterest income decreased $31 thousand for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Total noninterest expense increased $83 thousand. Tax expense decreased $135 thousand.
Interest Income. Interest income increased by $922 thousand to $5.0 million for the three months ended March 31, 2023. The yield on interest-earning assets increased 37 basis points from 3.20% for the three months ended March 31, 2022 to 3.57% for the three months ended March 31, 2023. Total average interest-earning assets increased by $51.1 million to $555.1 million for the three months ended March 31, 2023 from $504.0 million for the three months ended March 31, 2022.
Interest income on loans increased by $677 thousand to $4.1 million from $3.4 million for the three months ended March 31, 2023 and March 31, 2022, respectively. The yield on loans increased 18 basis points from 4.03% for the three months ended March 31, 2022 to 4.21% for the three months ended March 31, 2023. The increase in yield is primarily due to an overall increase in market rates. The average balance of loans increased by $50.3 million, or 14.9%, to $386.8 million for the three months ended March 31, 2023 from $336.5 million for the three months ended March 31, 2022. The increase in the average balance of our loans is reflective of increased originations offsetting normal loan repayments.
Interest income on investment securities increased $171 thousand, or 27.2%, to $800 thousand for the three months ended March 31, 2023 from $629 thousand for the three months ended March 31, 2022. This was the result of an increase of $563 thousand, or 0.4%, in the average balances of securities to $160.7 million from $160.2 million for the three months ended March 31, 2023 and 2022, respectively, combined with an increase in the total average yield of our investment securities of 42 basis points to 1.99% from 1.57%. The increase in average balances of our investment securities is reflective of our efforts during the past twelve months to invest in higher yielding assets. Our increased yields are reflective of overall higher investment rates that were available on purchases made during the prior twelve months.
Income on other interest earning assets increased by $74 thousand, or 1,095.0%, to $81 thousand for the three months ended March 31, 2023 from $7 thousand for the three months ended March 31, 2022. The average balance of other interest-earning assets increased $293 thousand to $7.6 million for the three months ended March 31, 2023 from $7.3 million for the three months ended March 31, 2022 and the yield increased 389 basis points over the same period. The increase in average balance was reflective of normal fluctuation. The increase in yield was a result of an overall increase in market rates, primarily federal funds rates.
Interest Expense. Interest expense increased $1.3 million, or 530.0%, to $1.6 million for the three months ended March 31, 2023 from $247 thousand for the three months ended March 31, 2022. The average rate paid on interest bearing liabilities increased 116 basis points from 0.25% for the three months ended March 31, 2022 to 1.41% for the three months ended March 31, 2023.
Interest expense on deposits increased $956 thousand, or 419.3%, to $1.2 million for the three months ended March 31, 2023 from $228 thousand for the three months ended March 31, 2022. The average rate paid on interest bearing deposits increased 94 basis points from 0.23% for the three months ended March 31, 2022 to 1.17% for the three months ended March 31, 2023. The average balance of interest bearing deposits increased $17.7 million, or 4.5%, to $411.9 million for the three months ended March 31, 2023 from $394.2 million for the three months ended March 31, 2022.
Interest expense on certificates of deposit increased by $712 thousand, or 428.9%, to $878 thousand for the three months ended March 31, 2023 from $166 thousand for the three months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 1.86% from 0.39% combined with a $17.1 million increase in average balances. The increase in interest cost on these deposits is due to an overall increase in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.
Interest expense on NOW, demand deposits, regular savings and other deposits increased by $21 thousand to $54 thousand for the three months ended March 31, 2023 from $33 thousand for the three months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 0.17% from 0.10%, offset by a $1.7 million decrease in average balances. The increase in interest cost on these deposits is due to an overall increase in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.
Interest expense on money market deposits increased by $223 thousand, or 769.0%, to $252 thousand for the three months ended March 31, 2023 from $29 thousand for the three months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 1.12% from 0.13% combined with a $2.4 million increase in average balances. The increase in interest cost on these deposits is reflective of an overall increase in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.
37
Interest expense for other borrowings increased by $353 thousand, or 1,888.3%, to $372 thousand for the three months ended March 31, 2023 from $19 thousand for the three months ended March 31, 2022. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. The increase in interest expense on other borrowings was attributable to an increase in the average cost of the borrowings to 4.37% from 1.54% combined with a $29.5 million increase in average balances. The increase in the cost of these borrowings is reflective of an overall increase in market rates. The increase in the average balance of these borrowings is reflective of funding needs for loan growth.
Net Interest Income. Net interest income before the provision for loan losses decreased by $387 thousand, or 10.2%, to $3.4 million for the three months ended March 31, 2023. Our interest rate spread and net interest margin decreased to 2.16% and 2.43%, from 2.95% and 3.00%, for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase in income on earning assets was less than the increase in cost of interest bearing liabilities, resulting in the decrease in net interest margin for the three months ended March 31, 2023.
Provision for Loan Losses. We recorded a $50 thousand provision for loan losses for the three months ended March 31, 2023 and no provision for the three months ended March 31, 2022. There were no charge-offs for the three months ended March 31, 2023 or for the three months ended March 31, 2022. The provision for the three months ended March 31, 2023 is primarily due to the growth of the loan portfolio balance.
Our total allowance for loan losses was $1.5 million, or 0.37% of total gross loans as of March 31, 2023 and $1.3 million, or 0.39%, of total gross loans as of June 30, 2022. There were no specifically identified impaired loans at March 31, 2023 or June 30, 2022. Total loans individually evaluated for impairment decreased $981 thousand, or 68.8%, to $445 thousand at March 31, 2023 compared to $1.4 million at June 30, 2022.
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, 2023 and 2022. There have been no changes to our allowance for loan loss methodology during three months ended March 31, 2023.
Noninterest Income. Noninterest income decreased $31 thousand, or 6.7%, to $433 thousand for the three months ended March 31, 2023 from $464 thousand for the three months ended March 31, 2022. The net gain on sale of mortgage loans reflected no gain for the three months ended March 31, 2023 and a $33 thousand gain for the three months ended March 31, 2022. Loan sales declined due to a decrease in demand brought on by the increased rate environment. Gains on the disposition of purchase credit impaired loans, which totaled $51 thousand for the three months ended March 31, 2023, decreased $19 thousand compared to $70 thousand for the three months ended March 31, 2022. We did not have the same opportunities for gains on the disposition of purchase credit impaired loans in the three months ended March 31, 2023 as we did in the three months ended March 31, 2022. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense for the three months ended March 31, 2023 increased by $83 thousand, or 2.9%, to $3.0 million for three months ended March 31, 2023 from $2.9 million for the three months ended March 31, 2022. Salaries and employee benefits increased $41 thousand due to routine salary increases. Data processing increased $31 thousand due to routine upgrades and volume increases in the current period. For the three months ended March 31, 2023, we recognized a gain on foreclosed assets of $37 thousand due to the sale of foreclosed properties. There were no foreclosed asset sales for the three months ended March 31, 2022. For the three months ended March 31, 2023, we recognized a gain in the value of the loan servicing asset of $22 thousand compared to a $42 thousand gain for the three months ended March 31, 2022. The fair value of our loan servicing asset is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to normal periodic fluctuations.
Income Tax Expense. Tax expense decreased $135 thousand, or 44.4%, to $169 thousand for the three months ended March 31, 2023 from $304 thousand for the three months ended March 31, 2022. This was primarily due to lower net income. Our effective income tax rate was 21.2% and 22.6% for the three months ended March 31, 2023 and 2022, respectively.
38
Comparison of Operating Results for the Nine Months Ended March 31, 2023 and March 31, 2022
General. We reported net income of $3.1 million for the nine months ended March 31, 2023 as well as for the nine months ended March 31, 2022. Interest income increased $1.9 million for the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022 and interest expense increased $1.6 million, resulting in a net increase to net interest income of $242 thousand. Total noninterest expense decreased $66 thousand. Tax expense increased $140 thousand.
Interest Income. Interest income increased by $1.9 million to $14.1 million for the nine months ended March 31, 2023. The yield on interest-earning assets increased 26 basis points from 3.22% for the nine months ended March 31, 2022 to 3.48% for the nine months ended March 31, 2023. Total average interest-earning assets increased by $34.2 million to $538.5 million for the nine months ended March 31, 2023 from $504.4 million for the nine months ended March 31, 2022.
Interest income on loans increased by $961 thousand to $11.5 million from $10.6 million for the nine months ended March 31, 2023 and March 31, 2022, respectively. The yield on loans decreased two basis points from 4.17% for the nine months ended March 31, 2022 to 4.15% for the nine months ended March 31, 2023. The decrease in yield is primarily due to lower deferred fees recognized in the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022. The average balance of loans increased by $32.9 million, or 9.8%, to $370.2 million for the nine months ended March 31, 2023 from $337.3 million for the nine months ended March 31, 2022. The increase in the average balance of our loans is reflective of increased originations offsetting normal loan repayments.
Interest income on investment securities increased $814 thousand, or 51.1%, to $2.4 million for the nine months ended March 31, 2023 from $1.6 million for the nine months ended March 31, 2022. This was the result of an increase of $9.0 million, or 5.8%, in the average balances of securities to $163.4 million from $154.5 million for the nine months ended March 31, 2023 and 2022, respectively, combined with an increase in the total average yield of our investment securities of 58 basis points to 1.96% from 1.38%. The increase in average balances of our investment securities is reflective of our efforts during the past twelve months to invest in higher yielding assets. Our increased yields are reflective of overall higher investment rates that were available on purchases made during the prior twelve months.
Income on other interest earning assets increased by $94 thousand, or 246.8%, to $132 thousand for the nine months ended March 31, 2023 from $38 thousand for the nine months ended March 31, 2022. The average balance of other interest-earning assets decreased $7.7 million to $4.9 million for the nine months ended March 31, 2023 from $12.6 million for the nine months ended March 31, 2022 and the yield increased 322 basis points over the same period. The decrease in average balance was primarily due to money market funds and fed funds being used to purchase higher yielding assets during the prior twelve months. The increase in yield was a result of an overall increase in market rates, primarily federal funds rates.
Interest Expense. Interest expense increased $1.6 million, or 188.5%, to $2.5 million for the nine months ended March 31, 2023 from $863 thousand for the nine months ended March 31, 2022. The average rate paid on interest bearing liabilities increased 48 basis points from 0.29% for the nine months ended March 31, 2022 to 0.77% for the nine months ended March 31, 2023.
Interest expense on deposits increased $1.0 million, or 125.1%, to $1.8 million for the nine months ended March 31, 2023 from $802 thousand for the nine months ended March 31, 2022. The average rate paid on interest bearing deposits increased 33 basis points from 0.27% for the nine months ended March 31, 2022 to 0.60% for the nine months ended March 31, 2023. The average balance of interest bearing deposits increased $11.8 million, or 3.0%, to $403.5 million for the nine months ended March 31, 2023 from $391.7 million for the nine months ended March 31, 2022.
Interest expense on certificates of deposit increased by $662 thousand, or 109.4%, to $1.3 million for the nine months ended March 31, 2023 from $605 thousand for the nine months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 0.98% from 0.45%, offset by $7.5 million decrease in average balances. The increase in interest cost on these deposits is due to an overall increase in market rates. The decrease in the average balance of these deposits is reflective of normal deposit fluctuation.
Interest expense on NOW, demand deposits, regular savings and other deposits increased by $49 thousand to $154 thousand for the nine months ended March 31, 2023 from $105 thousand for the nine months ended March 31, 2022. The increase in interest expense on these deposits was attributable to a $12.4 million increase in average balances combined with an increase in the average cost on these deposits to 0.15% from 0.11%. The increase in interest cost on these deposits is due to an overall increase in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.
Interest expense on money market deposits increased by $292 thousand, or 317.4%, to $384 thousand for the nine months ended March 31, 2023 from $92 thousand for the nine months ended March 31, 2022. The increase in interest expense on these deposits was attributable to an increase in the average cost on these deposits to 0.55% from 0.14% combined with a $6.9 million increase in average balances. The increase in interest cost on these deposits is reflective of an overall increase in market rates. The increase in the average balance of these deposits is reflective of normal deposit fluctuation.
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Interest expense for other borrowings increased by $624 thousand to $685 thousand for the nine months ended March 31, 2023 from $61 thousand for the nine months ended March 31, 2022. Other borrowings include both FHLB advances as well as any overnight federal funds purchased. The increase in interest expense on other borrowings was attributable to an increase in the average cost of the borrowings to 3.64% from 1.01% combined with a $17.0 million increase in average balances. The increase in the cost of these borrowings is reflective of an overall increase in market rates. The increase in the average balance of these borrowings is reflective of funding needs for loan growth.
Net Interest Income. Net interest income before the provision for loan losses increased by $242 thousand, or 2.1%, to $11.6 million for the nine months ended March 31, 2023. Our interest rate spread and net interest margin decreased to 2.71% and 2.87%, from 2.93% and 2.99%, for the nine months ended March 31, 2023 and March 31, 2022, respectively. The increase in income on earning assets was more than the increase in cost of interest bearing liabilities, resulting in the increase in net interest margin for the nine months ended March 31, 2023.
Provision for Loan Losses. We recorded a $150 thousand provision for loan losses for the nine months ended March 31, 2023 and no provision for the nine months ended March 31, 2022. There were no charge-offs for the nine months ended March 31, 2023 or for the nine months ended March 31, 2022. The provision for the nine months ended March 31, 2023 is primarily due to the growth of the loan portfolio balance.
Our total allowance for loan losses was $1.5 million, or 0.37% of total gross loans as of March 31, 2023 and $1.3 million, or 0.39%, of total gross loans as of June 30, 2022. There were no specifically identified impaired loans at March 31, 2023 or June 30, 2022. Total loans individually evaluated for impairment decreased $981 thousand, or 68.8%, to $445 thousand at March 31, 2023 compared to $1.4 million at June 30, 2022.
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, 2023 and 2022. There have been no changes to our allowance for loan loss methodology during nine months ended March 31, 2023.
Noninterest Income. Noninterest income decreased $6 thousand, or 0.5%, to $1.3 million for the nine months ended March 31, 2023. The net gain on sale of mortgage loans reflected a $12 thousand gain for the nine months ended March 31, 2023 and a $182 thousand gain for the nine months ended March 31, 2022. Loan sales declined due to a decrease in demand brought on by the increased rate environment. The change in the fair value of equity securities was a loss of $1 thousand for the nine months ended March 31, 2023 compared to a loss of $49 thousand for the nine months ended March 31, 2022. Gains or losses on the fair value of equity securities are market driven. There were $84 thousand in losses on the sale of securities for the nine months ended March 31, 2023, and no sale of securities for the nine months ended March 31, 2022. Securities were sold during the nine months ended March 31, 2023 to adjust the investment portfolio to yield higher net earnings going forward. The net gain on payoff of purchased credit impaired loans increased $170 thousand to $240 thousand for the nine months ended March 31, 2023 compared to $70 thousand for the nine months ended March 31, 2022. We had more opportunities for gains on the disposition of purchase credit impaired loans in the nine months ended March 31, 2023 than we did in the nine months ended March 31, 2022. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense for the nine months ended March 31, 2023 decreased by $66 thousand, or 0.7%, to $8.8 million for nine months ended March 31, 2023 from $8.9 million for the nine months ended March 31, 2022. Salaries and employee benefits decreased $121 thousand due to reduced ESOP costs, as the ESOP loan was fully repaid in December 2022, and higher deferred loan costs. Data processing increased $68 thousand due to routine upgrades and volume increases in the current period. For the nine months ended March 31, 2023, we recognized a gain on foreclosed assets of $37 thousand due to the sale of foreclosed properties. There were no foreclosed asset sales for the nine months ended March 31, 2022. For the nine months ended March 31, 2023, we recognized a gain in the value of the loan servicing asset of $41 thousand compared to a $39 thousand gain for the nine months ended March 31, 2022. The fair value of our loan servicing asset is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to normal periodic fluctuations.
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Income Tax Expense. Tax expense increased $140 thousand, or 20.9%, to $809 thousand for the nine months ended March 31, 2023 from $669 thousand for the nine months ended March 31, 2022. This was primarily due to a smaller permanent tax benefit being recognized during the nine months ended March 31, 2023 as compared to the nine months ended March 31, 2022, which was a result of fewer nonqualified stock options being exercised during the nine months ended March 31, 2023 as compared to the nine months ended March 31, 2022. Our effective income tax rate was 20.9% and 18.0% for the nine months ended March 31, 2023 and 2022, 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. Our liquidity monitoring process is designed to contend with changing economic situations. 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. Treasury and 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, 2023, or approximately $141.6 million as of that date, with a remaining availability of $99.6 million as of March 31, 2023.
Common Stock Dividends. On August 25, 2022, November 23, 2022 and February 23, 2023 the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.7 million.
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 March 31, 2023. 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, 2023, 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.
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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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| (a) | None. |
| (b) | Not applicable. |
| (c) | Issuer Repurchases. On March 29, 2023, the Board of Directors authorized the repurchase of up to 50,000 shares of the Company’s common stock. The Company did not have a repurchase plan in place January 1, 2023 to March 29, 2023. |
| Total Number of Shares 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 | ||||||||||||||
| January 1 - January 31, 2023 | — | $ | — | — | — | ||||||||||||
| February 1 - February 28, 2023 | — | — | — | — | |||||||||||||
| March 1 - March 31, 2023 | — | — | — | 50,000 | |||||||||||||
| Total | — | $ | — | — | (1) | ||||||||||||
| (1) | The Company did not have a repurchase plan in place from January 1, 2023 to March 29, 2023. A publicly announced repurchase program for up to 50,000 shares of the Company’s issued and outstanding common stock was approved by the Board of Directors on March 30, 2023. The Company received a regulatory non-objection to make repurchases through the plan through December 31, 2023. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. INDEX TO EXHIBITS
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed below.
Exhibit |
Description | |
| 31.1 | Certification of Curtis T. Evatt, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a). | |
| 31.2 |
| |
| 32 | Certification of Curtis T. Evatt, President and Chief Executive Officer, and John W. Hobbs, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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 | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Oconee Federal Financial Corp. | ||
| Date: May 12, 2023 | ||
/s/ Curtis T. Evatt | ||
| Curtis T. Evatt | ||
| President and Chief Executive Officer | ||
| /s/ John W. Hobbs | ||
| John W. Hobbs | ||
| Executive Vice President and Chief Financial Officer | ||
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