Annual Report to Shareholders
2020
OCONEE FEDERAL FINANCIAL CORP.
201 E. North Second Street
Seneca, SC 29678
(864) 882-2765
www.oconeefederal.com
October 9, 2020
Dear Fellow Shareholders,
On behalf of the Board of Directors and the entire Oconee Federal team, I am pleased to present
the 2020 Annual Report to shareholders of Oconee Federal Financial Corp., the parent company of
Oconee Federal Savings and Loan Association. At June 30, 2020 we had total assets of $516 million.
Net income for the year was $3.9 million, or $0.67 per diluted share. As in prior years, we continued to
add value to our shareholders by paying $2.3 million in dividends, or $0.40 per share during the year.
The current global COVID-19 pandemic has presented Oconee Federal with challenges to protect the
health and safety of our customers and employees, while still delivering the superior products and
customer service that our community has come to expect from us. Our hearts go out to everyone who
has been affected by this pandemic, whether directly or indirectly. We expect there to be continued
uncertainty as a result of this pandemic, but we are confident that we can adapt and focus on what has
made us successful in the past, and that will pave the way for us to continue to be successful in the
future. All of this is possible because of the combination of your support, our dedicated employees
and our satisfied customers.
We are privileged to serve you and are deeply appreciative of the confidence and trust that you place
in us. We look forward to continuing to serve you in the coming year.
Sincerely,
Curtis T. Evatt
President & CEO
Board Of Directors:
Curtis T. Evatt
Robert N. McLellan, Jr.
Cecil T. Sandifer, Jr.
Harry B. Mays, Jr.
W. Maurice Poore
Clayton
Walhalla
Greenville
Westminster
Seneca
Clemson
SOUTH
CAROLINA
Toccoa
Doyle
GEORGIA
EXECUTIVE OFFICES
Executive Offices
201 E. North Second Street
Seneca, SC 29678
BRANCHES AND OFFICES
Main Office
115 E. North Second Street
Seneca, SC 29678
Toccoa Branch
2859 Highway 17 Alternate
Toccoa, GA 30577
Doyle Street Branch
12 East Doyle Street
Toccoa, GA 30577
Seneca Branch
813 - 123 By-Pass
Seneca, SC 29678
Clayton Branch
221 Highway 76 East
Clayton, GA 30525
Clemson Branch
357 Old Greenville Hwy.
Clemson, SC 29631
Walhalla Branch
204 W. North Broad Street
Walhalla, SC 29691
Westminster Branch
111 W. Windsor Street
Westminster, SC 29693
GEORGIASOUTHCAROLINANORTHCAROLINA UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 001-35033
Oconee Federal Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
Federal
(State or other jurisdiction of
Incorporation or organization)
201 East North Second Street, Seneca, South Carolina
(Address of principal executive offices)
32-0330122
(IRS Employer
Identification Number)
29678
(Zip Code)
(864) 882-2765
(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Trading Symbol
OFED
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
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 reports), and (2) has been
subject to such requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the 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
Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of September 9, 2020 there were 5,605,456 shares outstanding of the registrant’s common stock. The aggregate value of the voting
and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock as of
December 31, 2019 was $40.4 million.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders. (Part III)
TABLE OF CONTENTS
PART I.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III.
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
PART IV.
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
25
25
26
26
26
27
28
29
39
40
79
79
79
80
80
80
80
80
81
82
i
ITEM 1. Business
Forward Looking Statements
PART I
This annual report contains forward-looking statements, which can be identified by the use of such words as estimate, project,
believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, but are not
limited to:
•
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
Annual Report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations
expressed in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to manage our operations 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;
adverse changes in the financial industry, securities, credit and national and local real estate markets (including real
estate values);
significant increases in our delinquencies and loan losses, including as a result of our inability to resolve classified
assets, changes in the underlying cash flows of our borrowers, and management’s assumptions in determining the
adequacy of the allowance for loan losses;
credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in
our allowance and provision for loan losses;
use of estimates for determining the fair value of certain of our assets, which may prove to be incorrect and result in
significant declines in valuations;
increased competition among depository and other financial institutions;
our ability to attract and maintain deposits, including by introducing new deposit products;
changes in interest rates generally, including changes in the relative differences between short term and long term
interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties
in our market areas and by declines in the value of real estate in our market area;
declines in the yield on our assets resulting from the current low interest rate environment;
our ability to successfully implement our business strategies;
risks related to a high concentration of loans secured by real estate located in our market areas;
changes in the level of government support of housing finance;
1
•
•
•
•
•
•
•
•
•
•
•
•
the results of examinations by our regulators, including the possibility that our regulators may, among other things,
require us to increase our allowance 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, regulatory fees and
compliance costs and the resources we have available to address such changes;
technological changes that may be more difficult or expensive than expected;
our reliance on a small executive staff;
changes in our compensation and benefit plans, and our ability to retain key members of our senior management team
and to address staffing needs to implement our strategic plan;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial
Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting
Oversight Board;
our ability to control costs and expenses, particularly those related to operating as a publicly traded company;
other changes in our financial condition or results of operations that reduce capital available to pay dividends;
other changes in the financial condition or future prospects of issuers of securities that we own, including our stock in
the Federal Home Loan Bank (“FHLB”) of Atlanta; and
other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing,
products and services.
Novel Coronavirus Pandemic (COVID-19)
On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus (“COVID-19”) a pandemic, which
continues to spread throughout the world and has adversely impacted global commercial activity and contributed to significant
declines and volatility in financial markets. The COVID-19 outbreak and government responses are creating disruption in global
supply chains and adversely impacting many industries. The outbreak could have a continued material adverse impact on economic
and market conditions and trigger a period of global economic slowdown. The federal banking agencies have encouraged financial
institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan
classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including
the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus has caused us to
modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in
meetings, events and conferences. We have certain employees working remotely and we may take further actions as may be required
by government authorities or that we determine are in the best interests of our employees, customers and business partners.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the COVID-19 outbreak.
Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results.
As the result we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our
business, financial condition, liquidity, and results of operations:
•
•
demand for our products and services may decline, making it difficult to grow assets and income;
if the economy is unable to substantially reopen or remain open, and high levels of unemployment continue for an
extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased
charges and reduced income;
•
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
2
•
•
•
•
our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance
periods, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets
may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest
margin and spread and reducing net income;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our
quarterly cash dividend,
•
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
• we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19
outbreak could have an adverse effect on us; and
• Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and
directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of
key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be
successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of
operations and prospects.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results
indicated by these forward-looking statements.
Oconee Federal Financial Corp.
Oconee Federal Financial Corp. (the “Company”) is a federally-chartered corporation that was incorporated in 2011 to be the
mid-tier stock holding company for Oconee Federal Savings and Loan Association (“Association”) in connection with the mutual
holding company reorganization of Oconee Federal Savings and Loan Association.
As of June 30, 2020, Oconee Federal Financial Corp. had 5,605,456 shares outstanding and a market capitalization of approximately
$144.5 million.
The executive offices of Oconee Federal Financial Corp. are located at 201 East North Second Street, Seneca, South Carolina
29678, and the telephone number is (864) 882-2765. Our website address is www.oconeefederal.com. Information on our website
should not be considered a part of this annual report. Oconee Federal Financial Corp. is subject to comprehensive regulation and
examination by the Board of Governors of the Federal Reserve System. At June 30, 2020, we had total assets of $515.6 million,
total deposits of $421.1 million and total equity of $88.3 million. We recorded net income of $3.9 million for the year ended
June 30, 2020.
Oconee Federal Savings and Loan Association
Oconee Federal Savings and Loan Association is a federally chartered savings and loan association headquartered in Seneca, South
Carolina. Oconee Federal Savings and Loan Association was originally chartered by the State of South Carolina in 1924 and in
1991 it converted to a federal charter.
Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits,
together with funds generated from operations, in one-to-four family residential mortgage loans and, to a lesser extent, nonresidential
mortgage, construction and land, agricultural and other loans. We also invest in U.S. Government and federal agency securities,
mortgage-backed securities, municipal securities and short-term deposits. We have also used borrowed funds as a source of funds,
and we borrow principally from the Federal Home Loan Bank of Atlanta. We conduct our business from our executive office and
eight full service branch offices. Our branch offices are located in Oconee County, South Carolina, Pickens County, South Carolina,
Stephens County, Georgia and Rabun County, Georgia. Our primary market area consists of the counties where we have offices and
the nearby communities and townships in adjacent counties in South Carolina and Georgia.
3
Oconee Federal Savings and Loan Association is subject to comprehensive regulation and examination by the Office of the
Comptroller of the Currency. Oconee Federal Savings and Loan Association is a member of the Federal Home Loan Bank system.
Oconee Federal, MHC
Oconee Federal, MHC is a federally-chartered mutual holding company formed in January 2011 to become the mutual holding
company of Oconee Federal Financial Corp. in connection with the mutual holding company reorganization of Oconee Federal
Savings and Loan Association. As a mutual non-stock holding company, Oconee Federal, MHC has as its members all current
holders of deposit accounts at Oconee Federal Savings and Loan Association and certain borrowers of as of October 21, 1991,
whose borrowings remain outstanding. As a mutual holding company, Oconee Federal, MHC is required by law to own a majority
of the voting stock of Oconee Federal Financial Corp. Oconee Federal, MHC is not currently, and at no time has been, an
operating company.
Mutual Holding Company Ownership Structure
Public stockholders own a minority of the outstanding shares of the Company’s common stock. As a result, stockholders other
than Oconee Federal, MHC are not be able to exercise voting control over most matters put to a vote of stockholders. Oconee
Federal, MHC owns a majority of the Company’s common stock and, through its board of directors, is able to exercise voting
control over most matters put to a vote of stockholders. The same directors and officers who manage Oconee Federal Savings and
Loan Association also manage the Company and Oconee Federal, MHC. The board of directors of Oconee Federal, MHC must
ensure that the interests of depositors of Oconee Federal Savings and Loan Association (as members of Oconee Federal, MHC) are
represented and considered in matters put to a vote of stockholders of the Company. Therefore, Oconee Federal, MHC may take
action that the public stockholders believe to be contrary to their interests. For example, Oconee Federal, MHC may exercise its
voting control to defeat a stockholder nominee for election to the board of directors of the Company.
In addition, stockholders are not able to force a merger or second-step conversion transaction without the consent of Oconee
Federal, MHC since such transactions also require the approval of a majority of all of the outstanding voting stock of the Company,
which can only be achieved if Oconee Federal, MHC voted to approve such transactions. Some stockholders may desire a sale or
merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since,
on a fully converted basis, most full stock institutions tend to trade at higher multiples than mutual holding companies. Stockholders
could, however, prevent a second-step conversion or the implementation of equity incentive plans as, under current regulations and
policies, such matters also require the separate approval of the stockholders other than Oconee Federal, MHC.
Market Area
We conduct business through our executive office, five full service branches in Clemson, Seneca, Walhalla, and Westminster, South
Carolina and three full service branches in Toccoa and Clayton, Georgia. Four of our South Carolina full service branches are located
in Oconee County, and one is located in Pickens County, both of which are located on the I-85 corridor between the Charlotte and
Atlanta metropolitan areas, approximately 120 miles south of Charlotte and approximately 120 miles north of Atlanta. Our South
Carolina full service branches are also located approximately 40 miles south of Greenville, South Carolina. Two of our Georgia
branches are located in Stephens County and one is located in Rabun County. Both counties border Oconee County, South Carolina.
Our primary market area, which consists of Oconee and Pickens Counties, South Carolina and Stephens and Rabun Counties,
Georgia and their nearby communities and townships in adjacent counties in both South Carolina and Georgia, is mostly rural and
suburban in nature. Our primary market area economy has historically been concentrated in manufacturing. The regional economy
is fairly diversified, with services, wholesale/retail trade, manufacturing and government providing the primary support. In addition,
Oconee County and nearby counties are experiencing an increase in retiree populations.
Competition
Competition for making loans and attracting deposits in our primary market area is intense, particularly in light of the relatively
modest population base of our primary markets and the relatively large number of institutions that maintain a presence in the area.
Financial institution competitors in our primary market area include other locally-based commercial banks, thrifts and credit unions,
as well as regional and super-regional banks. We also compete with depository and lending institutions not physically located in our
primary market area but capable of doing business remotely, mortgage loan originators and mortgage brokers and other companies
in the financial services industry, such as investment firms, mutual funds and insurance companies. Some of our competitors offer
products and services that we currently do not offer, such as investment services, trust services and private banking. To meet our
4
competition, we seek to emphasize our community orientation, local and timely decision making and superior customer service.
As of June 30, 2019 the most recent date of available data, our market share of deposits represented 23.9%, 8.6%, and 24.4% of
FDIC-insured deposits in Oconee County, South Carolina, Rabun County, Georgia, and Stephens County, Georgia, respectively.
Lending Activities
The principal lending activity of Oconee Federal Savings and Loan Association is originating one-to-four family residential
mortgage loans and, to a lesser extent, home equity loans and lines of credit, nonresidential real estate loans, construction and land
loans, commercial loans, agricultural loans, and other loans.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated:
2020
2019
Amount
Percent
Amount
Percent
At June 30,
2018
Amount
(Dollars in thousands)
Percent
2017
2016
Amount
Percent
Amount
Percent
Real estate loans:
One-to-four
family . . . . . . . $283,931 79.83% $289,077 80.28% $269,868 82.34% $259,854 84.50% $241,079 82.54%
704
Multi-family . . .
5,763
Home equity . . .
Nonresidential . . 20,083
Agricultural . . . .
1,187
Construction
and land . . . . . 29,096
Total
0.20
1.62
5.65
0.33
1,605
5,191
19,350
1,510
0.45
1.44
5.37
0.42
1,735
3,914
17,591
1,272
0.53
1.19
5.37
0.39
1,864
4,900
19,176
1,441
0.61
1.59
6.23
0.47
1,994
6,575
20,299
2,957
0.68
2.25
6.95
1.01
8.18
33,651
9.35
27,513
8.39
15,254
4.96
14,083
4.82
real estate
loans . . . . . 340,764 95.81
Commercial and
350,384 97.31
321,893 98.21
302,489 98.36
286,987 98.25
industrial(1) . . . . .
8,135
2.29
4,390
1.22
326
0.10
51
0.02
176
0.06
Consumer and
other loans . . . . .
6,768
1.90
5,314
1.47
5,539
1.69
5,018
1.63
4,900
1.68
Total loans . . . $355,667 100.00% $360,088 100.00% $327,758 100.00% $307,558 100.00% $292,063 100.00%
Allowance for
loan losses . . . . .
(1,346)
Loans, net . . . . . . . $354,321
(1,297)
$358,791
(1,097)
$326,661
(1,016)
$306,542
(922)
$291,141
(1)
Includes $4.1 million of 100% SBA-guaranteed Paycheck Protection Program (“PPP”) loans as of June 30, 2020.
Contractual Maturities and Interest Rate Sensitivity. The following table summarizes the scheduled repayments of our loan
portfolio at June 30, 2020. 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)
2,186 $
— $
58 $
685 $
502 $
2,819 $
1,053 $
5,676 $ 12,979
Amounts due in:
One year or less . . . . $
More than one to
five years . . . . . . .
11,398
—
505
10,226
150
8,402
6,962
812
38,455
More than five to
ten years . . . . . . .
More than ten years . .
27,733
242,614
Total . . . . . . . . . . $ 283,931 $
194
510
704 $
5,127
6,671
2,501
5,763 $ 20,083 $
73
297
238
1,187 $
857
17,018
29,096 $
120
—
8,135 $
212
41,211
68 263,022
6,768 $ 355,667
For loans with maturities greater than one year from June 30, 2020, $37.3 million have variable rates and $305.4 million have
fixed rates.
5
Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Oconee Federal Savings and
Loan Association is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Oconee
Federal Savings and Loan Association’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily
marketable collateral” or 30% for certain residential development loans). At June 30, 2020, based on the 15% limitation, Oconee
Federal Savings and Loan Association’s loans-to-one-borrower limit was approximately $12.4 million. At June 30, 2020, our largest
loan relationship with one borrower was for approximately $4.3 million secured by a commercial property and was performing in
accordance with its terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on
the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations
(consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors
as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the
borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit
reports, financial statements and tax returns.
Under our loan policy, the loan officer processing an application is responsible for ensuring proposals and approval of any extensions
of credit are in compliance with internal policies and procedures and applicable laws and regulations, and for establishing and
maintaining credit files and documentation sufficient to support the loan and to perfect any collateral position.
Our lending officers do not have individual lending authority. We have a tiered approval process requiring multiple officers and/
or committee approval depending on the size of the loan credit exposure. Total credit exposure is the sum total of all loans that
a customer has directly or guarantees with Oconee Federal. To ensure adequate liquidity, under our loan policy, aggregate loans
outstanding should not exceed our total deposits and advances from the Federal Home Loan Bank of Atlanta.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
One-to-four Family Residential Real Estate. The cornerstone of our lending program has long been the origination of long-term
loans secured by mortgages on owner-occupied one-to-four family residences. These loans are made in amounts generally with
loan-to-value ratios of up to 80% for traditional owner-occupied homes. For traditional homes, we may originate loans with loan-
to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. We may
make exceptions for special loan programs that we offer. At June 30, 2020, $283.9 million, or 79.8% of our total loan portfolio,
consisted of one-to-four family residential mortgage loans. Virtually all of the residential mortgage loans we originate are secured
by properties located in our market area.
The repayment terms of our mortgage loans are generally up to 30 years for traditional homes and up to 15 years for manufactured
or modular homes. The repayment terms of non-owner-occupied homes are generally up to 15 years for fixed-rate loans and up to
30 years for adjustable-rate loans. Although we typically retain in our portfolio the loans we originate, we generally originate our
fixed-rate one-to-four family residential loans in accordance with secondary market standards. Due to consumer demand in the
current low market interest rate environment, most of our recent originations are 15- to 30-year fixed-rate loans secured by one-to-
four family residential real estate.
We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure
the loan. Our one-to-four family residential mortgage loans do not currently include prepayment penalties and do not produce negative
amortization. Our one-to-four family residential mortgage loans customarily include due-on-sale clauses giving us the right to declare
the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage.
Multi-family. Multi-family real estate loans generally have a maximum term of five years with a 30-year amortization period and
a final balloon payment and are secured by properties containing five or more units in our market area. These loans are generally
made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate projected
debt service coverage ratio. Our underwriting analysis includes considering the borrower’s expertise and requires verification of the
borrower’s credit history, income and financial statements, banking relationships, independent appraisals, references and income
projections for the property. We generally obtains personal guarantees on these loans.
Multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This
greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects
of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the
successful operation of the related real estate project.
6
Home Equity. We offer home equity loans and lines of credit secured by first or second deeds of trust on primary residences in our
market area. Our home equity loans and lines of credit are limited to an 80% loan-to-value ratio (including all prior liens). Standard
residential mortgage underwriting requirements are used to evaluate these loans. We offer adjustable-rate and fixed-rate options for
these loans with a maximum term of 10 years. The repayment terms on lines of credit are interest only monthly with principle due
at maturity. Home equity loans have a more traditional repayment structure with principal and interest due monthly. The maximum
term on home equity loans is 10 years with an amortization schedule not to exceed 20 years.
Nonresidential Real Estate. Nonresidential loans include those secured by real estate mortgages on churches, owner-occupied and
non-owner occupied commercial buildings of various types, retail and office buildings, hotels, and other business and industrial
properties. The nonresidential real estate loans that we originate generally have terms of five to 20 years with amortization periods
up to 20 years. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75%.
We consider a number of factors in originating nonresidential real estate loans. We evaluate 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 us and other financial
institutions. In evaluating the property securing the loan, the factors we consider 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.
Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit
risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment
of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the
businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the
economy in general, including the current adverse conditions. Our nonresidential real estate lending includes a significant amount of
loans to churches. Because a church’s financial stability often depends on donations from congregation members rather than income
from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area
and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties,
the real estate securing church loans may be less marketable than other nonresidential real estate. Accordingly, the nature of these
loans makes them more difficult for management to monitor and evaluate.
Agricultural. Agricultural loans are secured by farmland and related improvements in our market area. These loans generally have
terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of these loans is generally 75%.
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. We generally make 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 we originate. Commercial construction loans have rates and terms
comparable to other commercial real estate loans that we originate. During the construction phase, the borrower generally pays
interest only. The maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans
are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial
construction loans are generally underwritten pursuant to the same guidelines used for originating other commercial real estate
loans. We make loans secured by land to complement our construction lending activities. These loans have terms of up to 10 years,
and maximum loan-to-value ratios of 75% for improved lots and 65% for unimproved land.
The application process for a construction loan includes a submission of accurate plans, specifications and costs of the project to be
constructed or developed, a copy of the deed or plat survey of the real estate involved in the loan and an appraisal of the proposed
collateral for the loan. Our construction loan agreements generally provide that loan proceeds are disbursed in increments as
construction progresses. Outside independent licensed or certified appraisers or architects inspect the progress of the construction
of the dwelling before disbursements are made.
7
To the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes
in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is
such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon
the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest)
of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a
project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments
to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to
identify problem loans at an early stage.
Commercial and Industrial. Commercial and industrial loans are offered to businesses and professionals in our market area. These
loans generally have short and medium terms on both a collateralized and uncollateralized basis. The structure of these loans are
largely determined by the loan purpose and collateral. Sources of collateral can include a lien on furniture, fixtures, equipment,
inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.
Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make repayment
from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional
complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases.
Within this category for the year ending June 30, 2020 are PPP loans that were authorized under the 2020 Coronavirus, Aid, Relief,
and Economic Security (“CARES”) Act. PPP loans are originated by the Association, are 100% guaranteed by the Small Business
Administration (“SBA”) and qualify to be forgiven based on certain criteria as determined by the SBA. The Association receives a
fee, with the percentage depending on the size of the loan, for originating these loans and earns 1% on the outstanding balance for
the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA.
Consumer. We offer installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other
legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans, 12 months for loans secured
by marketable securities and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. We generally only
extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low
balances. To date, our consumer lending, apart from home equity loans, has been quite limited.
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.
Originations, Purchases and Sales of Loans
Lending activities are conducted solely by our salaried personnel operating at our main and branch office locations. All loans
originated by us are underwritten pursuant to our policies and procedures. We originate both fixed-rate and adjustable-rate loans.
Our ability to originate fixed or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected
by current and expected future levels of market interest rates. We originate real estate and other loans through our salaried loan
officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
Secondary Mortgage Lending
We have access to secondary mortgage lending programs. As such we originated and sold $12.8 million of conforming one-to-four
residential real estate mortgage loans for the year ended June 30, 2020 as compared to $5.5 million for the year ended June 30, 2019.
Delinquencies and Nonperforming Assets
Delinquency Procedures. It is the policy of the Association to promptly identify all delinquent loan accounts and use all reasonable
and legal means either to cure the delinquencies or to take prompt legal action to foreclose, repossess or liquidate the collateral.
8
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. Real estate owned is initially
recorded at fair value less costs to sell. Thereafter, it is recorded at the lower of carrying amount or fair value, less estimated costs to sell.
Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value
of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance
is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed.
Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less
estimated costs to sell. Subsequent impairments in value of real estate owned are recorded as an impairment loss.
Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated:
2020
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
At June 30,
30-59
Days
Total
Past Due
Past Due
(Dollars in thousands)
2019
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
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 . . . . . . . . . . . . . . . . . . $
2,055 $
—
—
179
—
—
2,234
—
—
2,234 $
407 $
—
—
—
—
10
417
—
—
417 $
561 $
—
40
—
—
—
601
—
—
601 $
3,023 $
—
40
179
—
10
3,252
—
—
3,252 $
5,879 $
228
64
458
—
308
6,937
—
8
6,945 $
1,486 $
—
—
—
—
31
1,517
—
—
1,517 $
229 $
—
40
—
—
—
269
—
—
269 $
7,594
228
104
458
—
339
8,723
—
8
8,731
Total delinquencies decreased $5.5 million, or 62.8%, to $3.3 million at June 30, 2020 as compared to total delinquencies of
$8.7 million at June 30, 2019. We count loans with partial payments due as delinquent.
COVID-19 Loan Modifications. Included in the table above are $15.0 million in loans as of June 30, 2020 that were modified to
defer principal payments or principal and interest payments from three to six months based on our affected borrower’s request and
need for COVID-19 financial relief. All loans modified for COVID-19 financial relief were current at the time of modification.
Of the loans modified for COVID-19 financial relief, $11.0 million were one-to-four family loans, $3.6 million were non-residential
loans and $416 thousand were multi-family loans. These loans are not considered troubled debt restructurings (“TDRs”). As of June
30, 2020 $14.8 million were current and $243 thousand were 30 days or more past due.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities
considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately
protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. “Substandard” assets
include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are
not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added
characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions,
and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such
little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but
possess weaknesses are designated as “special mention” by our management.
9
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an
amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which
have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required
either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to
review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports to our regulators and in accordance with our classification of assets policy,
we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with
applicable regulations.
On the basis of this review of our assets, our classified or special mention assets at the dates indicated were as set forth below.
Special mention and substandard assets are presented gross of allowance, and doubtful assets are presented net of allowance.
At June 30,
2019
2020
(Dollars in thousands)
Special mention assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Substandard assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Special mention and Classified assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,984
4,877
159
8,020
$
$
3,286
5,818
811
9,915
Real estate owned assets decreased by $652 thousand, or 80.4%, to $159 thousand at June 30, 2020 from $811 thousand at June 30,
2019. Our substandard assets decreased by $941 thousand, or 16.2%, to $4.9 million at June 30, 2020 from $5.8 million at June 30,
2019. Our overall classified asset totals decreased by $1.9 million, or 19.1%, to $8.0 million at June 30, 2020 from $9.9 million at
June 30, 2019. Special mention assets at June 30, 2020 consisted primarily of one-to-four family real estate loans of $2.9 million and
$54 thousand of other loans as compared to the June 30, 2019 balances which consisted primarily of one-to-four family real estate
loans of $3.2 million and $69 thousand of other loans. Substandard assets at June 30, 2020 consisted primarily of $3.9 million in
one-to-four family residential real estate loans, $834 thousand of nonresidential real estate loans and $118 thousand of other loans
as compared to the June 30, 2019 balances which consisted primarily of $4.4 million in one-to-four family residential real estate
loans, $908 thousand of nonresidential real estate loans and $507 thousand of other loans.
Loans classified as substandard and doubtful are considered to be impaired loans. Impaired loans are loans that we do not reasonably
believe that we will collect all contractual principal and interest payments due on the loans. Those $250 thousand and over are
individually evaluated to determine if a specific loss reserve is required. All others are collectively evaluated. The recorded
investment of substandard and doubtful loans at June 30, 2020 was $4.9 million, a decrease of $941 thousand from $5.8 million at
June 30, 2019. There were no specific allowances reserved for these loans at June 30, 2020 or June 30, 2019.
Nonperforming Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have
become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for
loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis
or cost-recovery method, until the loans qualify for return to accrual. Generally, loans are restored to accrual status when all the
principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved
to nonaccrual status in accordance with our policy, which is typically upon 90 days of non-payment. Loans for which the terms
have been modified and for which (i) the borrower is experiencing financial difficulties and (ii) we have granted a concession to
the borrower are considered TDRs and are included in impaired loans and leases. Income on nonaccrual loans or leases, including
impaired loans and leases but excluding certain TDRs which continue to accrue interest, is recognized on a cash basis when and if
actually collected. For the year ended June 30, 2020, there were no defaults on any loans that were considered TDRs. At June 30,
2020, all TDRs were on nonaccrual status.
10
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated:
2020
2019
At June 30,
2018
(Dollars in thousands)
2017
2016
Nonaccrual loans:
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 nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . .
Real estate owned:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,969
—
40
732
—
—
2,741
—
—
$ 2,741
$ —
—
—
$ —
$ 2,741
$ —
159
—
159
—
$ 2,900
$ 2,674
—
40
816
356
31
3,917
—
—
$ 3,917
$ —
—
—
$ —
$ 3,917
$ 226
585
—
811
—
$ 4,728
$ 3,969
—
40
908
445
19
5,381
—
1
$ 5,382
$ —
—
—
$ —
$ 5,382
$
91
983
—
1,074
—
$ 6,456
$ 2,762
—
89
43
514
75
3,483
—
—
$ 3,483
$ —
—
—
$ —
$ 3,483
$ 152
713
—
865
—
$ 4,348
$ 2,133
—
126
942
531
25
3,757
—
—
$ 3,757
$ —
—
—
$ —
$ 3,757
$ 899
267
188
1,354
—
$ 5,111
Accruing troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . .
Accruing troubled debt restructurings and total
$ —
$ —
$ —
$ —
$ —
nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,900
$ 4,728
$ 6,456
$ 4,348
$ 5,111
Total nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets to total assets . . . . . . . . . . . . . . . . . . .
Total nonperforming assets to loans and real estate owned . . . . . .
0.77%
0.56%
0.81%
1.09%
0.90%
1.31%
1.64%
1.32%
1.96%
1.13%
0.90%
1.41%
1.29%
1.05%
1.74%
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.
Interest income that would have been recorded had our nonaccrual loans been current in accordance with their original terms was
$182 thousand for the year ended June 30, 2020. No interest was recognized on these loans for the year ended June 30, 2020. Interest
income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms
was $91 thousand for the year ended June 30, 2020. No interest was recognized on TDRs during the year ended June 30, 2020.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary
to reflect probable losses inherent in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a
quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
11
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (a) specific
allowances for identified problem loans; and (b) a general valuation allowance on the remainder of the loan portfolio. Although
we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the
entire portfolio.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired.
Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include:
•
•
•
•
•
•
•
the strength of the customer’s personal or business cash flows;
the availability of other sources of repayment;
the amount due or past due;
the type and value of collateral;
the strength of our collateral position;
the estimated cost to sell the collateral; and
the borrower’s effort to cure the delinquency.
In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the
property serving as collateral on the mortgage.
General Valuation Allowance of the Loan Portfolio. We establish a general allowance for smaller balance, homogenous loans that
are not otherwise specifically impaired to recognize the probable incurred losses within our portfolio, but which, unlike specific
allowances, has not been allocated to particular problem loans. In estimating this portion of the allowance, we apply loss factors
to each loan portfolio segment. Loans not identified as impaired are aggregated into homogenous pools of loans, or segments,
which share similar risk characteristics, primarily based on the type of loan, the purpose of the loan, and the underlying collateral
supporting the loan. We estimate our loss factors taking into consideration both quantitative and qualitative aspects that would affect
our estimation of probable incurred losses. These aspects include, but are not limited to historical charge-offs; loan delinquencies
and foreclosure trends; current economic trends and demographic data within our primary market area such as unemployment rates
and population trends; current trends in real estate values within our market area; charge-off trends of other comparable institutions;
the results of any internal loan reviews; loan to value ratios; our historically conservative credit risk policy; the strength of our
underwriting and ongoing credit monitoring function; and other relevant factors.
We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available
and have made an adjustment to the qualitative factor related to the economy in our model in response to the additional risks that
we believe have become present. However, the rapid development and fluidity of this pandemic precludes any prediction as to the
ultimate impact of the COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move
through the pandemic related quarantine and the country reopens.
We evaluate our loss factors quarterly to ensure their relevance in the current real estate and economic environment, and we
review the allowance for loan losses (as a percentage of total loans) maintained by us relative to other thrift institutions within our
peer group, taking into consideration the other institutions’ delinquency trends, charge-offs, nonperforming loans, and portfolio
composition as a basis for validation for the adequacy of our overall allowance for loan loss.
Acquired Loans. We separate loans that we have acquired through a business combination from loans that we have originated
when computing the general valuation allowance. We do this as loans that we have acquired have a completely different risk profile
as these loans were originated from a different demographic market from ours and underwritten and collateralized according to
different lending policies and practices. Therefore, we apply different loss factors to those loans in determining the general valuation
allowance. These loss factors represent the credit discounts used in the original fair value determinations made on the date of
acquisition of these loans. We will continue to evaluate these factors on a quarterly basis based on both quantitative and qualitative
considerations and revise these factors as necessary.
Acquired loans that are identified as purchased credit impaired (“PCI”) will continue to be classified as PCI for their remaining
lives, even if modified, extended or renewed, unless they meet the criteria for a TDR. We perform the same type of evaluation for
these loans as any other loan that we believe to be impaired. Each PCI loan is evaluated on an individual basis quarterly.
12
Overall Allowance. Our allowance at June 30, 2020 reflects a general valuation component of $1.3 million and no specific component
of specific loans determined to be impaired. Our allowance at June 30, 2019 also consisted of a general valuation component of
$1.3 million and no specific component of specific loans determined to be impaired. The overall allowance remained stable at
$1.3 million but increased as a percentage of total loans to 0.38% as of June 30, 2020 compared to 0.36% as of June 30, 2019.
At June 30, 2020, all individually evaluated impaired loans were within our acquired loan portfolio and totaled $2.4 million, all of
which were purchased credit impaired. There was no impairment measured on these loans. At June 30, 2019, within our acquired
loan portfolio, we had a total of $3.3 million in individually evaluated impaired loans, all of which were purchased credit impaired.
There was no impairment measured on these loans.
Within our originated portfolio, there were no loans specifically identified as impaired at June 30, 2020 or June 30, 2019. To the
best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the years ended June 30,
2020 and 2019. Net charge-offs for the year ended June 30, 2020 were $1 thousand compared to $18 thousand for the year ended
June 30, 2019.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated:
Year Ended June 30,
2020
$ 1,297
50
2019
2018
(Dollars in thousands)
$ 1,016
108
$
$ 1,097
218
—
—
—
—
—
—
—
(1)
(1)
(18)
—
—
—
—
—
—
—
(18)
—
—
(13)
—
—
(26)
—
(1)
(40)
2017
2016
922
203
$ 1,008
451
(33)
—
—
(77)
—
—
—
(1)
(111)
(447)
—
(72)
—
—
(9)
—
(9)
(537)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
13
—
—
—
—
—
—
—
—
—
—
—
— — — — —
—
— —
(537)
922
2
(109)
$ 1,016
13
(27)
$ 1,097
(18)
$ 1,297
(1)
$ 1,346
$
49.11% 33.11% 20.38% 29.17% 24.54%
0.33
0.38
0.01
0.00
0.36
0.01
0.33
0.04
0.31
0.18
Allowance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs:
Real estate loans
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Real estate loans
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance to nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance to total loans outstanding at the end of the year . . . . . . . . . . . . . . .
Net charge-offs to average loans outstanding during the year . . . . . . . . . . . . .
13
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category,
the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for
loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict
the use of the allowance to absorb losses in other categories.
2020
At June 30,
2019
(Dollars in thousands)
2018
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
Real estate loans:
One-to-four family . . . . . . . $ 1,032
4
Multi-family . . . . . . . . . . . .
34
Home equity . . . . . . . . . . . .
75
Nonresidential . . . . . . . . . . .
4
Agricultural . . . . . . . . . . . . .
105
Construction and land . . . . .
Total real estate loans . . . . . . .
Commercial and industrial . . .
Consumer and other loans . . . .
Total allowance for loan losses. . $ 1,346 100.00% 100.00% $ 1,297 100.00% 100.00% $ 1,097 100.00% 100.00%
76.66% 79.83% $
0.30
2.53
5.57
0.30
7.80
93.16
4.83
2.01
80.28% $
0.45
1.44
5.37
0.42
9.35
97.31
1.22
1.47
85.60%
0.36
0.73
6.02
0.09
6.75
99.55
0.36
0.09
82.34%
0.53
1.19
5.37
0.39
8.39
98.21
0.10
1.69
76.71%
0.31
1.85
6.71
0.23
7.25
93.06
5.17
1.77
0.20
1.62
5.65
0.33
8.18
95.81
2.29
1.90
939
4
8
66
1
74
995
4
24
87
3
94
1,254
65
27
1,207
67
23
1,092
4
1
At June 30,
2017
2016
(Dollars in thousands)
% of
Allowance
to Total
Allowance
Amount
% of
Loans in
Category
to Total
Loans
% of
Allowance
to Total
Allowance
% of
Loans in
Category
to Total
Loans
Amount
Real estate loans:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,005
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . . . .
7
Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . $ 1,016
900
4
2
63
1
35
88.59%
0.39
0.20
6.20
0.10
3.44
98.92
0.39
0.69
84.57% $ 733
4
0.61
1.59
2
130
6.15
0.47
5
39
4.96
913
98.35
6
0.02
3
1.63
100.00% 100.00% $ 922
79.50%
0.43
0.22
14.10
0.54
4.23
99.02
0.65
0.33
82.55%
0.68
2.25
6.95
1.01
4.82
98.26
0.06
1.68
100.00% 100.00%
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for
loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing
our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers
and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be
necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect our financial condition and results of operations.
14
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding
needs, to help manage our interest rate risk, and to generate a return on idle funds within the context of our interest rate and credit
risk objectives.
Our board of directors approved and adopted our investment policy. The investment policy is reviewed annually by our board of
directors and any changes to the policy are subject to the approval of our board of directors. Authority to make investments under
the approved investment policy guidelines is delegated to our Investment Committee. All investment transactions are reviewed at
regularly scheduled monthly meetings of our board of directors.
Our investment policy permits investments in securities issued by the United States government and its agencies or government
sponsored enterprises. We also may invest in mortgage-backed securities and mutual funds that invest in mortgage-backed securities.
Our investment policy also permits, with certain limitations, investments in bank-owned life insurance, collateralized mortgage
obligations, asset-backed securities, real estate mortgage investment conduits, South Carolina revenue bonds and municipal
securities. While equity investments are generally not authorized by our investment policy, such investments are permitted on a
case-by-case basis provided such investments are pre-authorized by our board of directors.
At June 30, 2020, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of equity
at that date.
Our investment policy does not permit investment in stripped mortgage-backed securities, complex securities and derivatives as
defined in federal banking regulations and other high-risk securities. As of June 30, 2020, we held no asset-backed securities other
than mortgage-backed securities. Our current policies do not permit hedging activities, such as engaging in futures, options or
swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests,
real estate mortgage investment conduit residual interests or stripped mortgage backed securities. At June 30, 2020, none of the
collateral underlying our securities portfolio was considered subprime or Alt-A (generally defined as loan collateral having less than
full documentation).
Current accounting principles require that, at the time of purchase, we designate a security as either held-to-maturity, available-
for-sale, or trading, based upon our ability and intent. Securities available-for-sale and trading securities are reported at fair value
and securities held-to-maturity are reported at amortized cost. All securities were classified as available-for-sale at June 30, 2020
and 2019. A periodic review and evaluation of our securities portfolios is conducted to determine if the fair value of any security
has declined below its carrying value and whether such decline is other-than-temporary. If such decline is deemed to be other-than-
temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. At June 30, 2020, the
fair values of our securities are based on published or securities dealers’ market values. At June 30, 2020, the amortized cost of our
securities classified as available-for-sale was $87.7 million compared to $94.7 million at June 30, 2019. The fair value of securities
classified as available-for-sale was $90.7 million compared to $95.4 million at June 30, 2019. The decrease in securities classified
as available-for-sale is primarily a result of principal paydowns and calls.
U.S. Government and Federal Agency Obligations. We may invest in U.S. Government and federal agency securities. While
these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these
investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
Mortgage-Backed Securities. At June 30, 2020, the amortized cost and fair value of our mortgage-backed securities portfolio
totaled $53.7 million and $55.2 million, respectively. Mortgage-backed securities are securities issued in the secondary market that
are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through”
certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including
servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one-to-four family or multifamily
mortgages, although we invest primarily in mortgage-backed securities backed by one-to-four family mortgages. The issuers of
such securities pool and resell the participation interests in the form of securities to investors such as the Company. The interest rate
of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. GNMA,
a United States Government agency, and government sponsored enterprises, such as FNMA and FHLMC, either guarantee the
payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than
individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may
be used to collateralize our borrowings.
15
Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate
estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount
relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment
estimates require modification that could cause amortization or accretion adjustments. Also, in September 2008, the Federal
Housing Finance Agency placed FHLMC and FNMA into conservatorship. The U.S. Treasury Department has established financing
agreements to ensure that FHLMC and FNMA meet their obligations to holders of mortgage-backed securities that they have issued
or guaranteed. These actions have not affected the markets for mortgage-backed securities issued by FHLMC or FNMA. Both
FHLMC and FNMA remain in conservatorship with the Federal Housing Finance Agency.
All of our mortgage-backed securities are issued by government agencies or government-sponsored entities.
Restricted Equity Securities. 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 carried at cost and classified as restricted equity securities.
We periodically evaluate the stock for impairment based on ultimate recovery of par value.
Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for deferred compensation
agreements. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations
generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses.
At June 30, 2020 and 2019, we had $19.5 million and $19.0 million, respectively, invested in bank-owned life insurance.
Securities Portfolio Composition. The following table sets forth the composition of our securities portfolio at the dates indicated:
2020
Amortized
Cost
Fair
Value
At June 30,
2019
Amortized
Cost
(Dollars in thousands)
Fair
Value
2018
Amortized
Cost
Fair
Value
Securities available-for-sale:
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA loan pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency mortgage-backed securities . .
U.S. Government agencies . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
$
20
2,493
20,821
—
9,723
53,660
1,011
$ 87,728
$
178
2,592
21,643
—
10,106
55,173
1,034
$ 90,726
$
20
2,493
24,968
22
14,889
40,366
11,980
$ 94,738
$
212
2,499
25,225
22
14,970
40,542
11,959
$ 95,429
$
20
5,485
43,393
401
10,529
44,490
14,027
$ 118,345
$
129
5,391
42,338
403
10,084
43,290
13,511
$ 115,146
Securities Portfolio Maturities and Yields. The following table sets forth the contractual maturities and weighted average yields
of our securities portfolio at June 30, 2020. Mortgage-backed securities are anticipated to be repaid in advance of their contractual
maturities as a result of projected mortgage loan prepayments. The weighted average life of the mortgage-backed securities in our
portfolio at June 30, 2020 was 3.9 years.
One Year or Less
More than One Year
to Five Years
More than Five Years
to Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(Dollars in thousands)
Securities available-for-sale:
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency mortgage-backed securities . . . . . . .
U.S. Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
249
250
—
139
—
638
—% $
1.75
2.00
—
2.00
—
2,244
4,505
9,149
39,374
—
1,011
1.99% $ 56,283
$
$
16
—% $
—
—
10,706
574
14,147
2.44
2.47
2.56
2.23
—
1.88
2.30% $ 25,427
—%
—
2.27
2.40
2.14
—
2.20%
More than Ten Years
Total
Amortized
Cost
Weighted
Amortized
Average
Yield
Cost
(Dollars in thousands)
Weighted
Average
Yield
Securities available-for-sale:
20
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,360
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
U.S. Government agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,380
—% $
—
2.44
—
—
—
20
2,493
20,821
9,723
53,660
1,011
2.43% $ 87,728
—%
2.37
2.36
2.55
2.21
1.88
2.28%
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may
use borrowings, primarily FHLB advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate
risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets
are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates,
market conditions and levels of competition.
Deposits. We accept deposits from Oconee and Pickens Counties, South Carolina, and Stephens and Rabun Counties, Georgia and
surrounding counties and townships. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money
market accounts, savings accounts, certificates of deposit and individual retirement accounts (“IRAs”). Deposit account terms
vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and
the interest rate. We do not accept brokered deposits, although we have the authority to do so. We very rarely accept certificates
of deposit in excess of $250 thousand or other deposits in excess of applicable FDIC insurance coverage, which is currently
$250 thousand per depositor.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms
are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth
goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of Oconee
Federal Savings and Loan Association in the community to attract and retain deposits. We also offer a fully functional electronic
banking platform, including on-line bill pay, and mobile banking as services to our deposit customers.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition.
Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial
institutions of varying sizes offering a wide range of products.
The following table sets forth the distribution of total deposits by account type, at the dates indicated:
2020
Amount
Percent
At June 30,
2019
Percent
Amount
(Dollars in thousands)
2018
Amount
Percent
NOW and demand deposits(1) . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . .
Regular savings and other deposits . . . . . . . . . . . . . . .
Certificates of deposit - IRA . . . . . . . . . . . . . . . . . . . .
Certificates of deposit - other . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 108,406
80,348
34,418
52,421
145,499
$ 421,092
25.74% $ 92,665
75,500
19.08
28,301
8.17
55,618
12.45
34.56
167,022
100.00% $ 419,106
22.11% $ 81,729
64,418
18.01
28,045
6.75
56,603
13.27
39.86
156,793
100.00% $ 387,588
21.09%
16.62
7.24
14.60
40.45
100.00%
(1)
Includes noninterest bearing deposits of $44.0 million and $36.2 million at June 30, 2020 and 2019, respectively.
17
As of June 30, 2020, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $250 thousand
was approximately $20.0 million. The following table sets forth the maturity of these certificates of deposit as of June 30, 2020:
June 30, 2020
Certificates of Deposit
greater than or equal to
$250 thousand
(Dollars in thousands)
Maturity Period:
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six through twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,983
2,710
7,936
6,394
20,023
Borrowings. We may obtain advances from the FHLB by pledging as security our capital stock in the Federal Home Loan Bank of
Atlanta and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different
repricing terms from our deposits, borrowings can change our interest rate risk profile.
At June 30, 2020, we had FHLB advances of $5.0 million at a weighted average stated rate of 1.50%, of which $2.5 million mature
in 2023 and $2.5 million mature in 2025. At June 30, 2019, we had FHLB advances of $19.0 million at a weighted average stated
rate of 2.75%, all of which matured in less than six months from year end. Our remaining available credit with the FHLB was
$126.0 million as of June 30, 2020. There were no overnight borrowings at June 30, 2020 or June 30, 2019.
Subsidiary and Other Activities
Oconee Federal Financial Corp. has no subsidiaries other than Oconee Federal Savings and Loan Association, and Oconee Federal
Savings and Loan Association has no subsidiaries.
Personnel
As of June 30, 2020, we had 77 full-time employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good working relations with our employees.
FEDERAL AND STATE TAXATION
Expense and Tax Allocation
Oconee Federal Savings and Loan Association has entered into an agreement with Oconee Federal Financial Corp. and Oconee
Federal, MHC to provide them with certain administrative support services for compensation not less than the fair market value of
the services provided. In addition, Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. have entered
into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Federal Taxation
General. Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association are subject to federal income taxation
in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the
tax rules applicable to Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association.
Method of Accounting. For federal income tax purposes, Oconee Federal Savings and Loan Association currently reports its income
and expenses on the accrual method of accounting and uses a tax year ending June 30 for filing its federal income tax returns.
Taxable Distributions and Recapture. Prior to the Small Business Protection Act of 1996, federal tax bad debt reserves created
prior to January 1, 1988 were subject to recapture into taxable income if the thrift institution failed to meet certain thrift asset and
definitional tests. Federal legislation has eliminated these thrift-related recapture rules.
18
At June 30, 2020, our total federal and South Carolina pre-1988 base year tax bad debt reserve was approximately $5.3 million.
Under current law, pre-1988 federal base year reserves remain subject to recapture if a thrift institution makes certain non-dividend
distributions, certain repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a thrift
or bank charter.
Net Operating Loss Carryovers. A financial institution may carry back net operating losses created before January 1, 2018 to
the preceding two taxable years and forward to the succeeding 20 taxable years. Net operating losses created after December 31,
2017 may be carried forward indefinitely. A net operating loss carryforward of $403 thousand was acquired as part of a previous
acquisition. At June 30, 2020 and 2019, $288 thousand and $309 thousand, respectively, of this carryforward remained.
Corporate Dividends-Received Deduction. Oconee Federal Financial Corp. may exclude from its income 100% of dividends
received from Oconee Federal Savings and Loan Association as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 65% in the case of dividends received from 20%-or-more-owned domestic corporations
and 50% in the case of dividends received from less-than-20%-owned domestic corporations.
State and Local Taxation
State Taxation. Oconee Federal Financial Corp. files a South Carolina income tax return, and Oconee Federal Savings and Loan
Association files South Carolina and Georgia income tax returns. State income tax rates are 4.5% to 6% in South Carolina and
6% in Georgia. For these purposes, state taxable income generally means federal taxable income subject to certain modifications,
primarily the exclusion of interest income on United States obligations, state income tax deductions, and adjustments for bonus
depreciation deductions. Oconee Federal Savings and Loan Association also files and pays business personal property tax and
Business Occupation Tax in the state of Georgia.
SUPERVISION AND REGULATION
General
As a federal savings association, Oconee Federal Savings and Loan Association is primarily subject to examination and regulation by
the OCC and, secondarily, by the FDIC as deposit insurer. The federal system of regulation and supervision establishes a comprehensive
framework of activities in which Oconee Federal Savings and Loan Association may engage and is intended primarily for the protection
of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of security holders. Under this system of federal
regulation, insured depository institutions are periodically examined to ensure that they satisfy applicable standards with respect to
their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Oconee Federal Savings and
Loan Association also is regulated to a lesser extent by the Federal Reserve Board, which governs the reserves to be maintained against
deposits and other matters. Oconee Federal Savings and Loan Association must comply with consumer protection regulations issued
by the Consumer Financial Protection Bureau. Oconee Federal Savings and Loan Association also is a member of and owns stock in
the Federal Home Loan Bank of Atlanta, which is one of the eleven regional banks in the Federal Home Loan Bank System. The OCC
examines Oconee Federal Savings and Loan Association and prepares reports for the consideration of its Board of Directors on any
operating deficiencies. Oconee Federal Savings and Loan Association’s relationship with its depositors and borrowers also is regulated
to a great extent by federal law and, to a lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the
form and content of Oconee Federal Savings and Loan Association’s loan documents and certain consumer protection matters.
As savings and loan holding companies, Oconee Federal Financial Corp. and Oconee Federal, MHC are subject to examination and
supervision by, and are required to file certain reports with, the Federal Reserve Board.
Set forth below are certain material regulatory requirements that are applicable to Oconee Federal Savings and Loan Association,
Oconee Federal Financial Corp. and Oconee Federal, MHC. This description of statutes and regulations is not intended to be a
complete description of such statutes and regulations and their effects on us. Any change in these laws or regulations, whether by
Congress or the applicable regulatory agencies, could have a material adverse impact on us and our operations.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as
amended, and the federal regulations thereunder. Under these laws and regulations, Oconee Federal Savings and Loan Association may
generally invest in mortgage loans secured by residential real estate without limit may also invest in commercial real estate, commercial
business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Oconee Federal
Savings and Loan Association also may establish subsidiaries, including those that may engage in certain activities not otherwise
permissible for Oconee Federal Savings and Loan Association, including real estate investment and securities and insurance brokerage.
19
Effective July 1, 2019, the Office of the Comptroller of the Currency issued a final rule, pursuant to a provision of the Economic
Growth Regulatory Relief and Consumer Protection Act (“EGRRCPA”), that permits a federal savings association to elect to
exercise national bank powers without converting to a national bank charter. The election is available to federal savings associations
that had total consolidated assets of $20 billion or less as of December 31, 2017. The Association did not exercise the covered
savings association election.
Capital Requirements. Federal regulations require federal savings associations to maintain common equity Tier 1 capital, Tier 1
capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. Higher levels of capital are required for asset
categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and
retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital
includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2
capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred
stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and
for institutions, such as Oconee Federal Savings and Loan Association, that have exercised an opt-out election regarding the treatment
of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in
the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but
qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
The regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a
“capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary
to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1,
2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
As a result of EGRRCP, the federal banking agencies developed a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible
equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying
community bank” that exceeds this ratio and elects the alternative regulatory capital scheme will be deemed to be in compliance
with all other capital and leverage requirements, including being categorized as “well capitalized” for Prompt Corrective Action
purposes, as described later. The “Community Bank Leverage Ratio” was established at 9%, and has temporarily been reduced to
8% as a result of the CARES Act. Oconee Federal Savings and Loan did not elect to use this alternative.
Loans-to-One Borrower. Generally, a federal savings and loan association may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10%
of unimpaired capital and surplus, if the excess is secured by specified readily marketable collateral, which does not include real
estate. As of June 30, 2020, Oconee Federal Savings and Loan Association’s largest lending relationship with a single or related
group of borrowers totaled $4.3 million, which represented 5.2% of unimpaired capital and surplus; therefore, Oconee Federal
Savings and Loan Association was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings and loan association, Oconee Federal Savings and Loan Association is subject
to a qualified thrift lender, or “QTL” test. Under the QTL test, Oconee Federal Savings and Loan Association must either qualify as
a “domestic building and loan association” within the meaning of Internal Revenue Code or maintain at least 65% of its “portfolio
assets” in “qualified thrift investments” (primarily residential mortgage loans and related investments, including mortgage-backed
securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of
property used in the conduct of the savings and loan association’s business.
A savings and loan association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home
Owners’ Loan Act. In addition, non-compliance with the QTL test is subject to agency enforcement action for a violation of law. At
June 30, 2020, Oconee Federal Savings and Loan Association maintained approximately 82.2% of its portfolio assets in qualified
thrift investments and, therefore, satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings and loan association, which include
cash dividends, stock repurchases and other transactions charged to the savings and loan association’s capital account. A federal
savings association must file an application with the OCC for approval of a capital distribution if:
•
the total capital distributions for the applicable calendar year exceed the sum of the association’s net income for that
year to date plus the association’s retained net income for the preceding two years;
20
•
•
•
the association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory-imposed condition; or
the association is not eligible for expedited treatment of its application or notice filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must still file a
notice with the Federal Reserve Board at least 30 days before its board of directors declares a dividend.
A notice or application for a capital distribution may be disapproved if:
•
•
•
the association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
The Federal Deposit Insurance Act generally provides that an insured depository institution may not make any capital distribution if,
after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. In addition, Oconee
Federal Savings and Loan Association’s ability to pay dividends is limited if Oconee Federal Savings and Loan Association does
not have the capital conservation buffer required by the new capital rules, which may limit the ability of Oconee Federal Financial
Corp. to pay dividends to its stockholders. See “Capital Requirements” above.
Liquidity. A federal savings and loan association is required to maintain a sufficient amount of liquid assets to ensure its safe and
sound operation. We seek to maintain a ratio of liquid assets not subject to pledge as a percentage of deposits and borrowings of
4.0% or greater of highly liquid assets. At June 30, 2020, this ratio was 26.3%. Total cash and cash equivalents was 8.2% of total
deposits at June 30, 2020.
Community Reinvestment Act and Fair Lending Laws. All federal savings and loan associations have a responsibility under
the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and
moderate-income borrowers. An association’s record of compliance with the Community Reinvestment Act is assessed in regulatory
examinations. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their
lending practices on the basis of characteristics specified in those statutes. An association’s failure to comply with the provisions
of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or
mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act
could result in enforcement actions by regulators and the Department of Justice. Oconee Federal Savings and Loan Association
received a “Satisfactory” Community Reinvestment Act rating in its most recent federal examination.
In June 2020, the Office of the Comptroller of the Currency published amendments to its Community Reinvestment Act regulations.
The final rule clarifies and expands the activities that qualify for Community Reinvestment Act credit, updates where activities
count for such credit and, according to the agency, seeks to create a more consistent and objective method for evaluating Community
Reinvestment Act performance. The final rule is effective October 1, 2020 but compliance with the revised requirements is not
mandatory until January 1, 2024 for institutions of Oconee Federal Savings and Loan Association’s size.
Transactions with Related Parties. A federal savings and loan association’s authority to engage in transactions with its “affiliates”
is limited by OCC regulations and the Federal Reserve Act and its implementing regulations. The term “affiliate” for these purposes
generally means any company that controls, is controlled by, or is under common control with an insured depository institution such
as Oconee Federal Savings and Loan Association. Oconee Federal Financial Corp. and Oconee Federal, MHC are affiliates of Oconee
Federal Savings and Loan Association. In general, transactions with affiliates must be on terms that are as favorable to the savings and
loan association as comparable transactions with non-affiliates and are subject to certain quantitative limits and collateral requirements.
In addition, savings and loan associations are prohibited from lending to any affiliates that are engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Transactions with
affiliates also must be consistent with safe and sound banking practices and not involve the purchase of low-quality assets.
Oconee Federal Savings and Loan Association’s authority to extend credit to its directors, executive officers and 10% shareholders,
as well as to entities controlled by such persons, is governed by the requirements of the Federal Reserve Act and related regulations.
Among other things, those provisions require that extensions of credit to insiders:
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features (subject to certain exemptions for lending
programs that are available to all employees); and
21
•
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of Oconee Federal Savings and Loan Association’s capital.
In addition, Oconee Federal Savings and Loan Association’s board of directors must approve extensions of credit in excess of
certain limits.
Enforcement. The OCC has primary enforcement responsibility over federal savings and loan associations, including the authority
to bring enforcement action against all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide
range of violations and actions, and range up to $25 thousand per day, unless a finding of reckless disregard is made, in which case
penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to
the OCC that enforcement action be taken with respect to a particular savings institution. If the OCC does not take action, the FDIC
has authority to take action under specified circumstances.
Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for
Safety and Soundness to implement the safety and soundness standards required under federal law. These standards relate to, among
other things, internal controls, information security systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate.
If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the
agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Failure to
implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition
of civil money penalties.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the regulators are authorized and, under
certain circumstances, required to take supervisory actions against undercapitalized savings and loan associations. An institution
is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%,
a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly
undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a
leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically
undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
An institution that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in
the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that
an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
If an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital
restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan.
An undercapitalized institution’s compliance with a capital restoration plan is required to be guaranteed by any company that
controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” institution fails
to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” institutions
must comply with one or more of a number of additional restrictions. “Critically undercapitalized” institutions are then subject to
additional measures.
The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework
provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will
be considered “well-capitalized” for purposes of prompt corrective action.
At June 30, 2020, Oconee Federal Savings and Loan Association met the criteria for being considered “well-capitalized.”
Insurance of Deposit Accounts. Deposit accounts in Oconee Federal Savings and Loan Association are insured by the FDIC’s
Deposit Insurance Fund, generally up to a maximum of $250 thousand per separately insured depositor and up to a maximum of
$250 thousand for self-directed retirement accounts.
The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. No institution may pay a dividend if in
default of its deposit insurance assessment.
22
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions deemed less risky of failure pay
lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory
ratings derived from statistical modeling estimating the probability of an institution’s failure within three years. That system,
effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.
The FDIC has the authority to increase insurance assessments. A material increase would likely have an adverse effect on the
operating expenses and results of operations of Oconee Federal Savings and Loan Association. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our
deposit insurance.
Federal Home Loan Bank System. Oconee Federal Savings and Loan Association is a member of the Federal Home Loan Bank
System, which consists of eleven regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central
credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the
Federal Home Loan Bank of Atlanta, Oconee Federal Savings and Loan Association is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank. As of June 30, 2020, Oconee Federal Savings and Loan Association was in compliance with
this requirement.
Other Regulations
Interest and other charges collected or contracted for by Oconee Federal Savings and Loan Association are subject to state usury
laws and federal laws concerning interest rates. Oconee Federal Savings and Loan Association’s operations are also subject to
federal laws (and regulations) applicable to credit transactions, such as the:
• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential
real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow
account practices, and prohibiting certain practices that increase the cost of settlement services;
• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
• Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
• Truth in Savings Act.
The operations of Oconee Federal Savings and Loan Association also are subject to the:
• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
• Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services;
• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital
check images and copies made from that image, the same legal standing as the original paper check; and
• The USA PATRIOT Act, which requires savings and loan associations to, among other things, establish broadened
anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and
reporting of money laundering. Such required compliance programs are intended to supplement existing compliance
requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets
Control regulations.
23
Holding Company Regulation
General. Oconee Federal, MHC and Oconee Federal Financial Corp. are non-diversified savings and loan holding companies
within the meaning of the federal law. As such, Oconee Federal, MHC and Oconee Federal Financial Corp. are registered savings
and loan holding companies and are subject to regulation, examinations, supervision by and reporting to the Federal Reserve Board.
In addition, the Federal Reserve Board has enforcement authority over Oconee Federal Financial Corp. and Oconee Federal, MHC,
and their non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or
prohibit activities that are determined to be a serious risk to Oconee Federal Savings and Loan Association.
Permitted Activities. The business activities of savings and loan holding companies are generally limited to those activities
permissible for financial holding companies under the Bank Holding Company Act of 1956, provided certain conditions are met and
financial holding company status is selected, or for multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are
incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under the Bank Holding Company Act, subject to regulatory approval,
and certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan holding company, including Oconee Federal Financial Corp. and Oconee Federal,
MHC, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company
thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5%
of a class of voting stock of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company
engaged in activities other than those permitted for a savings and loan holding company; or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal
Reserve Board evaluates such factors as the financial and managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and needs of the community and
competitive factors.
No acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than
one state may be approved, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan
holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Capital. The Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital
requirements, and EGRRCP directed the Federal Reserve Board to increase the asset threshold for the exception to $3.0 billion,
which was done in 2018. Consequently, savings and loan holding companies of less than $3.0 billion of assets, such as Oconee
Federal, MHC and Oconee Federal Financial Corp., are exempted from the consolidated holding company regulatory capital
requirements unless otherwise directed by the Federal Reserve Board in individual cases.
Source of Strength. Federal law extends the “source of strength” doctrine to savings and loan holding companies. The Federal
Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of managerial and
financial strength to their subsidiary savings associations by providing capital, liquidity and other support in times of financial stress.
Dividends. The Federal Reserve Board has issued policy statements regarding the payment of dividends and the repurchase of
shares of common stock by bank holding companies and savings and loan holding companies. In general, dividends should be paid
only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with
the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory
consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four
quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or
earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan
holding company to pay dividends may be restricted if a subsidiary savings association becomes undercapitalized. A savings and
loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock
or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or
redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared
with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of
Oconee Federal Financial Corp. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
The level of any dividends that may be paid by Oconee Federal Financial Corp. will also be affected by the ability of Oconee
Federal, MHC to waive the receipt of dividends.
24
Waivers of Dividends by Oconee Federal, MHC. Oconee Federal Financial Corp. may pay dividends on its common stock to
public shareholders. If it does, it is also required to pay dividends to Oconee Federal, MHC, unless Oconee Federal, MHC elects to
waive the receipt of dividends. Under federal law, Oconee Federal, MHC must receive the approval of the Federal Reserve Board
before it may waive the receipt of any dividends from Oconee Federal Financial Corp. The Federal Reserve Board has issued
an interim final rule providing that it will not object to dividend waivers under certain circumstances, including circumstances
where the waiver is not detrimental to the safe and sound operation of the savings association and a majority of the mutual holding
company’s members have approved the waiver of dividends by the mutual holding company within the previous twelve months.
There can be no assurance that a particular dividend waiver request would be approved by the Federal Reserve Board. In addition,
any dividends waived by Oconee Federal, MHC must be considered in determining an appropriate exchange ratio in the event of a
conversion of the mutual holding company to stock form.
Conversion of Mutual Holding Company to Stock Form. Federal regulations permit a mutual holding company to convert from
the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). In a Conversion Transaction
a new holding company would be formed as the successor to Oconee Federal Financial Corp. (the “New Holding Company”),
Oconee Federal, MHC’s corporate existence would end, and certain depositors of Oconee Federal Savings and Loan Association
would receive the right to subscribe for additional shares of the New Holding Company. There can be no assurance that such a
conversion transaction will occur.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any
person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding
company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or
more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in
control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding
voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the
competitive effects of the acquisition.
In March 2020, the Federal Reserve Board adopted a final rule, effective September 30, 2020, that revises its framework for
determining whether a company has a “controlling influence” of a bank or savings and loan holding company.
Federal Securities Laws
Oconee Federal Financial Corp.’s common stock is registered with the Securities and Exchange Commission. Oconee Federal
Financial Corp. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
ITEM 1A. Risk Factors
Disclosures of risk factors are not required by smaller reporting companies, such as the Company.
ITEM 1B. Unresolved Staff Comments
None.
25
ITEM 2. Properties
As of June 30, 2020, the net book value of our properties was $8.4 million. The following is a list of our offices:
Location
Year
Acquired
Square
Footage
Main Office
Main Office Annex
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
115 E. North 2nd St.
201 E. North 2nd St.
813 123 By-Pass
204 W. North Broad St.
111 W. Windsor St.
2859 Highway 17 Alternate Toccoa, Georgia
Toccoa, Georgia
12 East Doyle St.
Clayton, Georgia
221 Highway 76 East
Clemson, South Carolina
208 Kelly Road
Owned
Seneca, South Carolina
Owned
Seneca, South Carolina
Owned
Seneca, South Carolina
Walhalla, South Carolina
Owned
Westminster, South Carolina Owned
Owned
Owned
Owned
Owned
1966
1996
1985
1973
1972
2014
2014
2014
2020
7,000
7,500
5,250
3,100
3,200
17,007
5,548
5,851
4,155
Net Book
Value
of Real
Property
(Dollars in
thousands)
654
$
634
408
312
219
2,280
721
460
2,668
8,356
$
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.
ITEM 3. Legal Proceedings
We are not currently involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course
of business. Periodically, there have been claims involving Oconee Federal Savings and Loan Association, such as claims to enforce
liens, condemnation proceedings on properties in which we hold a security interest, claims involving the making and servicing of
real property loans and other issues incidental to our business.
At June 30, 2020, we were not involved in any legal proceedings the outcome of which management believes would be material to
our financial condition or results of operations.
ITEM 4. Mine Safety Disclosures
Not applicable.
26
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market. Our common stock is listed on the Nasdaq Capital Market under the symbol “OFED.” The approximate number of holders
of record of our common stock as of September 9, 2020 was 278. Certain shares of our common stock are held in “nominee” or
“street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Equity Compensation Plans. At June 30, 2020, there were no compensation plans under which equity securities of Oconee Federal
Financial Corp. were authorized for issuance other than the Employee Stock Ownership Plan and the Equity Incentive Plan. See
“Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Issuer Repurchases. On May 28, 2020, the Board of Directors authorized the repurchase of up to 100,000 shares of the Company’s
common stock, terminating the previous authorization on March 20, 2019 to repurchase 100,000 shares. The repurchase authorization
has no expiration date. In connection with these repurchase authorizations, the Company has purchased a total of 153,610 shares
of its common stock during the year ended June 30, 2020. During the three months ended June 30, 2020, the Company repurchased
70,550 shares of its common stock.
April 1 - April 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . .
May 1 - May 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . .
June 1 - June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Number of
Shares
Purchased
Average Price
Paid Per
Share
725
$
— $
$
$
69,825
70,550
16.80
—
27.05
26.94
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
725
—
69,825
70,550(1)
Approximate Maximum
Dollar Value or Number
of Shares That May Yet
be Purchased Under
Publicly Announced Plan
2,853(2)
100,000(3)
30,175(3)
(1) All shares were purchased pursuant to a publicly announced repurchase programs that were approved by the Board of Directors on March 20, 2019 and
May 20, 2020.
(2) Represents the maximum number of shares available for repurchase under the March 20, 2019 plan at month end.
(3) Represents the maximum number of shares available for repurchase under the May 20, 2020 plan at month end.
Sales of Unregistered Securities. During the year ended June 30, 2020, we did not offer or sell any unregistered securities.
27
ITEM 6. Selected Financial Data
Financial condition data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating data:
Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At or For the Year Ended June 30,
2020
2019
2018
(Dollars in thousands)
2017
2016
$ 515,582
90,726
354,321
421,092
88,305
$ 527,826
95,429
358,791
419,106
88,297
$ 487,959
115,146
326,661
387,588
84,865
$ 481,317
118,334
306,542
394,505
85,961
$ 485,640
132,084
291,141
399,634
85,401
$ 18,710
3,894
14,816
50
2,040
12,042
4,764
900
3,864
$
$ 18,846
3,593
15,253
218
1,693
12,134
4,594
874
3,720
$
$ 17,046
1,810
15,236
108
1,662
12,050
4,740
1,705
3,035
$
$ 17,154
1,324
15,830
203
2,126
10,750
7,003
1,478
5,525
$
$ 17,755
1,189
16,566
451
2,643
11,480
7,278
2,032
5,246
$
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.68
0.67
$
$
0.65
0.64
$
$
0.53
0.52
$
$
0.97
0.95
$
$
0.91
0.90
28
Performance ratios:
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate spread(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest-earning assets to average interest-bearing liabilities . . . . .
End of year equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
0.75%
4.39
2.94
3.13
2.35
72.22
1.23x
17.23%
17.16
For the Years Ended June 30,
2019
2018
2017
2016
0.73%
4.34
3.07
3.24
2.39
71.44
1.22x
17.43%
16.91
0.63% 1.15% 1.09%
6.31
6.84
3.54
3.72
3.52
3.33
3.77
3.58
3.43
2.39
2.23
2.45
60.16
60.30
70.77
1.18x
1.19x
1.22x
17.69% 17.83% 17.78%
16.75
17.85
17.29
Capital ratios:
Total capital to risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity tier 1 capital to risk weighted assets . . . . . . . . . . . . . . . . . .
Tier I capital to risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I capital to adjusted total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.13%
29.64
29.64
16.05
29.03%
28.56
28.56
15.46
29.75% 32.46% 31.00%
32.00
29.30
32.00
29.30
15.90
15.53
30.59
30.59
15.40
Asset quality ratios:
Allowance for loan losses as a percentage of total loans . . . . . . . . . . . . . . .
Allowance for loan losses as a percentage of nonperforming loans . . . . . .
Allowance for loan losses as a percentage of nonperforming assets . . . . . .
Net charge-offs to average outstanding loans during the period . . . . . . . . .
Nonperforming loans as a percentage of total loans . . . . . . . . . . . . . . . . . . .
Nonperforming assets as a percentage of total assets . . . . . . . . . . . . . . . . . .
Nonperforming assets as a percentage of loans and real estate owned . . . . .
0.38%
49.11
46.41
0.00
0.77
0.56
0.82
0.36%
33.11
27.43
0.01
1.09
0.90
1.31
0.33% 0.33% 0.32%
20.38
16.99
0.01
1.64
1.32
1.96
24.54
18.04
0.18
1.29
1.05
1.74
29.17
23.37
0.04
1.13
0.90
1.41
Other:
Number of full-service branch offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
7
7
7
7
(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Represents net interest income as a percent of average interest-earning assets.
(3) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Oconee Federal Savings and Loan Association has historically operated as a traditional thrift institution headquartered in Seneca,
South Carolina. Our principal business consists of attracting retail deposits from the general public in our market area and investing
those deposits, together with funds generated from operations, in one-to-four family residential mortgage loans and, to a much
lesser extent, nonresidential mortgage, construction and land and other loans. We also invest in U.S. Government and federal agency
securities, mortgage-backed securities and municipal securities. Our revenues are derived principally from the interest on loans
and securities and loan fees and service charges. Our primary sources of funds are deposits and principal and interest payments on
loans and securities. At June 30, 2020, we had total assets of $515.6 million, total deposits of $421.1 million and total equity of
$88.3 million.
A significant majority of our assets consist of long-term, fixed-rate residential mortgage loans and, to a much lesser extent,
investment-quality securities, which we have funded primarily with deposit accounts and the repayment of existing loans. Our results
of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn
on our interest-earning assets, consisting primarily of loans, investment securities (including U.S. Government and federal agency
securities, mortgage-backed securities and municipal securities) and other interest-earning assets, primarily interest-earning deposits
29
at other financial institutions, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction
accounts and certificates of deposit. Our results of operations also are affected by our provisions for loan losses, noninterest income
and noninterest expense. Noninterest income currently consists primarily of service charges on deposit accounts and miscellaneous
other income. Noninterest expense currently consists primarily of compensation and employee benefits, occupancy and equipment
expenses, data processing, professional and supervisory fees, office expense, provision for real estate owned and related expenses,
and other operating expenses. Our results of operations also may be affected significantly by general and local economic and
competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Other than our loans for the construction of one-to-four family residential mortgage loans, we do not offer “interest only” mortgage
loans on one-to-four family residential properties (where the borrower pays interest for an initial period, after which the loan
converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option
ARM” loans, where the borrower can pay less than the interest owed on his or her loan, resulting in an increased principal balance
during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories
typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable
repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant
assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting
policies. Additional discussions of these policies are discussed in Note 1 “Summary of Significant Accounting Policies” to the
accompanying Consolidated Financial Statements contained in Item 8. We consider the following to be our critical accounting policies:
Allowance for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary to reflect probable losses
inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which
is charged against income. In determining the allowance for loan losses, management makes significant estimates and judgments,
which to some extent involve assumptions about borrowers’ abilities to continue to make future principal and interest payments.
These estimates and judgments involve a high degree of judgment and subjectivity and are based on facts and circumstances that
existed at the date in which the allowance is determined. Changes in the macro and micro economic environment can have a
significant impact on these estimates and judgments in the future that could result in changes to the allowance for loan losses.
Integral to our allowance methodology is the use of a loan grading system whereby all loans are assigned a grade based on the risk
profile of each loan. Loan grades are initially assigned at origination and are routinely evaluated to determine if grades need to be
changed. Through our internal credit review function, ongoing credit monitoring, and continuous review of past due trends, loan
grades are adjusted by management either to respond to improvements in or deterioration of credit. 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.
The allowance methodology consists of two parts: an evaluation of loss for specific loans and an evaluation of loss for homogenous
pools of loans, commonly referred to as the specific and general valuation allowance. Certain loans exhibiting signs of potential
credit weakness are evaluated individually for impairment. A loan is considered to be impaired if it is probable that we will not
receive substantially all contractual principal and interest payments. The amount of impairment, or specific valuation allowance, is
measured by a comparison of the present value of expected future cash flows less selling expenses to the loan’s carrying value, or
in the case of collateral dependent loans a comparison to the fair value of the collateral less selling costs. To the extent the carrying
value of the loan exceeds the present value of a loan’s expected cash flows less selling expenses, a specific allowance is recorded.
If the carrying value is less than the present value of the impaired loan’s expected future cash flows, no specific allowance is
recorded however the loan is not included in the determination of the general valuation allowance.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing
loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific
loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties.
Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing
a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are
carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
The general valuation allowance is determined for loans not determined to be impaired. We segregate our loan portfolio into portfolio
segments. These portfolio segments share common characteristics such as the type of loan, its purpose, its underlying collateral, and
other risk characteristics. Once segregated, these loans are further segregated by loan grade. To calculate the allowance by grade,
we apply internally developed loss factors comprised of both quantitative and qualitative considerations.
30
We estimate our loss factors by taking into consideration both quantitative and qualitative aspects that would affect our estimation
of probable incurred losses. These aspects include, but are not limited to historical charge-offs; loan delinquencies and foreclosure
trends; current economic trends and demographic data within our market area, such as unemployment rates and population trends;
current trends in real estate values; charge-off trends of other comparable institutions; the results of any internal loan reviews;
loan-to-value ratios; our historically conservative credit risk policy; the strength of our underwriting and ongoing credit monitoring
function; and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible
to significant revision based on changes in economic and real estate market conditions. Actual loan losses may be significantly more
than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and
have made adjustments to certain qualitative factors in our model in response to the additional risks that we believe have become
present. However, the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate impact of the
COVID-19 outbreak. We will continue to review and make adjustments as may be necessary as we move through the pandemic
related quarantine and the country reopens.
See Note 1 “Summary of Significant Accounting Policies” and Note 4 “Loans” to the accompanying Consolidated Financial
Statements contained in Item 8 for additional discussion on the allowance for loan losses.
Business Combinations. Business combinations are accounted for using the acquisition method of accounting. As such, assets
acquired, including identified intangible assets, and liabilities assumed are recorded at their fair value, which often involves
estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other
valuation techniques, all of which are inherently subjective. Identified intangible assets are amortized based upon the estimated
economic benefits to be received, which is also subjective. Management will review identified intangible assets for impairment at
least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable,
in which case an impairment charge would be recorded. Goodwill is subject to impairment testing on at least an annual basis.
In addition, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. Our reporting unit for purposes of testing our
goodwill for impairment is our banking operations unit, which contains all other activities performed by the Company.
Valuation of Goodwill. The testing for impairment of goodwill is a two-step process. The first step in testing for impairment is to
determine the fair value of our reporting unit and compare that fair value with the carrying value of the reporting unit (including
goodwill.) If the fair value of the reporting unit exceeds the carrying value, the second step is not necessary and goodwill is deemed
not to be impaired. If the fair value of the reporting unit is less than the carrying value, the Company must estimate a hypothetical
purchase price for the reporting unit (representing the unit’s fair value) and then compare that hypothetical purchase price with the
fair value of the unit’s net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting
unit’s net assets represents the implied fair value of goodwill. An impairment loss would be recognized as a charge to earnings if
the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill. Our annual impairment evaluation
is May of each year.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance
is established. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Business Strategy
We have continued our primarily focus on the execution of our community oriented retail banking strategy. Highlights of our current
business strategy include the following:
• Continue to Focus on Residential Lending. We have been and will continue to be primarily a one-to-four family
residential mortgage lender for borrowers in our market area. As of June 30, 2020, $289.7 million, or 81.5%, of our
total loan portfolio consisted of one-to-four family residential mortgage loans (including home equity loans). In the
future, we may gradually increase our residential construction and home equity loan portfolios.
• Maintain a Modest Portfolio of Nonresidential Real Estate Loans. We have historically maintained a small portfolio
of nonresidential real estate loans. Our nonresidential real estate loans were $15.8 million, or 4.4% of our total loan
portfolio at June 30, 2020.
31
• Manage Interest Rate Risk While Maintaining or Enhancing, to the Extent Practicable, our Net Interest Margin.
Subject to market conditions, we have sought to enhance net interest income by emphasizing controls on the cost of
funds, particularly on the deposit products that we offer, rather than attempting to maximize asset yields, as loans
with high yields often involve greater credit risk and may be repaid during periods of decreasing market interest rates.
In addition, in view of our strong capital position, from time to time, we place more emphasis on enhancing our net
interest income than on limiting our interest rate risk.
• Rely on Community Orientation and High Quality Service to Maintain and Build a Loyal Local Customer Base
and Maintain our Status as an Independent Community-Based Institution. We were established in 1924 and have
been operating continuously in Oconee County since that time. By using our recognized brand name and the goodwill
developed over years of providing timely, efficient banking services, we have been able to attract a solid base of
local retail customers on which to continue to build our banking business. We have historically focused on promoting
relationships within our community rather than specific banking products, and we expect to continue to build our
customer base by relying on customer referrals and referrals from local builders and realtors. We extend this strategy
to the Rabun and Stephens counties as well.
• Adhere to Conservative Underwriting Guidelines to Maintain Strong Asset Quality. We have emphasized maintaining
strong asset quality by following conservative underwriting guidelines, sound loan administration, and focusing on
loans secured by real estate located within our market area only. Our nonperforming assets totaled $2.9 million, or
0.56% of total assets at June 30, 2020. Our total nonperforming loans to total loans ratio was 0.77% at June 30, 2020.
Total loan delinquencies, 30 days or more past due, as of June 30, 2020, were $3.3 million, or 0.9% of total loans. Total
loan delinquencies, 30 days or more past due, as of June 30, 2019, were $8.7 million, or 2.4% of total loans.
Comparison of Financial Condition at June 30, 2020 and June 30, 2019
Our total assets decreased by $12.2 million, or 2.3%, to $515.6 million at June 30, 2020 from $527.9 million at June 30, 2019.
Our total cash decreased by $2.1 million, or 5.7%, to $34.6 million at June 30, 2020 from $36.7 million at June 30, 2019. This
decrease was primarily due to normal fluctuations. Our total cash and deposit balance includes the deposits of Oconee Federal, MHC.
Securities available-for-sale decreased $4.7 million from June 30, 2019 to June 30, 2020. The Association is not actively replenishing
security repayments and maturities with purchases due to the funding needs of the Company.
Total gross loans decreased $4.4 million to $355.7 million at June 30, 2020 from $360.1 million at June 30, 2019. The majority
of the decrease was in our one-to-four family loans and non-residential real estate loans, which decreased by $5.1 million and
$3.5 million, respectively, from June 30, 2019 to June 30, 2020 and was offset by increase in other loan categories. This decrease
was primarily a result of loan originations generally not matching loan repayments during the year ended June 30, 2020.
Our total deposits increased to $421.1 million at June 30, 2020 from $419.1 million at June 30, 2019. This increase was primarily
due to normal fluctuations. We generally do not accept brokered deposits and no brokered deposits were accepted during the year
ended June 30, 2020.
We had $5.0 million and $19.0 million in advances from the FHLB as of June 30, 2020 and June 30, 2019, respectively. We had
credit available under a loan agreement with the FHLB in the amount of 25% of total assets, or approximately $126.0 million and
$128.1 million at June 30, 2019 and June 30, 2019, respectively.
Our total shareholders’ equity increased $8 thousand to $88.31 million at June 30, 2020 from $88.30 million at June 30, 2019.
The small increase is primarily the result of net income for the year ended June 30, 2020 of $3.9 million and $1.8 million in other
comprehensive income being offset by $3.9 million of stock repurchases and $2.3 million in dividends distributed.
Comparison of Operating Results for the Years Ended June 30, 2020 and June 30, 2019
General. Net income increased by $144 thousand, or 3.9%, to $3.9 million for the year ended June 30, 2020 from $3.7 million for
the year ended June 30, 2019. In further detail, there was a decrease in net interest income before the provision for loan losses of
$437 thousand, or 2.9%. This decrease in income was offset with an increase in noninterest income of $347 thousand, or 20.5%,
a decrease in loan loss provision of $168 thousand, or 77.1%, and a decrease in noninterest expense of $92 thousand, or 0.8%.
Tax expense increased $26 thousand, or 3.0%.
32
Interest Income. Interest income decreased by $136 thousand, or 0.7%, to $18.7 million for the year ended June 30, 2020 from
$18.8 million for the year ended June 30, 2019. The decrease was primarily the result of a decrease in our average yield on interest-
earning assets. The average yield on interest-earning assets decreased to 3.95% for the year ended June 30, 2019 from 4.00% for
the year ended June 30, 2019. The average balance of interest-earning assets increased to $473.2 million for the year ended June 30,
2020 from $470.7 million for the year ended June 30, 2019.
Interest income on loans increased $210 thousand, or 1.3%, to $16.4 million for the year ended June 30, 2020 from $16.2 million for
the year ended June 30, 2019. The average balance of our loans increased to $358.3 million for the year ended June 30, 2020 from
$351.8 million for the year ended June 30, 2019. The increase in the average balance of our loans is reflective of a peak in our loan
portfolio size beginning at the end of fiscal 2019 which then started decreasing at the later stages of fiscal 2020. The average yield
was 4.57% for the year ended June 30, 2020 compared to 4.60% for the year ended June 30, 2019, a result of a decreased loan rate
environment during the year ended June 30, 2020.
Interest income on investment securities decreased $487 thousand, or 20.6%, to $1.9 million for the year ended June 30, 2020
from $2.4 million for the year ended June 30, 2019, reflecting a decrease of $20.9 million, or 19.3%, in the average balances of
securities to $87.6 million from $108.5 million for the years ended June 30, 2020 and 2019, respectively, along with a decrease in
the total average yield of our investment securities of four basis points to 2.14% from 2.18%. The decrease in average balances of
our investment securities is reflective of our efforts to use routine repayments and maturities in the investment portfolio to help fund
our lending as well as repay FHLB advances. Our decreased yields are reflective of the liquidation of higher yielding investments
in fiscal 2020 along with overall lower investment rates generated on purchases made in late fiscal 2019 and during fiscal 2020.
Income on other interest earning assets increased by $141 thousand, or 45.5%, to $451 thousand for the year ended June 30, 2020
from $310 thousand for the year ended June 30, 2019. The average balance of other interest-earning assets increased $17.0 million
to $27.3 million for the year ended June 30, 2020 from $10.4 million for the year ended June 30, 2019 while the yield decreased 134
basis points over the same period. The increase in average balance was primarily due to funds being held in money market accounts
as a liquidity resource for possible large deposit withdrawals. The decrease in yield was primarily a result of decreased short-term
rates on interest-earning assets due to overall market rate decreases.
Interest Expense. Interest expense increased $301 thousand, or 8.4%, to $3.9 million for the year ended June 30, 2020 from
$3.6 million for the year ended June 30, 2019. The average rate paid on interest bearing liabilities increased eight basis points in
fiscal year 2020 to 1.01% from 0.93% for fiscal year 2019. This increase was primarily due to general increases in deposit rates
due to the competitive economic environment. The increase in the average rate paid on deposits was coupled with an increase in
the average balance of interest bearing deposits of $11.6 million, or 3.2%, to $377.0 million for the year ended June 30, 2020 from
$365.4 million for the year ended June 30, 2019.
The largest increase in deposit interest expense was related to expense on certificates of deposit, which increased by $412 thousand,
or 16.5% to $2.9 million for the year ended June 30, 2020 from $2.5 million for the year ended June 30, 2019. The increase in
interest expense on these deposits was attributable to the rising interest rate environment in late fiscal 2019. The average cost on
these deposits increased from 1.13% for the year ended June 30, 2019 to 1.37% for the year ended June 30, 2020. The average
balance on these deposits decreased $7.9 million, from $220.8 million for the year ended June 30, 2019 to $212.9 million for the
year ended June 30, 2020.
Interest expense on NOW and demand deposits and regular savings and other deposits increased by $117 thousand to $255 thousand
for the year ended June 30, 2020 from $138 thousand for the year ended June 30, 2019. The increase in interest expense on these
deposits was attributable to an increase in the average cost on these deposits to 0.29% from 0.17%, as well as an $8.8 million
increase in average balances.
Interest expense on money market deposits increased $111 thousand as the cost of these deposits increased six basis points from
0.61% for the year ended June 30, 2019 to 0.67% for the year ended June 30, 2020. The average balance of money market deposits
increased from $65.7 million to $76.4 million for the same period. The increase in money market deposits was due to normal
periodic fluctuations.
Interest expense for other borrowings decreased by $339 thousand, or 61.0%, to $217 thousand for the year ended June 30, 2020
from $556 thousand for the year ended June 30, 2019. Other borrowings include both FHLB advances as well as any overnight
federal funds purchased. Average other borrowings were $8.7 million for the year ended June 30, 2020 compared to $21.4 million
for the year ended June 30, 2019. The average rate was 2.50% and 2.60% for the year ended June 30, 2020 and 2019, respectively.
33
Net Interest Income. Net interest income decreased by $437 thousand, or 2.9%, to $14.8 million for the year ended June 30, 2020
compared to $15.3 million for fiscal 2019. Net interest margin for the year ended June 30, 2020 was 3.13%, down 11 basis points
from 3.24% for the year ended June 30, 2019. This decrease in net interest margin was reflective of the decrease in our average yield
on interest earning assets to 3.95% for the year ended June 30, 2020 from 4.00% for the year ended June 30, 2019 and the increase
in the average cost of funds to 1.01% for the year ended June 30, 2020 from 0.93% for the year ended June 30, 2019.
Provision for Loan Losses. We recorded a provision for loan losses of $50 thousand for the year ended June 30, 2020 compared
with a provision of $218 thousand for the year ended June 30, 2019. Net charge-offs for the year ended June 30, 2020 were
$1 thousand. Net charge-offs for the year ended June 30, 2019 were $18 thousand. The lower provision is primarily due to a decline
in outstanding loan balances during the year ended June 30, 2020.
Our total allowance for loan losses was $1.35 million, or 0.38%, of total gross loans as of June 30, 2020. Our total allowance for loan
losses was $1.30 million, or 0.36%, of total gross loans as of June 30, 2019. There were no specifically identified impaired loans at
June 30, 2020 or June 30, 2019. The recorded investment in individually evaluated impaired loans was $2.4 million and $3.3 million
at June 30, 2020 and at June 30, 2019, respectively. Total loans individually evaluated for impairment decreased $866 thousand, or
26.6%, to $2.4 million at June 30, 2020 compared to $3.26 million at June 30, 2019.
We used the same overall methodology in assessing the allowances for both periods. Our allowance reflects a general valuation
component of $1.3 million as of June 30, 2020 and June 30, 2019, with no specific component for loans determined to be impaired
based upon analysis of certain individual loans determined to be impaired for the periods ended June 30, 2020 and June 30, 2019.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the years ended June
30, 2020 and 2019.
Noninterest Income. For the year ended June 30, 2020, noninterest income increased $347 thousand, or 20.5%, to $2.0 million
from $1.7 million for the year ended June 30, 2019. Gains on the sale of mortgage loans, which totaled $184 thousand for the year
ended June 30, 2020, increased $62 thousand compared to $122 thousand for the year ended June 30, 2019. The change in fair
value of equity securities totaled a negative $34 thousand for the year ended June 30, 2020 compared to a positive $83 thousand
for the year ended June 30, 2019. Mortgage servicing income totaled $183 thousand for the year ended June 30, 2020 compared to
$211 thousand for the year ended June 30, 2019. The mortgage servicing income is reducing due to the decreasing size of the loan
servicing portfolio. Gains on the sale of securities totaled $181 thousand for the year ended June 30, 2020 compared to losses of
$40 thousand for the year ended June 30, 2019. Gains or losses on the sale of securities are largely market driven. Securities were
sold at a loss during the year ended June 30, 2019 so that funds could be more beneficially used to yield higher net earnings going
forward. Gains on the disposition of purchase credit impaired loans, which totaled $309 thousand for the year ended June 30, 2020,
increased $245 thousand compared to $64 thousand for the year ended June 30, 2019. We did not have the same opportunities for
gains on the disposition of purchase credit impaired loans in the year ending June 30, 2019 as we did in the year ending June 30,
2020. Changes in all other noninterest income items were due to normal periodic fluctuations.
Noninterest Expense. Noninterest expense decreased $92 thousand, or 0.8%, to $12.04 million for the year ended June 30, 2020
from $12.13 million for the year ended June 30, 2019. Salaries and employee benefits decreased by $519 thousand, or 7.5% to
$6.4 million for the year ended June 30, 2020 from $6.9 million for the year ended June 30, 2019 due to routine increases offset
by a reduction in personnel related to the closing of a loan production office. Occupancy and equipment expenses increased by
$231 thousand, or 13.2% to $1.98 million for the year ended June 30, 2020 from $1.75 million for the year ended June 30, 2019 due
to routine upgrades and improvements as well as the opening of a new branch office in January 2020. Professional and supervisory
fee expenses decreased by $38 thousand, or 5.9% to $604 thousand for the year ended June 30, 2020 from $642 thousand for the
year ended June 30, 2019 primarily due to reduced audit and legal expenses. FDIC deposit insurance decreased $109 thousand
due to assessment credits received from the FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.35%
during the year ended June 30, 2020. Foreclosed asset expenses increased by $122 thousand, or 117.3% to $226 thousand for the
year ended June 30, 2020 from $104 thousand for the year ended June 30, 2019. In the prior year, we recognized more gains from the
sale of properties to offset foreclosure expenses than in the current year. For the year ended June 30, 2020, we recognized an expense
for the decrease in value of the loan servicing asset of $410 thousand compared to $225 thousand for the year ended June 30, 2019.
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value. These servicing rights are
then measured at each reporting date and changes are recorded as “change in loan servicing asset” on the consolidated statements of
income and comprehensive income. The fair values of servicing rights are subject to significant fluctuations as a result of changes
in estimated and actual prepayment speeds and default rates and losses. Changes in all other noninterest expense items were due to
normal periodic fluctuations.
34
Income Tax Expense. Income tax expense increased $26 thousand, or 3.0%, to $900 thousand for the year ended June 30, 2020
from $874 thousand for the year ended June 30, 2019. The increase was primarily due to an increase of pre-tax net income.
Our effective income tax rate was 18.9% and 19.0% for the years ended June 30, 2020 and 2019, respectively.
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay
on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
The following table sets forth average balance sheets, average yields and costs, and certain other information at the dates and for the
periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average
balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred
fees, discounts and premiums that are amortized or accreted to interest income.
2020
Interest
and
Dividends
Average
Balance
For the Year Ended June 30,
2019
Yield/
Cost
Average
Balance
Interest
and
Dividends
Yield/
Cost
Average
Balance
(Dollars in Thousands)
2018
Interest
and
Dividends
Yield/
Cost
Assets:
Interest-earning assets:
Loans . . . . . . . . . . . . . . . . . . . . . $358,305
70,291
Investment securities . . . . . . . . .
17,318
Investment securities, tax-free . .
27,333
Other interest-earning assets . . .
473,247
Total interest-earning assets .
39,152
Noninterest-earning assets . . . . . .
Total assets . . . . . . . . . . . . . . $512,399
4.57% $ 351,765
$ 16,381
76,176
2.12
1,488
32,350
390
2.25
10,377
451 1.65
470,668
3.95
35,989
$ 506,657
18,710
4.60% $ 316,533
$ 16,171
82,919
2.15
1,637
38,298
728
2.25
7,080
310 2.99
444,830
4.00
34,934
$ 479,764
18,846
4.56%
$ 14,443
1.92
1,591
848
2.21
164 2.32
3.83
17,046
Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits . . . . $ 57,734
Money market deposits . . . . . . .
76,362
Regular savings and
other deposits . . . . . . . . . . . .
Certificates of deposit . . . . . . . .
29,994
212,906
Total interest-bearing
$
183
511
0.32% $ 50,983
65,688
0.67
$
77
400
0.15% $ 48,441
70,511
0.61
$
53
244
0.11%
0.35
72
0.24
2,911 1.37
27,941
220,820
61
0.22
2,499 1.13
28,105
204,546
42
0.15
1,260 0.62
deposits . . . . . . . . . . . . . . .
Other Borrowings . . . . . . . . . . . . .
376,996
8,665
3,677
0.98
217 2.50
365,432
21,404
3,037
0.83
556 2.60
Total interest-bearing
liabilities . . . . . . . . . . . . . .
Noninterest bearing deposits . . . . .
385,661
36,650
Other noninterest-bearing
liabilities . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . .
2,160
424,471
87,928
Total liabilities and equity . . . $512,399
3,894
1.01
386,836
32,539
1,600
420,975
85,682
$ 506,657
3,593
0.93
1,599
0.45
211 1.54
1,810
0.50
351,603
13,679
365,282
27,766
1,069
394,117
85,647
$ 479,764
Net interest income . . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . .
Average interest-earning assets
to average interest-bearing
liabilities . . . . . . . . . . . . . . . . . .
$ 14,816
$ 15,253
$ 15,236
2.94%
3.13%
3.07%
3.24%
3.33%
3.43%
1.23x
1.22x
1.22x
35
Rate/Volume Analysis
The following tables present 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.
Year Ended
June 30, 2020 Compared to 2019
Volume
Rate
(Dollars in thousands)
Net
Interest income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
298
(449)
194
43
$
(88) $
(38)
(53)
(179)
210
(487)
141
(136)
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10)
(320)
(330)
373
650
(19)
631
640
(339)
301
$ (810) $ (437)
$
Year Ended
June 30, 2019 Compared to 2018
Volume
Rate
(Dollars in thousands)
Net
Interest income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$ 1,619
(358)
90
1,351
109
284
56
449
$ 1,728
(74)
146
1,800
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91
156
247
$ 1,104
1,347
189
1,536
$ (1,087) $
1,438
345
1,783
17
Management of Market Risk
Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities
are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the
exposure of our net interest income to changes in market interest rates. Our board of directors is responsible for the review and
oversight of our asset/liability strategies. The Asset/Liability Committee of our board of directors meets monthly and is charged with
developing an asset/liability management plan. Our board of directors has established an Asset/Liability Management Committee,
consisting of senior management, which communicates daily to review pricing and liquidity needs and to assess our interest rate
risk. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level
of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for
managing this risk consistent with the guidelines approved by our board of directors.
The techniques we are currently using to manage interest rate risk include:
•
using pricing strategies in an effort to balance the proportions of 30-year and 15-year fixed rate loans in our portfolio;
• maintaining a modest portfolio of adjustable-rate one-to-four family residential loans;
36
•
•
funding a portion of our operations with deposits with terms greater than one year;
focusing our business operations on local retail customers who value our community orientation and personal service
and who may be somewhat less sensitive to interest rate changes than wholesale deposit customers; and
• maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to
interest-bearing liabilities.
Depending on market conditions, from time to time we place more emphasis on enhancing net interest margin rather than matching
the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from
a mismatch in the maturity of our assets and liabilities portfolios can, during periods of stable or declining interest rates, provide
high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy,
our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines
due to the difference between long- and short-term interest rates.
An important measure of interest rate risk is the amount by which the net present value (“NPV”) of an institution’s cash flows from
assets, liabilities and off balance sheet items changes in the event of a range of assumed changes in market interest rates. We have
prepared an analysis of estimated changes in our NPV under the assumed instantaneous changes in the United States treasury yield
curve. The financial model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest
rate sensitivity of the NPV. Set forth below is an analysis of the changes to the economic value of our equity as of June 30, 2020
in the event of designated changes in the United States treasury yield curve. At June 30, 2020, our NPV exposure related to these
hypothetical changes in market interest rates was within the current guidelines we have established.
Net Portfolio
Value per Model
Dollar Change
from Base
Percentage
Change
from Base
Percentage Total
of Market Value
of Assets
(Dollars in thousands)
Up 300 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Up 200 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Up 100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Down 100 basis points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
100,506
102,637
101,966
97,975
98,645
2,531
4,662
3,991
—
670
2.58%
4.76
4.07
—
0.68
0.48%
0.88
0.75
—
0.13
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in
net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and
assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing
of specific assets and liabilities. In addition, the net portfolio value table does not reflect the impact of a change in interest rates on
the credit quality of our assets. Accordingly, although the net portfolio value table provides an indication of our interest rate risk
exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of
changes in market interest rates on our net interest income and will differ from actual results.
Our policies generally do not permit us to engage in derivative transactions, such as futures, options, caps, floors or swap transactions;
however, such transactions may be entered into with the prior approval of the Asset/Liability Management Committee or the board
of directors for hedging purposes only.
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.
Our cash flows are derived from operating activities, investing activities and financing activities. Net cash flows provided by
operating activities were $5.1 million for the year ended June 30, 2020 and $5.4 million for the year ended June 30, 2019. Net cash
flows provided by investing activities were $11.0 million for the year ended June 30, 2020 and net cash flows used in investing
activities were $11.1 million for the year ended June 30, 2019. Net cash flows used by financing activities for the year ended June 30,
2020 were $18.2 million and net cash flows provided by financing activities were $32.4 million for the year ended June 30, 2019.
37
Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing,
lending, and investing activities during any given period. At June 30, 2020 and 2019, cash and short-term investments totaled
$34.6 million and $36.7 million, respectively. We may also utilize as sources of funds the sale of securities available-for-sale, federal
funds purchased, Federal Home Loan Bank of Atlanta advances and other borrowings.
At June 30, 2020 and 2019, we had outstanding commitments to originate loans of $10.1 million and $7.7 million, respectively.
We had $20.5 million in unfunded commitments under lines of credit at June 30, 2020 and $36.2 million in unfunded commitments
under lines of credit at June 30, 2019. We anticipate that we will have sufficient funds available to meet our current loan
commitments. In recent periods, loan commitments have been funded through liquidity and normal deposit flows. Certificates of
deposit scheduled to mature in one year or less from June 30, 2020 totaled $146.9 million. Management believes based on past
experience that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core
deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term
needs. Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid
assets based upon management’s assessment of expected loan demand, expected deposit flows, yields available on interest-earning
deposits and investment securities, and the objectives of our asset/liability management program. Excess liquid assets are invested
generally in interest-earning overnight deposits and federal funds sold. If we require funds beyond our ability to generate them
internally, we have additional borrowing capacity with the FHLB. At June 30, 2020, we had a remaining available borrowing limit
of $121.0 million in advances from the FHLB.
Our liquidity monitoring process is designed to contend with changing economic situations, which would include the current
COVID-19 pandemic. We have therefore not changed our daily or long-term liquidity management procedures as a result
of COVID-19.
We are subject to various regulatory capital requirements and at June 30, 2020, we were in compliance with all applicable capital
requirements. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” and Note 11 of the Notes to
our Consolidated Financial Statements.
Common Stock Dividend Policy. The Company paid a quarterly $0.10 per share dividend on August 22, 2019, November 21, 2019,
February 20, 2020, and May 21, 2020 for a total of $2.3 million in dividends paid during the year ended June 30, 2020. On July 23,
2020, the Board of Directors of the Company declared a quarterly cash dividend of $0.10 per share of the Company’s common stock
payable to stockholders of record as of August 6, 2020, which was paid on August 20, 2020.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in
accordance with U.S. generally accepted accounting principles, are not recorded in our consolidated financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to
manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan
commitments and unused lines of credit, see Note 10 of the Notes to our Consolidated Financial Statements.
For the fiscal year ended June 30, 2020, we did not engage in any off-balance-sheet transactions other than loan origination
commitments in the normal course of our lending activities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the Notes to our Consolidated Financial Statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted
accounting principles in the United States of America, which require the measurement of financial position and operating results
in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
38
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are not required for smaller reporting companies, such as the Company.
However, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management of
Market Risk.”
39
ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at June 30, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income and Comprehensive Income for the years ended June 30, 2020 and 2019 . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the years ended June 30, 2020 and 2019 . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements as of and for the years ended June 30, 2020 and 2019 . . . . . . . . . . . . . . . . . .
41
42
43
44
45
46
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Oconee Federal Financial Corp.
Seneca, South Carolina
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Oconee Federal Financial Corp. and its subsidiary (the
“Company”) as of June 30, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes
in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements
(collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the auditing standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2018.
Greenville, South Carolina
September 22, 2020
41
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2020 AND 2019
(Amounts in thousands, except share and per share data)
June 30, 2020
June 30, 2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate owned, 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, $0.01 par value, 100,000,000 shares authorized;
6,530,074 and 6,530,074 shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at par, 924,618 and 771,008 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
4,673
29,843
66
34,582
90,726
355,667
(1,346)
354,321
92
9,367
159
1,074
364
1,249
19,482
2,593
211
458
365
539
515,582
43,995
377,097
421,092
5,000
1,185
427,277
65
(9)
7,342
79,071
2,243
(407)
88,305
515,582
$
$
$
$
5,678
30,946
66
36,690
95,429
360,088
(1,297)
358,791
—
8,134
811
1,137
447
1,854
19,022
2,593
305
868
1,187
558
527,826
36,232
382,874
419,106
19,000
1,423
439,529
65
(8)
10,986
77,464
394
(604)
88,297
527,826
See accompanying notes to consolidated financial statements
42
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Amounts in thousands, except share and per share data)
Years Ended
June 30, 2020
June 30, 2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain/(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
Unrealized gains on securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for (gains)/losses realized in net income . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share: (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share: (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements
43
16,381
1,488
390
451
18,710
3,677
217
3,894
14,816
50
14,766
403
459
183
184
348
(34)
181
309
7
2,040
6,390
1,980
901
242
604
211
256
19
226
410
803
12,042
4,764
900
3,864
2,522
(530)
(181)
38
1,849
5,713
0.68
0.67
0.40
$
$
$
$
$
$
$
16,171
1,637
728
310
18,846
3,037
556
3,593
15,253
218
15,035
424
468
211
122
308
83
(40)
64
53
1,693
6,909
1,749
893
217
642
193
222
128
104
225
852
12,134
4,594
874
3,720
3,767
(768)
40
(8)
3,031
6,751
0.65
0.64
0.40
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Amounts in thousands, except share and per share data)
Balance at June 30, 2018 . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . .
Reclassification of unrealized gain on
equity securities . . . . . . . . . . . . . . . . . . . .
Reclassification of amortized premium on
callable securities . . . . . . . . . . . . . . . . . . .
Purchase of 56,622 shares of
treasury stock(1) . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Common Stock Issued . . . . . . . . . . . . . . . . .
Dividends(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP shares earned . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2019 . . . . . . . . . . . . . . .
Balance at June 30, 2019 . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . .
Purchase of 153,610 shares of
treasury stock(3) . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Dividends(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP shares earned . . . . . . . . . . . . . . . . . . .
Balance at June 30, 2020 . . . . . . . . . . . . . . .
$
65
—
—
—
—
—
—
—
—
65
65
—
—
—
—
—
Common
Stock
Treasury
Stock
Additional
Paid-In
Capital
$
(7) $ 12,000
—
—
—
—
—
—
—
—
(1)
—
—
—
(1,586)
126
180
42
224
(8) $ 10,986
(8) $ 10,986
—
—
—
—
(1)
—
—
(3,936)
80
28
184
(9) $ 7,342
— —
$
$
$
$
— —
$
$
65
Retained
Earnings
$ 76,136
3,720
—
109
(245)
—
—
—
(2,256)
—
$
$
$ 77,464
$ 77,464
3,864
—
—
—
(2,257)
—
$
$ 79,071
Accumulated
Other
Comprehensive
Income (loss)
$
Unearned
ESOP
Shares
Total
(2,528) $
—
3,031
(801) $ 84,865
3,720
3,031
—
—
(109)
—
—
—
—
(245)
—
—
—
—
—
$
394
$
394
—
1,849
—
—
—
—
$
2,243
(1,587)
—
126
—
180
—
(2,214)
—
197
421
(604) $ 88,297
(604) $ 88,297
3,864
1,849
—
—
(3,937)
—
80
—
(2,229)
—
197
381
(407) $ 88,305
(1) The weighted average cost of treasury shares purchased during the year was $26.47 per share. Treasury stock repurchases were accounted for using the par
value method.
(2) Approximately $85 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of
approximately 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $49 and resulting release of approximately 4,500
shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $36 and resulting release of approximately 2,600
shares, and was accounted for as additional compensation expense for the year ended June 30, 2019.
(3) The weighted average cost of treasury shares purchased during the year was $25.63 per share. Treasury stock repurchases were accounted for using the par
value method.
(4) Approximately $79 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of
approximately 6,900 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,400
shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,500
shares, and was accounted for as additional compensation expense for the year ended June 30, 2020.
See accompanying notes to consolidated financial statements
44
OCONEE FEDERAL FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Amounts in thousands, except share and per share data)
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion of purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss on sale of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in loan servicing asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (gain)/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 compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposal 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of restricted equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of restricted equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan originations and repayments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided/(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of common stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used)/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 consolidated financial statements
45
Years Ended
June 30, 2020
June 30, 2019
$
3,864
$
3,720
50
117
1,305
(713)
603
77
—
410
(181)
(12,864)
12,956
(184)
34
(460)
(309)
381
80
165
(238)
5,093
(1,848)
—
(32,671)
21,759
17,234
(213)
818
740
5,160
10,979
1,986
5,000
(19,000)
(2,229)
(3,937)
—
(18,180)
(2,108)
36,690
34,582
$
$
218
55
1,148
(247)
18
7
(29)
225
40
(5,498)
5,620
(122)
(83)
(468)
(64)
421
126
(69)
417
5,435
(1,811)
29
(12,201)
11,054
23,928
(940)
725
633
(32,469)
(11,052)
31,518
54,100
(49,600)
(2,214)
(1,587)
180
32,397
26,780
9,910
36,690
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Risks and Uncertainties: On March 10, 2020, the World Health Organization declared the outbreak of novel coronavirus
(“COVID-19”) a pandemic, which continues to spread throughout the world and has adversely impacted global commercial activity
and contributed to significant declines and volatility in financial markets. The COVID-19 outbreak and government responses are
creating disruption in global supply chains and adversely impacting many industries. The outbreak could have a continued material
adverse impact on economic and market conditions and trigger a period of global economic slowdown. The federal banking agencies
have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief
from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly
hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. The spread of the coronavirus
has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical
participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that
we determine are in the best interests of our employees, customers and business partners.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the COVID-19 outbreak
with regard to capital, liquidity, loan loss reserves, etc. Nevertheless, the outbreak presents uncertainty and risk with respect to the
Company, its performance, and its financial results.
Nature of Operations and Principle of Consolidation: The consolidated financial statements of Oconee Federal Financial Corp.
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”) and have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). Intercompany accounts and transactions are eliminated during consolidation. The Company is majority
owned (74.29%) by Oconee Federal, MHC. These consolidated financial statements do not include the transactions and balances
of Oconee Federal, MHC. The Association is a federally chartered stock savings and loan association engaged in the business of
accepting savings and demand deposits and providing mortgage, consumer and commercial loans. Primarily, the Association’s
business is in the Oconee County area of northwestern South Carolina, the northeast area of Georgia in Stephens County and Rabun
County. The following is a description of the significant accounting policies the Company follows in preparing and presenting its
consolidated financial statements.
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.
Cash Flows: Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-bearing deposits and amounts
due from other depository institutions.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing
requirements. These balances do not earn interest.
Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one
year and are carried at cost.
Securities: Securities are classified as available-for-sale when they might be sold before maturity. Non-equity securities available-
for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Effective July 1, 2018, the change in fair value of equity securities is recognized in the income statement in accordance with
Accounting Standards Update 2016-01.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.
Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
The Company evaluates securities for other-than-temporary impairments (“OTTI”) at least on a quarterly basis, and more frequently
when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which
the fair value has been less than cost and the financial condition and near-term prospects of the issuer. Additionally, the Company
considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s
46
OCONEE FEDERAL FINANCIAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the Years Ended June 30, 2020 and 2019 (Amounts in thousands, except share and per share data) OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are
issued by the federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer’s financial condition.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate
cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a
valuation allowance and charged to earnings. Loans held for sale, for which the fair value option has been elected, are recorded
at fair value as of each balance sheet date. The fair value includes the servicing value of the loans as well as any accrued interest.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at
the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued
on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest
income using the level-yield method over the contractual lives of the loans without anticipating prepayments.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of
collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on
nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses
are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component consists of the amount of impairment related
to loans that have been evaluated on an individual basis, and the general component consists of the amount of impairment related
to loans that have been evaluated on a collective basis. Loans are considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts when due according to the contractual terms of the
loan agreement. Loans over $250 that are considered impaired are individually evaluated to determine if a specific loss reserve
is required. All other impaired loans are collectively evaluated. Loans for which the terms have been modified resulting in a
concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”).
We have assessed the impact of the COVID-19 pandemic on the allowance for loan loss using the information that is available and
have made an adjustment to the qualitative factor related to the economy in our model in response to the additional risks that we
believe have become present. We believe that the recorded allowance is adequate at the relevant balance sheet dates. However,
the rapid development and fluidity of this pandemic precludes any prediction as to the ultimate impact of the COVID-19 outbreak.
We will continue to review and make adjustments as may be necessary as we move through the pandemic related quarantine and as
the country reopens.
Loan Grading System: Management utilizes an internal loan grading system and assigns each loan a grade of pass, special mention,
substandard, or doubtful, which are more fully explained in Note 4. Any nonresidential or residential non-owner occupied loans
that meet certain size requirements and performance characteristics are individually evaluated for impairment. The amount of
impairment, if any, is measured by a comparison of the loan’s carrying value to the net present value of future cash flows using the
loan’s effective rate at inception or at the fair value of collateral if repayment is expected to come solely from the collateral. All loans
graded pass, special mention, substandard and doubtful not specifically evaluated for impairment are collectively evaluated for
impairment by portfolio segment. To develop and document a systematic methodology for determining the portion of the allowance
47
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
for loan losses for loans evaluated collectively, the Company has divided the loan portfolio into segments, each with different risk
characteristics and methodologies for assessing risk. Those portfolio segments are discussed below:
One-to-four family: One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on
primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a
mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. The Company currently
originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.
For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage
insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer.
The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.
The Company historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or
modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of December 1,
2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered.
The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate
over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the
Company’s permission. Such homes must be “de-titled” by the states of South Carolina or Georgia so that they are taxed and must
be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such
homes are affixed.
Multi-family: Multi-family real estate loans generally have a maximum term of five years with a 30 year amortization period and
a final balloon payment and are secured by properties containing five or more units in the Company’s market area. These loans are
generally made in amounts of up to 75% of the lesser of the appraised value or the purchase price of the property with an appropriate
projected debt service coverage ratio. The Company’s underwriting analysis includes considering the borrower’s expertise and
requires verification of the borrower’s credit history, income and financial statements, banking relationships, independent appraisals,
references and income projections for the property. The Company generally obtains personal guarantees on these loans.
Multi-family real estate loans generally present a higher level of risk than loans secured by one-to-four family residences.
This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon
the successful operation of the related real estate project.
Home Equity: The Company offers home equity loans and lines of credit secured by first or second deeds of trust on primary
residences in our market area. The Company’s home equity loans and lines of credit are limited to an 80% loan-to-value ratio
(including all prior liens). Standard residential mortgage underwriting requirements are used to evaluate these loans. The Company
offers adjustable-rate and fixed-rate options for these loans with a maximum term of 10 years. The repayment terms on lines of
credit are interest only monthly with principle due at maturity. Home equity loans have a more traditional repayment structure
with principal and interest due monthly. The maximum term on home equity loans is 10 years with an amortization schedule not to
exceed 20 years.
Nonresidential Real Estate: Nonresidential loans include those secured by real estate mortgages on churches, owner-occupied and
non-owner-occupied commercial buildings of various types, retail and office buildings, hotels, and other business and industrial
properties. The nonresidential real estate loans that the Company originates generally have terms of five to 20 years with amortization
periods up to 20 years. The maximum loan-to-value ratio of our nonresidential real estate loans is generally 75%.
Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit
risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment
of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the
businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the
economy in general, including the current adverse conditions. Our nonresidential real estate lending includes a significant amount of
loans to churches. Because a church’s financial stability often depends on donations from congregation members rather than income
48
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area
and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties,
the real estate securing church loans may be less marketable than other nonresidential real estate.
The Company considers a number of factors in originating nonresidential real estate loans. The Company evaluates the qualifications
and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources
of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the
Company and other financial institutions. In evaluating the property securing the loan, the factors the Company considers include
the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the
appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service).
For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of
the denomination with which it is affiliated, attendance figures and growth projections and current and pro forma operating budgets.
The collateral underlying all nonresidential real estate loans is appraised by outside independent appraisers approved by our board
of directors. Personal guarantees may be obtained from the principals of nonresidential real estate borrowers, and in the case of
church loans, guarantees from the applicable denomination may be obtained.
Agricultural: These loans are secured by farmland and related improvements in the Company’s market area. These loans generally
have terms of five to 20 years with amortization periods up to 20 years. The maximum loan-to-value ratio of these loans is
generally 75%. The Company is managing a small number of these loans in our portfolio. We continue to closely monitor our
existing relationships.
Loans secured by agricultural real estate generally are larger than one-to-four family residential loans and involve greater credit
risk. Agricultural real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment
of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the
businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the
economy in general, including the current adverse conditions.
Construction and Land: The Company makes construction loans to individuals for the construction of their primary residences
and to commercial businesses for their real estate needs. These loans generally have maximum terms of twelve months, and upon
completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms
comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction loans have rate
and terms comparable to commercial loans that we originate. During the construction phase, the borrower generally pays interest
only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans
are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial
construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.
The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes
loans for the construction of homes “on speculation”, but the Company generally permits a borrower to have only two such loans at
a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional
amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured
by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans
is 85%.
Commercial and Industrial Loans: Commercial and industrial loans are offered to businesses and professionals in the Company’s
market area. These loans generally have short and medium terms on both a collateralized and uncollateralized basis. The structure of
these loans are largely determined by the loan purpose and collateral. Sources of collateral can include a lien on furniture, fixtures,
equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.
Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make
repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases
involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans
and leases.
49
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Within this category for the year ending June 30, 2020 are Paycheck Protection Program (“PPP”) Loans that were authorized under
the 2020 Coronavirus, Aid, Relief, and Economic Security (“CARES”) Act. PPP loans are originated by the Association, are 100%
guaranteed by the Small Business Administration (“SBA”) and qualify to be forgiven based on certain criteria as determined by
the SBA. The bank received a fee, the percentage depending on the size of the loan, for originating these loans and earn 1% on the
outstanding balance for the term of the loans, the maximum of which is five years unless forgiven sooner by the SBA.
Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of
automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured
loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends
consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are
unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on
the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore,
the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
Concentration of Credit Risk and Other: The Company’s business activity is principally with customers located in the northwest
portion of South Carolina and northeast Georgia. The Company requires its customers to provide collateral, generally in the form of
title to real estate, for substantially all loans. Certain consumer loans are made to customers without requiring collateral. Except for
loans in the Company’s market area, the Company has no other significant concentrations of credit risk.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) provides deposit insurance for up to $250 for substantially all depository accounts. The Company
from time to time may have amounts on deposit in excess of the insured limits, and management believes the risk of loss is
not significant.
Purchased Credit Impaired Loans: With the acquisition of Stephens Federal Bank in 2014, the Company purchased individual
loans with evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans were recorded at the
amount paid, such that there was no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by
an increase in the allowance for loan losses. Purchased credit impaired loans are accounted for individually. The Company estimates
the amount and timing of expected cash flows for each loan, and the expected cash flows in excess of amount paid is recorded as
interest income over the remaining life of the loan (accretable yield). The excess of the loans’ contractual principal and interest over
expected cash flows is not recorded (nonaccretable difference).
Future expected cash flows are re-estimated periodically over the life of each purchased credit impaired loan. If the present value of
expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than
the carrying amount, it is recognized as part of future interest income. For the years ended and as of June 30, 2019 and 2018, the
amount of accretable yield on PCI loans was immaterial.
Purchased Performing Loans: The Company accounts for purchased performing loans at acquisition at fair value, which includes
a credit discount. The resulting fair value (premium/discount) is amortized/accreted to interest income on a level yield basis over
the estimated lives of the loans. There is no allowance for loan losses established for purchased performing loans at acquisition;
however, a provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.
Loan Servicing Rights: When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value
with the income statement effect recorded in mortgaging banking income. Fair value is based on market prices for comparable
mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of
estimated future net servicing income.
Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports
changes in fair value of servicing assets in earnings in the period in which the changes occur, and are shown as change in loan
servicing asset on the consolidated statements of income and comprehensive income. The fair values of servicing rights are subject
to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
50
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill: Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a
business combination. Management reviews goodwill for impairment annually, or more frequently if deemed necessary, as goodwill
is deemed to have an indefinite life. On the annual assessment date, May 31, management performs a qualitative assessment of
whether it was more likely than not that the fair value exceeds carrying value. Based on the most recent assessment, management
determined that it was more likely than not that the fair value exceeded its carrying value, resulting in no impairment to goodwill.
Core Deposit Intangible: Core deposit intangible represents the estimated value of long-term deposit core deposit relationships
acquired in a business combination. This value is amortized over the weighted-average estimated useful lives of deposit accounts
using a method that management believes reasonably approximates the anticipated benefit stream from this intangible. The estimated
useful lives are periodically reviewed for reasonableness. The core deposit intangible acquired will be amortized over 10 years
using the original projections of future benefit stream of cash flows, adjusted periodically, if needed for potential impairment of the
remaining unamortized balance of the core deposit intangible.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings
and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture,
fixtures and equipment are depreciated using the straight-line method, with useful lives ranging from 5 to 7 years. Maintenance
and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current year operations.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable.
Real Estate Owned: Real estate acquired through loan foreclosure is initially recorded at fair value less cost to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, real estate owned is recorded at the lower of carrying amount
or fair value less estimated costs to sell. Any initial losses at the time of foreclosure are charged against the allowance for loan
losses with any subsequent losses or write-downs included in the consolidated statements of income and comprehensive income as
a component of noninterest expenses.
Restricted Equity Securities: Restricted equity securities consist of Federal Home Loan Bank of Atlanta (“FHLB”) stock and First
National Bankers Bancshares, Inc. (“FNBB”) stock. The Company is a member of the FHLB system. Members are required to
own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. There is
a very limited market for FNBB stock. Based on the redemptive provisions of the FHLB and FNBB, the stock is carried at cost,
as restricted securities, and is periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.
Income Taxes: The provision for income taxes is based on amounts reported in the consolidated statements of income and
comprehensive income (after exclusion of non-taxable income such as interest on state and municipal securities) and includes
changes in deferred taxes. Deferred taxes are computed using the asset and liability approach. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Company follows guidance issued by the Financial Accounting Standards Board (“FASB”) with respect to accounting for
uncertainty in income taxes. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than
not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in other noninterest expense.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income for the Company consists solely of unrealized gains and losses on securities available-for-sale, net of tax.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does
not believe there now are such matters that will have a material effect on the consolidated financial statements.
51
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are
recorded when they are funded.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information. Changes
in market conditions could significantly affect the estimates. For financial instruments where there is little or no relevant market
information due to limited or no market activity, the Company estimates the fair value of these instruments through the use of a
discounted present value of estimated cash flows technique, which includes the Company’s own assumptions as to the amounts and
timing of cash flows, adjusted for risk factors related to nonperformance and liquidity. The Company’s assumptions are based on an
exit price strategy and take into consideration the assumptions that a willing market participant would use about nonperformance
and liquidity risk.
Employee Stock Ownership Plan (“ESOP”): The cost of shares issued to the ESOP, but not yet allocated to participants, is shown
as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be
released to participant accounts. Dividends, when paid, on allocated ESOP shares reduce retained earnings. Dividends, when paid,
on unearned ESOP shares reduce debt and accrued interest.
Retirement Plans: Profit sharing plan expense is the amount of the Company’s contribution to participants of the plan. Deferred
compensation and supplemental retirement plan expense allocates the benefits over years of service.
Bank Owned Life Insurance: The Company has purchased life insurance policies on certain directors. Accounting guidance requires
bank owned life insurance to be recorded at the amount that can be realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Reclassifications: Some items in the prior year consolidated financial statements were reclassified to conform to the current
presentation and had no effect on net income or shareholders’ equity.
Earnings Per Share (“EPS”): Basic EPS is based on the weighted average number of common shares outstanding and is adjusted for
ESOP shares not yet committed to be released. Unvested restricted stock awards, which contain rights to non-forfeitable dividends,
are considered participating securities and the two-class method of computing basic and diluted EPS is applied. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options,
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the
Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include
the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive,
using the treasury stock method.
Segment Reporting: While the chief decision-makers monitor the revenue streams of the various products and services, operations
are managed and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior
management to make resource allocation or performance decisions. Management has determined that the Company has a single
operating segment, which is to provide consumer and commercial banking services to individuals and businesses located in
Oconee County, South Carolina and to Stephens and Rabun Counties, Georgia and their surrounding counties and townships.
The Company’s various products and services are those generally offered by community banks, and the allocation of resources is
based on the overall performance of the Company versus individual regions, branches, products and services.
New Accounting Standards:
Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848)”. Issued in March 2020, ASU 2020-04
provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are
effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material
effect on its financial statements.
52
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ASU 2020-03, “Codification Improvements to Financial Instruments”. Issued in March 2020, ASU 2020-03 provides guidance
that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the current expected
credit losses (CECL) guidance issued in 2016. The amendments were effective upon issuance. The Company does not expect these
amendments to have a material effect on its financial statements.
ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)”. Issued in February 2020, ASU 2020-02
provides guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff
Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective
date of the new leases standard. The amendments were effective upon issuance.
ASU 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for
income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding.
The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019,
ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety
of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after
December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as
an entity has adopted the amendments in ASU 2016-13.
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 2019-07, “Codification Updates to SEC Sections”. Issued in July 2019, ASU 2019-07 updates various Topics of the Accounting
Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final
rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.
ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”. Issued in May 2019, ASU 2019-05
provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible
instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the
FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as
the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.
ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments”. Issued in April 2019, ASU 2019-04 clarifies and improves areas of guidance
related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments.
The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019.
The amendments related to hedging was effective for the Company for interim and annual periods beginning after December 15,
2018. The Company adopted the new guidance effective July 1, 2019. This pronouncement did not have a material impact on the
Company’s consolidated financial statements as the Company does have any hedging activity. The amendments related to recognition
and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on
its financial statements.
53
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ASU 2019-01, Leases (Topic 842): Codification Improvements. Issued in March 2019, ASU 2019-01 aligns the guidance for fair
value of the underlying asset by lessors that are not manufacturers or dealers in Accounting Standards Codification (ASC) 842,
Leases, with that of the existing guidance (ASC 820, Fair Value Measurement). As a result, the fair value of the underlying asset at
lease commencement is its cost, reflecting any volume or trade discounts that may apply and costs incurred to acquire the asset, as
per ASC 842, Leases. However, if there has been a significant lapse of time between when the underlying asset is acquired and when
the lease commences, the definition of fair value (in ASC 820, Fair Value Measurement) should be applied. The ASU also requires
lessors within the scope of ASC 942, Financial Services—Depository and Lending, to present all principal payments received
under leases within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim
disclosures in the fiscal year in which a company adopts the new leases standard. The amendment is effective for the Company for
fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the new guidance
effective July 1, 2019. This pronouncement did not have a material impact on the Company’s consolidated financial statements as
the Company does not have any significant leases.
ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures.
The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in
this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years; early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement
uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of
adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is
permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional
disclosures until their effective date. The Company does not expect these amendments to have a material effect on its consolidated
financial statements.
ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities”. Issued in March 2017, ASU 2017-08 amends the amortization period for certain callable debt securities
held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do
not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance
is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. The amendments were applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained
earnings as of the beginning of the period of adoption. The Company adopted this standard on June 30, 2019 as reflected by a $245
adjustment to retained earnings.
ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January
2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the
requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that
qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment
for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis.
The Company does not believe that this new guidance will have a material effect on its consolidated financial statements.
ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued
in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit
losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment,
held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held
by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented
at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.
The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current
estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current
54
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial
assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized
cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense.
Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss
expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather
than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. The Company has determined that it will continue to prepare its credit loss allowance internally.
The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. In November 2019,
the FASB codified a delay in the implementation schedule (ASU 2019-10) 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 other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies
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.
NOTE 2—EARNINGS PER SHARE
Basic EPS is determined by dividing net earnings available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock
outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into
common stock, if dilutive, using the treasury stock method. ESOP shares are considered outstanding for this calculation unless
unearned. The factors used in the earnings per common share computation follow:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
June 30, 2020
June 30, 2019
$
$
$
$
3,864
(2)
(2)
3,860
5,708,822
(5,800)
(48,890)
5,654,132
0.68
5,654,132
65,133
5,719,265
0.67
$
$
$
$
3,720
(3)
(3)
3,714
5,763,190
(8,800)
(68,459)
5,685,931
0.65
5,685,931
73,969
5,759,900
0.64
During the years ended June 30, 2020 and 2019, there were 11,200 and 22,400 shares, respectively, that were considered anti-
dilutive as the weighted average exercise prices of outstanding stock options were in excess of the weighted average market value
for the periods presented.
55
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 3—SECURITIES AVAILABLE-FOR-SALE
Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s
intent. U.S. Government agency mortgage-backed securities consist of securities issued by U.S. Government agencies and U.S.
Government sponsored enterprises. Investment securities at June 30, 2020 and 2019 are as follows:
June 30, 2020
Available-for-sale:
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency mortgage-backed securities . . . . . . . .
U.S. Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2019
Available-for-sale:
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA loan pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency mortgage-backed securities . . . . . . . .
U.S. Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
$
20
2,493
20,821
9,723
53,660
1,011
$ 87,728
Amortized
Cost
$
20
2,493
24,968
22
14,889
40,366
11,980
$ 94,738
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Change in
Fair Value
Equity
Securities
Fair
Value
$
$
— $
99
822
383
1,538
23
2,865
$
— $
—
—
—
(25)
—
(25) $
$
158
—
—
—
—
—
158
178
2,592
21,643
10,106
55,173
1,034
$ 90,726
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Change in
Fair Value
Equity
Securities
Fair
Value
$
$
— $
11
295
—
111
228
10
655
$
— $
(5)
(38)
—
(30)
(52)
(31)
(156) $
$
192
—
—
—
—
—
—
192
212
2,499
25,225
22
14,970
40,542
11,959
$ 95,429
Securities pledged at June 30, 2020 and 2019 had a fair value amount of $12,524 and $26,029, respectively, and were pledged to
secure public deposits and FHLB advances.
At June 30, 2020 and 2019, there were no holdings of securities of any one issuer, other than the U.S. Government agencies and
U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.
56
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 3—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 twelve months or more at June 30, 2020 and 2019. The table also shows 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)
$ 6,342 $
$ 6,342 $
(25)
(25)
4 $ — $
4 $ — $
—
—
— $ 6,342 $
— $ 6,342 $
(25)
(25)
4
4
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)
$
991 $
745
—
(5)
(10)
—
4 $ — $
2
3,750
— 3,059
—
(28)
(30)
— $
7
7
991 $
4,495
3,059
(5)
(38)
(30)
5,377
(9)
5
11,198
(43)
18
16,575
(52)
4,475
$11,588 $
(23)
(47)
4 2,013
15 $20,020 $
(8)
(109)
2 6,488
34 $31,608 $
(31)
(156)
4
9
7
23
6
49
June 30, 2020
Available-for-sale:
U.S. Government
agency mortgage-
backed securities . . . . . .
June 30, 2019
Available-for-sale:
Certificates of deposit . . . .
Municipal securities . . . . .
CMOs . . . . . . . . . . . . . . . .
U.S. Government agency
mortgage-backed
securities . . . . . . . . . . . .
U.S. Government agency
bonds . . . . . . . . . . . . . . .
(1) Actual amounts.
None of the unrealized losses at June 30, 2020 were recognized into net income for the year ended June 30, 2020 because the
issuer’s bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to
sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair
value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at
June 30, 2019 were recognized as having OTTI during the year ended June 30, 2019.
57
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 3—SECURITIES AVAILABLE-FOR-SALE (Continued)
The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2020 and 2019 by contractual maturity
are summarized in the following table. Mortgage-backed securities are not scheduled since expected maturities will differ from
contractual maturities because borrowers have the right to prepay the obligations. FHLMC common stock is not scheduled because
it has no contractual maturity date.
June 30, 2020
June 30, 2019
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
499
7,759
10,707
5,360
63,403
87,728
$
$
503
8,044
11,152
5,570
65,457
90,726
$
$
2,000
11,627
18,817
7,019
55,275
94,738
$
$
1,994
11,663
18,955
7,093
55,724
95,429
(1)
Includes SBA loan pools.
The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the
years ended June 30, 2020 and 2019:
Year Ended
Available-for-sale:
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
17,234
$
193
(12)
June 30, 2019
23,928
$
35
(75)
NOTE 4—LOANS
The components of loans at June 30, 2020 and 2019 were as follows:
Real estate loans:
June 30, 2020
June 30, 2019
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
283,931
704
5,763
20,083
1,187
29,096
340,764
8,135
6,768
355,667
$
$
289,077
1,605
5,191
19,350
1,510
33,651
350,384
4,390
5,314
360,088
(1)
Includes $4,094 of 100% SBA-guaranteed PPP loans as of June 30, 2020.
58
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
The following table presents the activity in the allowance for loan losses for the year ended June 30, 2020 by portfolio segment:
Year ended June 30, 2020
Real estate loans:
Beginning
Balance
Provision
Charge-offs
Recoveries
Ending
Balance
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
995
4
24
87
3
94
1,207
67
23
1,297
$
$
37
—
10
(12)
1
11
47
(2)
5
50
$
$
— $
—
—
—
—
—
—
—
(1)
(1) $
— $
—
—
—
—
—
—
—
—
— $
1,032
4
34
75
4
105
1,254
65
27
1,346
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by
portfolio segment at June 30, 2020:
Ending Allowance on Loans:
Loans:
At June 30, 2020
Real estate loans:
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
—
—
—
—
—
—
— $
1,032
4
34
75
4
105
1,254
65
27
1,346
$
$
$
1,832
—
—
562
—
—
2,394
—
—
$
2,394
282,099
704
5,763
19,521
1,187
29,096
338,370
8,135
6,768
353,273
(1)
Includes $4,094 of PPP loans for which no loan loss reserve was allocated due to 100% SBA guarantee.
59
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
The following table presents the activity in the allowance for loan losses for the year ended June 30, 2019 by portfolio segment:
Year ended June 30, 2019
Real estate loans:
Beginning
Balance
Provision
Charge-offs
Recoveries
Ending
Balance
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
939
4
8
66
1
74
1,092
4
1
1,097
$
$
74
—
16
21
2
20
133
63
22
218
$
$
(18) $
—
—
—
—
—
(18)
—
—
(18) $
— $
—
—
—
—
—
—
—
—
— $
995
4
24
87
3
94
1,207
67
23
1,297
The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by
portfolio segment at June 30, 2019:
At June 30, 2019
Real estate loans:
Ending Allowance on Loans:
Loans:
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
—
—
—
—
—
—
— $
995
4
24
87
3
94
1,207
67
23
1,297
$
$
$
2,291
—
—
613
356
—
3,260
—
—
$
3,260
286,786
1,605
5,191
18,737
1,154
33,651
347,124
4,390
5,314
356,828
60
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
The tables below present loans that were individually evaluated for impairment by portfolio segment at June 30, 2020 and 2019,
including the average recorded investment balance and interest earned for the years ended June 30, 2020 and 2019:
June 30, 2020
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no recorded allowance:
Real estate loans:
One-to-four family . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
— $
—
— $
$
2,062
—
—
588
178
—
2,828
—
—
$
2,828
— $
—
—
—
—
—
—
—
—
— $
2,828
$
—
$
2,828
36
—
—
—
—
—
36
—
—
36
—
—
—
—
—
—
—
—
—
—
36
—
36
$
1,863
—
—
596
—
—
2,459
—
—
$
2,459
$
1,832
—
—
562
—
—
2,394
—
—
$
2,394
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
2,394
$
—
$
2,394
2,459
$
—
$
2,459
61
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
June 30, 2019
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
2,363
—
—
642
390
—
3,395
—
—
$
3,395
— $
—
—
—
—
—
—
—
—
— $
3,395
$
—
$
3,395
53
—
—
—
—
—
53
—
—
53
—
—
—
—
—
—
—
—
—
—
53
—
53
$
2,375
—
—
648
905
—
3,928
—
—
$
3,928
$
2,291
—
—
613
356
—
3,260
—
—
$
3,260
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
3,928
$
—
$
3,928
3,260
$
—
$
3,260
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
— $
—
— $
62
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due
90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or
individually for impairment. PCI loans for which the Company cannot reasonably estimate the amount and timing of future cash
flows are classified as nonaccrual.
Total past due and nonaccrual loans by portfolio segment at June 30, 2020:
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 . . . . . . . . . . . . . . . . . . .
$
$
COVID-19 Loan Modifications:
2,055 $
—
—
179
—
—
2,234
—
—
2,234 $
407 $
—
—
—
—
10
417
—
—
417 $
561 $
—
40
—
—
—
601
—
—
601 $
—
40
179
—
10
3,023 $ 280,908 $ 283,931 $
704
704
5,723
5,763
19,904
20,083
1,187
1,187
29,086
29,096
337,512
340,764
8,135
8,135
6,768
6,768
3,252 $ 352,415 $ 355,667 $
3,252
—
—
1,969 $
—
40
732
—
—
2,741
—
—
2,741 $
—
—
—
—
—
—
—
—
—
—
In light of recent disruptions in economic conditions caused by COVID-19, the financial regulators have issued guidance encouraging
banks to work constructively with borrowers affected by the virus in our community. This guidance provides that the agencies will
not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices. Included
in the table above are $15,024 in loans that were modified to defer principal payments or principal and interest payments from three
to six months based on our affected borrower’s request and need for COVID-19 financial relief. All loans modified for COVID-19
financial relief were current at the time of modification. There are $10,993 in one-to-four family loans, $3,615 in non-residential loans
and $416 in multi-family loans. Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides
banks the option to temporarily suspend certain requirements under ASC 340-10 troubled debt restructuring classifications for a
limited period of time to account for the effects of COVID-19. The Federal Reserve and the other banking agencies and regulators
have also issued a joint statement encouraging banks to work prudently with borrowers and to describe the agencies’ interpretations
of how accounting rules under ASC 310-40 apply to certain COVID-19 related modifications. We have not considered any of the
COVID-19 related modifications performed to date to be troubled debt restructurings. As of June 30, 2020, $14,781 were current
and $243 were 30 days or more past due.
63
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
Total past due and nonaccrual loans by portfolio segment at June 30, 2019:
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 . . . . . . . . . . . . . . . . . . .
$
$
Troubled Debt Restructurings:
5,879 $
228
64
458
—
308
6,937
—
8
6,945 $
1,486 $
—
—
—
—
31
1,517
—
—
1,517 $
229 $
—
40
—
—
—
269
—
—
269 $
7,594 $ 281,483 $ 289,077 $
228
104
458
—
339
1,605
1,377
5,191
5,087
19,350
18,892
1,510
1,510
33,651
33,312
350,384
341,661
4,390
4,390
5,314
5,306
8,731 $ 351,357 $ 360,088 $
8,723
—
8
2,674 $
—
40
816
356
31
3,917
—
—
3,917 $
—
—
—
—
—
—
—
—
—
—
At June 30, 2020 and June 30, 2019, total loans that have been modified as troubled debt restructurings were $1,985 and $2,675,
respectively, which consisted of two nonresidential real estate and four one-to-four family first lien loans at June 30, 2020 and one
agricultural loan, two nonresidential real estate and four one-to-four family first lien loans at June 30, 2019. There was no specific
allowance for loss established for these loans at June 30, 2020 or June 30, 2019. Additionally, there were no commitments to lend
any additional amounts on any loan after the modification. There have been no loans modified as troubled debt restructurings during
the twelve months ended June 30, 2020. No loans identified as troubled debt restructurings have defaulted since restructuring.
All of these loans are on nonaccrual at June 30, 2020 and June 30, 2019. At June 30, 2020 and June 30, 2019, $1,774 and $2,291,
respectively, were individually evaluated for impairment.
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.
64
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
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.
Total loans by risk grade and portfolio segment at June 30, 2020:
Pass
Pass-Watch
Special
Mention
Substandard
Doubtful
Total
Real estate loans:
One-to-four family . . . . . . . . .
Multi-family . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . .
Construction and land . . . . . . .
Total real estate loans . . . . .
Commercial and industrial . . . . .
Consumer and other loans . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
$
$
273,228
704
5,268
19,077
1,187
28,611
328,075
8,135
6,768
342,978
$
$
$
3,848
—
392
172
—
416
4,828
—
—
$
4,828
$
2,930
—
54
—
—
—
2,984
—
—
$
2,984
$
3,925
—
49
834
—
69
4,877
—
—
$
4,877
— $
—
—
—
—
—
—
—
—
— $
283,931
704
5,763
20,083
1,187
29,096
340,764
8,135
6,768
355,667
Total loans by risk grade and portfolio segment at June 30, 2019:
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 . . . . . . . . . . . . . . . . . . . . . .
$
$
276,141
1,605
4,733
17,951
1,154
33,130
334,714
4,390
5,314
344,418
$
$
5,316
—
313
491
—
446
6,566
—
—
6,566
$
$
3,217
—
69
—
—
—
3,286
—
—
3,286
$
$
4,403
—
76
908
356
75
5,818
—
—
5,818
$
$
— $
—
—
—
—
—
—
—
—
— $
289,077
1,605
5,191
19,350
1,510
33,651
350,384
4,390
5,314
360,088
At June 30, 2020 and 2019, consumer mortgage loans secured by residential real estate properties totaling $135 and $194 respectively,
were in formal foreclosure proceedings and are included in one-to-four family loans.
65
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 4—LOANS (Continued)
Loans to principal officers, directors, and their affiliates during the years ended June 30, 2020 and 2019 were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
1,102
$
937
(34)
2,005
$
June 30, 2019
1,134
$
—
(32)
1,102
$
Directors and officers of the Company are customers of the institution in the ordinary course of business. In the opinion of
management, these loans do not involve more than normal risk of collectability nor do they present other unfavorable features.
NOTE 5—PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2020 and 2019 were as follows:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
2,438
$
9,798
2,145
206
14,587
(5,220)
9,367
$
June 30, 2019
2,225
$
8,134
2,781
182
13,322
(5,188)
8,134
$
Depreciation expense was $615 and $494 for the years ended June 30, 2020 and 2019, respectively.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The carrying value of goodwill was $2,593 at June 30, 2020 and 2019, respectively. The carrying value of the core deposit intangible
was $211 and $305 at June 30, 2020 and 2019, respectively.
Core deposit intangible gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
959
(748)
211
$
$
June 30, 2019
959
(654)
305
$
$
Amortization expense for the core deposit intangible for the years ended June 30, 2020 and 2019 was $94 and $112, respectively.
Estimated amortization expense for each of the next five years is as follows:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
70
60
42
32
7
211
66
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 7—DEPOSITS
At June 30, 2020 and 2019, certificate of deposit accounts with balances over $250 totaled approximately $18,771 and $24,777,
respectively. Scheduled maturities of certificates of deposit at June 30, 2020 are as follows for each fiscal year:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
147,458
35,797
10,158
4,114
393
197,920
There are no certificates of deposit scheduled to mature after 2025. The Company does not accept brokered certificates of deposit.
Directors and executive officers were customers of, and had transactions with, the Company in the ordinary course of business.
Included in such transactions are deposit accounts, all of which were made under normal terms. The aggregate amount of these
deposit accounts was $2,119 and $1,925 at June 30, 2020 and 2019, respectively.
NOTE 8 – BORROWINGS
At June 30, 2020 and 2019, advances from the Federal Home Loan Bank were as follows:
FHLB advances due February 2023 through January 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances due September 2019 through December 2019 . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
Balance
5,000
5,000
Stated Interest Rate
1.40% - 1.59%
June 30, 2019
Balance
19,000
19,000
Stated Interest Rate
2.62% - 2.78%
$
$
$
$
The average interest rate of all outstanding FHLB advances was 1.50% and 2.75% on June 30, 2020 and June 30, 2019, respectively.
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized
by $10,786 of investment securities at June 30, 2020. The Association has also pledged as collateral FHLB stock and has entered
into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as
determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $125,976
at June 30, 2020.
Payments over the next five fiscal years are as follows:
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,500
$2,500
There were no overnight borrowings at June 30, 2020 or June 30, 2019.
67
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 9—INCOME TAXES
Income tax expense for the years ended June 30, 2020 and 2019 was as follows:
Current federal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current state expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred state expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
422
$
148
253
77
900
$
June 30, 2019
585
$
269
64
(44)
874
$
Temporary differences between tax and financial reporting that result in net deferred tax assets are as follows at June 30, 2020
and 2019:
Deferred tax assets:
Fair value adjustments from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired net operating loss (“NOL”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
June 30, 2019
$
$
$
164
347
325
127
74
38
51
—
112
3
1,241
(637)
(191)
(48)
(876)
365
$
399
334
269
143
79
32
48
10
79
4
1,397
(154)
(8)
(48)
(210)
1,187
A net operating loss (“NOL”) of $403 was acquired in the Stephens Federal Bank acquisition in 2014. At June 30, 2020 and 2019,
the NOL remaining totaled $288 and $309, respectively, with a deferred tax asset of $74 and $79, respectively. The NOL will expire
on June 30, 2034. The realization of the deferred tax asset resulting from the NOL is dependent upon generating sufficient taxable
income prior to the NOL’s expiration. In assessing the realizability of the deferred tax asset, management considered whether it is
more likely than not that some portion or all of the deferred tax asset would not be realized. Based on the Company’s current and
expected future financial performance as well as strong asset quality, management determined that no valuation allowance was
necessary at June 30, 2020.
Retained earnings as of June 30, 2020 and 2019 includes approximately $5,284 representing reserve method bad debt reserves
originating prior to December 31, 1987 for which no deferred income taxes are required to be provided. These reserves may be
included in taxable income if the Company pays dividends in excess of its accumulated earnings and profits (as defined by the
Internal Revenue Code) or in the event of a distribution in partial or complete liquidation of the Company.
68
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 9—INCOME TAXES (Continued)
A reconciliation of the amount computed by applying the federal statutory rate to pretax income with income tax expense for the
years ended June 30, 2020 and 2019 is as follows:
June 30, 2020
%
Amount
21.00% $ 965
June 30, 2019
%
21.00%
Amount
$ 1,000
Tax at statutory federal income tax rate
Increase (decrease) resulting from:
State income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life insurance benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148
(97)
(82)
(69)
$ 900
225
3.10
(98)
(2.04)
(153)
(1.72)
(1.45)
(65)
18.89% $ 874
4.90
(2.13)
(3.33)
(1.41)
19.03%
The Company has no current uncertain tax positions in place. No amounts were accrued for penalties or interest as of June 30, 2020
and 2019. The Company is subject to U.S. federal income tax as well as income tax of the states of South Carolina and Georgia. The
Company is no longer subject to examination by taxing authorities for tax years ending before 2017.
NOTE 10—COMMITMENTS
Loan commitments and related activities: Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire
without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses
are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk at June 30, 2020 and 2019 was as follows:
June 30, 2020
June 30, 2019
Fixed
Variable
Fixed
Variable
Loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
9,901
9,540
$
$
167
10,991
$
$
7,131
22,810
$
$
583
13,361
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments are primarily for the
purpose of financing the purchase, the refinance, or the construction of residential real estate. At June 30, 2020, these commitments
have interest rates ranging from 2.10% to 18.00% and maturities ranging from one to 30 years.
Financial instruments with off-balance-sheet risk: The Company has no additional financial instruments with off-balance-sheet risk.
NOTE 11—REGULATORY CAPITAL REQUIREMENTS
Savings and loan associations are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Management believes that as of June 30, 2020, the Association met all capital adequacy requirements to which it is subject. Savings
and loan holding companies became subject to capital requirements on January 1, 2015.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
69
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 11—REGULATORY CAPITAL REQUIREMENTS (Continued)
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2020 and 2019,
the Association was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have changed the Association’s category.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Association to maintain
minimum amounts and ratios of total, Tier 1 capital and Common Equity Tier 1 capital, as defined by the regulations, to risk-
weighted assets, as defined, and of Tier 1 capital to average assets, as defined. The final rules implementing the Basel Committee
on Banking Supervision’s capital guidelines for U.S. banks (the “Basel III rules”) became effective for the Company on January 1,
2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January
1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based
capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% by 2019. The net realized gain or loss
on available for sale securities is not included in computing regulatory capital. Management believes that, as of June 30, 2020 and
2019, the Company and the Association met all capital adequacy requirements to which they are subject.
The Association’s actual and minimum capital requirements to be well-capitalized under prompt corrective action provisions are
as follows:
June 30, 2020
Total capital to risk weighted assets . . . . . . . . . . .
Common equity tier 1 capital to risk
weighted assets . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 (core) capital to risk weighted assets . . . . .
Tier 1 (core) capital to average assets . . . . . . . . . .
Actual
Amount
$ 82,712
For Capital
Adequacy Purposes
Ratio
Amount
Ratio
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
30.13% $ 28,821
10.50% $ 27,448
10.00%
81,366
81,366
81,366
29.64
29.64
16.05
19,214
23,331
20,277
7.00
8.50
4.00
17,841
21,959
25,347
6.50
8.00
5.00
June 30, 2019
Total capital to risk weighted assets . . . . . . . . . . .
Common equity tier 1 capital to risk
weighted assets . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 (core) capital to tangible assets . . . . . . . . .
Tier 1 (core) capital to average assets . . . . . . . . . .
Actual
Ratio
Amount
$ 80,824
For Capital
Adequacy Purposes
Ratio
10.500% $ 27,846
Amount
Amount
29.03% $ 29,238
Ratio
10.00%
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
79,527
79,527
79,527
28.56
28.56
15.46
19,492
23,669
20,571
7.000
8.500
4.000
18,100
22,276
25,714
6.50
8.00
5.00
The June 30, 2020 and 2019 Total Risk Weighted Assets Capital Ratios, Common Equity Tier 1 Ratios, and the Tier 1 to Risk
Weighted Assets Capital Ratios displayed above under the heading “For Capital Adequacy Purposes” include conservation buffers
of 2.50%.
The Qualified Thrift Lender test requires at least 65% of assets be maintained in housing-related finance and other specified areas.
If this test is not met, limits are placed on growth, branching, new investments, FHLB advances and dividends, or the Association
must convert to a commercial bank charter. Management believes this test is met.
Dividend Restrictions—The Company’s principal source of funds for dividend payments is dividends received from the Association.
Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these
regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined
with the retained net profits of the preceding two years, subject to the capital requirements described above. The Association has
paid $2,999 in dividends during 2020 and, as of June 30, 2020 could, without prior approval, but with regulatory notice, declare
dividends of approximately $2,000 (based on calendar year net income through June 30, 2020).
70
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 12—FAIR VALUE MEASUREMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There
are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as
of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
Investment Securities:
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted
prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted
prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market
indicators (Level 3).
Loans:
The fair values of loans, excluding loans held for sale and impaired loans, are estimated based on the loan’s interest rate structure.
Fair values for variable rate loans that reprice frequently and with no significant change in credit risk are based on the carrying
values resulting in a Level 3 classification. Fair values for fixed rate loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers of similar credit quality along with an exit price
notion resulting in a Level 3 classification.
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 June 30, 2020 or 2019.
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 2 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.
71
OCONEE FEDERAL FINANCIAL CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the Years Ended June 30, 2020 and 2019 (Amounts in thousands, except share and per share data) OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2019 and 2018
(Amounts in thousands, except share and per share data)
NOTE 12—FAIR VALUE MEASUREMENTS (Continued)
Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing
a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is
commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize
a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable
sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the
inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and
adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers
(for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have
been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in
the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or
industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the
most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
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 1 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.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and 2019 are summarized below:
Fair Value Measurements
June 30, 2020
June 30, 2019
(Level 2)
(Level 3)
(Level 2)
(Level 3)
Financial assets:
Securities available-for-sale:
FHLMC common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA loan pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency mortgage-backed securities . . . . . . .
U.S. Government agency bonds . . . . . . . . . . . . . . . . . . . . . . . .
Total securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
178
2,592
21,643
—
10,106
55,173
1,034
90,726
—
90,726
$
$
— $
—
—
—
—
—
—
—
458
458
$
212
2,499
25,225
22
14,970
40,542
11,959
95,429
—
95,429
$
$
—
—
—
—
—
—
—
—
868
868
72
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 12—FAIR VALUE MEASUREMENTS (Continued)
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable
inputs Level 3 for the years ended June 30, 2020 and 2019:
Fair Value Measurements
(Level 3) Year Ended
June 30, 2020
Loan Servicing
Rights
June 30, 2019
Loan Servicing
Rights
Balance at beginning of period: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized net losses included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
868
—
(410)
458
$
$
1,093
—
(225)
868
The table below presents assets measured at fair value on a non-recurring basis by level at June 30, 2020 and 2019:
Fair Value Measurements
June 30, 2020
(Level 3)
June 30, 2019
(Level 3)
Non-financial assets:
Real estate owned, net:
One-to-four family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonresidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured at fair value on a non-recurring basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
159
159
159
$
226
585
811
811
Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned and
their respective valuation allowances at June 30, 2020 and 2019 were $159 and $811 and $0 and $38, respectively. The resulting
write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the years ended June 30, 2020
and 2019 were $0 and $38, respectively.
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value at June 30,
2020 and 2019:
June 30, 2020
Fair Value
June 30, 2019
Fair Value
Level 3 Quantitative Information
Valuation Technique
Unobservable Inputs
Range
Loan servicing rights . . . . . . . . .
$
458
$
868
Real estate owned net:
One-to-four family . . . . . . . . . .
$
— $
226
Nonresidential . . . . . . . . . . . . . .
$
159
$
585
Discounted
cash flows
Discount rate,
estimated timing of
cash flows
8.63% to 9.75%
Sales comparison
approach
Adjustment for
differences between
the comparable sales
Sales comparison
approach
Adjustment for
differences between
the comparable sales
0% to 20%
0% to 20%
73
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 12—FAIR VALUE MEASUREMENTS (Continued)
The carrying amounts and estimated fair values of the Company’s on-balance sheet financial instruments at June 30, 2020 and 2019
are summarized below:
Financial assets
Securities available-for-sale . . . . . . . . . . . . . .
Loans, net(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale(2) . . . . . . . . . . . . . . . . . . . .
Loan servicing rights . . . . . . . . . . . . . . . . . . . .
Restricted equity securities . . . . . . . . . . . . . . .
Financial liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . .
Financial assets
Securities available-for-sale . . . . . . . . . . . . . .
Loans, net(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing rights . . . . . . . . . . . . . . . . . . . .
Restricted equity securities . . . . . . . . . . . . . . .
Financial liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB Advances . . . . . . . . . . . . . . . . . . . . . . .
Carrying
Amount
June 30, 2020
Fair Value
(Level 1)
(Level 2)
(Level 3)
Total
$
90,726
354,321
92
458
1,249
— $
—
—
—
N/A
90,726
—
—
—
N/A
$
— $
364,636
92
458
N/A
90,726
364,636
92
458
N/A
421,092
5,000
$
223,172
—
$
197,020
5,141
$
— $
—
420,192
5,141
Carrying
Amount
95,429
358,791
868
1,854
419,106
19,000
$
$
June 30, 2019
Fair Value
(Level 1)
(Level 2)
(Level 3)
Total
— $
—
—
N/A
95,429
—
—
N/A
196,466
—
$
218,985
19,000
$
$
— $
358,473
868
N/A
95,429
358,473
868
N/A
— $
—
415,451
19,000
$
$
$
$
(1) Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of June
30, 2020 and 2019 was measured using an exit price notion.
(2) 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.
NOTE 13—EMPLOYEE BENEFIT PLANS
The Company has deferred compensation agreements with certain of its directors whereby director fees are withheld to fund
insurance contracts from which the funds will ultimately be disbursed. These agreements require the Company to make payments to
such directors beginning at the age set forth in the agreement or upon death of the director if prior to the minimum age requirement.
The directors vest ratably over periods established in the agreements. Interest on the liabilities is charged to earnings based on
imputed interest rates established at the beginning of each agreement, which range from 6.69% to 8.50% at both June 30, 2020
and 2019, respectively. The total expense incurred under these plans for the years ended June 30, 2020 and 2019 was $43 and $47,
respectively. The recorded liability for these agreements was $494 and $555 at June 30, 2020 and 2019, respectively, and is included
in other accrued liabilities in the consolidated balance sheet.
74
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 13—EMPLOYEE BENEFIT PLANS (Continued)
To provide funds for the payments under these deferred compensation agreements, the Company has purchased insurance policies
on the lives of the directors covered by these plans.
The Company has the option of making an annual contribution to a profit-sharing plan for all full-time employees over the age of 21
having completed one year of service. The Company has exercised this option in 2020 and 2019, and as such, total expense under
the profit sharing plan for each of the years ended June 30, 2020 and 2019 was $148 and $147, respectively.
NOTE 14—EMPLOYEE STOCK OWNERSHIP PLAN
Employees participate in an Employee Stock Ownership Plan. The ESOP borrowed from the Company to purchase 248,842 shares
of the Company’s common stock at $10 per share during 2011. The Company makes discretionary contributions to the ESOP, and
pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are
made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated
shares increase participant accounts.
Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. There
were no discretionary contributions made to the ESOP for debt retirement in 2020 or 2019. ESOP compensation expense recognized
for the years ended June 30, 2020 and 2019 was $380 and $421, respectively.
Shares held by the ESOP at June 30, 2020 and 2019 were as follows:
Committed to be released to participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated to participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
12,903
141,264
38,534
192,701
June 30,2019
11,983
127,257
59,245
198,485
Fair value of unearned shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
993
$
1,360
NOTE 15—STOCK BASED COMPENSATION
On April 5, 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity
Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 435,472 shares
of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options,
either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan may not be less
than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole
discretion to determine the amount and to whom equity incentive awards are granted.
There have been no stock options or restricted stock issued in fiscal 2020 or 2019. Stock options and restricted stock have vesting
periods of five years or seven years, a percentage of which vests annually on each anniversary of the grant date. Apart from the
vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material
conditions applicable to the awards issued.
75
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 15—STOCK BASED COMPENSATION (Continued)
The following table summarizes stock option activity for the year ended June 30, 2020:
Outstanding - June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding - June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fully vested and exercisable at June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected to vest in future periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fully vested and expected to vest - June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average Exercise
Price/Share
Aggregate
Intrinsic
Value(1)
$
$
$
$
14.65
—
—
29.33
14.18
13.08
14.18
$
$
$
1,904
1,883
1,904
Options
169,519
—
—
(5,200)
164,319
148,319
16,000
164,319
(1) The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The current market price was based
on the closing price of common stock of $25.77 per share on June 30, 2020.
The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses
the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-
free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the
Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the SNL Financial Index
of Thrift MHCs. The expected life of the options is calculated based on the “simplified” method as provided for under generally
accepted accounting principles.
The fiscal weighted-average fair value of options granted and assumptions used in the Black-Scholes-Merton option pricing model
in the fiscal years granted are listed below. There have been no stock options granted in fiscal 2020 or 2019.
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 6,500 and 13,095 options that were
earned during the years ended June 30, 2020 and 2019, respectively. Stock-based compensation expense for stock options for the
years ended June 30, 2020 and 2019 was $21 and $36, respectively. Total unrecognized compensation cost related to stock options
was $55 at June 30, 2020 and is expected to be recognized over a weighted-average period of 3.1 years.
The following table summarizes non-vested restricted stock activity for the year ended June 30, 2020:
Balance - beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance - end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
8,800
—
—
(3,000)
5,800
19.78
$
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. There was no restricted stock granted during 2020 or 2019. Total shares of restricted stock granted under the Plan
is 119,294 of which 5,800 remain unvested at June 30, 2020. The weighted-average grant date fair value of all shares granted is
$19.78 per share. Stock-based compensation expense for restricted stock included in noninterest expense for the years ended June
30, 2020 and 2019 was $59 and $90, respectively. Unrecognized compensation expense for nonvested restricted stock awards was
$90 and is expected to be recognized over 1.7 years.
76
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 16—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 were $69,553 and $83,938 at June 30, 2020 and 2019, respectively.
Custodial escrow balances maintained in connection with serviced loans were $702 and $771 at June 30, 2020 and 2019, respectively.
Activity for loan servicing rights for the year ended June 30, 2020 and 2019 is as follows:
Year Ended
June 30, 2020
June 30, 2019
Loan servicing rights:
Beginning of period: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
868
—
(410)
458
$
$
1,093
—
(225)
868
Fair value at June 30, 2020 was determined using a discount rate of 8.63%, prepayment speed assumptions ranging from 9.23% to
25.95% Conditional Prepayment Rate (“CPR”) depending on the loans coupon, term and seasoning, and a weighted average default
rate of 0.23%. Fair value at June 30, 2019 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging
from 5.13% to 13.62% CPR depending on the loans coupon, term and seasoning, and a weighted average default rate of 0.37%.
NOTE 17—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30, 2020 and 2019 is as follows:
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
June 30, 2019
$
$
$
$
3,892
140
282
2,341
$
$
$
$
3,591
543
432
6,657
NOTE 18—PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
JUNE 30, 2020 AND 2019
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESOP loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
June 30, 2019
$
$
$
$
1,428
523
282
86,487
88,720
415
88,305
88,720
$
$
$
$
4,909
709
194
82,899
88,711
414
88,297
88,711
77
OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended June 30, 2020 and 2019
(Amounts in thousands, except share and per share data)
NOTE 18—PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend from banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed income (losses) of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020
32
$
2,999
(483)
2,548
1,221
3,769
(95)
3,864
$
June 30, 2019
40
$
—
(447)
(407)
4,042
3,635
(85)
3,720
$
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by provided by operating activities:
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed (income) losses of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows From Investing Activities
Payments received on ESOP loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities
Purchases of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
June 30, 2020
June 30, 2019
$
3,864
$
3,720
(88)
1
(1,221)
2,556
129
129
(3,937)
—
(2,229)
(6,166)
(3,481)
4,909
1,428
$
—
(123)
(4,042)
(445)
102
102
(1,587)
180
(2,214)
(3,621)
(3,964)
8,873
4,909
NOTE 19—SUBSEQUENT EVENTS
On July 23, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $0.10 per share of the Company’s
common stock payable to stockholders of record as of August 6, 2020, which was paid on August 20, 2020.
Management has reviewed events occurring through September 22, 2020, the date the financial statements were available to be
issued and has identified no subsequent events that have occurred requiring disclosure other than the dividend discussed above.
78
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal year. Based
upon that evaluation, the principal executive officer and principal financial officer concluded that, as of June 30, 2020,
our disclosure controls and procedures were effective.
(b) Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s system of internal control over financial reporting is designed under the supervision of
management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of the Company’s consolidated financial
statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of
management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions or that the degree of compliance with policies and procedures
may deteriorate.
As of June 30, 2020, management assessed the effectiveness of the Company’s internal control over financial
reporting based upon the framework established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based upon its assessment, management believes that the
Company’s internal control over financial reporting as of June 30, 2020 is effective using these criteria. This annual
report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company (as a
non-accelerated filer) to provide only management’s report in this annual report.
(c) Changes in Internal Control Over Financial Reporting
There were no significant changes made in our internal control over financial reporting during the Company’s fourth
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM 9B. Other Information
Not applicable.
79
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information contained under the sections captioned “Proposal I—Election of Directors—Directors,“ —Executive Officers Who
Are Not Directors,” “—Code of Ethics” and “—Meetings and Committees of the Board of Directors” in the Company’s definitive
Proxy Statement for the 2020 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.
ITEM 11. Executive Compensation
The information contained under the section captioned “Executive Compensation” in the Proxy Statement is incorporated herein
by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Securities Authorized for Issuance Under Stock-Based Compensation Plans. The following table sets forth
information as of June 30, 2020 about Company common stock that may be issued under the Company’s equity
compensation plans.
EQUITY COMPENSATION PLAN INFORMATION
Equity compensation plans approved by security holders(1) . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
164,319
164,319
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
$
$
14.18
14.18
Number of
securities
remaining
available
for future
issuance under
stock-based
compensation
35,666
35,666
(1) These awards were granted pursuant to the Oconee Federal Financial Corp. 2012 Equity Incentive Plan.
(b) Security Ownership of Certain Beneficial Owners. The information required by this item is incorporated herein by
reference to the section captioned “Voting Securities and Principal Holders” in the Proxy Statement.
(c) Security Ownership of Management. The information required by this item is incorporated herein by reference to the
section captioned “Proposal I—Election of Directors” in the Proxy Statement.
(d) Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the section captioned “Proposal I—Election of
Directors—Board Independence” and “—Transactions with Certain Related Persons” of the Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Proposal II—Ratification of
Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement.
80
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
3.1
Charter of Oconee Federal Financial Corp.(1)
3.2(i)
Bylaws of Oconee Federal Financial Corp.(2)
3.2(ii)
Amendment to the Bylaws of Oconee Federal Financial Corp.(3)
4(i)
4(vi)
10.1
10.2
10.3
10.4
10.6
10.7
Form of Common Stock Certificate(1)
Description of Oconee Federal Financial Corp’s common stock(1)
Form of Employee Stock Ownership Plan(1)
(Intentionally omitted)
Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and
W. Maurice Poore(1)
Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and
Cecil T. Sandifer, Jr.(1)
Amended and Restated Employment Agreement by and between Oconee Federal Savings and Loan Association,
Oconee Federal Financial Corp. and Curtis T. Evatt(6)
Oconee Federal Savings and Loan Association Endorsement Split Dollar Life Insurance Plan for Curtis T. Evatt and
Nancy M. Carter(4)
10.8
Oconee Federal Financial Corp. 2012 Equity Incentive Plan(5)
21
23
31.1
31.2
32
101
Subsidiaries of Registrant(1)
Consent of Elliott Davis LLC
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2020
and 2019 (ii) the Consolidated Statements of Income and Comprehensive Income for the years ended June 30, 2020
and 2019, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended June 30, 2020 and
2019, (iv) the Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019, and (v) the Notes
to the Consolidated Financial Statements.
(1)
Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-169419), as initially filed September 16, 2010, and as subsequently amended.
(2)
Incorporated by reference to the current report on Form 8-K (File No. 001-35033), filed on April 26, 2013.
(3)
Incorporated by reference to the current report on Form 8-K (file No. 001-35033), filed on October 1, 2018.
(4)
Incorporated by reference to the current report on Form 8-K (File No. 001-35033), filed on June 28, 2013.
(5)
Incorporated by reference to the proxy statement for the special meeting of stockholders (File No. 001-35033), filed February 23, 2012.
(6)
Incorporated by reference to the quarterly report on Form 10-Q (File No. 001-35033), filed on February 10, 2017.
81
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 22, 2020
OCONEE FEDERAL FINANCIAL CORP.
By:
/s/ Robert N. McLellan, Jr.
Robert N. McLellan, Jr.
Chairman of the Board
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ ROBERT N. MCLELLAN, JR.
Robert N. McLellan, Jr.
/s/ CURTIS T. EVATT
Curtis T. Evatt
/s/ JOHN W. HOBBS
John W. Hobbs
/s/ HARRY B. MAYS, JR.
Harry B. Mays, Jr.
/s/ W. MAURICE POORE
W. Maurice Poore
/s/ CECIL T. SANDIFER, JR.
Cecil T. Sandifer, Jr.
Chairman of the Board
September 22, 2020
President, Chief Executive Officer, Director
(Principal Executive Officer)
September 22, 2020
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
September 22, 2020
September 22, 2020
September 22, 2020
September 22, 2020
82
October 9, 2020
Dear Fellow Shareholders,
On behalf of the Board of Directors and the entire Oconee Federal team, I am pleased to present
the 2020 Annual Report to shareholders of Oconee Federal Financial Corp., the parent company of
Oconee Federal Savings and Loan Association. At June 30, 2020 we had total assets of $516 million.
Net income for the year was $3.9 million, or $0.67 per diluted share. As in prior years, we continued to
add value to our shareholders by paying $2.3 million in dividends, or $0.40 per share during the year.
The current global COVID-19 pandemic has presented Oconee Federal with challenges to protect the
health and safety of our customers and employees, while still delivering the superior products and
customer service that our community has come to expect from us. Our hearts go out to everyone who
has been affected by this pandemic, whether directly or indirectly. We expect there to be continued
uncertainty as a result of this pandemic, but we are confident that we can adapt and focus on what has
made us successful in the past, and that will pave the way for us to continue to be successful in the
future. All of this is possible because of the combination of your support, our dedicated employees
and our satisfied customers.
We are privileged to serve you and are deeply appreciative of the confidence and trust that you place
in us. We look forward to continuing to serve you in the coming year.
Sincerely,
Curtis T. Evatt
President & CEO
Board Of Directors:
Curtis T. Evatt
Robert N. McLellan, Jr.
Cecil T. Sandifer, Jr.
Harry B. Mays, Jr.
W. Maurice Poore
Clayton
Walhalla
Greenville
Westminster
Seneca
Clemson
SOUTH
CAROLINA
Toccoa
Doyle
GEORGIA
EXECUTIVE OFFICES
Executive Offices
201 E. North Second Street
Seneca, SC 29678
BRANCHES AND OFFICES
Main Office
115 E. North Second Street
Seneca, SC 29678
Toccoa Branch
2859 Highway 17 Alternate
Toccoa, GA 30577
Doyle Street Branch
12 East Doyle Street
Toccoa, GA 30577
Seneca Branch
813 - 123 By-Pass
Seneca, SC 29678
Clayton Branch
221 Highway 76 East
Clayton, GA 30525
Clemson Branch
357 Old Greenville Hwy.
Clemson, SC 29631
Walhalla Branch
204 W. North Broad Street
Walhalla, SC 29691
Westminster Branch
111 W. Windsor Street
Westminster, SC 29693
GEORGIASOUTHCAROLINANORTHCAROLINA Annual Report to Shareholders
2020
OCONEE FEDERAL FINANCIAL CORP.
201 E. North Second Street
Seneca, SC 29678
(864) 882-2765
www.oconeefederal.com