UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the Quarterly Period ended September 30, 2015

 

Or

 

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

 

For transition period from              to             

 

Commission File Number 001-35033

 

 

 

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Federal   32-0330122

(State of Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification Number)

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

 

(864) 882-2765

Registrant’s telephone number, including area code

 

Not Applicable

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

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

There were 5,882,140 shares of Common Stock, par value $.01 per share, outstanding as of November 16, 2015.

 

 

 

 

 

 

OCONEE FEDERAL FINANCIAL CORP.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I.   2
ITEM 1. FINANCIAL STATEMENTS 2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 4. CONTROLS AND PROCEDURES 38
PART II.   38
ITEM 1. LEGAL PROCEEDINGS 38
ITEM 1A. RISK FACTORS 38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 39
ITEM 4. MINE SAFETY DISCLOSURES 39
ITEM 5. OTHER INFORMATION 39
ITEM 6. EXHIBITS 39
SIGNATURES 40
INDEX TO EXHIBITS 41

 

 1 
Table of Contents 

 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

 

PART I

ITEM 1.FINANCIAL STATEMENTS

 

   September 30,
2015
   June 30,
2015
 
   (Unaudited)   (Audited) 
         
ASSETS          
Cash and due from banks  $4,201   $4,883 
Interest-earning deposits   11,951    21,309 
Total cash and cash equivalents   16,152    26,192 
Securities available-for-sale   112,326    111,167 
Loans   304,604    309,267 
Allowance for loan losses   (1,011)   (1,008)
Net loans   303,593    308,259 
Loans held for sale   -    118 
Premises and equipment, net   7,015    7,058 
Real estate owned, net   1,682    2,092 
Accrued interest receivable          
Loans   1,087    1,077 
Investments   398    312 
Restricted equity securities   440    440 
Bank owned life insurance   17,152    9,044 
Goodwill   2,593    2,593 
Core deposit intangible   838    874 
Loan servicing rights   1,332    1,396 
Deferred tax assets   2,723    3,766 
Other assets   1,201    1,191 
Total assets  $468,532   $475,579 
           
LIABILITIES          
Deposits          
Noninterest bearing  $20,969   $20,254 
Interest bearing   364,343    373,839 
Total deposits   385,312    394,093 
Accrued interest payable and other liabilities   916    696 
Total liabilities   386,228    394,789 
           
SHAREHOLDERS' EQUITY          
Common stock, $0.01 par value, 100,000,000 shares authorized; 5,882,140 shares outstanding   65    65 
Treasury stock, $0.01 par value, 589,899 shares   (6)   (6)
Additional paid-in capital   13,470    13,354 
Retained earnings   69,804    68,950 
Accumulated other comprehensive income (loss)   468    (26)
Unearned ESOP shares   (1,497)   (1,547)
Total shareholders' equity   82,304    80,790 
Total liabilities and shareholders' equity  $468,532   $475,579 

 

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(Unaudited)

 

   Three Months Ended 
   September 30,
2015
   September 30,
2014
 
Interest and dividend income:          
Loans, including fees  $3,883   $2,886 
Securities, taxable   390    381 
Securities, tax-exempt   88    36 
Interest-earning deposits and other   16    7 
Total interest income   4,377    3,310 
           
Interest expense:          
Deposits   288    308 
Total interest expense   288    308 
           
Net interest income   4,089    3,002 
           
Provision for loan losses   145    - 
Net interest income after provision for loan losses   3,944    3,002 
           
Noninterest income:          
Service charges on deposit accounts   119    18 
Income on bank owned life insurance   112    67 
Mortgage banking income   96    - 
Gain on sales of securities   9    5 
Gain on disposition of purchase credit impaired loans   719    - 
Change in loan servicing asset   (64)   - 
Other   2    - 
Total noninterest income   993    90 
           
Noninterest expense:          
Salaries and employee benefits   1,489    910 
Occupancy and equipment   360    167 
Data processing   149    67 
Professional and supervisory fees   251    113 
Office expense   41    43 
Advertising   37    23 
FDIC deposit insurance   55    38 
Provision for real estate owned and related expenses   106    19 
Loss on sales of real estate owned   69   8 
Other   153    95 
Total noninterest expense   2,710    1,483 
           
Income before income taxes   2,227    1,609 
Income tax expense   785    565 
           
Net income  $1,442   $1,044 
           
Other comprehensive income (loss)          
Unrealized gain (loss) on securities available-for-sale  $783   $(243)
Tax effect   (283)   92 
Reclassification adjustment for gains realized in net income   (9)   (5)
Tax effect   3    2 
Total other comprehensive gain (loss)   494    (154)
           
Comprehensive income  $1,936   $890 
           
           
Basic net income per share: (Note 2)  $0.25   $0.18 
Diluted net income per share: (Note 2)  $0.25   $0.18 
Dividends declared per share:  $0.10   $0.10 

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

                   Accumulated         
           Additional       Other   Unearned     
   Common   Treasury   Paid-In   Retained   Comprehensive   ESOP     
   Stock   Stock   Capital   Earnings   Income (Loss)   Shares   Total 
                             
Balance at July 1, 2014  $64   $(6)  $12,186   $66,705   $(147)  $(1,821)  $76,981 
Net income   -    -    -    1,044    -    -    1,044 
Other comprehensive loss   -    -    -    -    (154)   -    (154)
Stock-based compensation expense   -    -    66    -    -    -    66 
Dividends (1)   -    -    -    (583)   -    -    (583)
ESOP shares earned   -    -    29    -    -    48    77 
Balance at September 30, 2014  $64   $(6)  $12,281   $67,166   $(301)  $(1,773)  $77,431 
                                    
Balance at July 1, 2015  $65   $(6)  $13,354   $68,950   $(26)  $(1,547)  $80,790 
Net income   -    -    -    1,442    -    -    1,442 
Other comprehensive income   -    -    -    -    494    -    494 
Stock-based compensation expense   -    -    76    -    -    -    76 
Dividends (2)   -    -    -    (588)   -    -    (588)
ESOP shares earned   -    -    40    -    -    50    90 
Balance at September 30, 2015  $65   $(6)  $13,470   $69,804   $468   $(1,497)  $82,304 

 

 

(1)Cash dividends declared on July 24, 2014 were paid on August 21, 2014.
(2)Cash dividends declared on July 30, 2015 were paid on August 27, 2015.

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

 

   Three Months Ended 
   September 30,
2015
   September 30,
2014
 
Cash Flows From Operating Activities          
Net income  $1,442   $1,044 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   145    - 
Provision for real estate owned   95    - 
Depreciation and amortization, net   325    221 
Deferred loan (costs) fees, net   (92)   17 
Deferred income tax expense   765    22 
Loss on sale of real estate owned   69    8 
Change in loan servicing asset   64    - 
Gain on sales of securities   (9)   (5)
Mortgage loans originated for sale   (1,749)   - 
Mortgage loans sold   1,907    - 
Gain on sales of mortgage loans   (40)   - 
Increase in cash surrender value of bank owned life insurance   (112)   (67)
Gain on disposition of purchase credit impaired loans   (719)   - 
ESOP compensation expense   90    77 
Stock-based compensation expense   76    66 
Net change in operating assets and liabilities:          
Accrued interest receivable   (96)   (128)
Accrued interest payable   (3)   (309)
Other   217    622 
Net cash provided by operating activities   2,375    1,568 
           
Cash Flows From Investing Activities          
Purchases of premises and equipment   (72)   (84)
Purchases of securities available-for-sale   (5,738)   (3,399)
Proceeds from maturities, paydowns and calls of securities available-for-sale   4,022    3,323 
Proceeds from sales of securities available-for-sale   1,164    1,501 
Purchases of bank owned life insurance   (8,000)   - 
Proceeds from sale of real estate owned   1,299    199 
Loan originations and repayments, net   4,279    (3,059)
Net cash used in investing activities   (3,046)   (1,519)
           
Cash Flows from Financing Activities          
Net change in deposits   (8,781)   (3,067)
Dividends paid   (588)   (583)
Net cash used in financing activities   (9,369)   (3,650)
           
Change in cash and cash equivalents   (10,040)   (3,601)
           
Cash and cash equivalents, beginning of year   26,192    11,890 
Cash and cash equivalents, end of period  $16,152   $8,289 

 

See accompanying notes to the consolidated financial statements

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(1)BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (70.80%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

 

On December 1, 2014, the Company acquired Stephens Federal Bank. The consolidated financial statements at September 30, 2015 and June 30, 2015 and for the three months ended September 30, 2015 are reflective of the addition of Stephens Federal Bank’s assets and liabilities.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2015 and June 30, 2015 and the results of operations and cash flows for the interim periods ended September 30, 2015 and 2014. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.

 

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

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(2)EARNINGS PER SHARE (“EPS”)

 

Basic EPS is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. ESOP shares are considered outstanding for this calculation unless unearned. The factors used in the earnings per common share computation follow:

 

   Three Months Ended 
   September 30,
2015
   September 30,
2014
 
Earnings per share          
Net income  $1,442   $1,044 
Less:  distributed earnings allocated to participating securities   (6)   (7)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities   (9)   (5)
Net earnings available to common shareholders  $1,427   $1,032 
           
Weighted average common shares outstanding including participating securities   5,882,140    5,834,395 
Less:  participating securities   (62,502)   (67,699)
Less: average unearned ESOP shares   (151,172)   (179,111)
Weighted average common shares outstanding   5,668,466    5,587,585 
           
Basic earnings per share  $0.25   $0.18 
           
Weighted average common shares outstanding   5,668,466    5,587,585 
Add:  dilutive effects of assumed exercises of stock options   70,820    54,644 
Average shares and dilutive potential common shares   5,739,286    5,642,229 
           
Diluted earnings per share  $0.25   $0.18 

 

During the three months ended September 30, 2015 and 2014, 15,400 and 7,700 shares, respectively, were considered anti-dilutive as the exercise price was below the average market price for the respective periods.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(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 September 30, 2015 and June 30, 2015 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
September 30, 2015  Cost   Gains   Losses   Value 
                 
FHLMC common stock  $20   $159   $-   $179 
Certificates of deposit   7,221    21    (13)   7,229 
Municipal securities   18,545    103    (75)   18,573 
SBA loan pools   1,557    9    -    1,566 
U.S. Government agency mortgage-backed securities   60,278    691    (254)   60,715 
U.S. Government agency bonds   23,972    125    (33)   24,064 
Total available-for-sale  $111,593   $1,108   $(375)  $112,326 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
June 30, 2015  Cost   Gains   Losses   Value 
                 
FHLMC common stock  $20   $160   $-   $180 
Certificates of deposit   7,221    29    (8)   7,242 
Municipal securities   13,574    11    (152)   13,433 
SBA loan pools   2,249    17    -    2,266 
U.S. Government agency mortgage-backed securities   64,177    488    (523)   64,142 
U.S. Government agency bonds   23,967    80    (143)   23,904 
Total available-for-sale  $111,208   $785   $(826)  $111,167 

 

Securities pledged at September 30, 2015 and June 30, 2015 had carrying amounts of $6,001 and $5,951, respectively. These securities were pledged to secure public deposits.

 

At September 30, 2015 and June 30, 2015, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for more than twelve months at September 30, 2015 and June 30, 2015. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

   Less than 12 Months   12 Months or More   Total 
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
 
September 30, 2015                                    
                                     
Certificates of deposit  $2,726   $(13)   11   $-   $-    -   $2,726   $(13)   11 
Municipal securities   6,691    (68)   17    530    (7)   1    7,221    (75)   18 
SBA loan pools   -    -    -    -    -    -    -    -    - 
U.S. Government agency mortgage-backed securities   7,355    (35)   6    11,118    (219)   12    18,473    (254)   18 
U.S. Government agency bonds   1,984    (4)   1    4,966    (29)   3    6,950    (33)   4 
   $18,756   $(120)   35   $16,614   $(255)   16   $35,370   $(375)   51 

 

   Less than 12 Months   12 Months or More   Total 
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
   Fair
Value
   Unrealized
Loss
   Number in
Unrealized
Loss (1)
 
June 30, 2015                                    
                                     
Certificates of deposit  $1,737   $(6)   7   $247   $(2)   1   $1,984   $(8)   8 
Municipal securities   10,472    (152)   30    -    -    -    10,472    (152)   30 
SBA loan pools   -    -    -    -    -    -    -    -    - 
U.S. Government agency mortgage-backed securities   18,981    (195)   15    11,521    (328)   12    30,502    (523)   27 
U.S. Government agency bonds   6,951    (68)   4    4,920    (75)   3    11,871    (143)   7 
   $38,141   $(421)   56   $16,688   $(405)   16   $54,829   $(826)   72 

 

 

(1)Actual amounts.

 

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

 

None of the unrealized losses at September 30, 2015 were recognized into net income for the three months ended September 30, 2015 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2015 were recognized as having OTTI during the three months ended September 30, 2015.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2015 and June 30, 2015 by contractual maturity. FHLMC common stock is not presented in this table.

 

   September 30, 2015   June 30, 2015 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
Less than one year  $2,997   $3,006   $1,244   $1,249 
Due from one to five years   15,526    15,602    22,156    22,042 
Due from six to ten years   24,508    24,543    11,450    11,412 
Due after ten years   6,707    6,714    9,912    9,876 
Mortgage-backed securities (1)   61,835    62,282    66,426    66,408 
Total  $111,573   $112,147   $111,188   $110,987 

 

 

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

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three months ended September 30, 2015 and 2014:

 

   Three Months Ended 
   September 30,
2015
   September 30,
2014
 
Proceeds  $1,164   $1,501 
Gross gains   9    5 
Gross losses   -    - 

 

The tax provision related to these net realized gains was $3 and $2 for the three months ended September 30, 2015 and 2014, respectively.

 

(4)LOANS

 

The components of loans at September 30, 2015 and June 30, 2015 were as follows:

 

   September 30,
2015
   June 30,
 2015
 
Real estate loans:          
One-to-four family  $254,980   $256,321 
Multi-family   2,508    2,574 
Home equity   7,721    8,198 
Nonresidential   22,590    21,685 
Agricultural   3,638    4,164 
Construction and land   12,180    14,590 
Total real estate loans   303,617    307,532 
Commercial and industrial   160    184 
Consumer and other loans   2,023    2,745 
Total loans   305,800    310,461 
Deferred net loan fees   (1,196)   (1,194)
Total loans net of deferred loan fees  $304,604   $309,267 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2015 by portfolio segment:

 

Three Months Ended September 30, 2015  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
 Balance
 
Real estate loans:                         
One-to-four family  $910   $111   $(140)  $-   $881 
Multi-family   4    -    -    -    4 
Home equity   1    19    -    -    20 
Nonresidential   55    13    -    -    68 
Agricultural   4    -    -    -    4 
Construction and land   25    (6)   -    -    19 
Total real estate loans   999    137    (140)   -    996 
Commercial and industrial   -    8    -    -    8 
Consumer and other loans   9    -    (2)   -    7 
Total loans  $1,008   $145   $(142)  $-   $1,011 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 30, 2015:

 

   Ending Allowance on Loans:   Loans: 
At September 30, 2015  Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
   Non-PCI   PCI (1)       Non-PCI   PCI (1)     
Real estate loans:                              
One-to-four family  $92   $4   $785   $2,092   $2,422   $250,461 
Multi-family   -    -    4    -    -    2,508 
Home equity   19    -    1    60    -    7,665 
Nonresidential   -    12    56    -    2,344    20,246 
Agricultural   -    -    4    -    946    2,692 
Construction and land   -    1    18    -    555    11,625 
Total real estate loans   111    17    868    2,152    6,267    295,197 
Commercial and industrial   -    -    8    -    -    160 
Consumer and other loans   7    -    -    10    -    2,014 
Total loans  $118   $17   $876   $2,162   $6,267   $297,371 

 

 

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

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2014 by portfolio segment:

 

Three Months Ended September 30, 2014  Beginning
Balance
   Provision   Charge-offs   Recoveries   Ending
Balance
 
Real estate loans:                         
One-to-four family  $736   $35   $-   $-   $771 
Multi-family   4    -    -    -    4 
Home equity   1    -    -    -    1 
Nonresidential   52    -    -    -    52 
Agricultural   -    -    -    -    - 
Construction and land   59    (33)   -    -    26 
Total real estate loans   852    2    -    -    854 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   3    (2)   -    -    1 
Total loans  $855   $-   $-   $-   $855 

 

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2015:

 

   Ending Allowance on Loans:   Loans: 
At June 30, 2015  Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
   Individually
Evaluated for
Impairment
   Collectively
Evaluated for
Impairment
 
   Non-PCI   PCI (1)       Non-PCI   PCI (1)     
Real estate loans:                              
One-to-four family  $197   $6   $707   $2,665   $2,778   $250,877 
Multi-family   -    -    4    -    -    2,574 
Home equity   -    -    1    -    -    8,198 
Nonresidential   -    10    45    -    2,627    19,058 
Agricultural   -    -    4    -    1,441    2,723 
Construction and land   -    -    25    -    599    13,991 
Total real estate loans   197    16    786    2,665    7,445    297,421 
Commercial and industrial   -    -    -    -    -    184 
Consumer and other loans   7    -    2    7    -    2,738 
Total loans  $204   $16   $788   $2,672   $7,445   $300,343 

 

 

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

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The tables below present loans that were individually evaluated for impairment by portfolio segment at September 30, 2015 and June 30, 2015, including the average recorded investment balance and interest earned for the three months ended September 30, 2015 and year ended June 30, 2015:

 

   September 30, 2015 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $3,962   $3,090   $-   $3,247   $46 
Multi-family   -    -    -    -    - 
Home equity   247    37    -    19    - 
Nonresidential   3,553    1,929    -    1,618    25 
Agricultural   1,819    946    -    1,194    24 
Construction and land   399    218    -    409    22 
Total real estate loans   9,980    6,220    -    6,486    117 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   3    2    -    1    - 
Total loans  $9,983   $6,222   $-   $6,487   $117 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $1,544   $1,429   $96   $1,736   $14 
Multi-family   -    -    -    -    - 
Home equity   21    19    19    10    - 
Nonresidential   566    415    12    867    6 
Agricultural   -    -    -    -    - 
Construction and land   785    337    1    169    - 
Total real estate loans   2,916    2,200    128    2,781    20 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   8    7    7    -    - 
Total loans  $2,924   $2,207   $135   $2,781   $20 
                          
Totals:                         
Real estate loans  $12,896   $8,420   $128   $9,267   $137 
Consumer and other loans   11    9    7    1    - 
Total loans  $12,907   $8,429   $135   $9,268   $137 

 

The unpaid principal balance and recorded investment in PCI loans was $10,745 and $6,267, respectively, at September 30, 2015.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   June 30, 2015 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans:                         
One-to-four family  $4,651   $3,403   $-   $1,889   $92 
Multi-family   -    -    -    -    - 
Home equity   207    -    -    -    - 
Nonresidential   2,830    1,307    -    654    39 
Agricultural   2,893    1,441    -    721    45 
Construction and land   1,271    599    -    300    23 
Total real estate loans   11,852    6,750    -    3,564    199 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   -    -    -    -    - 
Total  $11,852   $6,750   $-   $3,564   $199 
                          
With recorded allowance:                         
Real estate loans:                         
One-to-four family  $2,082   $2,042   $203   $1,658   $28 
Multi-family   -    -    -    -    - 
Home equity   -    -    -    -    - 
Nonresidential   1,938    1,319    10    660    25 
Agricultural   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Total real estate loans   4,020    3,361    213    2,318    53 
Commercial and industrial   -    -    -    -    - 
Consumer and other loans   9    7    7    -    - 
Total  $4,029   $3,368   $220   $2,318   $53 
                          
Totals:                         
Real estate loans  $15,872   $10,111   $213   $5,882   $252 
Consumer and other loans   9    7    7    -    - 
Total  $15,881   $10,118   $220   $5,882   $252 

 

The unpaid principal balance and recorded investment in PCI loans was $13,209 and $7,445, respectively, at June 30, 2015.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the carrying amount of those loans at September 30, 2015 and June 30, 2015:

 

PCI Loans, net of related discounts:        
   September 30,
2015
   June 30,
2015
 
Real estate loans:          
One-to-four family  $2,418   $2,772 
Multi-family   -    - 
Home equity   -    - 
Nonresidential   2,332    2,617 
Agricultural   946    1,441 
Construction and land   554    599 
Total real estate loans   6,250    7,429 
Commercial and industrial   -    - 
Consumer and other loans   -    - 
Total loans  $6,250   $7,429 

 

Carrying amounts listed above are net of an allowance for loan losses of $17 and $16 at September 30, 2015 and June 30, 2015, respectively.

 

The following table presents the changes in the carrying value and the accretable yield on purchased credit impaired loans for the three months ended September 30, 2015:

 

   Three Months Ended
September 30, 2015
 
   Accretable
Yield
   Carrying
Value
 
Balance at beginning of year  $(694)  $7,429 
Subsequent adjustments   -    - 
Liquidations   118    (1,146)
Reductions from payments   -    (32)
Accretion   124    - 
Reclassification from nonaccretable to accretable   (48)   - 
Change in the allowance   -    (1)
Balance at end of period  $(500)  $6,250 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amount of such loans at September 30, 2015 is as follows:

 

   September 30,
2015
 
Balance at beginning of year  $2,798 
Additions   74 
Reductions from payments and liquidations   (585)
Balance at end of period  $2,287 

 

No income was recognized for the three months ended September 30, 2015 on the cost recovery basis.

 

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 that are collectively evaluated for impairment and individually evaluated for impairment. Separate tables are presented to show the aging of total past due loans and the aging of past due PCI loans only.

 

Total past due loans and nonaccrual loans at September 30, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
September 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $5,788   $1,586   $907   $8,281   $246,699   $254,980   $1,339   $- 
Multi-family   -    -    -    -    2,508    2,508    -    - 
Home equity   141    -    58    199    7,522    7,721    57    - 
Nonresidential   106    58    1,145    1,309    21,281    22,590    1,145    - 
Agricultural   -    -    -    -    3,638    3,638    481    - 
Construction and land   87    94    25    206    11,974    12,180    25    - 
Total real estate loans   6,122    1,738    2,135    9,995    293,622    303,617    3,047    - 
Commercial and industrial   -    -    -    -    160    160    -    - 
Consumer and other loans   2    1    -    3    2,020    2,023    2    - 
Total loans  $6,124   $1,739   $2,135   $9,998   $295,802   $305,800   $3,049   $- 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI past due and nonaccrual loans at September 30, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
September 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $156   $-   $480   $636   $1,788   $2,424   $636   $- 
Home equity   -    -    -    -    -    -    -    - 
Nonresidential   -    58    1,145    1,203    1,140    2,343    1,145    - 
Agricultural   -    -    -    -    945    945    481    - 
Construction and land   13    -    25    38    517    555    25    - 
Total loans  $169   $58   $1,650   $1,877   $4,390   $6,267   $2,287   $- 

 

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, 2015: 

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
June 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $5,871   $1,243   $2,311   $9,425   $246,896   $256,321   $2,311   $- 
Multi-family   -    -    -    -    2,574    2,574    -    - 
Home equity   49    -    -    49    8,149    8,198    -    - 
Nonresidential   229    313    1,108    1,650    20,035    21,685    1,379    - 
Agricultural   -    -    -    -    4,164    4,164    487    - 
Construction and land   78    -    -    78    14,512    14,590    -    - 
Total real estate loans   6,227    1,556    3,419    11,202    296,330    307,532    4,177    - 
Commercial and industrial   -    -    -    -    184    184    -    - 
Consumer and other loans   1    1    -    2    2,743    2,745    -    - 
Total loans  $6,228   $1,557   $3,419   $11,204   $299,257   $310,461   $4,177   $- 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

PCI past due and nonaccrual loans at June 30, 2015:

 

                               Accruing 
   30-59   60-89   90 Days                   Loans 
   Days   Days   or More   Total       Total   Nonaccrual   Past Due 90 
June 30, 2015  Past Due   Past Due   Past Due   Past Due   Current   Loans   Loans   Days or More 
Real estate loans:                                        
One-to-four family  $237   $-   $932   $1,169   $1,609   $2,778   $932   $- 
Home equity   -    -    -    -    -    -    -    - 
Nonresidential   14    313    1,108    1,435    1,192    2,627    1,379    - 
Agricultural   -    -    -    -    1,441    1,441    487    - 
Construction and land   -    -    -    -    599    599    -    - 
Total loans  $251   $313   $2,040   $2,604   $4,841   $7,445   $2,798   $- 

 

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

 

Troubled Debt Restructurings:

 

At September 30, 2015 and June 30, 2015, total loans that have been modified as troubled debt restructurings were $481 and $487, respectively, which consisted of one agricultural loan and one home equity line of credit. These loans were PCI loans recorded initially at fair value. No additional allowance has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts under either loan or any payment default on any loan after the modification. There were no troubled debt restructurings during the three months ended September 30, 2015.

 

Loan Grades:

 

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.

 

Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.

 

Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.

 

Special Mention: Loan assets of this grade have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loan assets of this grade are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Portfolio Segments:

 

One-to-four family: One-to-four family residential loans consist primarily of loans secured by first or second deeds of trust on primary residences, and are originated as adjustable-rate or fixed-rate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company's market area. The Company currently originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.

 

For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. The Company may make exceptions for special loan programs that we offer. For example, the Company currently offers mortgages of up to $95 with loan-to-value ratios of up to 95% to low- to moderate-income borrowers solely for the purchase of their primary residence. The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.

 

The Company has historically originated residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. The Company no longer offers residential mortgage loans for manufactured or modular homes as of December 1, 2014. However, renewals of existing performing credits that meet the Company’s underwriting requirements will be considered. The Company requires lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without the Company’s permission. Such homes must be "de-titled" by the State of South Carolina or Georgia so that they are taxed and must be transferred as residential homes rather than vehicles. The Company also obtains a mortgage on the real estate to which such homes are affixed. Loans for manufactured or modular homes represent less than 2% of our portfolio of one-to-four family loans.

 

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

 

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

 

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

 

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

 

Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions. In addition, because a church's financial stability often depends on donations from congregation members, some of whom may not reside in our market area, rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other nonresidential real estate.

 

The Company considers a number of factors in originating nonresidential real estate loans. The Company evaluates the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions. In evaluating the property securing the loan, the factors the Company considers include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current 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. 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 one such loan 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. The maximum loan-to-value ratio of these construction loans is 80%.

 

Commercial and Industrial Loans: As a result of the Stephens Federal Bank acquisition, the Company acquired commercial and industrial loans. These 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,

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.

 

Commercial and industrial loans and leases typically are underwritten on the basis of the borrower’s or lessee’s ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases.

 

Consumer and Other Loans: The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans and 18 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances.

 

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

Based on the most recent analysis performed, the risk grade of loans by portfolio segment are presented in the following tables. Separate tables are presented to show the risk grade of loans that have been acquired.

 

Total loans by risk grade and portfolio segment at September 30, 2015:

 

September 30, 2015  Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $239,223   $9,616   $1,623   $4,518   $-   $254,980 
Multi-family   2,508    -    -    -    -    2,508 
Home equity   7,306    186    173    56    -    7,721 
Nonresidential   14,470    4,232    1,544    2,344    -    22,590 
Agricultural   1,274    416    1,002    946    -    3,638 
Construction and land   10,092    1,052    480    556    -    12,180 
Total real estate loans   274,873    15,502    4,822    8,420    -    303,617 
Commercial and industrial   145    15    -    -    -    160 
Consumer and other loans   2,010    -    4    9    -    2,023 
Total loans  $277,028   $15,517   $4,826   $8,429   $-   $305,800 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Total loans by risk grade and portfolio segment at June 30, 2015:

 

June 30, 2015  Pass   Pass-Watch   Special
Mention
   Substandard   Doubtful   Total 
Real estate loans:                              
One-to-four family  $242,399   $6,909   $1,568   $5,445   $-   $256,321 
Multi-family   2,574    -    -    -    -    2,574 
Home equity   7,840    184    174    -    -    8,198 
Nonresidential   13,226    4,275    1,558    2,355    271    21,685 
Agricultural   1,295    423    1,005    1,441    -    4,164 
Construction and land   12,586    920    485    599    -    14,590 
Total real estate loans   279,920    12,711    4,790    9,840    271    307,532 
Commercial and industrial   169    15    -    -    -    184 
Consumer and other loans   2,725    6    7    7    -    2,745 
Total loans  $282,814   $12,732   $4,797   $9,847   $271   $310,461 

 

(5)FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

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

 

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

 

Investment Securities:

 

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The Company’s preferred stock investments are not actively traded; therefore, management estimates the fair value of its preferred stock using estimations provided by external dealer quotes.

 

Impaired Loans:

 

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

 

Real Estate Owned:

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

 

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Loan Servicing Rights:

 

Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data and results in a Level 3 classification.

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2015 and June 30, 2015 are summarized below:

 

   Fair Value Measurements 
   (Level 2)   (Level 3)   (Level 2)   (Level 3) 
   September 30, 2015   June 30, 2015 
Financial assets:                    
Securities available-for-sale  $112,147   $179   $110,987   $180 
Loan servicing rights   -    1,332    -    1,396 
Total financial assets  $112,147   $1,511   $110,987   $1,576 

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at September 30, 2015 and June 30, 2015:

 

   Fair Value Measurements 
   (Level 3)   (Level 3) 
   September 30,
2015
   June 30,
 2015
 
Impaired real estate loans, with specific allocations:          
One-to-four family  $1,333   $1,839 
Nonresidential   403    1,309 
Construction and land   336    - 
Total financial assets   2,072    3,148 
Non-financial assets:          
Real estate owned, net:          
One-to-four family   956    1,335 
Nonresidential   556    365 
Construction and land   170    392 
Total non-financial assets   1,682    2,092 
Total assets measured at fair value on a non-recurring basis  $3,754   $5,240 

 

The Company's impaired loans at September 30, 2015 and June 30, 2015 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of these loans were $2,072 and $3,148, respectively, which consisted of valuation allowances of $134 and $220, respectively. Not shown in the table above,

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

there were recorded investments of $19 of home equity loans and $7 of consumer and other loans that were impaired with valuation allowances of $19 and $7, respectively, at September 30, 2015. At June 30, 2015, there were recorded investments of $7 thousand in consumer and other loans for which a valuation allowance of $7 was allocated. The impact to the provision for loan losses from the change in the valuation allowance for the three months ended September 30, 2015 and 2014 was an increase of $30 and a decrease of $7, respectively.

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned and their respective valuation allowances at September 30, 2015 and June 30, 2015 were $1,682 and $2,092 and $179 and $84, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell were $95 and $0 for the three months ended September 30, 2015 and 2014, respectively.

 

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs Level 3 for the three months ended September 30, 2015 and 2014:

 

   Fair Value
Measurements
  Fair Value 
   (Level 3)  (Level 3)
   Three Months Ended  Three Months Ended
   September 30,
2015
  September 30,
2014
   FHLMC
Common Stock
  Loan Servicing
Rights
  Total  FHLMC
Common Stock
Balance at beginning of year:  $180   $1,396   $576   $314 
Purchases   —      —      —      —   
Change in fair value   (1)   (64)   (65)   (99)
Balance at end of period:  $179   $1,332   $1,511   $215 

 

 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2015 and June 30, 2015.

 

   Level 3 Quantitative Information
   September 30,
2015
   June 30,
 2015
   Valuation
Technique
  Unobservable
Inputs
  Range
   Fair Value   Fair Value          
Impaired real estate loans net, with specific allocations:                   
One-to-four family  $1,333   $1,839   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 30%
                    
Nonresidential   403    1,309   Discounted cash flows  Discount rate, estimated timing of cash flows   
                    
Construction and land   336       Discounted cash flows  Discount rate, estimated timing of cash flows   
                    
Real estate owned net:                   
One-to-four family  $956   $1,335   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 20%
                    
Nonresidential   556    365   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 20%
                    
Construction and land   170    392   Sales comparison approach  Adjustment for differences between the comparable sales  0% to 20%

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at September 30, 2015 and June 30, 2015 are summarized below:

 

   September 30, 2015 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $112,326   $-   $112,147   $179   $112,326 
Loans, net   303,593    -    -    305,305    305,305 
Loans held for sale (2)   -    -    -    -    - 
Loan servicing rights   1,332    -    -    1,332    1,332 
Restricted equity securities (1)   440    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $385,312   $138,966   $246,435   $-   $385,401 

 

   June 30, 2015 
   Carrying   Fair Value 
   Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets                         
Securities available-for-sale  $111,167   $-   $110,987   $180   $111,167 
Loans, net   308,259    -    -    310,116    310,116 
Loans held for sale (2)   118    -    -    118    118 
Loan servicing rights   1,396    -    -    1,396    1,396 
Restricted equity securities (1)   440    N/A    N/A    N/A    N/A 
                          
Financial liabilities                         
Deposits  $394,093   $137,618   $256,681   $-   $394,299 

 

 

(1)It is not practicable to determine fair value of restricted equity securities due to restrictions placed on transferability.
(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 2 classification.

 

(6)EMPLOYEE STOCK OWNERSHIP PLAN

 

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

 

No contributions to the ESOP were made during the three months ended September 30, 2015. The expense recognized for the three months ended September 30, 2015 and 2014 was $90 and $77, respectively.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Shares held by the ESOP at September 30, 2015 and June 30, 2015 were as follows:

 

   September 30,
2015
   June 30,
2015
 
Committed to be released to participants   14,906    9,938 
Allocated to participants   85,248    85,248 
Unearned   148,688    153,656 
Total ESOP shares   248,842    248,842 
           
Fair value of unearned shares  $2,974   $2,827 

 

(7)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.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table summarizes stock option activity for the three months ended September 30, 2015:

 

   Options   Weighted-
Average
Exercise
Price/Share
   Weighted-
Average
Remaining
Contractual
Life (in years)
   Aggregate
Intrinsic
Value (1)
 
Outstanding - July 1, 2015   248,686   $12.02           
Granted   -    -           
Exercised   -    -           
Forfeited   -    -           
Outstanding - September 30, 2015   248,686   $12.02    6.71   $1,985 
Fully vested and exercisable at September 30, 2015   127,741   $11.63    6.71   $1,069 
Expected to vest in future periods   120,945                
Fully vested and expected to vest - September 30, 2015   248,686   $12.02    6.71   $1,985 

 

 

(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 $20.00 per share on September 30, 2015.

 

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

 

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

 

   Fiscal Years Granted 
   2015   2014   2012 
Risk-free interest rate   1.68%   2.32%   1.54%
Expected dividend yield   2.00%   2.33%   3.45%
Expected stock volatility   15.9    15.5    15.3 
Expected life (years)   8    8    8 
Fair value  $2.86   $2.46   $1.00 

 

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 21,835 and 32,105 options that were earned during the three months ended September 30, 2015 and 2014, respectively. Stock-based compensation expense for stock options for the three months ended September 30, 2015 and 2014 was $12 and $11, respectively. Total unrecognized compensation cost related to stock options was $119 at September 30, 2015 and is expected to be recognized over a weighted-average period of 3.0 years.

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The following table summarizes non-vested restricted stock activity for the three months ended September 30, 2015:

 

   September 30,
2015
 
Balance - beginning of year   62,502 
Granted   - 
Forfeited   - 
Vested   - 
Balance - end of period   62,502 
Weighted average grant date fair value  $13.15 

 

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The weighted-average grant date fair value of restricted stock granted on April 27, 2012 was $11.58 per share or $1,009. The weighted-average grant date fair value of restricted stock granted on November 13, 2013 was $17.16 per share or $216. The weighted-average grant date fair value of restricted stock granted on January 23, 2015 was $20.01 per share or $252. Stock-based compensation expense for restricted stock included in noninterest expense for the three months ended September 30, 2015 and 2014 was $63 and $60, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $745 at September 30, 2015 and is expected to be recognized over a weighted-average period of 2.8 years.

 

(8)LOAN SERVICING RIGHTS

 

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

 

The principal balances of those loans at September 30, 2015 are as follows:

 

   September 30,
2015
   June 30,
2015
 
Mortgage loan portfolio serviced for:          
FHLMC  $136,901   $141,195 

 

Custodial escrow balances maintained in connection with serviced loans were $1,081 and $986 at September 30, 2015 and June 30, 2015.

 

Activity for loan servicing rights for the three months ended September 30, 2015 is as follows:

 

   September 30,
2015
 
     
Loan servicing rights:     
Beginning of period:  $1,396 
Additions   - 
Change in fair value   (64)
End of period:  $1,332 

 

Fair value at September 30, 2015 was determined using a discount rate of 9.50%, prepayment speed assumptions ranging from 7.0% to 19.8% Conditional Prepayment Rate “CPR” depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.61%. 

 

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(9)SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the three months ended September 30, 2015 and 2014 is as follows:

 

   September 30,
2015
   September 30,
2014
 
Cash paid during the period for:          
Interest paid  $291   $309 
Income taxes paid  $1,520   $100 
Supplemental noncash disclosures:          
Transfers from loans to real estate owned  $1,053   $59 

 

(10)SUBSEQUENT EVENTS

 

On October 29, 2015, the Board of Directors of Oconee Federal Financial Corp. (the “Company”) declared a quarterly cash dividend of $0.10 per share of the Company’s common stock. The dividend is payable to stockholders of record as of November 12, 2015, and will be paid on or about November 27, 2015.

 

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ITEM 2.

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

 

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

 

·statements of our goals, intentions and expectations;
·statements regarding our business plans and prospects and growth and operating strategies;
·statements regarding the asset quality of our loan and investment portfolios; and
·estimates or our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·increased competition among depository and other financial institutions;

 

·our ability to attract and maintain deposits, including attracting and maintaining deposits from former depositors of Stephens Federal Bank and introducing new deposit products;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·the integration of our business with that of Stephens Federal Bank may not be successful, or such integration may take longer to accomplish than expected;

 

·the growth opportunities and cost savings from the acquisition of Stephens Federal Bank may not be fully realized or may take longer to realize than expected;

 

·our ability to manage increased expenses following the acquisition of Stephens Federal Bank, including salary and employee benefit expenses, occupation expenses, additional provisions related to loans acquired from Stephens Federal Bank and expenses related to foreclosed real estate acquired from Stephens Federal Bank;

 

·operating costs, customer losses and business disruption following the acquisition of Stephens Federal Bank, including adverse effects of relationships with employees, may be greater than expected;

 

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

 

·our reliance on a small executive staff;

 

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

 

·changes in consumer spending, borrowing and savings habits;

 

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

 

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

 

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

 

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

 

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

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2015, as filed with the Securities and Exchange Commission.

 

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Comparison of Financial Condition at September 30, 2015 and June 30, 2015

 

Our total assets decreased by $7.1 million, or 1.5%, to $468.5 million at September 30, 2015 from $475.6 million at June 30, 2015. The decrease reflects the decrease in our total deposits of $8.8 million, or 2.2%, to $385.3 million at September 30, 2015 from $394.1 million at June 30, 2015. Total cash and cash equivalents decreased $10.0 million, or 38.2%, to $16.2 million at September 30, 2015 from $26.2 million at June 30, 2015. The decrease in cash and cash equivalents is primarily reflective of the decrease in deposits and the purchase of bank owned life insurance, net of cash received from operations and the decline in our total loans. Bank owned life insurance increased $8.1 million, or 90.0%, to $17.2 million at September 30, 2015 from $9.0 million at June 30, 2015. We purchased an additional $8.0 million in bank owned life insurance on certain employees of the Company during the three months ended September 30, 2015. Securities available-for-sale increased modestly to $112.3 million at September 30, 2015 from $111.2 million at June 30, 2015 due to new securities purchases and an increase in the unrealized gains on securities at September 30, 2015.

 

Total gross loans decreased by $4.6 million, or 1.5%, to $305.8 million at September 30, 2015 from $310.5 million at June 30, 2015. A portion of this decrease, $1.1 million, was from the liquidation and foreclosure of PCI loans during the three months ended September 30, 2015 that we acquired from the Stephens Federal Bank acquisition. An additional $786 thousand in originated loans were foreclosed on during the three months ended September 30, 2015. The remaining $2.7 million decrease in loans is reflective of the seasonally slower loan demand in our market area as well as normal loan payment amortization.

 

Deposits decreased $8.8 million, or 2.2%, to $385.3 million at September 30, 2015 from $394.1 million at June 30, 2015. The decline in our deposits reflected a decrease in certificates of deposit of $10.2 million, which was offset partially by an increase in NOW and demand deposits and money market deposits of $2.1 million. Money market deposits increased $1.5 million to $19.0 million at September 30, 2015 from $17.5 million at June 30, 2015. The increase in money market deposits is reflective of a slight increase in our money market rates that we offered during the three months ended September 30, 2015. We believe the decline in our certificates of deposit is reflective of depositors moving their deposits into higher yielding investments in the market.

 

Oconee Federal, MHC’s cash is held on deposit with the Company. We generally do not accept brokered deposits and no brokered deposits were accepted during the three months ended September 30, 2015.

 

We had no advances from the Federal Home Loan Bank of Atlanta as of September 30, 2015 or June 30, 2015. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% of total assets (as of September 30, 2015), or approximately $51.5 million.

 

Total shareholders’ equity increased $1.5 million, or 1.9%, to $82.3 million at September 30, 2015 compared to $80.8 million at June 30, 2015. The increase in total shareholders’ equity is primarily reflective of net income of $1.4 million, net of dividends paid of $588 thousand, and other comprehensive income of $494 thousand for the three months ended September 30, 2015.

 

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Nonperforming Assets

 

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

 

   September 30,
2015
   June 30,
 2015
 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family  $1,339   $2,311 
Home equity   57    - 
Nonresidential   1,145    1,379 
Agricultural   481    487 
Construction and land   25    - 
Total real estate loans   3,047    4,177 
Consumer and other loans   2    - 
Total nonaccrual loans  $3,049   $4,177 
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more  $-   $- 
Total of nonaccrual and 90 days or more past due loans (1)  $3,049   $4,177 
Real estate owned, net:          
One-to-four family  $956   $1,335 
Nonresidential   556    365 
Construction and land   170    392 
Total nonperforming assets  $4,731   $6,269 
           
Troubled debt restructurings  $481   $487 
Troubled debt restructurings and total nonperforming assets  $5,212   $6,756 
           
Total nonperforming loans to total loans   1.00%   1.35%
Total nonperforming assets to total assets   1.11%   1.42%
Total nonperforming assets to loans and real estate owned   1.70%   2.16%

 

 

(1)There were no loans past due 90 days or more and still accruing at September 30, 2015 and June 30, 2015.

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $37 thousand and $33 thousand for the three months ended September 30, 2015 and 2014, respectively. Interest of $5 thousand and $64 thousand was recognized on these loans and is included in net income for the three months ended September 30, 2015 and 2014, respectively.

 

Interest income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms was $18 thousand and $0 for the three months ended September 30, 2015 and 2014, respectively. No interest was recognized on trouble debt restructured loans.

 

The decrease in nonperforming loans to total loans is reflective of continued improvement in asset quality and the successful liquidation through sale or payoff during the three months ended September 30, 2015 of $880 thousand in PCI loans that were nonperforming. The net decline in our real estate owned of $410 thousand, or 19.5%, to $1.7 million at September 30, 2015 from $2.1 million at June 30, 2015 improved our ratio of nonperforming assets to total assets and nonperforming assets to loans and real estate owned to 1.11% and 1.70%, respectively, from 1.42% and 2.16%, respectively at June 30, 2015.

 

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Analysis of Net Interest Margin

 

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

 

   For the Three Months Ended 
   September 30, 2015   September 30, 2014 
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
   Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $306,428   $3,883    5.07%  $233,035   $2,886    4.95%
Investment securities   95,913    390    1.63    97,122    381    1.57 
Investment securities, tax-free   15,958    88    2.21    5,911    36    2.44 
Interest-earning deposits   15,251    16    0.42    12,726    7    0.22 
Total interest-earning assets   433,550    4,377    4.04    348,794    3,310    3.80 
Noninterest-earning assets   38,554              9,499           
Total assets  $472,104             $358,293           
                               
Liabilities and shareholders’ equity:                              
Interest-bearing liabilities:                              
NOW and demand deposits  $49,339   $17    0.14%  $18,184   $4    0.09%
Money market deposits   17,641    6    0.14    12,605    6    0.20 
Regular savings and other deposits   48,718    11    0.09    42,362    38    0.35 
Certificates of deposit   250,734    254    0.41    198,946    260    0.52 
Total interest-bearing deposits   366,432    288    0.32    272,097    308    0.45 
Total interest-bearing liabilities   366,432              272,097           
Noninterest bearing deposits   22,978              7,450           
Other noninterest-bearing liabilities   709              1,700           
Total liabilities   390,119              281,247           
Shareholders’ equity   81,985              77,046           
Total liabilities and shareholders’ equity  $472,104             $358,293           
                               
Net interest income       $4,089             $3,002      
Interest rate spread             3.72%             3.35%
Net interest margin             3.77%             3.44%
Average interest-earning assets to average interest-bearing liabilities   1.18X            1.28X         

 

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Comparison of Operating Results for the Three Months Ended September 30, 2015 and September 30, 2014

 

General. We reported net income of $1.4 million for the three months ended September 30, 2015 as compared to net income of $1.0 million for the three months ended September 30, 2014. The increase in net income is largely reflective of increases in net interest income before the provision for loan losses and in noninterest income, offset partially by an increase in noninterest expense for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Net interest income before the provision for loan losses increased $1.1 million, or 36.7%, to $4.1 million from $3.0 million. Noninterest income increased $834 thousand, or 926.7%, to $924 thousand from $90 thousand. Noninterest expense increased by $1.1 million, or 73.3%, to $2.6 million from $1.5 million.

 

Interest Income. Interest income increased by $1.1 million, or 33.3%, to $4.4 million for the three months ended September 30, 2015 from $3.3 million for the three months ended September 30, 2014. The increase reflected an increase in the yield on interest-earning assets of 24 basis points to 4.04% for the three months ended September 30, 2015 as compared to 3.80% for the three months ended September 30, 2014 and an increase in the average balance of interest-earning assets by $84.8 million, or 24.3%, to $433.6 million for the three months ended September 30, 2015 from $348.8 million for the three months ended September 30, 2014. The increase in the average balance of interest-earning assets was primarily the result of the acquisition of Stephens Federal Bank and the related addition of $94.5 million in loans at fair value. The overall increase in yield is a reflection of higher yields maintained during the three months ended September 30, 2015 on all interest-earning assets as compared to those maintained during the three months ended September 30, 2014.

 

Interest income on loans increased by $1.0 million, or 34.5%, to $3.9 million for the three months ended September 30, 2015 from $2.9 million for the three months ended September 30, 2014. The increase reflected an increase of $73.4 million, or 31.5%, in the average balance of loans to $306.4 million for the three months ended September 30, 2015 from $233.0 million for the three months ended September 30, 2014 and a slight increase of 12 basis points in the yield on loans to 5.07% from 4.95% for the same periods. The increase in the average balance of our loans is reflective of the aforementioned acquisition of Stephens Federal Bank, and as a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield. Interest income on investment securities increased by $61 thousand, or 14.6%, to $478 thousand for the three months ended September 30, 2015 from $417 thousand for the three months ended September 30, 2014. The increase reflected an increase in the average balance of securities of $8.9 million, or 8.6%, to $111.9 million for the three months ended September 30, 2015 from $103.0 million for the three months ended September 30, 2014 and an increase of nine basis points in the yield on securities to 1.71% from 1.62%. The increase in average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during this period of low loan demand. The increase in the yield on our investment securities is reflective of our efforts to shift our portfolio concentration to investments in municipal securities, which gives us slightly higher yields. The tax equivalent yield on our municipal securities for the three months ended September 30, 2015 and 2014 was approximately 3.0% and 3.4%, respectively.

 

Interest Expense. Interest expense decreased by $20 thousand, or 6.5%, to $288 thousand for the three months ended September 30, 2015 from $308 thousand for the three months ended September 30, 2014. The decrease reflected a decrease of 13 basis points in the average rate paid on deposits for the three months ended September 30, 2015 to 0.32% from 0.45% for the three months ended September 30, 2014. The decrease in the average rate paid on deposits more than offset the increase of $94.3 million, or 34.7%, in the average balances of interest-bearing deposits to $366.4 million for the three months ended September 30, 2015 from $272.1 million for the three months ended September 30, 2014. The largest decrease in interest expense came from regular savings and other deposits, which decreased by $27 thousand, or 71.1%, to $11 thousand for the three months ended September 30, 2015 from $38 thousand for the same period in 2014. The decrease is reflective of a decrease in the average rate paid on these deposits of 26 basis points to nine basis points for the three months ended September 30, 2015 compared to 35 basis points for the three months ended September 30, 2014, which more than offset the increase of $6.3 million, or 14.9%, in the average balance of these deposits to $48.7 million for the three months ended September 30, 2015 from $42.4 million for the three months ended September 30, 2014. The increase in the average balance of regular savings and other deposits as well as the average balances of all other interest-bearing deposits is primarily the result of the acquisition of Stephens Federal Bank, which added $139.2 million of deposits.

 

Net Interest Income. Net interest income before the provision for loan losses increased by $1.1 million, or 36.7%, to $4.1 million for the three months ended September 30, 2015 from $3.0 million for the three months ended September 30, 2014. Our interest rate spread and net interest margin for the three months ended September 30, 2015 increased to 3.72% and 3.77%, respectively, from 3.35% and 3.44%, respectively, for the three months ended September 30, 2014. The increase in interest rate spread and net interest margin are reflective of both higher yields on interest-earning assets and lower costs of funds on interest-bearing liabilities.

 

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Provision for Loan Losses. We recorded a provision for loan losses of $145 thousand for the three months ended September 30, 2015 compared with no provision for the three months ended September 30, 2014. Net charge-offs for the three months ended September 30, 2015 were $142 thousand. Of this amount, $115 thousand was related to one loan identified as an impaired loan at June 30, 2015 with a specific valuation allowance of the same that was foreclosed upon during the three months ended September 30, 2015. There were no charge-offs for the three months ended September 30, 2014. Approximately $30 thousand of our provision was related to an increase in specific valuation allowances on impaired loans. The remaining $115 thousand of our provision is related to an increase in our general valuation allowance. The increase in the general valuation allowance is a result of an increase in net charge-offs for the three months ended September 30, 2015. Of the $145 thousand in provision for loan losses for the three months ended September 30, 2015, approximately $1 thousand was related to specific valuation allowances needed on PCI loans.

 

Our total allowance for loan losses was $1.0 million, or 0.33% and 0.32% of total gross loans, at September 30 and June 30, 2015, respectively. The ending allowance for specifically identified impaired loans was $135 thousand at September 30, 2015 compared to $220 thousand at June 30, 2015. The general valuation allowance at September 30, 2015 and June 30, 2015 was $876 thousand and $788 thousand, respectively. The allowance for specifically identified impaired loans at September 30, 2015 and June 30, 2015 includes an allowance of $17 and $16, respectively for PCI loans. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 30, 2015 and 2014. There have been no changes to our allowance for loan loss methodology, and even though our policy with respect to identifying loans for individual impairment analysis does not require a review of every loan, we review all loans adversely classified as substandard or doubtful for impairment, regardless of size.

 

Noninterest Income. Noninterest income increased by $903 thousand, or 1,003.3%, for the three months ended September 30, 2015 to $993 thousand compared to $90 thousand for the three months ended September 30, 2014. The majority of the noninterest income was related to $719 thousand of gains the on disposition of PCI loans. As a result of the acquisition of Stephens Federal Bank, we obtained servicing on mortgage loans sold to FHLMC, and, therefore, recognized $96 thousand of mortgage banking income for the three months ended September 30, 2015. Additionally, we realized an increase in service charges on deposit accounts of $101 thousand, or 561.1%, to $119 thousand for the three months ended September 30, 2015 from $18 thousand for the same period in 2014. This increase is primarily related to the increase in deposits gained from the Stephens Federal Bank acquisition. Other noninterest income was $657 thousand and $0, respectively, for the three months ended September 30, 2015 and 2014. These increases in noninterest income were offset, partially, by a decrease in the value of our loan servicing asset of $64 thousand due to a decline in the servicing asset’s fair value for the three months ended September 30, 2015.

 

Noninterest Expense. Noninterest expense for the three months ended September 30, 2015 increased by $1.2 million, or 80.0%, to $2.7 million from $1.5 million for the same period in 2014. The increase in noninterest expenses is primarily reflective of increases in salaries and employee benefits of $579 thousand, or 63.6%, to $1.5 million for the three months ended September 30, 2015 from $910 thousand for the three months ended September 30, 2014. Additionally, the other significant increases were related to occupancy and equipment of $193 thousand, or 115.6%, to $360 thousand for the three months ended September 30, 2015 from $167 thousand for the same period in 2014, professional and supervisory fees of $138 thousand, or 122.1%, to $251 thousand for the three months ended September 30, 2015 from $113 thousand for the same period in 2014, data processing of $82 thousand, or 122.4%, to $149 thousand for the three months ended September 30, 2015 from $67 thousand for the same period in 2014, provision for real estate owned and related expenses of $87 thousand, or 457.9%, to $106 thousand for the three months ended September 30, 2015 from $19 thousand for the same period in 2014, loss on sale of real estate owned of $61 thousand, or 762.5%, to $69 thousand for the three months ended September 30, 2015 from $8 thousand for the same period in 2014, and other expense of $50 thousand, or 48.5%, to $153 thousand for the three months ended September 30, 2015 from $103 thousand for the same period in 2014. The increase in salaries and employee benefits is due to increases in salaries of certain management level employees, and the addition of Stephens Federal Bank’s employees, which increased our full-time equivalents to 80 during the three months ended September 30, 2015 from 45 for the three months ended September 30, 2014. The increase in occupancy and equipment expenses is related to the increase in additional costs to maintain three newly added branch facilities as well as moderate increases in depreciation expense due to the addition of property and equipment, all as a result of the Stephens Federal Bank acquisition. The increase in professional and supervisory expenses is primarily related to increased audit and supervisory exam fees due to the increased size and complexity of the Company as a result of the merger. The increase in the provision for real estate owned and related expenses is primarily due to the increase in the number of real estate properties owned as a result of the Stephens Federal Bank acquisition and impairment charges on existing real estate owned of $95 thousand for the three months ended September 30, 2015. No impairment charges were recognized during the three months ended September 30, 2014. The increase in other is primarily due to amortization of the core deposit intangible of $36 thousand for the three months ended September 30, 2015.

 

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Income Tax Expense. Income tax expense for the three months ended September 30, 2015 was $785 thousand compared with $565 thousand for the three months ended September 30, 2014. Our effective income tax rate was 35.2% and 35.1% for the same period, respectively.

 

Liquidity and Capital Resources

 

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

 

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% assets (as of September 30, 2015), or approximately $52.5 million.

 

Common Stock Dividend Policy. On August 27, 2015, the Company paid a $0.10 per share cash dividend on its common stock for a total of $588 thousand.

 

Equity Compensation Plans. There were no issuances of restricted stock or stock options during the three months ended September 30, 2015.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2015, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

(a)  None.

 

(b)  Not applicable.

 

(c)  Issuer Repurchases. On June 19, 2013, the Board of Directors authorized the repurchase of up to 150,000 shares of the Company's common stock. The repurchase authorization has no expiration date. During the three months ended September

 

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30, 2015, no shares were repurchased. The total number of shares remaining that may be repurchased under this plan is 46,700.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

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

 

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Table of Contents 

 

SIGNATURES

 

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

 

  Oconee Federal Financial Corp.
   
Date: November 16, 2015  
   
  /s/ T. Rhett Evatt
  T. Rhett Evatt
  Chairman and Chief Executive Officer
   
  /s/ H. Allen Salter
  H. Allen Salter
  Executive Vice President, Chief Financial Officer and Treasurer

 

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Table of Contents 

 

INDEX TO EXHIBITS

 

Exhibit
number
  Description
   
31.1   Certification of T. Rhett Evatt, Chairman and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
   
31.2   Certification of H. Allen Salter, Executive Vice President, Chief Financial Officer and Treasurer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
   
32   Certification of T. Rhett Evatt, Chairman and Chief Executive Officer, and H. Allen Salter Senior Executive Vice President, Chief Financial Officer and Treasurer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101  

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language):

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

 

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