Oconee Federal Financial Corp.
Annual Report 2020

Plain-text annual report

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

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