UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549  

FORM 10-Q 

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

For the Quarterly Period ended December 31, 2019

Or

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

For transition period from              to             

Commission File Number 001-35033

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)  

Federal	32-0330122
(State of Other Jurisdiction of Incorporation)	(I.R.S Employer Identification Number)
201 East North Second Street, Seneca, South Carolina	29678
(Address of Principal Executive Officers)	(Zip Code)

(864) 882-2765

Registrant’s telephone number, including area code

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	OFED	The NASDAQ Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐ 

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

As of February 6, 2020, the registrant had 5,718,607 shares of common stock, $0.01 par value per share, outstanding.

OCONEE FEDERAL FINANCIAL CORP.

Form 10-Q Quarterly Report

Table of Contents

PART I.		2
ITEM 1.	FINANCIAL STATEMENTS	2
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40
ITEM 4.	CONTROLS AND PROCEDURES	40
PART II.
ITEM 1.	LEGAL PROCEEDINGS	41
ITEM 1A.	RISK FACTORS	41
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41
ITEM 4.	MINE SAFETY DISCLOSURES	41
ITEM 5.	OTHER INFORMATION	41
ITEM 6.	INDEX TO EXHIBITS	42
SIGNATURES		43
EXHIBITS		44

1 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

PART I  

ITEM 1. FINANCIAL STATEMENTS

	December 31, 2019 (unaudited)			June 30, 2019
ASSETS
Cash and due from banks	$	3,825		$	5,678
Interest-earning deposits		17,724			30,946
Fed funds sold		72			66
Total cash and cash equivalents		21,621			36,690
Securities available-for-sale		85,748			95,429
Loans		360,243			360,088
Allowance for loan losses		(1,296	)		(1,297	)
Net loans		358,947			358,791
Premises and equipment, net		9,534			8,134
Real estate owned, net		617			811
Accrued interest receivable
Loans		1,039			1,137
Investments		382			447
Restricted equity securities, at cost		1,046			1,854
Bank owned life insurance		19,249			19,022
Goodwill		2,593			2,593
Core deposit intangible		254			305
Loan servicing rights		781			868
Deferred tax assets		944			1,187
Other assets		452			558
Total assets	$	503,207		$	527,826
LIABILITIES
Deposits
Noninterest - bearing	$	33,579		$	36,232
Interest - bearing		378,823			382,874
Total deposits		412,402			419,106
Federal Home Loan Bank advances		—			19,000
Accrued interest payable and other liabilities		1,949			1,423
Total liabilities		414,351			439,529
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,530,074 and 6,530,074 shares outstanding, respectively		65			65
Treasury stock, at par, 811,087 and 771,008 shares, respectively		(8	)		(8	)
Additional paid-in capital		10,215			10,986
Retained earnings		78,392			77,464
Accumulated other comprehensive income		699			394
Unearned ESOP shares		(507	)		(604	)
Total shareholders’ equity		88,856			88,297
Total liabilities and shareholders’ equity	$	503,207		$	527,826

See accompanying notes to the consolidated financial statements

2 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

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

	Three Months Ended						Six Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Interest and dividend income:
Loans, including fees	$	4,143		$	4,050		$	8,260		$	7,817
Securities, taxable		373			402			781			816
Securities, tax-exempt		95			205			200			414
Other interest-earning assets		151			42			338			73
Total interest income		4,762			4,699			9,579			9,120
Interest expense:
Deposits		1,025			656			2,085			1,221
Other borrowings		59			161			186			246
Total interest expense		1,084			817			2,271			1,467
Net interest income		3,678			3,882			7,308			7,653
Provision for loan losses		—			76			—			148
Net interest income after provision for loan losses		3,678			3,806			7,308			7,505
Noninterest income:
Service charges on deposit accounts		105			113			227			213
Income on bank owned life insurance		113			115			226			229
Mortgage servicing income		48			51			97			109
Gain on sale of mortgage loans		50			23			82			49
ATM & debit card income		84			81			173			154
Change in fair value of equity securities, net		(48	)		(28	)		32			(43	)
Gain on sale of securities, net		—			—			12			1
Gain on payoff of purchase credit impaired loans		32			22			32			22
Other		1			7			4			43
Total noninterest income		385			384			885			777
Noninterest expense:
Salaries and employee benefits		1,578			1,727			3,168			3,413
Occupancy and equipment		459			462			927			877
Data processing		215			201			437			456
ATM & debit card expense		62			51			121			105
Professional and supervisory fees		181			204			328			400
Office expense		64			59			108			104
Advertising		70			59			127			109
FDIC deposit insurance		1			30			2			63
Foreclosed assets, net		100			11			144			24
Change in loan servicing asset		34			33			87			76
Other		190			213			406			420
Total noninterest expense		2,954			3,050			5,855			6,047
Income before income taxes		1,109			1,140			2,338			2,235
Income tax expense		19			221			314			447
Net income	$	1,090		$	919		$	2,024		$	1,788
Other comprehensive income
Unrealized gains/(losses) on securities available-for-sale	$	(84	)	$	1,541		$	398		$	891
Tax effect		17			(312	)		(84	)		(171	)
Reclassification adjustment for gains realized in net income		—			—			(12	)		(1	)
Tax effect		—			—			3			—
Total other comprehensive income/(loss)		(67	)		1,229			305			719
Comprehensive income	$	1,023		$	2,148		$	2,329		$	2,507
Basic net income per share: (Note 3)	$	0.19		$	0.16		$	0.36		$	0.31
Diluted net income per share: (Note 3)	$	0.19		$	0.16		$	0.35		$	0.31
Dividends declared per share:	$	0.10		$	0.10		$	0.20		$	0.20

See accompanying notes to the consolidated financial statements

3 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

For the three months ended December 31, 2019 and December 31, 2018

	Common Stock		Treasury Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Unearned ESOP Shares			Total
Balance at Sept 30, 2018	$	65	$	(7	)	$	11,582		$	76,427		$	(3,038	)	$	(752	)	$	84,277
Net income		—		—			—			919			—			—			919
Other comprehensive income		—		—			—			—			1,229			—			1,229
Purchase of 3,657 shares of treasury stock (1)		—		—			(94	)		—			—			—			(94	)
Stock-based compensation expense		—		—			36			—			—			—			36
Dividends (2)		—		—			35			(527	)		—			—			(492	)
ESOP shares earned		—		—			66			—			—			50			116
Balance at December 31, 2018	$	65	$	(7	)	$	11,625		$	76,819		$	(1,809	)	$	(702	)	$	85,991
Balance at Sept 30, 2019	$	65	$	(8	)	$	10,254		$	77,823		$	766		$	(555	)	$	88,345
Net income		—		—			—			1,090			—			—			1,090
Other comprehensive loss		—		—			—			—			(67	)		—			(67	)
Purchase of 5,699 shares of treasury stock (3)		—		—			(131	)		—			—			—			(131	)
Stock-based compensation expense		—		—			20			—			—			—			20
Dividends (4)		—		—			29			(521	)		—			—			(492	)
ESOP shares earned		—		—			43			—			—			48			91
Balance at December 31, 2019	$	65	$	(8	)	$	10,215		$	78,392		$	699		$	(507	)	$	88,856

(1) The weighted average cost of treasury shares purchased during the three months ended was $25.89 per share.  Treasury stock repurchases were accounted for using the par value method.

(2) Approximately $85 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $49 and resulting release of approximately 4,500 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $36 and resulting release of approximately 2,600 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2018.

(3) The weighted average cost of treasury shares purchased during the three months ended was $23.02 per share.  Treasury stock repurchases were accounted for using the par value method.

(4) Approximately $79 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,200 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,900 shares, and was accounted for as additional compensation expense for the three months ended December 31, 2019.

See accompanying notes to the consolidated financial statements

4 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

For the six months ended December 31, 2019 and December 31, 2018

	Common Stock		Treasury Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Unearned ESOP Shares			Total
Balance at June 30, 2018	$	65	$	(7	)	$	12,000		$	76,136		$	(2,528	)	$	(801	)	$	84,865
Net income		—		—			—			1,788			—			—			1,788
Other comprehensive income		—		—			—			—			719			—			719
Purchase of 19,439 shares of treasury stock (1)		—		—			(615	)		—			—			—			(615	)
Stock-based compensation expense		—		—			72			—			—			—			72
Dividends (2)		—		—			36			(1,105	)		—			—			(1,069	)
ESOP shares earned		—		—			132			—			—			99			231
Balance at December 31, 2018	$	65	$	(7	)	$	11,625		$	76,819		$	(1,809	)	$	(702	)	$	85,991
Balance at June 30, 2019	$	65	$	(8	)	$	10,986		$	77,464		$	394		$	(604	)	$	88,297
Net income		—		—			—			2,024			—			—			2,024
Other comprehensive income		—		—			—			—			305			—			305
Purchase of 40,079 shares of treasury stock (3)		—		—			(927	)		—			—			—			(927	)
Stock-based compensation expense		—		—			39			—			—			—			39
Dividends (4)		—		—			29			(1,096	)		—			—			(1,067	)
ESOP shares earned		—		—			88			—			—			97			185
Balance at December 31, 2019	$	65	$	(8	)	$	10,215		$	78,392		$	699		$	(507	)	$	88,856

(1) The weighted average cost of treasury shares purchased during the six months ended was $27.15 per share.  Treasury stock repurchases were accounted for using the par value method.

(2) Approximately $85 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,100 additional shares. The portion of the dividend paid on allocated shares of approximately $49 and resulting release of approximately 4,500 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $36 and resulting release of approximately 2,600 shares, and was accounted for as additional compensation expense for the six months ended December 31, 2018.

(3) The weighted average cost of treasury shares purchased during the six months ended was $23.14 per share.  Treasury stock repurchases were accounted for using the par value method.

(4) Approximately $79 of cash dividends paid on shares in the ESOP was used as an additional principal reduction on the ESOP debt, resulting in the release of approximately 7,200 additional shares. The portion of the dividend paid on allocated shares of approximately $50 and resulting release of approximately 4,300 shares, was treated as a dividend. The portion of the dividend paid on unallocated shares of approximately $29 and resulting release of approximately 2,900 shares, and was accounted for as additional compensation expense for the six months ended December 31, 2019.

See accompanying notes to the consolidated financial statements

5 

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

	Six Months Ended
	December 31, 2019			December 31, 2018
Cash Flows From Operating Activities
Net income	$	2,024		$	1,788
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			148
Provision for real estate owned		117			18
Depreciation and amortization, net		613			598
Net accretion of purchase accounting adjustments		(39	)		(98	)
Deferred income tax expense/(income)		162			(80	)
Net gain on sale of real estate owned		—			(12	)
Net gain on sale of premises and equipment		—			(29	)
Change in loan servicing asset		87			76
Net gain on sales of securities		(12	)		(1	)
Mortgage loans originated for sale		(6,214	)		(2,823	)
Mortgage loans sold		6,296			2,718
Gain on sales of mortgage loans		(82	)		(49	)
Change in fair value of equity securities		(32	)		43
Increase in cash surrender value of bank owned life insurance		(227	)		(228	)
Gain on payoff of purchased credit impaired loans		(32	)		(22	)
ESOP compensation expense		185			231
Stock based compensation expense		39			72
Net change in operating assets and liabilities:
Accrued interest receivable and other assets		269			(10	)
Accrued interest payable and other liabilities		526			602
Net cash provided by operating activities		3,680			2,942
Cash Flows From Investing Activities
Purchases of premises and equipment		(1,680	)		(1,080	)
Disposal of premises and equipment		—			29
Purchases of securities available-for-sale		(7,644	)		(1,173	)
Proceeds from maturities, paydowns and calls of securities available-for-sale		12,205			6,184
Proceeds from sales of securities available-for-sale		5,268			1,193
Purchases of restricted equity securities		—			(910	)
Redemptions of restricted equity securities		808			151
Proceeds from sale of real estate owned		77			293
Loan originations and repayments, net		(85	)		(29,032	)
Net cash provided/(used) in investing activities		8,949			(24,345	)
Cash Flows from Financing Activities
Net change in deposits		(6,704	)		6,361
Proceeds from notes payable to FHLB		—			54,100
Repayment of notes payable to FHLB		(19,000	)		(36,100	)
Dividends paid		(1,067	)		(1,069	)
Purchase of treasury stock		(927	)		(615	)
Net cash provided/(used) by financing activities		(27,698	)		22,677
Change in cash and cash equivalents		(15,069	)		1,274
Cash and cash equivalents, beginning of period		36,690			9,910
Cash and cash equivalents, end of period	$	21,621		$	11,184

See accompanying notes to the consolidated financial statements

6 

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 (72.82%) by Oconee Federal, MHC.  These financial statements do not include the transactions and balances of Oconee Federal, MHC.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2019 and June 30, 2019 and the results of operations and cash flows for the interim periods ended December 31, 2019 and 2018. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year ending June 30, 2020 or any other period.  These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. 

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

Cash Flows:   Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-earning deposits and amounts due from other depository institutions.

Use of Estimates:   To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.

(2) NEW ACCOUNTING STANDARDS

Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740)”. Issued in December 2019, ASU 2019-12 provides guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For the Company, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-11, “Codification to Improvements to Topic 326, Financial Instruments – Credit Losses”. Issued in November 2019, ASU 2019-11 provides guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For the Company, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”. Issued in November 2019, ASU 2019-10 provides guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies (such as the Company) applying standards on current expected credit losses (CECL), derivatives, hedging and leases. For the Company, the new effective date for Credit Losses (CECL) will be for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. For the Company, the effective dates for Derivatives, Hedging and Leases were not deferred under this guidance. The Company does not expect these amendments to have a material effect on its financial statements.

7

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

ASU 2019-07, “Codification Updates to SEC Sections”. Issued in July 2019, ASU 2019-07 updates various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”.   Issued in May 2019, ASU 2019-05 provides entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. On October 16, 2019, the Financial Accounting Standards Board (“FASB”) announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company) to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”. Issued in April 2019, ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2019-01, Leases (Topic 842): Codification Improvements. Issued in March 2019, ASU 2019-01 aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Accounting Standards Codification (ASC) 842, Leases, with that of the existing guidance (ASC 820, Fair Value Measurement).  As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply and costs incurred to acquire the asset, as per ASC 842, Leases. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, Fair Value Measurement) should be applied. The ASU also requires lessors within the scope of ASC 942, Financial Services—Depository and Lending, to present all principal payments received under leases within investing activities. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The amendment is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the new guidance effective July 1, 2019.  This pronouncement will not have a material impact on the Company’s consolidated financial statements as the Company does not have any significant leases.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. Issued in August 2018, ASU 2018-13 provides guidance about fair value measurement disclosures. The amendment requires numerous removals, modifications and additions of fair value disclosure information. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years; early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. Issued in March 2017, ASU 2017-08 amends the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  The amendments were applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  The Company adopted this standard on June 30, 2019 as reflected by a $245 adjustment to retained earnings.

8

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Issued in January 2017, ASU 2017-04 amendments eliminate Step 2 from the goodwill impairment test.  The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  ASU 2017-04 should be adopted on a prospective basis.  The Company does not believe that this new guidance will have a material effect on its consolidated financial statements.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. Issued in June 2016, ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.  The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses.  The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense.  Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company has determined that it will continue to prepare its credit loss allowance internally. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB announced a delay in the implementation schedule allowing certain entities, including smaller reporting companies (such as the Company)  to adopt ASU 2016-13 in fiscal years beginning after December 15, 2022, and interim periods within those years.

There have been no accounting standards that have been issued or proposed by the FASB or other standards-setting bodies during this quarter that are expected to have a material impact on the Company’s financial position, results of operations or cash flows. The Company continues to evaluate the impact of standards previously issued and not yet effective, and have no changes in our assessment to disclose since filing of the Form 10-K.

(3) EARNINGS PER SHARE (“EPS”)

Basic EPS is based on the weighted average number of common shares outstanding and is adjusted for ESOP shares not yet committed to be released.  Unvested restricted stock awards, which contain rights to non-forfeitable dividends, are considered participating securities and the two-class method of computing basic and diluted EPS is applied.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock options) or which could be converted into common stock, if dilutive, using the treasury stock method.  The factors used in the earnings per common share computation follow: 

9

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended						Six Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Earnings per share
Net income	$	1,090		$	919		$	2,024		$	1,788
Less:  distributed earnings allocated to participating securities		(1	)		(1	)		(2	)		(3	)
Less:  (undistributed income) dividends in excess of earnings allocated to participating securities		(1	)		(2	)		(1	)		(2	)
Net earnings available to common shareholders	$	1,088		$	916		$	2,021		$	1,783
Weighted average common shares outstanding including participating securities		5,719,941			5,762,678			5,729,799			5,768,419
Less:  participating securities		(8,800	)		(15,355	)		(8,800	)		(15,355	)
Less: average unearned ESOP shares		(50,412	)		(61,926	)		(43,880	)		(55,760	)
Weighted average common shares outstanding		5,660,729			5,685,397			5,677,119			5,697,304
Basic earnings per share	$	0.19		$	0.16		$	0.36		$	0.31
Weighted average common shares outstanding		5,660,729			5,685,397			5,677,119			5,697,304
Add:  dilutive effects of assumed exercises of stock options		66,874			119,788			65,850			123,711
Average shares and dilutive potential common shares		5,727,603			5,805,185			5,742,969			5,821,015
Diluted earnings per share	$	0.19		$	0.16		$	0.35		$	0.31

For the three and six months ended December 31, 2019, 11,200 shares were considered anti-dilutive as the exercise price was in excess of the average market price, and for the three and six months ended December 31, 2018, 22,400 shares were considered anti-dilutive as the exercise price was in excess of the average market price.

(4) SECURITIES AVAILABLE-FOR-SALE

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consists of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at December 31, 2019 and June 30, 2019 are as follows:

10

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

			Gross		Gross			Change in
	Amortized		Unrealized		Unrealized			Fair Value		Fair
December 31, 2019	Cost		Gains		Losses			Equity Securities		Value
Available-for-sale:
FHLMC common stock	$	20	$	—	$	—		$	224	$	244
Certificates of deposit		2,493		35		—			—		2,528
Municipal securities		21,092		389		(27	)		—		21,454
SBA loan pools		18		—		—			—		18
CMOs		12,883		86		(56	)		—		12,913
U.S. Government agency mortgage-backed securities		42,124		483		(27	)		—		42,580
U.S. Government agency bonds		6,009		10		(8	)		—		6,011
Total available-for-sale	$	84,639	$	1,003	$	(118	)	$	224	$	85,748

			Gross		Gross			Change in
	Amortized		Unrealized		Unrealized			Fair Value		Fair
June 30, 2019	Cost		Gains		Losses			Equity Securities		Value
Available-for-sale:
FHLMC common stock	$	20	$	—	$	—		$	192	$	212
Certificates of deposit		2,493		11		(5	)		—		2,499
Municipal securities		24,968		295		(38	)		—		25,225
SBA loan pools		22		—		—			—		22
CMOs		14,889		111		(30	)		—		14,970
U.S. Government agency mortgage-backed securities		40,366		228		(52	)		—		40,542
U.S. Government agency bonds		11,980		10		(31	)		—		11,959
Total available-for-sale	$	94,738	$	655	$	(156	)	$	192	$	95,429

Securities pledged at December 31, 2019 and June 30, 2019 had fair values of $20,160 and $26,029, respectively.  These securities were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) advances. 

At December 31, 2019 and June 30, 2019, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

11

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 twelve months or more at December 31, 2019 and June 30, 2019.  The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates. 

	Less than 12 Months							12 Months or More							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)
December 31, 2019
Available-for-sale:
Municipal securities		2,518		(22	)		7		634		(5	)		1		3,152		(27	)		8
CMOs		3,499		(40	)		7		1,202		(16	)		3		4,701		(56	)		10
U.S. Government agency mortgage-backed securities		4,734		(27	)		7		—		—			—		4,734		(27	)		7
U.S. Government agency bonds		—		—			—		992		(8	)		1		992		(8	)		1
	$	10,751	$	(89	)		21	$	2,828	$	(29	)		5	$	13,579	$	(118	)		26

	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, 2019
Available-for-sale:
Certificates of deposit	$	991	$	(5	)		4	$	—	$	—			—	$	991	$	(5	)		4
Municipal securities		745		(10	)		2		3,750		(28	)		7		4,495		(38	)		9
CMOs		—		—			—		3,059		(30	)		7		3,059		(30	)		7
U.S. Government agency mortgage-backed securities		5,377		(9	)		5		11,198		(43	)		18		16,575		(52	)		23
U.S. Government agency bonds		4,475		(23	)		4		2,013		(8	)		2		6,488		(31	)		6
	$	11,588	$	(47	)		15	$	20,020	$	(109	)		34	$	31,608	$	(156	)		49

(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 amortized cost and the financial condition and near-term prospects of the issuer.  Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security’s anticipated recovery in fair value.  In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. 

None of the unrealized losses at December 31, 2019 were recognized into net income for the three or six months ended December 31, 2019 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates.  The fair value of these securities is expected to recover as they approach their maturity date or reset date.  None of the unrealized losses at June 30, 2019 were recognized as having OTTI during the year ended June 30, 2019.        

12

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 December 31, 2019 and June 30, 2019 by contractual maturity. 

	December 31, 2019				June 30, 2019
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Less than one year	$	1,250	$	1,250	$	2,000	$	1,994
Due from one to five years		11,527		11,616		11,627		11,663
Due after five years to ten years		10,471		10,685		18,817		18,955
Due after ten years		6,364		6,460		7,019		7,093
Mortgage-backed securities, CMOs and FHLMC stock (1)		55,027		55,737		55,275		55,724
Total available for sale	$	84,639	$	85,748	$	94,738	$	95,429

(1) Actual cash flows may differ from contractual maturities as borrowers may prepay obligations without prepayment penalty. FHLMC common stock is not scheduled because it has no contractual maturity date.     

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and six months ended December 31, 2019 and 2018:

	Three Months Ended				Six Months Ended
Available-for-sale:	December 31, 2019		December 31, 2018		December 31, 2019			December 31, 2018
Proceeds	$	—	$	—	$	5,268		$	1,193
Gross gains		—		—		15			3
Gross losses		—		—		(3	)		(2	)

The tax provision related to the net realized gain for the six months ended December 31, 2019 was $3, and for the six months ended December 31, 2018 was less than $1.

(5) LOANS

The components of loans at December 31, 2019 and June 30, 2019 were as follows:

	December 31, 2019		June 30, 2019
Real estate loans:
One-to-four family	$	289,358	$	289,077
Multi-family		1,535		1,605
Home equity		6,241		5,191
Nonresidential		17,579		19,350
Agricultural		1,491		1,510
Construction and land		33,605		33,651
Total real estate loans		349,809		350,384
Commercial and industrial		4,208		4,390
Consumer and other loans		6,226		5,314
Total loans	$	360,243	$	360,088

13

OCONEE FEDERAL FINANCIAL CORP. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2019 by portfolio segment:

Three months ended December 31, 2019	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	993	$	—		$	—		$	—	$	993
Multi-family		4		—			—			—		4
Home equity		29		4			—			—		33
Nonresidential		85		(8	)		—			—		77
Agricultural		4		—			—			—		4
Construction and land		87		7			—			—		94
Total real estate loans		1,202		3			—			—		1,205
Commercial and industrial		70		(4	)		—			—		66
Consumer and other loans		25		1			(1	)		—		25
Total loans	$	1,297	$	—		$	(1	)	$	—	$	1,296

Six months ended December 31, 2019	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	995	$	(2	)	$	—		$	—	$	993
Multi-family		4		—			—			—		4
Home equity		24		9			—			—		33
Nonresidential		87		(10	)		—			—		77
Agricultural		3		1			—			—		4
Construction and land		94		—			—			—		94
Total real estate loans		1,207		(2	)		—			—		1,205
Commercial and industrial		67		(1	)		—			—		66
Consumer and other loans		23		3			(1	)		—		25
Total loans	$	1,297	$	—		$	(1	)	$	—	$	1,296

14 

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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2019:

	Ending Allowance on Loans:				Loans:
At December 31, 2019	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Real estate loans:
One-to-four family	$	—	$	993	$	2,223	$	287,135
Multi-family		—		4		—		1,535
Home equity		—		33		—		6,241
Nonresidential		—		77		587		16,992
Agricultural		—		4		320		1,171
Construction and land		—		94		—		33,605
Total real estate loans		—		1,205		3,130		346,679
Commercial and industrial		—		66		—		4,208
Consumer and other loans		—		25		—		6,226
Total loans	$	—	$	1,296	$	3,130	$	357,113

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2018 by portfolio segment:

Three months ended December 31, 2018	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	956	$	29		$	—	$	—	$	985
Multi-family		4		—			—		—		4
Home equity		13		2			—		—		15
Nonresidential		69		35			—		—		104
Agricultural		1		—			—		—		1
Construction and land		98		(1	)		—		—		97
Total real estate loans		1,141		65			—		—		1,206
Commercial and industrial		3		15			—		—		18
Consumer and other loans		7		(4	)		—		—		3
Total loans	$	1,151	$	76		$	—	$	—	$	1,227

Six months ended December 31, 2018	Beginning Balance		Provision		Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	939	$	64	$	(18	)	$	—	$	985
Multi-family		4		—		—			—		4
Home equity		8		7		—			—		15
Nonresidential		66		38		—			—		104
Agricultural		1		—		—			—		1
Construction and land		74		23		—			—		97
Total real estate loans		1,092		132		(18	)		—		1,206
Commercial and industrial		4		14		—			—		18
Consumer and other loans		1		2		—			—		3
Total loans	$	1,097	$	148	$	(18	)	$	—	$	1,227

15 

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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2019:

	Ending Allowance on Loans:				Loans:
At June 30, 2019	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Real estate loans:
One-to-four family	$	—	$	995	$	2,291	$	286,786
Multi-family		—		4		—		1,605
Home equity		—		24		—		5,191
Nonresidential		—		87		613		18,737
Agricultural		—		3		356		1,154
Construction and land		—		94		—		33,651
Total real estate loans		—		1,207		3,260		347,124
Commercial and industrial		—		67		—		4,390
Consumer and other loans		—		23		—		5,314
Total loans	$	—	$	1,297	$	3,260	$	356,828

The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2019 and June 30, 2019, including the average recorded investment balance and interest earned for the six months ended December 31, 2019 and the year ended June 30, 2019:

16 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

	December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family	$	2,300	$	2,223	$	—	$	2,257	$	31
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		621		587		—		600		—
Agricultural		869		320		—		338		—
Construction and land		—		—		—		—		—
Total real estate loans		3,790		3,130		—		3,195		31
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	3,790	$	3,130	$	—	$	3,195	$	31
With recorded allowance:
Real estate loans:
One-to-four family	$	—	$	—	$	—	$	—	$	—
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		—		—		—		—		—
Agricultural		—		—		—		—		—
Construction and land		—		—		—		—		—
Total real estate loans		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—
Totals:
Real estate loans	$	3,790	$	3,130	$	—	$	3,195	$	31
Consumer and other loans		—		—		—		—		—
Total	$	3,790	$	3,130	$	—	$	3,195	$	31

17 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) 

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

	June 30, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family	$	2,375	$	2,291	$	—	$	2,363	$	53
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		648		613		—		642		—
Agricultural		905		356		—		390		—
Construction and land		—		—		—		—		—
Total real estate loans		3,928		3,260		—		3,395		53
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	3,928	$	3,260	$	—	$	3,395	$	53
With recorded allowance:
Real estate loans:
One-to-four family	$	—	$	—	$	—	$	—	$	—
Multi-family		—		—		—		—		—
Home equity		—		—		—		—		—
Nonresidential		—		—		—		—		—
Agricultural		—		—		—		—		—
Construction and land		—		—		—		—		—
Total real estate loans		—		—		—		—		—
Commercial and industrial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—
Totals:
Real estate loans	$	3,928	$	3,260	$	—	$	3,395	$	53
Consumer and other loans		—		—		—		—		—
Total	$	3,928	$	3,260	$	—	$	3,395	$	53

18 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables present the aging of past due loans as well as nonaccrual loans.  Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or individually for impairment. 

Total past due loans and nonaccrual loans at December 31, 2019:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans		Accruing Loans Past Due 90  Days or More
Real estate loans:
One-to-four family	$	3,773	$	2,421	$	237	$	6,431	$	282,927	$	289,358	$	2,349	$	—
Multi-family		224		—		—		224		1,311		1,535		—		—
Home equity		77		—		40		117		6,124		6,241		777		—
Nonresidential		512		—		—		512		17,067		17,579		29		—
Agricultural		—		—		—		—		1,491		1,491		40		—
Construction and land		40		—		—		40		33,565		33,605		320		—
Total real estate loans		4,626		2,421		277		7,324		342,485		349,809		3,515		—
Commercial and industrial		—		—		—		—		4,208		4,208		—		—
Consumer and other loans		—		—		—		—		6,226		6,226		—		—
Total	$	4,626	$	2,421	$	277	$	7,324	$	352,919	$	360,243	$	3,515	$	—

Total past due and nonaccrual loans by portfolio segment at June 30, 2019:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Nonaccrual Loans		Accruing Loans Past Due 90 Days or More
Real estate loans:
One-to-four family	$	5,879	$	1,486	$	229	$	7,594	$	281,483	$	289,077	$	2,674	$	—
Multi-family		228		—		—		228		1,377		1,605		—		—
Home equity		64		—		40		104		5,087		5,191		40		—
Nonresidential		458		—		—		458		18,892		19,350		816		—
Agricultural		—		—		—		—		1,510		1,510		356		—
Construction and land		308		31		—		339		33,312		33,651		31		—
Total real estate loans		6,937		1,517		269		8,723		341,661		350,384		3,917		—
Commercial and industrial		—		—		—		—		4,390		4,390		—		—
Consumer and other loans		8		—		—		8		5,306		5,314		—		—
Total	$	6,945	$	1,517	$	269	$	8,731	$	351,357	$	360,088	$	3,917	$	—

19 

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Troubled Debt Restructurings:

At December 31, 2019 and June 30, 2019, total loans that have been modified as troubled debt restructurings were $2,488 and $2,675, respectively, which consisted of one agricultural loan, two non-residential real estate loans and four one-to-four family first lien loans at December 31, 2019 and June 30, 2019. There was no specific allowance for loss established for these loans at December 31, 2019 or June 30, 2019.  Additionally, there were no commitments to lend any additional amounts on any loan after the modification.  No loans have been modified as troubled debt restructurings during the six months ended December 31, 2019. No loans modified as troubled debt restructurings during the twelve months ended December 31, 2019 have defaulted since restructuring.  All of these loans are on nonaccrual at December 31, 2019 and June 30, 2019. At December 31, 2019 and June 30, 2019, $2,171 and $2,291, respectively, were individually evaluated for impairment.

Loan Grades:

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

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

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

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

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

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

Portfolio Segments:

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

For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral.  The Company may make exceptions for special loan programs that we offer.  The Company also originates residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%. 

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

 20

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

Loans secured by nonresidential real estate generally are larger than one-to-four family residential loans and involve greater credit risk.  Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers.  Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.  Our nonresidential real estate lending includes a significant amount of loans to churches.  Because a church’s financial stability often depends on donations from congregation members rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar.  In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other nonresidential real estate.

The Company considers a number of factors in originating nonresidential real estate loans.  The Company evaluates the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions.  In evaluating the property securing the loan, the factors the Company considers include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service).  For church loans, the Company also considers the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current operating budgets.  The collateral underlying all nonresidential real estate loans is appraised by outside independent appraisers approved by our board of directors.  Personal guarantees may be obtained from the principals of nonresidential real estate borrowers, and in the case of church loans, guarantees from the applicable denomination may be obtained.              

 21

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Agricultural:  These loans are secured by farmland and related improvements in the Company’s market area.  These loans generally have terms of five to 20 years with amortization periods up to 20 years.  The maximum loan-to-value ratio of these loans is generally 75%.  The Company is managing a small number of these loans in our portfolio.  We continue to closely monitor our existing relationships.

Loans secured by agricultural real estate generally are larger than one-to-four family residential loans and involve greater credit risk.  Agricultural real estate loans often involve large loan balances to single borrowers or groups of related borrowers.  Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions.

Construction and Land:  The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs.  These loans generally have maximum terms of twelve months, and upon completion of construction convert to conventional amortizing mortgage loans.  Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates.  Commercial construction loans have rate and terms comparable to commercial loans that we originate.  During the construction phase, the borrower generally pays interest only.  Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%.  Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans.  Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating commercial loans.

The Company also makes interim construction loans for nonresidential properties.  In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only two such loans at a time.  These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing nonresidential real estate loans.  These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate.  Generally, the maximum loan-to-value ratio of these construction loans is 85%. 

Commercial and Industrial Loans:  Commercial and industrial loans are offered to businesses and professionals in the Company’s market area.  These loans generally have short and medium terms on both a collateralized and uncollateralized basis.  The structure of these loans are largely determined by the loan purpose and collateral.  Sources of collateral can include a lien on furniture, fixtures, equipment, inventory, receivables and other assets of the company.  A UCC-1 is typically filed to perfect our lien on these assets.

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

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

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

 22

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 December 31, 2019:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	277,492	$	4,655	$	2,945	$	4,266	$	—	$	289,358
Multi-family		1,535		—		—		—		—		1,535
Home equity		5,715		420		57		49		—		6,241
Nonresidential		16,375		341		—		863		—		17,579
Agricultural		1,171		—		—		320		—		1,491
Construction and land		33,101		431		—		73		—		33,605
Total real estate loans		335,389		5,847		3,002		5,571		—		349,809
Commercial and industrial		4,208		—		—		—		—		4,208
Consumer and other loans		6,226		—		—		—		—		6,226
Total	$	345,823	$	5,847	$	3,002	$	5,571	$	—	$	360,243

Total loans by risk grade and portfolio segment at June 30, 2019:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	276,141	$	5,316	$	3,217	$	4,403	$	—	$	289,077
Multi-family		1,605		—		—		—		—		1,605
Home equity		4,733		313		69		76		—		5,191
Nonresidential		17,951		491		—		908		—		19,350
Agricultural		1,154		—		—		356		—		1,510
Construction and land		33,130		446		—		75		—		33,651
Total real estate loans		334,714		6,566		3,286		5,818		—		350,384
Commercial and industrial		4,390		—		—		—		—		4,390
Consumer and other loans		5,314		—		—		—		—		5,314
Total	$	344,418	$	6,566	$	3,286	$	5,818	$	—	$	360,088

At December 31, 2019, loans totaling $109 were in formal foreclosure proceedings and are included in the one-to-four family loan category.

 23

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data) 

6)           BORROWINGS

There were no Federal Home Loan Bank advances outstanding at December 31, 2019. At June 30, 2019, advances from the Federal Home Loan Bank were as follows:

	June 30, 2019
	Balance		Stated Interest Rate
FHLB advances due September 2019 through December 2019	$	19,000		2.62% - 2.78	%
Total	$	19,000

The average interest rate of all outstanding FHLB advances was 2.75% on June 30, 2019.

Each advance was payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $22,632 of investment securities at June 30, 2019. The Association has also pledged as collateral FHLB stock and has entered into a blanket collateral agreement whereby qualifying mortgages, free of other encumbrances and at various discounted values as determined by the FHLB, will be maintained. Based on this collateral, the Association is eligible to borrow up to a total of $130,998 at December 31, 2019.

There were no overnight borrowings at December 31, 2019 or June 30, 2019.

(7)           FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Investment Securities:

The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans: 

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

 24

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data) 

Real Estate Owned: 

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

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

Loan Servicing Rights:    

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

Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 and June 30, 2019 are summarized below:

	Fair Value Measurements
	December 31, 2019				June 30, 2019
	(Level 2)		(Level 3)		(Level 2)		(Level 3)
Financial assets:
Securities available-for-sale:
FHLMC common stock	$	244	$	—	$	212	$	—
Certificates of deposit		2,528		—		2,499		—
Municipal securities		21,454		—		25,225		—
SBA loan pools		18		—		22		—
CMOs		12,913		—		14,970		—
U.S. Government agency mortgage-backed securities		42,580		—		40,542		—
U.S. Government agency bonds		6,011		—		11,959		—
Total securities available-for-sale		85,748		—		95,429		—
Loan servicing rights		—		781		—		868
Total financial assets	$	85,748	$	781	$	95,429	$	868

 25

OCONEE FEDERAL FINANCIAL CORP. 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
(Amounts in thousands, except share and per share data) 

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at December 31, 2019 and June 30, 2019:

	Fair Value Measurements
	December 31, 2019		June 30, 2019
	(Level 3)		(Level 3)
Non-financial assets:
Real estate owned, net:
One-to-four family	$	136	$	226
Nonresidential		481		585
Total non-financial assets		617		811
Total assets measured at fair value on a non-recurring basis	$	617	$	811

Real estate owned is carried at the lower of carrying value or fair value less costs to sell.  The carrying value of real estate owned at December 31, 2019 and June 30, 2019 was $617 and $811, respectively. The valuation allowances associated with these properties at December 31, 2019 and June 30, 2019 was $117 and $38, respectively. 

The table below presents a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended December 31, 2019 and 2018:

	Fair Value Measurements
	(Level 3)
	Three Months Ended						Six Months Ended
	December 31,  2019			December 31,  2018			December 31,  2019			December 31,  2018
	Loan Servicing Rights			Loan Servicing Rights			Loan Servicing Rights			Loan Servicing Rights
Balance at beginning of period:	$	815		$	1,050		$	868		$	1,093
Purchases		—			—			—			—
Unrealized net losses included in net income		(34	)		(33	)		(87	)	$	(76	)
Balance at end of period:	$	781		$	1,017		$	781		$	1,017

 26

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 December 31, 2019 and June 30, 2019.

		Level 3 Quantitative Information
	December 31,  2019		June 30,  2019		Valuation Technique	Unobservable Inputs	Range
	Fair Value		Fair Value
Loan servicing rights	$	781	$	868	Discounted cash flows	Discount rate, estimated timing of cash flows	9.25% to 9.75%
Real estate owned net:
One-to-four family	$	136	$	226	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 20%
Nonresidential	$	481	$	585	Sales comparison approach	Adjustment for differences between the comparable sales	0% to 20%

 27

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 sheets approximate fair value.  These items include cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully.  The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2019 and June 30, 2019 are summarized below:

	December 31, 2019
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	85,748	$	—	$	85,748	$	—	$	85,748
Loans, net (1)		358,947		—		—		361,305		361,305
Loan servicing rights		781		—		—		781		781
Restricted equity securities		1,046		N/A		N/A		N/A		N/A
Financial liabilities
Deposits	$	412,402	$	195,767	$	213,493	$	—	$	409,260

	June 30, 2019
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	95,429	$	—	$	95,429	$	—	$	95,429
Loans, net (1)		358,791		—		—		358,473		358,473
Loan servicing rights		868		—		—		868		868
Restricted equity securities		1,854		N/A		N/A		N/A		N/A
Financial liabilities
Deposits	$	419,106	$	196,466	$	218,985	$	—	$	415,451
FHLB Advances		19,000		—		19,000		—		19,000

(1) Carrying amount of loans is net of unearned income and the allowance. In accordance with the adoption of ASU No. 2016-01, the fair value of loans as of December 31, 2019 and June 30, 2019 was measured using an exit price notion.

(8)           EMPLOYEE STOCK OWNERSHIP PLAN

Employees participate in an Employee Stock Ownership Plan (“ESOP”).  The ESOP borrowed from the Company to purchase 248,842 shares of the Company’s common stock at $10.00 per share during 2011.  The Company makes discretionary contributions to the ESOP and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan.  When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded.  Dividends on allocated shares increase participant accounts.

Participants receive the shares at the end of employment.  The Company makes contributions to the ESOP each December. There were no discretionary contributions made to the ESOP for debt retirement in 2019 or 2018. Total ESOP compensation expense for the three and six months ended December 31, 2019 was $91 and $185, respectively, and for the three and six months ended December 31, 2018 was $116 and $231, respectively.

 28

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 December 31, 2019 and June 30, 2019 were as follows:

	December 31,  2019		June 30, 2019
Committed to be released to participants		23,865		11,983
Allocated to participants		127,257		127,257
Unearned		41,579		59,245
Total ESOP shares		192,701		198,485
Fair value of unearned shares	$	1,081	$	1,360

(9)           STOCK BASED COMPENSATION

On April 5, 2012, the shareholders of Oconee Federal Financial Corp. approved the Oconee Federal Financial Corp. 2012 Equity Incentive Plan (the “Plan”) for employees and directors of the Company.  The Plan authorizes the issuance of up to 435,472 shares of the Company’s common stock, with no more than 124,420 of shares as restricted stock awards and 311,052 as stock options, either incentive stock options or non-qualified stock options.  The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted.  The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

There have been no stock options or restricted stock issued in fiscal 2020 or fiscal 2019.

The following table summarizes stock option activity for the six months ended December 31, 2019:

	Options			Weighted- Average Exercise Price/Share		Aggregate Intrinsic Value (1)
Outstanding - June 30, 2019		169,519		$	14.65
Granted		—			—
Exercised		—			—
Forfeited		(5,200	)		29.33
Outstanding - December 31, 2019		164,319		$	14.18	$	1,943
Fully vested and exercisable at December 31, 2019		143,419		$	12.86	$	1,886
Expected to vest in future periods		20,900
Fully vested and expected to vest - December 31, 2019		164,319		$	14.18	$	1,943

(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 $26.01 per share on December 31, 2019. 

 29

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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 2,470 and 8,070 options that were earned during the six months ended December 31, 2019 and 2018, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2019 was $6 and $10, respectively, and for the three and six months ended December 31, 2018 was $11 and $21, respectively. Total unrecognized compensation cost related to stock options was $67 at December 31, 2019 and is expected to be recognized over a weighted-average period of 3.1 years.

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2019:

	December 31,  2019
Balance - beginning of year		8,800
Granted		—
Forfeited		—
Vested		—
Balance - end of period		8,800
Weighted average grant date fair value	$	19.77

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for restricted stock included in noninterest expense for the three and six months ended December 31, 2019 was $15 and $30, respectively, and for the three and six months ended December 31, 2018 was $25 and $51, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $119 at December 31, 2019 and is expected to be recognized over a weighted-average period of 2.2 years. 

(10)         LOAN SERVICING RIGHTS

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

The principal balances of those loans at December 31, 2019 and June 30, 2019 are as follows:

	December 31, 2019		June 30, 2019
Mortgage loan portfolio serviced for:
FHLMC	$	72,606	$	83,938

Custodial escrow balances maintained in connection with serviced loans were $366 and $771 at December 31, 2019 and June 30, 2019.

Activity for loan servicing rights for the three and six months ended December 31, 2019 and 2018 is as follows:

	Three Months Ended						Six Months Ended
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Loan servicing rights:
Beginning of period:	$	815		$	1,050		$	868		$	1,093
Additions		—			—			—			—
Change in fair value		(34	)		(33	)		(87	)		(76	)
End of period:	$	781		$	1,017		$	781		$	1,017

 30

OCONEE FEDERAL FINANCIAL CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share data)

Fair value at December 31, 2019 was determined using a discount rate of 9.25%, prepayment speed assumptions ranging from 5.9% to 14.2% Conditional Prepayment Rate (“CPR”) depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.29%.  Fair value at December 31, 2018 was determined using a discount rate of 10.25%, prepayment speed assumptions ranging from 4.7% to 13.7% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.40%. 

(11) SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the six months ended December 31, 2019 and 2018 is as follows:

	December 31,		December 31,
	2019		2018
Cash paid during the period for:
Interest paid	$	2,269	$	1,465
Income taxes paid	$	140	$	218
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	—	$	48
Change in unrealized gain/loss on securities available-for-sale	$	386	$	856

(12) SUBSEQUENT EVENTS

On January 23, 2020, the Board of Directors of Oconee Federal Financial Corp. declared a quarterly cash dividend of $0.10 per share of Oconee Federal Financial Corp.’s common stock.  The dividend is payable to stockholders of record as of February 6, 2020, and will be paid on or about February 20, 2020.

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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 of our risks and future costs and benefits. 

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

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 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 introducing new deposit products;

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

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

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

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

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

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

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

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

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

● changes in the ability of third-party providers to perform their obligations to us;

● technological changes that may be more difficult or expensive than expected;

● cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems;

● 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;

● the effects of actual government shutdowns;

32 

● the ability of the U.S. government to manage federal debt limits;

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

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

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

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2019, as filed with the Securities and Exchange Commission.

Comparison of Financial Condition at December 31, 2019 and June 30, 2019

Our total assets decreased by $24.6 million, or 4.7%, to $503.2 million at December 31, 2019 from $527.8 million at June 30, 2019.  Total cash and cash equivalents decreased $15.1 million, or 41.1%, to $21.6 million at December 31, 2019 from $36.7 million at June 30, 2019. The decrease in cash and cash equivalents was primarily due to the repayment of outstanding Federal Home Loan Bank advances during the six month period, and also reflected our funding deposit withdrawals. Our available-for-sale securities portfolio decreased by $9.7 million from $95.4 million at June 30, 2019 to $85.7 million at December 31, 2019. The Association is not actively replenishing security repayments and maturities with purchases due to the funding needs of our loan portfolio. Gross loans increased $155 thousand, or 0.04%, to $360.2 million at December 31, 2019 from $360.1 million at June 30, 2019.  This increase was primarily a result of loan originations generally matching to loan repayments during the six months ended December 31, 2019.

Deposits decreased $6.7 million, or 1.6%, to $412.4 million at December 31, 2019 from $419.1 million at June 30, 2019.  The decrease in our deposits reflected a decrease of $6.0 million in certificates of deposit, $353 thousand in NOW accounts, and $2.6 million in non-interest bearing checking accounts offset by an increase of $961 thousand in savings deposits and $1.3 million in money market deposits. 

Oconee Federal, MHC’s cash is held on deposit with the Association.  We generally do not accept brokered deposits and no brokered deposits were accepted during the six months ended December 31, 2019.

Federal Home Loan Bank advances decreased by $19.0 million, or 100.0%. We had no Federal Home Loan Bank advances outstanding at December 31, 2019 as we have not needed borrowings to fund our operations. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of December 31, 2019, or approximately $131.0 million. We had no federal funds purchased as of December 31, 2019 or as of June 30, 2019.

Total shareholders’ equity increased $559 thousand, or 0.6%, to $88.9 million at December 31, 2019 compared to $88.3 million at June 30, 2019.  This was due to our net income during the period of $2.0 million, the increase of $163 thousand in ESOP shares earned and an increase in after-tax unrealized gains in our investment portfolio of $305 thousand being offset by our payment of dividends of $1.1 million and $927 thousand used for the repurchase of treasury stock. The Company and the Association exceeded all regulatory capital requirements at December 31, 2019 and June 30, 2019. 

33 

Nonperforming Assets

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

	December 31, 2019			June 30, 2019
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One-to-four family	$	2,349		$	2,674
Multi-family		—			—
Home equity		777			40
Nonresidential		29			816
Agricultural		40			356
Construction and land		320			31
Total real estate loans		3,515			3,917
Commercial and industrial		—			—
Consumer and other loans		—			—
Total nonaccrual loans (1)	$	3,515		$	3,917
Accruing loans past due 90 days or more:
Real estate loans:
Total accruing loans past due 90 days or more	$	—		$	—
Total of nonaccrual and 90 days or more past due loans (2)	$	3,515		$	3,917
Real estate owned, net:
One-to-four family	$	136		$	226
Nonresidential		481			585
Construction and land		—			—
Other nonperforming assets		—			—
Total nonperforming assets	$	4,132		$	4,728
Accruing troubled debt restructurings	$	—		$	—
Troubled debt restructurings and total nonperforming assets	$	4,132		$	4,728
Total nonperforming loans to total loans		0.98	%		1.09	%
Total nonperforming assets to total assets		0.82	%		0.90	%
Total nonperforming assets to loans and real estate owned		1.15	%		1.31	%

(1) Nonaccrual troubled debt restructurings included in the totals above were $2.5 million and $2.7 million, at December 31, 2019 and June 30, 2019, respectively.

(2) There were no loans past due 90 days or more and still accruing at December 31, 2019 and June 30, 2019.

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $136 thousand and $150 thousand for the six months ended December 31, 2019 and 2018, respectively.  There was no interest recognized on these loans for the six months ended December 31, 2019 and December 31, 2018.

Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $63 thousand and $78 thousand for the six months ended December 31, 2019 and 2018, respectively. There was no interest recognized on troubled debt restructured loans for the six months ended December 31, 2019 and December 31, 2018.

Nonperforming assets decreased $596 thousand from $4.7 million as of June 30, 2019 to $4.1 million as of December 31, 2019.  Nonaccrual loans decreased $402 thousand to $3.5 million as of December 31, 2019 and real estate owned decreased $194 thousand to $617 thousand as of December 31, 2019.  There were no accruing loans past due 90 days or more at either date.   The decrease in nonaccrual loans primarily related to normal monthly fluctuations. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 0.82% and 1.15%, respectively, at December 31, 2019 compared to 0.90% and 1.31%, respectively at June 30, 2019.

34 

Analysis of Net Interest Margin

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

	For the Three Months Ended
	December 31, 2019								December 31, 2018
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	360,215		$	4,143		4.60	%	$	351,078		$	4,050		4.61	%
Investment securities		70,307			373		2.12			76,821			401		2.09
Investment securities, tax-free		17,198			95		2.21			36,929			205		2.22
Other interest-earning assets		28,545			151		2.12			3,997			43		4.30
Total interest-earning assets		476,265			4,762		4.00			468,825			4,699		4.01
Noninterest-earning assets		38,879								34,393
Total assets	$	515,144							$	503,218
Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	56,554		$	51		0.36	%	$	50,569		$	19		0.15	%
Money market deposits		75,868			145		0.76			64,085			78		0.48
Regular savings and other deposits		28,868			20		0.27			27,407			13		0.19
Certificates of deposit		219,936			809		1.46			217,892			546		0.99
Total interest-bearing deposits		381,226			1,025		1.07			359,953			656		0.72
Other Borrowings		8,350			59		2.80			24,790			161		2.58
Total interest-bearing liabilities		389,576			1,084		1.10			384,743			817		0.84
Noninterest bearing deposits		34,840								35,045
Other noninterest-bearing liabilities		2,775								1,768
Total liabilities		427,191								421,556
Equity		87,953								81,662
Total liabilities and equity	$	515,144							$	503,218
Net interest income				$	3,678							$	3,882
Interest rate spread							2.90	%							3.17	%
Net interest margin							3.10	%							3.32	%
Average interest-earning assets to
average interest-bearing liabilities		1.22	x							1.30	x

35 

	For the Six Months Ended
	December 31, 2019								December 31, 2018
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	361,139		$	8,260		4.57	%	$	343,267		$	7,817		4.55	%
Investment securities		72,230			781		2.16			78,091			816		2.09
Investment securities, tax-free		18,112			200		2.21			37,269			414		2.22
Other interest-earning assets		29,300			338		2.31			4,517			73		3.23
Total interest-earning assets		480,781			9,579		3.98			463,144			9,120		3.94
Noninterest-earning assets		39,116								34,208
Total assets	$	519,897							$	497,352
Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	55,871		$	95		0.34	%	$	50,766		$	36		0.14	%
Money market deposits		75,587			325		0.85			64,213			141		0.44
Regular savings and other deposits		28,587			41		0.28			27,617			24		0.17
Certificates of deposit		221,063			1,624		1.46			216,711			1,020		0.93
Total interest-bearing deposits		381,108			2,085		1.09			359,307			1,221		0.67
Other Borrowings		13,175			186		2.80			19,975			246		2.44
Total interest-bearing liabilities		394,283			2,271		1.14			379,282			1,467		0.77
Noninterest bearing deposits		35,104								34,092
Other noninterest-bearing liabilities		2,408								1,386
Total liabilities		431,795								414,760
Equity		88,102								82,592
Total liabilities and equity	$	519,897							$	497,352
Net interest income				$	7,308							$	7,653
Interest rate spread							2.84	%							3.17	%
Net interest margin							3.05	%							3.31	%
Average interest-earning assets to average interest-bearing liabilities		1.22	x							1.22	x

Comparison of Operating Results for the Three Months Ended December 31, 2019 and December 31, 2018

General. We reported net income of $1.1 million for the three months ended December 31, 2019 as compared to net income of $919 thousand for the three months ended December 31, 2018. Interest income increased $63 thousand for the three months ended December 31, 2019 compared to December 31, 2018 and interest expense increased $267 thousand resulting in a net decrease to net interest income of $204 thousand. Noninterest income increased $1 thousand for the three months ended December 31, 2019 compared to December 31, 2018. Total noninterest expense decreased $96 thousand. Tax expense decreased $202 thousand primarily due to the recognition of a permanent tax benefit as a result of non-qualified stock options being exercised during the year ended December 31, 2019.

Interest Income. Interest income increased by $63 thousand to $4.8 million from $4.7 million for the three months ended December 31, 2019 and December 31, 2018, respectively.  The yield on interest-earning assets decreased one basis point from 4.01% for the three months ended December 31, 2018 to 4.00% for the three months ended December 31, 2019.  Total average interest-earning assets increased by $7.5 million to $476.3 million for the three months ended December 31, 2019 from $468.8 million for the three months ended December 31, 2018.

Interest income on loans increased by $93 thousand to $4.14 million from $4.05 million for the three months ended December 31, 2019 and December 31, 2018, respectively.  The yield on loans decreased one basis point from 4.61% for the three months ended December 31, 2018 to 4.60% for the three months ended December 31, 2019. The average balance of loans increased by $9.1 million, or 2.6%, to $360.2 million for the three months ended December 31, 2019 from $351.1 million for the three months ended December 31, 2018.  The increase in the average balance of our loans is reflective of normal loan growth.

36 

Interest income on investment securities decreased by $138 thousand, or 22.8%, to $468 thousand for the three months ended December 31, 2019 from $606 thousand for the three months ended December 31, 2018.  The decrease reflected the combination of a decrease in the average balance of securities of $26.3 million, or 23.1%, to $87.5 million for the three months ended December 31, 2019 from $113.8 million for the three months ended December 31, 2018, offset by an increase in the yield on securities to 2.14% from 2.13% for the respective periods.  The decrease in the average balances of our investment securities reflects our efforts during fiscal 2019 and 2020 to reduce investment purchases, which allowed us to use those funds as well as investment repayments and maturities to fund loan growth. 

Income on other interest earning assets increased by $108 thousand, or 251.2%, to $151 thousand for the three months ended December 31, 2019 from $43 thousand for the three months ended December 31, 2018. The average balance of other interest-earning assets increased $24.5 million from the three months ended December 31, 2018 to the three months ended December 31, 2019 and the yield decreased 218 basis points over the same period. The increase in average balances was due to funds being held in money market accounts pending repayment of FHLB advances. The decrease in yield was a result of the majority of the current year funds being held in money market accounts compared to the prior year funds being predominately held in restricted equities.  

Interest Expense. Interest expense increased by $267 thousand, or 32.7%, to $1.1 million for the three months ended December 31, 2019 from $817 thousand for the three months ended December 31, 2018.  This increase was attributable to general increases in deposit rates due to the competitive economic environment. The increase reflected an increase of 35 basis points in the average rate paid on interest-bearing deposits for the three months ended December 31, 2019 to 1.07% from 0.72% for the three months ended December 31, 2018.  The increase in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions.  Average interest-bearing deposits were $381.2 million for the three months ended December 31, 2019 compared to $360.0 million for the three months ended December 31, 2018. 

The largest increase in deposit interest expense was related to expense on certificates of deposit, which increased $263 thousand, or 48.2%, to $809 thousand for the three months ended December 31, 2019 from $546 thousand for the three months ended December 31, 2018.  The average rate paid on certificates of deposit increased by 47 basis points from 0.99% for the three months ended December 31, 2018 to 1.46% for the three months ended December 31, 2019 and the average balances increased by $2.0 million from $217.9 million for the three-month period ended December 31, 2018 to $219.9 million for the three-month period ended December 31, 2019. The increase in the average balance of our certificates of deposit is reflective of normal deposit growth. The increase in the average rate paid on our certificates of deposit is reflective of the competitive economic environment.

Interest expense for other borrowings decreased by $102 thousand, or 63.4%, to $59 thousand for the three months ended December 31, 2019 from $161 thousand for the three months ended December 31, 2018. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $8.4 million for the three months ended December 31, 2019 compared to $24.8 million for the three months ended December 31, 2018.  The average rate was 2.80% and 2.58% for the three months ended December 31, 2019 and 2018, respectively, due to an increase in market interest rates.

Net Interest Income. Net interest income before the provision for loan losses decreased by $204 thousand, or 5.3%, to $3.7 million for the three months ended December 31, 2019.  Our interest rate spread and net interest margin decreased to 2.90% and 3.10%, respectively, from 3.17% and 3.32%, respectively, for the three months ended December 31, 2019 and December 31, 2018, respectively.  The decreasing yield on earning assets and the higher cost of certificates of deposit and other borrowings contributed to the decrease in net interest margin for the three months ended December 31, 2019.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended December 31, 2019 compared with $76 thousand for the three months ended December 31, 2018.  There was $1 thousand in charge-offs for the three months ended December 31, 2019. There were no charge-offs for the three months ended December 31, 2018.  The lack of provision for the three months ended December 31, 2019 is primarily due to slight loan growth during the three months ended December 31, 2019 combined with improved portfolio performance.

Our total allowance for loan losses was $1.3 million, or 0.36%, of total gross loans as of December 31, 2019 and June 30, 2019.  There were no specifically identified impaired loans at December 31, 2019 or June 30, 2019.  The recorded investment in individually evaluated impaired loans was $3.1 million and $3.3 million at December 31, 2019 and at June 30, 2019, respectively. Total loans individually evaluated for impairment decreased $130 thousand, or 4.0%, to $3.1 million at December 31, 2019 compared to $3.3 million at June 30, 2019. 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2019 and 2018.  There have been no changes to our allowance for loan loss methodology during the quarter.

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Noninterest Income. Noninterest income increased $1 thousand, or 0.3%, to $385 thousand for the three months ended December 31, 2019 from $384 thousand for the three months ended December 31, 2018.  Mortgage servicing income decreased $3 thousand due to a declining servicing portfolio balance. Gain on sale of mortgage loans was $50 thousand and $23 thousand for the three months ended December 31, 2019 and 2018, respectively. The change in fair value of equity securities was a loss of $48 thousand for the three months ended December 31, 2019 compared to a loss of $28 thousand for the three months ended December 31, 2018. Gains or losses on the fair value of equity securities are market driven. The net gain on payoff of purchase credit impaired loans was $32 thousand and $22 thousand for the three months ended December 31, 2019 and December 31, 2018, respectively, due to the liquidation of one loan in each period. Changes in all other noninterest income items were due to normal periodic fluctuations.

Noninterest Expense. Noninterest expense for the three months ended December 31, 2019 decreased by $96 thousand, or 3.1%, to $3.0 million from $3.1 million for the same period in 2018.  Salaries and employee benefits decreased $149 thousand due a reduction in personnel related to the closing of a loan production office. Data processing increased $14 thousand due to routine upgrades in the current period.  Professional and supervisory fees decreased $23 thousand primarily due to reduced audit and legal fees. FDIC deposit insurance decreased $29 thousand due to an assessment credit received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of September 30, 2019. Foreclosed asset expenses increased $89 thousand primarily due to a $89 thousand write down of REO property during the three months ended December 31, 2019. The change in the value of the loan servicing portfolio increased $1 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.

Income Tax Expense. Tax expense decreased $202 thousand, or 91.4%, to $19 thousand for the three months ended December 31, 2019 from a $314 thousand for the three months ended December 31, 2018. The decrease is primarily due to the recognition of a permanent tax benefit as a result of non-qualified stock options being exercised during the period ended December 31, 2019. Our effective income tax rate was 1.7% and 19.4% for the three months ended December 31, 2019 and 2018, respectively.

Comparison of Operating Results for the Six Months Ended December 31, 2019 and December 31, 2018

General. We reported net income of $2.0 million for the six months ended December 31, 2019 as compared to net income of $1.8 million for the six months ended December 31, 2018. Interest income increased $459 thousand for the six months ended December 31, 2019 compared to December 31, 2018 and interest expense increased $804 thousand resulting in a net decrease to net interest income of $345 thousand. Noninterest income increased $108 thousand for the six months ended December 31, 2019 compared to December 31, 2018. Total noninterest expense decreased $192 thousand. Tax expense decreased $133 thousand primarily due to the recognition of a permanent tax benefit as a result of non-qualified stock options being exercised during the year ended December 31, 2019.

Interest Income. Interest income increased by $459 thousand to $9.6 million from $9.1 million for the six months ended December 31, 2019 and December 31, 2018, respectively.  The yield on interest-earning assets increased four basis points from 3.94% for the six months ended December 31, 2018 to 3.98% for the six months ended December 31, 2019.  Total average interest-earning assets increased by $17.7 million to $480.8 million for the six months ended December 31, 2019 from $463.1 million for the six months ended December 31, 2018.

Interest income on loans increased by $443 thousand to $8.3 million from $7.8 million for the six months ended December 31, 2019 and December 31, 2018, respectively.  The yield on loans increased two basis point from 4.55% for the six months ended December 31, 2018 to 4.57% for the six months ended December 31, 2019. The average balance of loans increased by $17.8 million, or 5.21%, to $361.1 million for the six months ended December 31, 2019 from $343.3 million for the six months ended December 31, 2018.  The increase in the average balance of our loans is reflective of normal loan growth.

Interest income on investment securities decreased by $249 thousand, or 20.2%, to $981 thousand for the six months ended December 31, 2019 from $1.2 million for the six months ended December 31, 2018. The decrease reflected a decrease in the average balance of securities of $25.1 million, or 21.7%, to $90.3 million for the six months ended December 31, 2019 from $115.4 million for the six months ended December 31, 2018, offset by an increase in the yield on securities to 2.17% from 2.13% for the respective periods.  The decrease in the average balances of our investment securities reflects our efforts during fiscal 2019 and 2020 to reduce investment purchases, which allowed us to use those funds as well as investment repayments and maturities to fund loan growth. 

Income on other interest earning assets increased by $265 thousand, or 363.0%, to $338 thousand for the six months ended December 31, 2019 from $73 thousand for the six months ended December 31, 2018. The average balance of other interest-earning assets increased $24.8 million from the six months ended December 31, 2018 to the six months ended December 31, 2019 and the yield decreased 92 basis points over the same period. The increase in average balances was due to funds being held in money market accounts pending repayment of FHLB advances. The decrease in yield was a result of the majority of the current year funds being held in money market accounts compared to the prior year funds being held in predominately restricted equities.  

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Interest Expense. Interest expense increased by $804 thousand, or 54.8%, to $2.3 million for the six months ended December 31, 2019 from $1.5 million for the six months ended December 31, 2018. This increase was attributable to general increases in deposit rates due to the competitive economic environment. The increase reflected an increase of 37 basis points in the average rate paid on interest-bearing deposits for the six months ended December 31, 2019 to 1.14% from 0.77% for the six months ended December 31, 2018.  The increase in the average rate paid on deposits reflects our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions.  Average interest-bearing deposits were $381.1 million for the six months ended December 31, 2019 compared to $359.3 million for the six months ended December 31, 2018. 

The largest increase in deposit interest expense was related to expense on certificates of deposit, which increased $604 thousand, or 59.2%, to $1.6 million for the six months ended December 31, 2019 from $1.0 million for the six months ended December 31, 2018.  The average rate paid on certificates of deposit increased by 53 basis points from 0.93% for the six months ended December 31, 2018 to 1.46% for the six months ended December 31, 2019 and the average balances increased by $4.4 million from $216.7 million for the six-month period ended December 31, 2018 to $221.1 million for the six-month period ended December 31, 2019. The increase in the average balance of our certificates of deposit is reflective of normal deposit growth. The increase in the average rate paid on our certificates of deposit is reflective of the normal competitive economic environment.

Interest expense for other borrowings decreased by $60 thousand, or 24.4%, to $186 thousand for the six months ended December 31, 2019 from $246 thousand for the six months ended December 31, 2018. Other borrowings include both FHLB advances as well as overnight federal funds purchased. Average other borrowings were $13.2 million for the six months ended December 31, 2019 compared to $20.0 million for the six months ended December 31, 2018.  The average rate was 2.80% and 2.44% for the six months ended December 31, 2019 and 2018, respectively, due to an increase in market interest rates.

Net Interest Income. Net interest income before the provision for loan losses decreased by $345 thousand, or 4.5%, to $7.3 million for the six months ended December 31, 2019.  Our interest rate spread and net interest margin decreased to 2.84% and 3.05%, respectively, from 3.17% and 3.31%, respectively, for the six months ended December 31, 2019 and December 31, 2018, respectively.  The increasing yield on earning assets was offset by the higher cost of certificates of deposit and other borrowings which contributed to the decrease in net interest margin for the six months ended December 31, 2019.

Provision for Loan Losses. We recorded no provision for loan losses for the six months ended December 31, 2019 compared with $148 thousand for the six months ended December 31, 2018.  There was $1 thousand in charge-offs for the six months ended December 31, 2019. There were $18 thousand in charge-offs for the six months ended December 31, 2018. The lack of provision for the six months ended December 31, 2019 is primarily due to slight loan growth during the six months ended December 31, 2019 combined with improved portfolio performance.

Our total allowance for loan losses was $1.3 million, or 0.36%, of total gross loans as of December 31, 2019 and June 30, 2019.  There were no specifically identified impaired loans at December 31, 2019 or June 30, 2019.  The recorded investment in individually evaluated impaired loans was $3.1 million and $3.3 million at December 31, 2019 and at June 30, 2019, respectively. Total loans individually evaluated for impairment decreased $130 thousand, or 4.0%, to $3.1 million at December 31, 2019 compared to $3.3 million at June 30, 2019. 

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2019 and 2018.  There have been no changes to our allowance for loan loss methodology during the six months ended December 31, 2019.

Noninterest Income. Noninterest income increased $108 thousand, or 13.9%, to $885 thousand for the six months ended December 31, 2019 from $777 thousand for the six months ended December 31, 2018.  Mortgage servicing income decreased $12 thousand due to a declining servicing portfolio balance. Gain on sale of mortgage loans was $82 thousand and $49 thousand for the six months ended December 31, 2019 and 2018, respectively. The change in fair value of equity securities was a gain of $32 thousand for the six months ended December 31, 2019 compared to a loss of $43 thousand for the six months ended December 31, 2018. Gains or losses on the fair value of equity securities are market driven. The net gain on sales of investment securities available for sale was $12 thousand and $1 thousand for the six months ended December 31, 2019 and December 31, 2018, respectively. Gains or losses on the sale of securities are largely market driven. The net gain on payoff of purchase credit impaired loans was $32 thousand and $22 thousand for the six months ended December 31, 2019 and December 31, 2018, respectively, due to the liquidation of one loan in each period.  Changes in all other noninterest income items were due to normal periodic fluctuations.

Noninterest Expense. Noninterest expense for the six months ended December 31, 2019 decreased by $192 thousand, or 3.2%, to $5.9 million from $6.0 million for the same period in 2018.  Salaries and employee benefits decreased $245 thousand primarily due a reduction in personnel related to the closing of a loan production office. Occupancy and equipment increased $50 thousand due to routine upgrades and improvements. Data processing decreased $19 thousand due to fewer routine upgrades in the current period as well as more favorable third party service pricing.  Professional and supervisory fees decreased $72 thousand primarily due to reduced audit and legal fees. FDIC deposit insurance decreased $61 thousand due to an assessment credits received from FDIC as a result of the FDIC Deposit Insurance Fund Reserve Ratio exceeding 1.38% as of June 30, 2019 and September 30, 2019. Foreclosed asset expenses increased $120 thousand primarily due to $117 thousand in write downs of REO property during the six months ended December 31, 2019. The change in the value of the loan servicing portfolio increased $11 thousand due to market conditions. Changes in all other noninterest expense items were due to normal periodic fluctuations.

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Income Tax Expense. Tax expense decreased $133 thousand, or 29.8%, to $314 thousand for the six months ended December 31, 2019 from a $447 thousand for the six months ended December 31, 2018. The decrease is primarily due to the recognition of a permanent tax benefit as a result of non-qualified stock options being exercised during the period ended December 31, 2019. Our effective income tax rate was 13.4% and 20.0% for the six months ended December 31, 2019 and 2018, respectively.

Liquidity and Capital Resources

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

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program.  Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration.  If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets (as of December 31, 2019), or approximately $131.0 million as of that date, with a remaining availability of $131.0 million as of December 31, 2019.

Common Stock Dividends.  On August 22, 2019 and November 21, 2019, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.

Equity Compensation Plans.  During the three months ended December 31, 2019, no shares of restricted stock or common stock options were issued.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2019, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

(a) None.

(b) Not applicable.

(c) Issuer Repurchases.  On March 20, 2019, the Board of Directors authorized the repurchase of up to 100,000 of the Company’s common stock. In connection with the authorization of this stock repurchase program, the Board of Directors terminated the Company’s existing stock repurchase program, which had authorized the Company to purchase up to 175,000 shares of its issued and outstanding common stock.  The Company had previously purchased a total of 174,747 shares of its common stock at a weighted average price of $22.64 per share under the existing stock repurchase program.

The following table sets forth information in connection with repurchases of the Company’s common stock for the quarter ended December 31, 2019:

	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan			Approximate Maximum Dollar Value or Number of Shares That May Yet be Purchased Under Publicly Announced Plans
October 1 - October 31, 2019		5,533	$	23.04		5,533			46,725
November 1 - November 30, 2019		166	$	22.50		166			46,559
December 1 - December 31, 2019		—	$	—		—			46,559	(2)
Total		5,699	$	23.02		5,699	(1)

(1) All shares were purchased pursuant to a publicly announced repurchase program that was approved by the Board of Directors on March 20, 2019. The repurchase program has no expiration date.

(2) Represents the maximum number of shares available for repurchase under the March 20, 2019 plan at December 31, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed below.

Exhibit number	Description
31.1	Certification of Curtis T. Evatt, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2	Certification of John W. Hobbs, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32	Certification of Curtis T. Evatt, President and Chief Executive Officer, and John W. Hobbs, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, 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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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: February 13, 2020
		/s/ Curtis T. Evatt
		Curtis T. Evatt
		President and Chief Executive Officer
		/s/ John W. Hobbs
		John W. Hobbs
		Senior Vice President and Chief Financial Officer

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