Oconee Federal Financial Corp. (Form: 10-Q, Received: 02/10/2017 17:05:09)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended December 31, 2016

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

For transition period from to

Commission File Number 001-35033

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

Federal		32-0330122
(State of Other Jurisdiction of Incorporation)		(I.R.S Employer Identification Number)

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

(864) 882-2765

Registrant’s telephone number, including area code

Not Applicable

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

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

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

There were 5,790,965 shares of Common Stock, par value $0.01 per share, outstanding as of February 9, 2017.

OCONEE FEDERAL FINANCIAL CORP.

Form 10-Q Quarterly Report

Table of Contents

PART I.		2

ITEM 1.	FINANCIAL STATEMENTS	2

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41

ITEM 4.	CONTROLS AND PROCEDURES	41

PART II.		41

ITEM 1.	LEGAL PROCEEDINGS	41

ITEM 1A.	RISK FACTORS	41

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42

ITEM 4.	MINE SAFETY DISCLOSURES	42

ITEM 5.	OTHER INFORMATION	42

ITEM 6.	EXHIBITS	42

SIGNATURES		43

INDEX TO EXHIBITS		44

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

PART I

ITEM 1. FINANCIAL STATEMENTS

	December 31, 2016			June 30, 2016
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	5,504		$	4,874
Interest-earning deposits		20,174			22,802
Total cash and cash equivalents		25,678			27,676
Securities available-for-sale		120,654			132,084
Loans		301,537			292,063
Allowance for loan losses		(996	)		(922	)
Net loans		300,541			291,141
Loans held for sale, at fair value		-			129
Premises and equipment, net		6,665			6,811
Real estate owned, net		752			1,354
Accrued interest receivable
Loans		937			1,016
Investments		557			492
Restricted equity securities, at cost		1,021			1,021
Bank owned life insurance		17,811			17,558
Goodwill		2,593			2,593
Core deposit intangible		664			744
Loan servicing rights		1,219			1,046
Deferred tax assets		2,585			1,128
Other assets		401			847
Total assets	$	482,078		$	485,640

LIABILITIES
Deposits
Noninterest bearing	$	26,058		$	23,356
Interest bearing		370,355			376,278
Total deposits		396,413			399,634
Accrued interest payable and other liabilities		1,758			605
Total liabilities		398,171			400,239

SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000,000 shares authorized; 6,463,039 shares issued and outstanding, respectively		65			65
Treasury stock, at par, 672,074 and 634,131 shares, respectively		(7	)		(6	)
Additional paid-in capital		12,423			12,882
Retained earnings		73,393			71,909
Accumulated other comprehensive (loss) income		(860	)		1,808
Unearned ESOP shares		(1,107	)		(1,257	)
Total shareholders' equity		83,907			85,401
Total liabilities and shareholders' equity	$	482,078		$	485,640

See accompanying notes to the consolidated financial statements

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015
Interest and dividend income:
Loans, including fees	$	3,639		$	3,850		$	7,376		$	7,734
Securities, taxable		388			430			831			820
Securities, tax-exempt		180			119			358			208
Interest-earning deposits and other		36			26			77			42
Total interest income		4,243			4,425			8,642			8,804
Interest expense:
Deposits		323			295			643			584
Total interest expense		323			295			643			584
Net interest income		3,920			4,130			7,999			8,220
Provision for loan losses		24			277			89			422
Net interest income after provision for loan losses		3,896			3,853			7,910			7,798
Noninterest income:
Service charges on deposit accounts		107			121			211			240
Income on bank owned life insurance		127			132			253			240
Mortgage banking income		82			95			175			191
Gain on sales of securities		57			-			125			9
Gain on disposition of purchase credit impaired loans		120			90			196			809
Other		2			14			3			19
Total noninterest income		495			452			963			1,508
Noninterest expense:
Salaries and employee benefits		1,629			1,857			3,141			3,346
Occupancy and equipment		370			354			738			714
Data processing		140			110			270			258
Professional and supervisory fees		249			167			456			417
Office expense		44			58			96			99
Advertising		46			63			77			100
FDIC deposit insurance		35			53			91			108
Foreclosed assets, net		2			47			37			222
Change in loan servicing asset		(196	)		22			(173	)		86
Other		136			173			316			328
Total noninterest expense		2,455			2,904			5,049			5,678
Income before income taxes		1,936			1,401			3,824			3,628
Income tax expense		618			452			1,233			1,237
Net income	$	1,318		$	949		$	2,591		$	2,391

Other comprehensive income
Unrealized (losses) gains on securities available-for-sale	$	(3,524	)	$	(579	)	$	(4,043	)	$	204
Tax effect		1,268			209			1,455			(74	)
Reclassification adjustment for gains realized in net income		(57	)		-			(125	)		(9	)
Tax effect		21			-			45			3
Total other comprehensive (loss) income		(2,292	)		(370	)		(2,668	)		124
Comprehensive (loss) income	$	(974	)	$	579		$	(77	)	$	2,515

Basic net income per share: (Note 3)	$	0.23		$	0.17		$	0.46		$	0.42
Diluted net income per share: (Note 3)	$	0.23		$	0.16		$	0.45		$	0.41
Dividends declared per share:	$	0.10		$	0.10		$	0.20		$	0.20

See accompanying notes to the consolidated financial statements

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

												Accumulated
						Additional						Other			Unearned
	Common		Treasury			Paid-In			Retained			Comprehensive			ESOP
	Stock		Stock			Capital			Earnings			Income (loss)			Shares			Total

Balance at July 1, 2015	$	65	$	(6	)	$	13,354		$	68,950		$	(26	)	$	(1,547	)	$	80,790
Net income		-		-			-			2,391			-			-			2,391
Other comprehensive income		-		-			-			-			124			-			124
Purchase of 1,800 shares of treasury stock ⁽¹⁾		-		-			(32	)		-			-			-			(32	)
Stock-based compensation expense		-		-			151			-			-			-			151
Dividends ⁽²⁾		-		-			35			(1,128	)		-			-			(1,093	)
ESOP shares earned		-		-			156			-			-			184			340
Balance at December 31, 2015	$	65	$	(6	)	$	13,664		$	70,213		$	98		$	(1,363	)	$	82,671

Balance at July 1, 2016	$	65	$	(6	)	$	12,882		$	71,909		$	1,808		$	(1,257	)	$	85,401
Net income		-		-			-			2,591			-			-			2,591
Other comprehensive loss		-		-			-			-			(2,668	)		-			(2,668	)
Purchase of 37,943 shares of treasury stock ⁽³⁾		-		(1	)		(777	)		-			-			-			(778	)
Stock-based compensation expense		-		-			151			-			-			-			151
Dividends ⁽⁴⁾		-		-			44			(1,107	)		-			-			(1,063	)
ESOP shares earned		-		-			123			-			-			150			273
Balance at December 31, 2016	$	65	$	(7	)	$	12,423		$	73,393		$	(860	)	$	(1,107	)	$	83,907

(1)

The weighted average cost of treasury shares purchased during the six months ended was $18.34 per share. Treasury stock repurchases were accounted for using the par value method.

(2)

Approximately $99 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 7,891 additional shares. The portion of the dividend paid on allocated shares of approximately $35 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 7,891 shares was accounted for as additional compensation expense of approximately $64 for the six months ended December 31, 2015.

(3)

The weighted average cost of treasury shares purchased during the six months ended was $20.48 per share. Treasury stock repurchases were accounted for using the par value method.

(4)

Approximately $99 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 8,938 additional shares. The portion of the dividend paid on allocated shares of approximately $44 was treated as a dividend. The remaining portion of the dividend payment and resulting release of approximately 8,938 shares was accounted for as additional compensation expense of approximately $55 for the six months ended December 31, 2016.

See accompanying notes to the consolidated financial statements

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OCONEE FEDERAL FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

	Six Months Ended
	December 31, 2016			December 31, 2015
Cash Flows From Operating Activities
Net income	$	2,591		$	2,391
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		89			422
Provision for real estate owned		103			110
Depreciation and amortization, net		745			557
Net amortization (accretion) of purchase accounting adjustments		119			(78	)
Deferred income tax expense		44			848
Net (gain) loss on sale of real estate owned		(86	)		59
Change in loan servicing asset		(173	)		86
Gain on sales of securities		(125	)		(9	)
Mortgage loans originated for sale		(1,543	)		(2,532	)
Mortgage loans sold		1,707			2,690
Gain on sales of mortgage loans		(35	)		(40	)
Increase in cash surrender value of bank owned life insurance		(253	)		(240	)
Gain on disposition of purchased credit impaired loans		(196	)		(809	)
ESOP compensation expense		273			340
Stock based compensation expense		151			151
Net change in operating assets and liabilities:
Accrued interest receivable and other assets		460			(60	)
Accrued interest payable and other liabilities		1,153			787
Net cash provided by operating activities		5,024			4,673

Cash Flows From Investing Activities
Purchases of premises and equipment		(71	)		(57	)
Purchases of securities available-for-sale		(19,779	)		(23,465	)
Proceeds from maturities, paydowns and calls of securities available-for-sale		11,069			9,142
Proceeds from sales of securities available-for-sale		15,648			1,164
Purchases of bank owned life insurance		-			(8,000	)
Proceeds from sale of real estate owned		739			1,448
Dispositions of purchased credit impaired loans		566			2,648
Loan originations and repayments, net		(10,132	)		8,535
Net cash used in investing activities		(1,960	)		(8,585	)

Cash Flows from Financing Activities
Net change in deposits		(3,221	)		3,075
Dividends paid		(1,063	)		(1,093	)
Purchase of treasury stock		(778	)		(32	)
Net cash (used in) provided by financing activities		(5,062	)		1,950

Change in cash and cash equivalents		(1,998	)		(1,962	)

Cash and cash equivalents, beginning of period		27,676			26,192
Cash and cash equivalents, end of period	$	25,678		$	24,230

See accompanying notes to the consolidated financial statements

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(1)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Oconee Federal Financial Corp., which include the accounts of its wholly owned subsidiary Oconee Federal Savings and Loan Association (the “Association”) (referred to herein as “the Company,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation. The Company is majority owned (71.91%) by Oconee Federal, MHC. These financial statements do not include the transactions and balances of Oconee Federal, MHC.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of December 31, 2016 and June 30, 2016 and the results of operations and cash flows for the interim periods ended December 31, 2016 and 2015. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year or any other period. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016.

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

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

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

(2)

NEW ACCOUNTING STANDARDS

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing ASU 2016-15 but does not expect that it will have a significant impact on its accounting and disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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.

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its accounting and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company does not believe that this new guidance will have a material effect on the consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

(3)

EARNINGS PER SHARE (“EPS”)

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

	Three Months Ended						Six Months Ended
	December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015
Earnings per share
Net income	$	1,318		$	949		$	2,591		$	2,391
Less: distributed earnings allocated to participating securities		(3	)		(6	)		(7	)		(13	)
Less: (undistributed income) dividends in excess of earnings allocated to participating securities		(6	)		(4	)		(11	)		(12	)
Net earnings available to common shareholders	$	1,309		$	939		$	2,573		$	2,366

Weighted average common shares outstanding including participating securities		5,793,350			5,881,847			5,802,651			5,881,993
Less: participating securities		(40,905	)		(62,502	)		(40,905	)		(62,502	)
Less: average unearned ESOP shares		(111,218	)		(141,676	)		(115,104	)		(144,160	)
Weighted average common shares outstanding		5,641,227			5,677,669			5,646,642			5,675,331

Basic earnings per share	$	0.23		$	0.17		$	0.46		$	0.42

Weighted average common shares outstanding		5,641,227			5,677,669			5,646,642			5,675,331
Add: dilutive effects of assumed exercises of stock options		96,097			71,507			89,680			71,221
Average shares and dilutive potential common shares		5,737,324			5,749,176			5,736,322			5,746,552

Diluted earnings per share	$	0.23		$	0.16		$	0.45		$	0.41

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

During the three months ended December 31, 2016, no shares were considered anti-dilutive. During the six months ended December 31, 2016, 28,700 shares were considered anti-dilutive as the exercise price was below the average market price for the respective periods. During the three and six months ended December 31, 2015, 15,400 shares were considered anti-dilutive as the exercise price was below the average market price for the respective periods.

(4)

SECURITIES AVAILABLE-FOR-SALE

Debt, mortgage-backed and equity securities have been classified in the consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consist of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at December 31, 2016 and June 30, 2016 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2016	Cost		Gains		Losses			Value
Available-for-sale:
FHLMC common stock	$	20	$	284	$	-		$	304
Certificates of deposit		7,723		30		(16	)		7,737
Corporate debt securities		-		-		-			-
Municipal securities		36,016		18		(830	)		35,204
SBA loan pools		627		4		-			631
U.S. Government agency mortgage-backed securities		65,559		192		(822	)		64,929
U.S. Government agency bonds		12,052		18		(221	)		11,849
Total available-for-sale	$	121,997	$	546	$	(1,889	)	$	120,654

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2016	Cost		Gains		Losses			Value
Available-for-sale:
FHLMC common stock	$	20	$	131	$	-		$	151
Certificates of deposit		7,470		64		-			7,534
Corporate debt securities		8,932		186		(2	)		9,116
Municipal securities		33,508		989		(16	)		34,481
SBA loan pools		1,268		8		(3	)		1,273
U.S. Government agency mortgage-backed securities		68,103		1,331		(31	)		69,403
U.S. Government agency bonds		9,957		169		-			10,126
Total available-for-sale	$	129,258	$	2,878	$	(52	)	$	132,084

Securities pledged at December 31, 2016 and June 30, 2016 had fair values of $5,990 and $6,114, respectively. These securities were pledged to secure public deposits.

At December 31, 2016 and June 30, 2016, there were no holdings of securities of any one issuer, other than U.S. Government agencies and U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders’ equity.

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for more than twelve months at December 31, 2016 and June 30, 2016. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

	Less than 12 Months							12 Months or More							Total
	Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾		Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾		Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾
December 31, 2016
Available-for-sale:
Certificates of deposit	$	1,731	$	(16	)		7	$	-	$	-			-	$	1,731	$	(16	)		7
Municipal securities		31,019		(808	)		76		697		(22	)		2		31,716		(830	)		78
U.S. Government agency mortgage-backed securities		46,597		(743	)		47		2,542		(79	)		4		49,139		(822	)		51
U.S. Government agency bonds		9,830		(221	)		9		-		-			-		9,830		(221	)		9
	$	89,177	$	(1,788	)		139	$	3,239	$	(101	)		6	$	92,416	$	(1,889	)		145

	Less than 12 Months							12 Months or More							Total
	Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾		Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾		Fair Value		Unrealized Loss			Number in Unrealized Loss ⁽¹⁾
June 30, 2016
Available-for-sale:
Municipal securities	$	2,574	$	(11	)		5	$	716	$	(5	)		2	$	3,290	$	(16	)		7
Corporate debt securities		1,018		(2	)		2		-		-			-		1,018		(2	)		2
SBA loan pools		-		-			-		508		(3	)		1		508		(3	)		1
U.S. Government agency mortgage-backed securities		1,057		(1	)		1		2,982		(30	)		4		4,039		(31	)		5
	$	4,649	$	(14	)		8	$	4,206	$	(38	)		7	$	8,855	$	(52	)		15

(1)

Actual amounts.

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

None of the unrealized losses at December 31, 2016 were recognized into net income for the three or six months ended December 31, 2016 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at June 30, 2016 were recognized as having OTTI during the year ended June 30, 2016.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents the amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2016 and June 30, 2016 by contractual maturity. FHLMC common stock is not presented in this table.

	December 31, 2016				June 30, 2016
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Less than one year	$	3,237	$	3,244	$	3,740	$	3,751
Due from one to five years		13,147		13,102		16,819		17,086
Due from five to ten years		30,648		29,970		30,778		31,622
Due after ten years		8,759		8,474		8,530		8,798
Mortgage-backed securities ⁽¹⁾		66,186		65,560		69,371		70,676
Total	$	121,977	$	120,350	$	129,238	$	131,933

(1)

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

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and six months ended December 31, 2016 and 2015:

	Three Months Ended				Six Months Ended
Available-for-sale:	December 31, 2016		December 31, 2015		December 31, 2016		December 31, 2015
Proceeds	$	12,495	$	-	$	15,648	$	1,164
Gross gains		57		-		125		9
Gross losses		-		-		-		-

The tax provision related to these net realized gains for the three and six months ended December 31, 2016 was $21 and $45, respectively, and for the three and six months ended December 31, 2015 was $0 and $3, respectively.

(5)

LOANS

The components of loans at December 31, 2016 and June 30, 2016 were as follows:

	December 31, 2016			June 30, 2016
Real estate loans:
One-to-four family	$	254,216		$	242,067
Multi-family		1,933			1,996
Home equity		5,722			6,433
Nonresidential		19,343			20,310
Agricultural		1,535			2,958
Construction and land		14,355			14,332
Total real estate loans		297,104			288,096
Commercial and industrial		167			176
Consumer and other loans		5,335			4,915
Total loans		302,606			293,187
Deferred net loan fees		(1,069	)		(1,124	)
Total loans net of deferred loan fees	$	301,537		$	292,063

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2016 by portfolio segment:

Three Months Ended December 31, 2016	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	785	$	10		$	-	$	-	$	795
Multi-family		4		-			-		-		4
Home equity		2		-			-		-		2
Nonresidential		132		(8	)		-		-		124
Agricultural		5		(3	)		-		-		2
Construction and land		35		4			-		-		39
Total real estate loans		963		3			-		-		966
Commercial and industrial		6		(1	)		-		-		5
Consumer and other loans		3		22			-		-		25
Total loans	$	972	$	24		$	-	$	-	$	996

Six Months Ended December 31, 2016	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	733	$	62		$	-		$	-	$	795
Multi-family		4		-			-			-		4
Home equity		2		-			-			-		2
Nonresidential		130		9			(15	)		-		124
Agricultural		5		(3	)		-			-		2
Construction and land		39		-			-			-		39
Total real estate loans		913		68			(15	)		-		966
Commercial and industrial		6		(1	)		-			-		5
Consumer and other loans		3		22			-			-		25
Total loans	$	922	$	89		$	(15	)	$	-	$	996

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2016:

	Ending Allowance on Loans:						Loans:
	Individually Evaluated for Impairment				Collectively Evaluated for Impairment		Individually Evaluated for Impairment				Collectively Evaluated for Impairment
At December 31, 2016	Non-PCI		PCI ⁽¹⁾				Non-PCI		PCI ⁽¹⁾
Real estate loans:
One-to-four family	$	34	$	74	$	687	$	993	$	1,933	$	250,337
Multi-family		-		-		4		-		-		1,932
Home equity		-		-		2		-		-		5,722
Nonresidential		-		68		56		453		903		17,974
Agricultural		-		-		2		448		-		1,086
Construction and land		-		9		30		-		509		13,759
Total real estate loans		34		151		781		1,894		3,345		290,810
Commercial and industrial		-		-		5		-		-		167
Consumer and other loans		-		-		25		-		-		5,321
Total loans	$	34	$	151	$	811	$	1,894	$	3,345	$	296,298

(1)

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

The following tables present the activity in the allowance for loan losses for the three and six months ended December 31, 2015 by portfolio segment:

Three Months Ended December 31, 2015	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	881	$	148		$	(68	)	$	-	$	961
Multi-family		4		-			-			-		4
Home equity		20		53			(72	)		-		1
Nonresidential		68		(1	)		-			-		67
Agricultural		4		-			-			-		4
Construction and land		19		67			-			-		86
Total real estate loans		996		267			(140	)		-		1,123
Commercial and industrial		8		-			-			-		8
Consumer and other loans		7		10			-			-		17
Total loans	$	1,011	$	277		$	(140	)	$	-	$	1,148

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Six Months Ended December 31, 2015	Beginning Balance		Provision		Charge-offs			Recoveries		Ending Balance
Real estate loans:
One-to-four family	$	910	$	259	$	(208	)	$	-	$	961
Multi-family		4		-		-			-		4
Home equity		1		72		(72	)		-		1
Nonresidential		55		12		-			-		67
Agricultural		4		-		-			-		4
Construction and land		25		61		-			-		86
Total real estate loans		999		404		(280	)		-		1,123
Commercial and industrial		-		8		-			-		8
Consumer and other loans		9		10		(2	)		-		17
Total loans	$	1,008	$	422	$	(282	)	$	-	$	1,148

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2016:

	Ending Allowance on Loans:						Loans:
	Individually Evaluated for Impairment				Collectively Evaluated for Impairment		Individually Evaluated for Impairment				Collectively Evaluated for Impairment
At June 30, 2016	Non-PCI		PCI ⁽¹⁾				Non-PCI		PCI ⁽¹⁾
Real estate loans:
One-to-four family	$	55	$	46	$	632	$	1,014	$	1,904	$	238,161
Multi-family		-		-		4		-		-		1,994
Home equity		-		-		2		-		-		6,575
Nonresidential		-		72		58		-		1,492		18,807
Agricultural		-		-		5		448		-		2,509
Construction and land		-		11		28		-		525		13,558
Total real estate loans		55		129		729		1,462		3,921		281,604
Commercial and industrial		-		-		6		-		-		176
Consumer and other loans		-		-		3		-		-		4,900
Total loans	$	55	$	129	$	738	$	1,462	$	3,921	$	286,680

(1)

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

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2016 and June 30, 2016, including the average recorded investment balance and interest earned for the six months ended December 31, 2016 and year ended June 30, 2016:

	December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family	$	688	$	489	$	-	$	741	$	24
Multi-family		-		-		-		-		-
Home equity		50		-		-		-		-
Nonresidential		1,479		907		-		1,009		26
Agricultural		997		448		-		448		18
Construction and land		818		478		-		332		19
Total real estate loans		4,032		2,322		-		2,530		87
Commercial and industrial		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Total	$	4,032	$	2,322	$	-	$	2,530	$	87

With recorded allowance:
Real estate loans:
One-to-four family	$	3,058	$	2,437	$	108	$	2,178	$	111
Multi-family		-		-		-		-		-
Home equity		-		-		-		-		-
Nonresidential		558		449		68		416		20
Agricultural		-		-		-		-		-
Construction and land		185		31		9		189		11
Total real estate loans		3,801		2,917		185		2,783		142
Commercial and industrial		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Total	$	3,801	$	2,917	$	185	$	2,783	$	142

Totals:
Real estate loans	$	7,833	$	5,239	$	185	$	5,313	$	229
Consumer and other loans		-		-		-		-		-
Total	$	7,833	$	5,239	$	185	$	5,313	$	229

The unpaid principal balance and recorded investment includes PCI loans of $5,365 and $3,345, respectively, at December 31, 2016.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	June 30, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no recorded allowance:
Real estate loans:
One-to-four family	$	1,787	$	992	$	-	$	2,198	$	113
Multi-family		-		-		-		-		-
Home equity		185		-		-		-		-
Nonresidential		2,192		1,111		-		1,209		72
Agricultural		997		448		-		945		-
Construction and land		359		185		-		392		35
Total real estate loans		5,520		2,736		-		4,744		220
Commercial and industrial		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Total	$	5,520	$	2,736	$	-	$	4,744	$	220

With recorded allowance:
Real estate loans:
One-to-four family	$	2,021	$	1,918	$	101	$	1,980	$	89
Multi-family		-		-		-		-		-
Home equity		-		-		-		-		-
Nonresidential		404		382		72		851		25
Agricultural		-		-		-		-		-
Construction and land		767		347		11		174		61
Total real estate loans		3,192		2,647		184		3,005		175
Commercial and industrial		-		-		-		-		-
Consumer and other loans		-		-		-		-		-
Total	$	3,192	$	2,647	$	184	$	3,005	$	175

Totals:
Real estate loans	$	8,712	$	5,383	$	184	$	7,749	$	395
Consumer and other loans		-		-		-		-		-
Total	$	8,712	$	5,383	$	184	$	7,749	$	395

The unpaid principal balance and recorded investment in PCI loans was $6,546 and $3,921, respectively, at June 30, 2016.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The following table presents the carrying amount of those loans at December 31, 2016 and June 30, 2016:

	December 31, 2016		June 30, 2016
Real estate loans:
One-to-four family	$	1,859	$	1,858
Multi-family		-		-
Home equity		-		-
Nonresidential		835		1,420
Agricultural		-		-
Construction and land		500		514
Total real estate loans		3,194		3,792
Commercial and industrial		-		-
Consumer and other loans		-		-
Total loans	$	3,194	$	3,792

Carrying amounts listed above are net of an allowance for loan losses of $151 and $129 at December 31, 2016 and June 30, 2016, respectively.

The following table presents the changes in the carrying value and the accretable yield on purchased credit impaired loans for the three and six months ended December 31, 2016 and 2015.

	Three Months Ended December 31, 2016						Three Months Ended December 31, 2015
	Accretable Yield			Carrying Value			Accretable Yield			Carrying Value
Balance at beginning of period	$	(1,312	)	$	3,694		$	(500	)	$	6,250
Payments and other exit events		(40	)		(414	)		(94	)		(1,069	)
Accretion		95			(95	)		98			(98	)
Reclassification from nonaccretable to accretable		-			-			(22	)		-
Change in the allowance		-			9			-			(31	)
Balance at end of period	$	(1,257	)	$	3,194		$	(518	)	$	5,052

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Six Months Ended December 31, 2016						Six Months Ended December 31, 2015
	Accretable Yield			Carrying Value			Accretable Yield			Carrying Value
Balance at beginning of year	$	(1,340	)	$	3,792		$	(694	)	$	7,429
Payments and other exit events		(75	)		(418	)		(104	)		(2,043	)
Accretion		158			(158	)		302			(302	)
Reclassification from nonaccretable to accretable		-			-			(22	)		-
Change in the allowance		-			(22	)		-			(32	)
Balance at end of period	$	(1,257	)	$	3,194		$	(518	)	$	5,052

Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amount of such loans at December 31, 2016 and 2015 is as follows:

	December 31, 2016			December 31, 2015
Balance at beginning of year	$	1,139		$	2,798
Additions		275			132
Reductions from payments and liquidations		(607	)		(963	)
Balance at end of period	$	807		$	1,967

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. Separate tables are presented to show the aging of total past due loans and the aging of past due PCI loans only.

Total past due loans and nonaccrual loans at December 31, 2016:

															Accruing
	30-59		60-89		90 Days										Loans
	Days		Days		or More		Total				Total		Nonaccrual		Past Due 90
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans		Days or More
Real estate loans:
One-to-four family	$	6,782	$	1,591	$	1,160	$	9,533	$	243,730	$	253,263	$	2,420	$	-
Multi-family		-		-		-		-		1,932		1,932		-		-
Home equity		100		96		83		279		5,443		5,722		133		-
Nonresidential		-		50		813		863		18,467		19,330		813		-
Agricultural		448		-		-		448		1,086		1,534		529		-
Construction and land		-		14		-		14		14,254		14,268		282		-
Total real estate loans		7,330		1,751		2,056		11,137		284,912		296,049		4,177		-
Commercial and industrial		-		-		-		-		167		167		-		-
Consumer and other loans		1		-		-		1		5,320		5,321		-		-
Total	$	7,331	$	1,751	$	2,056	$	11,138	$	290,399	$	301,537	$	4,177	$	-

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

PCI past due and nonaccrual loans at December 31, 2016:

															Accruing
	30-59		60-89		90 Days										Loans
	Days		Days		or More		Total				Total		Nonaccrual		Past Due 90
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans		Days or More
Real estate loans:
One-to-four family	$	147	$	398	$	19	$	564	$	1,369	$	1,933	$	165	$	-
Nonresidential		-		50		360		410		493		903		360		-
Construction and land		-		-		-		-		509		509		282		-
Total loans	$	147	$	448	$	379	$	974	$	2,371	$	3,345	$	807	$	-

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, 2016:

															Accruing
	30-59		60-89		90 Days										Loans
	Days		Days		or More		Total				Total		Nonaccrual		Past Due 90
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans		Days or More
Real estate loans:
One-to-four family	$	7,086	$	1,001	$	863	$	8,950	$	232,129	$	241,079	$	2,133	$	-
Multi-family		-		-		-		-		1,994		1,994		-		-
Home equity		94		22		84		200		6,375		6,575		126		-
Nonresidential		-		48		942		990		19,309		20,299		942		-
Agricultural		-		-		-		-		2,957		2,957		531		-
Construction and land		93		-		25		118		13,965		14,083		25		-
Total real estate loans		7,273		1,071		1,914		10,258		276,729		286,987		3,757		-
Commercial and industrial		-		-		-		-		176		176		-		-
Consumer and other loans		-		-		-		-		4,900		4,900		-		-
Total	$	7,273	$	1,071	$	1,914	$	10,258	$	281,805	$	292,063	$	3,757	$	-

PCI past due and nonaccrual loans at June 30, 2016:

															Accruing
	30-59		60-89		90 Days										Loans
	Days		Days		or More		Total				Total		Nonaccrual		Past Due 90
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Loans		Days or More
Real estate loans:
One-to-four family	$	-	$	389	$	21	$	410	$	1,494	$	1,904	$	172	$	-
Nonresidential		-		48		942		990		502		1,492		942		-
Construction and land		-		-		25		25		500		525		25		-
Total loans	$	-	$	437	$	988	$	1,425	$	2,496	$	3,921	$	1,139	$	-

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Troubled Debt Restructurings:

At December 31, 2016 and June 30, 2016, total loans that have been modified as troubled debt restructurings were $1,585 and $1,588, respectively, which consisted of two agricultural loans, two home equity lines of credit, and one one-to-four family first liens at June 30, 2016 and an additional one-to-four family loan at December 31, 2016. All loans were acquired and initially recorded at fair value. An additional allowance of $34 and $55 at December 31, 2016 and June 30, 2016, respectively, has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts under either loan or any payment default on any loan after the modification. The one troubled debt restructuring during the six months ended December 31, 2016 involved renewal of a loan at a higher loan-to-value ratio than is offered on similar loans. No reductions of principal or interest rates were granted. No loans restructured during the twelve months ended December 31, 2016 defaulted.

Loan Grades:

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

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

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

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

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

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

Portfolio Segments:

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

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

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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

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

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

Total loans by risk grade and portfolio segment at December 31, 2016:

	Pass		Pass- Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	238,160	$	6,701	$	2,230	$	6,172	$	-	$	253,263
Multi-family		1,932		-		-		-		-		1,932
Home equity		5,081		299		259		83		-		5,722
Nonresidential		12,956		3,636		1,382		1,356		-		19,330
Agricultural		340		387		278		529		-		1,534
Construction and land		12,626		863		234		545		-		14,268
Total real estate loans		271,095		11,886		4,383		8,685		-		296,049
Commercial and industrial		167		-		-		-		-		167
Consumer and other loans		5,317		-		1		3		-		5,321
Total	$	276,579	$	11,886	$	4,384	$	8,688	$	-	$	301,537

Total loans by risk grade and portfolio segment at June 30, 2016:

	Pass		Pass-Watch		Special Mention		Substandard		Doubtful		Total
Real estate loans:
One-to-four family	$	226,899	$	6,805	$	1,890	$	5,485	$	-	$	241,079
Multi-family		1,994		-		-		-		-		1,994
Home equity		6,083		106		260		126		-		6,575
Nonresidential		13,218		4,095		1,494		1,492		-		20,299
Agricultural		1,352		398		676		531		-		2,957
Construction and land		12,397		878		239		569		-		14,083
Total real estate loans		261,943		12,282		4,559		8,203		-		286,987
Commercial and industrial		157		19		-		-		-		176
Consumer and other loans		4,892		-		3		5		-		4,900
Total	$	266,992	$	12,301	$	4,562	$	8,208	$	-	$	292,063

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

At December 31, 2016, consumer mortgage loans secured by residential real estate properties totaling $488 were in formal foreclosure proceedings and are included in one-to-four family loans.

(6)

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Investment Securities:

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

Impaired Loans:

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

Real Estate Owned:

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

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Loan Servicing Rights:

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

Assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and June 30, 2016 are summarized below:

	Fair Value Measurements
	December 31, 2016				June 30, 2016
	(Level 2)		(Level 3)		(Level 2)		(Level 3)
Financial assets:
Securities available-for-sale:
FHLMC common stock	$	304	$	-	$	151	$	-
Certificates of deposit		7,737		-		7,534		-
Corporate debt securities		-		-		9,116		-
Municipal securities		35,204		-		34,481		-
SBA loan pools		631		-		1,273		-
U.S. Government agency mortgage-backed securities		64,929		-		69,403		-
U.S. Government agency bonds		11,849		-		10,126		-
Total securities available-for-sale		120,654		-		132,084		-
Loan servicing rights		-		1,219		-		1,046
Total financial assets	$	120,654	$	1,219	$	132,084	$	1,046

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Presented in the table below are assets measured at fair value on a nonrecurring basis using level 3 inputs at December 31, 2016 and June 30, 2016:

	Fair Value Measurements
	December 31, 2016		June 30, 2016
	(Level 3)		(Level 3)
Financial assets:
Impaired loans, with specific allocations:
One-to-four family	$	2,329	$	1,817
Nonresidential		381		310
Construction and land		22		336
Total financial assets		2,732		2,463
Non-financial assets:
Real estate owned, net:
One-to-four family		752		899
Nonresidential		-		267
Construction and land		-		188
Total non-financial assets		752		1,354
Total assets measured at fair value on a non-recurring basis	$	3,484	$	3,817

The Company's impaired loans at December 31, 2016 and June 30, 2016 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of these loans were $2,732 and $2,463, respectively, which consisted of valuation allowances of $185 and $184, respectively. The impact to the provision for loan losses from the change in the valuation allowance for the three and six months ended December 31, 2016 was a decrease of $22 and an increase of $1, respectively, and for the three and six months ended December 31, 2015 was an increase of $262 and $292, respectively.

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned and their respective valuation allowances at December 31, 2016 and June 30, 2016 were $752 and $1,354 and $102 and $102, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and six months ended December 31, 2016, were $0 and $103, respectively. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and six months ended December 31, 2015, were $15 and $110, respectively.

The tables below present a reconciliation of all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended December 31, 2016 and 2015:

	Fair Value Measurements
	(Level 3)
	Three Months Ended					Six Months Ended
	December 31, 2016		December 31, 2015			December 31, 2016		December 31, 2015
	Loan Servicing Rights		Loan Servicing Rights			Loan Servicing Rights		Loan Servicing Rights
Balance at beginning of year:	$	1,023	$	1,332		$	1,046	$	1,396
Purchases		-		-			-		-
Change in fair value		196		(22	)		173		(86	)
Balance at end of period:	$	1,219	$	1,310		$	1,219	$	1,310

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2016 and June 30, 2016.

Level 3 Quantitative Information

December 31,
2016

June 30,
2016

Valuation
Technique

Unobservable
Inputs

Range

Fair Value

Loan servicing rights

1,219

1,046

Discounted cash flows

Discount rate, estimated timing of cash flows

9% to 10%

Impaired real estate loans net,
with specific allocations:

One-to-four family

2,329

1,817

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 30%

Nonresidential

381

310

Discounted cash flows

Discount rate, estimated timing of cash flows

2% to 28%

Construction and land

336

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 30%

Real estate owned net:

One-to-four family

752

899

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 20%

Nonresidential

267

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 20%

Construction and land

188

Sales comparison approach

Adjustment for differences between the comparable sales

0% to 20%

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at December 31, 2016 and June 30, 2016 are summarized below:

	December 31, 2016
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	120,654	$	-	$	120,654	$	-	$	120,654
Loans, net		300,541		-		-		305,807		305,807
Loan servicing rights		1,219		-		-		1,219		1,219
Restricted equity securities		1,021		N/A		N/A		N/A		N/A

Financial liabilities
Deposits	$	396,413	$	178,789	$	210,488	$	-	$	389,277

	June 30, 2016
	Carrying		Fair Value
	Amount		(Level 1)		(Level 2)		(Level 3)		Total
Financial assets
Securities available-for-sale	$	132,084	$	-	$	132,084	$	-	$	132,084
Loans, net		291,141		-		-		296,203		296,203
Loans held for sale (1)		129		-		-		129		129
Loan servicing rights		1,046		-		-		1,046		1,046
Restricted equity securities		1,021		N/A		N/A		N/A		N/A

Financial liabilities
Deposits	$	399,634	$	175,652	$	224,037	$	-	$	399,689

(1)

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.

(7)

EMPLOYEE STOCK OWNERSHIP PLAN

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

Participants receive the shares at the end of employment. The Company makes contributions to the ESOP each December. In December 2016, $50 of discretionary contributions were made to the ESOP for debt retirement, which resulted in the release of additional shares and recognition of additional compensation expense of $88 for both the three and six months ended December 31, 2016. In December 2015, $100 of discretionary contributions were made to the ESOP for debt retirement, which resulted in the release of additional shares and recognition of additional compensation expense of $160 for both the three and six months ended December 31, 2015. Total ESOP compensation expense for the three and six months ended December 31, 2016 was $181 and $273, respectively, and for the three and six months ended December 31, 2015 was $250 and $340, respectively.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Shares held by the ESOP at December 31, 2016 and June 30, 2016 were as follows:

	December 31, 2016		June 30, 2016
Committed to be released to participants		25,793		10,602
Allocated to participants		112,043		112,043
Unearned		104,010		126,197
Total ESOP shares		241,846		248,842

Fair value of unearned shares	$	2,444	$	2,470

(8)

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.

On February 5, 2016, the compensation committee of the board of directors approved the issuance of 21,000 stock options to purchase Company stock and 7,000 shares of restricted stock were granted to officers. 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. The weighted average vesting period of stock options and restricted stock granted was 5.7 years and 6.0 years, respectively. Stock options expire ten years after issuance. 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.

The following table summarizes stock option activity for the six months ended December 31, 2016:

	Options		Weighted- Average Exercise Price/Share		Weighted- Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (1)
Outstanding - July 1, 2016		261,986	$	12.46
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding - December 31, 2016		261,986	$	12.46		2.40	$	2,892,325
Fully vested and exercisable at December 31, 2016		169,954	$	11.65		2.40	$	2,013,955
Expected to vest in future periods		92,032
Fully vested and expected to vest - December 31, 2016		261,986	$	12.46		2.40	$	2,892,325

(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 $23.50 per share on December 31, 2016.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

	Fiscal Years Granted
	2016
Risk-free interest rate		1.67	%
Expected dividend yield		2.06	%
Expected stock volatility		16.1
Expected life (years)		8
Fair value	$	2.75

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 23,750 and 21,835 options that were earned during the six months ended December 31, 2016 and 2015, respectively. Stock-based compensation expense for stock options for the three and six months ended December 31, 2016 was $14 and $28, respectively, and for the three and six months ended December 31, 2015 was $12 and $24, respectively. Total unrecognized compensation cost related to stock options was $97 at December 31, 2016 and is expected to be recognized over a weighted-average period of 2.4 years.

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2016:

	December 31, 2016
Balance - beginning of year		40,905
Granted		-
Forfeited		-
Vested		-
Balance - end of period		40,905
Weighted average grant date fair value	$	13.09

The fair value of the restricted stock awards is amortized to compensation expense over their respective vesting periods and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. The weighted-average grant date fair value of restricted stock granted on January 23, 2015 was $20.01 per share or $252. The weighted-average grant date fair value of restricted stock granted on February 5, 2016 was $19.40 per share or $136. Stock-based compensation expense for restricted stock included in noninterest expense for the three and six months ended December 31, 2016 was $62 and $123, respectively, and for the three and six months ended December 31, 2015 was $64 and $127, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $424 at December 31, 2016 and is expected to be recognized over a weighted-average period of 2.9 years.

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OCONEE FEDERAL FINANCIAL CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(9)

LOAN SERVICING RIGHTS

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

The principal balances of those loans at December 31, 2016 and June 30, 2016 are as follows:

	December 31, 2016		June 30, 2016
Mortgage loan portfolio serviced for:
FHLMC	$	117,682	$	125,812

Custodial escrow balances maintained in connection with serviced loans were $811 and $1,007 at December 31, 2016 and June 30, 2016.

Activity for loan servicing rights for the three and six months ended December 31, 2016 and 2015 is as follows:

	Three Months Ended					Six Months Ended
	December 31, 2016		December 31, 2015			December 31, 2016		December 31, 2015
Loan servicing rights:
Beginning of period:	$	1,023	$	1,332		$	1,046	$	1,396
Additions		-		-			-		-
Change in fair value		196		(22	)		173		(86	)
End of period:	$	1,219	$	1,310		$	1,219	$	1,310

Fair value at December 31, 2016 was determined using a discount rate of 9.63%, prepayment speed assumptions ranging from 5.1% to 12.7% Conditional Prepayment Rate (“CPR”) depending on the loans coupon, term and seasoning, and a weighted average default rate of 0.61%. Fair value at December 31, 2015 was determined using a discount rate of 9.75%, prepayment speed assumptions ranging from 5.2% to 17.5% CPR depending on the loans’ coupon, term and seasoning, and a weighted average default rate of 0.61%.

(10)

SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the six months ended December 31, 2016 and 2015 is as follows:

	December 31, 2016		December 31, 2015
Cash paid during the period for:
Interest paid	$	641	$	591
Income taxes paid	$	510	$	117
Supplemental noncash disclosures:
Transfers from loans to real estate owned	$	154	$	1,443

(11)

SUBSEQUENT EVENTS

On January 26, 2017, the Board of Directors of Oconee Federal Financial Corp. (the “Company”) declared a quarterly cash dividend of $0.10 per share of the Company’s common stock. The dividend is payable to stockholders of record as of February 9, 2017, and will be paid on or about February 23, 2017.

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ITEM 2.

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

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

statements of our goals, intentions and expectations;

statements regarding our business plans and prospects and growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

increased competition among depository and other financial institutions;

our ability to attract and maintain deposits, including introducing new deposit products;

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

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

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

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

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

changes in the level of government support of housing finance;

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

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

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

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 FHLB of Atlanta; and

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

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Oconee Federal Financial Corp. for the year ended June 30, 2016, as filed with the Securities and Exchange Commission.

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

Our total assets decreased by $3.6 million, or 0.7%, to $482.1 million at December 31, 2016 from $485.6 million at June 30, 2016. Total cash and cash equivalents decreased $2.0 million, or 7.2%, to $25.7 million at December 31, 2016 from $27.7 million at June 30, 2016. Our available-for-sale securities portfolio also decreased from $132.1 million at June 30, 2016 to $120.7 million at December 31, 2016. Proceeds from sales and calls of securities and excess cash was used to fund loan growth. Gross loans increased $9.5 million, or 3.2%, to $301.5 million at December 31, 2016 from $292.1 million at June 30, 2016. This increase is a result of increased loan demand experienced during the six months ended December 31, 2016.

Deposits decreased $3.2 million, or 0.8%, to $396.4 million at December 31, 2016 from $399.6 million at June 30, 2016. The decrease in our deposits reflected a decrease of $8.9 million in certificates of deposit and $387 thousand in savings deposits, offset by an increase in money market deposits of $3.2 million and NOW and demand deposits of $2.9 million. The increase in money market deposits reflects an increase in rate on certain money market accounts during the six months ended December 31, 2016 and increased efforts to offer and market our deposit products. We believe the decline in our certificates of deposit reflects depositors moving their deposits into higher yielding investments in the market.

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Oconee Federal, MHC’s cash is held on deposit with the Company. We generally do not accept brokered deposits and no brokered deposits were accepted during the six months ended December 31, 2016.

We had no advances from the Federal Home Loan Bank of Atlanta as of December 31, 2016 or June 30, 2016. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of our total assets as of December 31, 2016, or approximately $120.6 million.

Total shareholders’ equity decreased $1.5 million, or 1.8%, to $83.9 million at December 31, 2016 compared to $85.4 million at June 30, 2016. Our net income of $2.6 million was fully offset by our other comprehensive loss of $2.7 for the six months ended December 31, 2016. The increase in other comprehensive loss was a result of the rising interest rate environment relative to the interest rate environment in which the investment securities were purchased. Management did not believe the unrealized losses represented an other-than-temporary impairment. Dividends of $1.1 million and share repurchases of $778 thousand also contributed to the decrease in shareholders’ equity during the period. The Company and the Bank exceeded all minimum regulatory capital requirements for the period.

Nonperforming Assets

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

	December 31, 2016			June 30, 2016
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One-to-four family	$	2,420		$	2,133
Multi-family		-			-
Home equity		133			126
Nonresidential		813			942
Agricultural		529			531
Construction and land		282			25
Total real estate loans		4,177			3,757
Commercial and industrial		-			-
Consumer and other loans		-			-
Total nonaccrual loans ⁽¹⁾	$	4,177		$	3,757
Accruing loans past due 90 days or more:
Real estate loans:
Total accruing loans past due 90 days or more	$	-		$	-
Total of nonaccrual and 90 days or more past due loans ⁽²⁾	$	4,177		$	3,757
Real estate owned, net:
One-to-four family	$	752		$	899
Nonresidential		-			267
Construction and land		-			188
Other nonperforming assets		-			-
Total nonperforming assets	$	4,929		$	5,111

Accruing troubled debt restructurings		-			-
Troubled debt restructurings and total nonperforming assets	$	4,929		$	5,111

Total nonperforming loans to total loans		1.39	%		1.29	%
Total nonperforming assets to total assets		1.02	%		1.05	%
Total nonperforming assets to loans and real estate owned		1.63	%		1.74	%

(1)

Nonaccrual troubled debt restructurings included in the totals above were $1,585 and $1,588, at December 31 and June 30, 2016, respectively.

(2)

There were no loans past due 90 days or more and still accruing at December 31, 2016 and June 30, 2016.

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Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $127 thousand and $97 thousand for the six months ended December 31, 2016 and 2015, respectively. Interest of $45 thousand and $31 thousand, respectively, was recognized on these loans and is included in net income for the six months ended December 31, 2016 and 2015, respectively.

Interest income that would have been recorded had our troubled debt restructured loans been current in accordance with their original terms was $66 thousand and $37 thousand, respectively, for the six months ended December 31, 2016 and 2015.

Nonperforming assets decreased $182 thousand from June 30, 2016 to December 31, 2016. Nonaccrual loans increased $420 thousand while real estate owned decreased $602 thousand. There were no accruing loans past due 90 days or more at either date. The increase in nonaccrual loans primarily related to seasonal fluctuations and an increase in our TDRs as we continue to work with borrowers to avoid foreclosure. Nonperforming assets to total assets and nonperforming assets to loans and real estate owned were 1.02% and 1.63%, respectively, at December 31, 2016 compared to 1.05% and 1.74%, respectively at June 30, 2016.

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Analysis of Net Interest Margin

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

	For the Three Months Ended
	December 31, 2016								December 31, 2015
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	298,374		$	3,639		4.88	%	$	300,351		$	3,850		5.13	%
Investment securities		92,930			388		1.67			98,791			430		1.74
Investment securities, tax-free		33,145			180		2.17			21,600			119		2.20
Interest-earning deposits		16,917			36		0.85			19,555			26		0.53
Total interest-earning assets		441,366			4,243		3.85			440,297			4,425		4.02
Noninterest-earning assets		39,150								41,661
Total assets	$	480,516							$	481,958

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	48,313		$	12		0.10	%	$	50,029		$	10		0.08	%
Money market deposits		79,244			72		0.36			62,139			49		0.32
Regular savings and other deposits		28,410			10		0.14			24,298			6		0.10
Certificates of deposit		213,853			229		0.43			239,525			230		0.39
Total interest-bearing deposits		369,820			323		0.35			375,991			295		0.31
Total interest-bearing liabilities		369,820			323		0.35			375,991			295		0.31
Noninterest bearing deposits		24,648								20,641
Other noninterest-bearing liabilities		1,421								2,262
Total liabilities		395,889								398,894
Equity		84,627								83,064
Total liabilities and equity	$	480,516							$	481,958

Net interest income				$	3,920							$	4,130
Interest rate spread							3.50	%							3.71	%
Net interest margin							3.55	%							3.75	%
Average interest-earning assets to average interest-bearing liabilities		1.19	x							1.17	x

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	For the Six Months Ended
	December 31, 2016								December 31, 2015
	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans	$	295,733		$	7,376		4.99	%	$	303,389		$	7,734		5.10	%
Investment securities		95,753			831		1.74			97,359			820		1.68
Investment securities, tax-free		32,929			358		2.17			18,779			208		2.22
Interest-earning deposits		17,975			77		0.86			17,106			42		0.49
Total interest-earning assets		442,390			8,642		3.91			436,633			8,804		4.03
Noninterest-earning assets		39,919								40,710
Total assets	$	482,309							$	477,343

Liabilities and equity:
Interest-bearing liabilities:
NOW and demand deposits	$	48,051		$	30		0.12	%	$	49,684		$	19		0.08	%
Money market deposits		78,284			134		0.34			50,610			67		0.26
Regular savings and other deposits		28,296			19		0.13			25,788			9		0.07
Certificates of deposit		217,306			460		0.42			245,130			489		0.40
Total interest-bearing deposits		371,937			643		0.34			371,212			584		0.31
Total interest-bearing liabilities		371,937			643		0.34			371,212			584		0.31
Noninterest bearing deposits		24,436								21,809
Other noninterest-bearing liabilities		972								1,969
Total liabilities		397,345								394,990
Equity		84,964								82,353
Total liabilities and equity	$	482,309							$	477,343

Net interest income				$	7,999							$	8,220
Interest rate spread							3.57	%							3.72	%
Net interest margin							3.62	%							3.77	%
Average interest-earning assets to average interest-bearing liabilities		1.19	x							1.18	x

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Comparison of Operating Results for the Three Months Ended December 31, 2016 and December 31, 2015

General. We reported net income of $1.3 million for the three months ended December 31, 2016 compared to $949 thousand for the three months ended December 31, 2015. Interest income decreased $182 thousand for the three months ended December 31, 2016 while interest expense increased $28 thousand resulting in a net decrease to net interest income of $210 thousand. Noninterest income increased $43 thousand for the three months ended December 31, 2016 compared to December 31, 2015 due primarily to gains recognized on the sales of securities available-for-sale and PCI loans. Total noninterest expense decreased $449 thousand due to lower salaries and employee benefits expenses and the net change in the loan servicing asset.

Interest Income. Interest income decreased by $182 thousand, or 4.1%, to $4.2 million for the three months ended December 31, 2016. The yield on interest earning-assets decreased 17 basis points from 4.02% for the three months ended December 31, 2015 to 3.85% for the three months ended December 31, 2016. The decrease was slightly offset by an increase in total average interest-earning assets of $1.1 million to $441.4 million for the three months ended December 31, 2016 from $440.3 million for the three months ended December 31, 2015.

Interest income on loans was $3.6 million for the three months ended December 31, 2016 compared to $3.9 million for the three months ended December 31, 2015. The yield on loans decreased 25 basis points from 5.13% for the three months ended December 31, 2015 to 4.88% for the three months ended December 31, 2016. The average balance of loans also decreased by $2.0 million, or 0.7%, to $298.4 million for the three months ended December 31, 2016 from $300.4 million for the three months ended December 31, 2015. The decrease in the average balance of our loans is reflective of the run-off in the months following the acquisition of Stephens Federal Bank in December 2014. As a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield.

Interest income on investment securities increased by $19 thousand, or 3.5%, to $568 thousand for the three months ended December 31, 2016 from $549 thousand for the three months ended December 31, 2015. The increase reflected an increase in the average balance of securities of $5.7 million, or 4.7%, to $126.1 million for the three months ended December 31, 2016 from $120.4 million for the three months ended December 31, 2015 offset by a decrease of two basis points in the yield on securities to 1.80% from 1.82%. The increase in the average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during periods of low loan demand.

The average balance of interest-earning deposits decreased $2.6 million from the three months ended December 31, 2015 to the three months ended December 31, 2015 while the yield increased 32 basis points over the same period.

Interest Expense. Interest expense increased by $28 thousand, or 9.5%, to $323 thousand for the three months ended December 31, 2016 from $295 thousand for the three months ended December 31, 2015. The increase reflected an increase of four basis points in the average rate paid on deposits for the three months ended December 31, 2016 to 0.35% from 0.31% for the three months ended December 31, 2015. The increase in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions. Average interest-bearing deposits were $369.8 million for the three months ended December 31, 2016 compared to $376.0 million for the three months ended December 31, 2015.

The largest increase in interest expense related to expense on money market deposits, which increased $23 thousand, or 46.9%, to $72 thousand for the three months ended December 31, 2016 from $49 thousand for the three months ended December 31, 2015. Average money market deposit balances increased $17.1 million from $62.1 million for the three months ended December 31, 2015 to $79.2 million for the three months ended December 31, 2016. The increase resulted from a successful money market campaign during the year ended June 30, 2016.

The average rate paid on certificates of deposit increased from 0.39% at December 31, 2015 to 0.43% for the three months ended December 31, 2016 while average balances decreased from $239.5 million for the three-month period ended December 31, 2015 to $213.9 million for the three-month period ended December 31, 2016. Lower volume resulted in a decrease in interest expense of $1 thousand for certificates of deposit.

The average balance of NOW and demand deposits decreased by $1.7 million while the average rate increased two basis points and the average balance of savings deposits increased $4.1 million and average rates increased four basis points.

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Net Interest Income. Net interest income before the provision for loan losses decreased by $210 thousand, or 5.1%, to $3.9 million for the three months ended December 31, 2016. Our interest rate spread and net interest margin for the three months ended December 31, 2016 decreased to 3.50% and 3.55%, respectively, from 3.71% and 3.75%, respectively, for the three months ended December 31, 2015. The lower yield and lower average balance of loans primarily contributed to the decrease in net interest margin for the three months ended December 31, 2016.

Provision for Loan Losses. We recorded a provision for loan losses of $24 thousand for the three months ended December 31, 2016 compared with $277 thousand for the three months ended December 31, 2015. There were no net charge-offs for the three months ended December 31, 2016 compared to $140 thousand for the three months ended December 31, 2015. Primarily all of the charge-offs for the three months ended December 31, 2015 were related to loans we acquired. The lower provision is due to lower net charge-offs, a smaller balance of PCI loans and the length of time that the PCI loans have been on the books.

Our total allowance for loan losses was $996 thousand, or 0.33%, of total gross loans, at December 31, 2016 and $922 thousand, or 0.32%, of total gross loans at June 30, 2016. The ending allowance for specifically identified impaired loans was $185 thousand at December 31, 2016 compared to $184 thousand at June 30, 2016. The recorded investment in impaired loans at December 31, 2016 was $5.2 million compared to $5.4 million at June 30, 2016. The allowance for specifically identified impaired loans at December 31, 2016 and June 30, 2016 includes an allowance of $151 thousand and $129 thousand, respectively for PCI loans.

The general valuation allowance at December 31, 2016 and June 30, 2016 was $811 thousand and $738 thousand, respectively. Total loans evaluated collectively for impairment increased $9.6 million, or 3.3%, to $296.3 million at December 31, 2016 compared to $286.7 million at June 30, 2016. No general valuation allowance has been recorded for the acquired portion of our loan portfolio that was not determined to be PCI.

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended December 31, 2016 and 2015. There have been no changes to our allowance for loan loss methodology.

Noninterest Income. Noninterest income increased $43 thousand, or 9.5%, to $495 thousand for the three months ended December 31, 2016 from $452 thousand for the three months ended December 31, 2015. Gains on the disposition of PCI loans of $120 thousand were recognized for the three months ended December 31, 2016 compared to $90 thousand for the three months ended December 31, 2015. Gains on sales of investment securities available for sale were $57 thousand for the three months ended December 31, 2016. There were no gains on sales of investment securities for the three months ended December 31, 2015. Gains on sales of securities are largely market driven, as we generally have no need to sell securities and would only expect to do so if a gain will be realized. Service charges and mortgage banking income declined for comparable periods as a result of decreased activity.

Noninterest Expense. Noninterest expense for the three months ended December 31, 2016 decreased by $449 thousand, or 15.5%, to $2.5 million from $2.9 million for the same period in 2015. Salaries and employee benefits decreased $228 thousand from $1.9 million for the three months ended December 31, 2015 to $1.6 million for the three months ended December 31, 2016 due to decreases in the discretional contributions to the ESOP and profit sharing plans in 2016.

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. For the three months ended December 31, 2016, we recognized income for the increase in the loan servicing asset of $196 thousand compared to an expense of $21 thousand for the three months ended December 31, 2015. 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.

Expenses related to foreclosed assets decreased from $47 thousand for the three months ended December 31, 2015 to $2 thousand for the three months ended December 31, 2016. Expenses related to foreclosed assets for the three months ended December 31, 2015 included a provision for potential losses of $15 thousand. There were also more properties held in real estate owned at December 31, 2015 compared to December 31, 2016 resulting in higher expenses. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold.

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Income Tax Expense. Income tax expense for the three months ended December 31, 2016 was $618 thousand compared with $452 thousand for the three months ended December 31, 2015. Our effective income tax rate was 31.9% and 32.3% for the same periods, respectively. The slight decrease in our effective tax rate is primarily due to a higher volume of tax-free investment securities.

Comparison of Operating Results for the Six Months Ended December 31, 2016 and December 31, 2015

General. We reported net income of $2.6 million for the six months ended December 31, 2016 compared to $2.4 million for the six months ended December 31, 2015. Interest income decreased $162 thousand for the six months ended December 31, 2016 while interest expense increased $59 thousand resulting in a net decrease to net interest income of $221 thousand. A provision for loan losses of $89 thousand was recognized for the six months ended December 31, 2016 compared to $422 thousand for the six months ended December 31, 2015. Noninterest income decreased $545 thousand for the six months ended December 31, 2016 compared to December 31, 2015 primarily due to a reduction in gains recognized on the disposition of PCI loans. Total noninterest expense decreased $629 thousand as a result of decreased foreclosed asset expenses, lower salaries and employee benefits and the change in the loan servicing asset.

Interest Income. Interest income decreased by $162 thousand, or 1.8%, to $8.6 million for the six months ended December 31, 2016. The yield on interest earning-assets decreased twelve basis points from 4.03% for the six months ended December 31, 2015 to 3.91% for the six months ended December 31, 2016. The decrease was slightly offset by an increase in total average interest-earning assets of $5.8 million to $442.4 million for the six months ended December 31, 2016 from $436.6 million for the six months ended December 31, 2015.

Interest income on loans was $7.4 million for the six months ended December 31, 2016 compared to $7.7 million for the six months ended December 31, 2015. The yield on loans decreased 11 basis points from 5.10% for the six months ended December 31, 2015 to 4.99% for the six months ended December 31, 2016, and the average balance of loans decreased by $7.7 million, or 2.5%, to $295.7 million for the six months ended December 31, 2016 from $303.4 million for the six months ended December 31, 2015. The decrease in the average balance of our loans is reflective of the run-off in the months following the acquisition of Stephens Federal Bank in December 2014. As a result of the acquisition, we obtained loans with slightly higher coupon rates from ours, which had a positive effect of increasing our overall loan portfolio yield.

Interest income on investment securities increased by $161 thousand, or 15.7%, to $1.2 million for the six months ended December 31, 2016 from $1.0 million for the six months ended December 31, 2015. The increase reflected an increase in the average balance of securities of $12.6 million, or 10.9%, to $128.7 million for the six months ended December 31, 2016 from $116.1 million for the six months ended December 31, 2015 and an increase of eight basis points in the yield on securities to 1.85% from 1.77%. The increase in the average balances of our investment securities is reflective of our efforts to continue to invest in high-quality investment securities during periods of low loan demand. The increase in the yield on our investment securities is reflective of our efforts to shift our portfolio concentration to investments in municipal securities, which give us slightly higher yields and in some cases provide tax-exempt income.

Interest Expense. Interest expense increased by $59 thousand, or 10.1%, to $643 thousand for the six months ended December 31, 2016 from $584 thousand for the six months ended December 31, 2015. The increase reflected an increase of three basis points in the average rate paid on deposits for the six months ended December 31, 2016 to 0.34% from 0.31% for the six months ended December 31, 2015. The increase in the average rate paid on deposits is reflective of our efforts to keep our cost of funds as low as possible but still maintain our competitiveness in our market area among other banking institutions. Average interest-bearing deposits were $371.9 million for the six months ended December 31, 2016 compared to $371.2 million for the six months ended December 31, 2015.

The largest increase in interest expense related to expense on money market deposits, which increased $67 thousand, or 100.0%, to $134 thousand for the six months ended December 31, 2016 from $67 thousand for the six months ended December 31, 2015. Average money market deposit balances increased $27.7 million from $50.6 million for the six months ended December 31, 2015 to $78.3 million for the six months ended December 31, 2016. The increases resulted from a successful money market campaign during the year ended June 30, 2016.

The average rate paid on certificates of deposit was 0.42% for the six months ended December 31, 2016 compared to 0.40% for the six months ended December 31, 2015. Average balances decreased from $245.1 million for the six-month period ended December 31, 2015 to $217.3 million for the six-month period ended December 31, 2016. Lower volume resulted in a decrease in interest expense of $29 thousand for certificates of deposit.

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The average balance of NOW and demand deposits decreased by $1.6 million while the average rate increased four basis points and the average balance of savings deposits increased $2.5 million and the average rate increased six basis points.

Net Interest Income. Net interest income before the provision for loan losses decreased by $221 thousand, or 2.7%, to $8.0 million for the six months ended December 31, 2016. Our interest rate spread and net interest margin for the six months ended December 31, 2016 decreased to 3.57% and 3.62%, respectively, from 3.72% and 3.77%, respectively, for the six months ended December 31, 2015. Average loan volume, which has the highest yield, decreased by $7.7 million, significantly contributing to the decrease in net interest margin for the six months ended December 31, 2016.

Provision for Loan Losses. We recorded a provision for loan losses of $89 thousand for the six months ended December 31, 2016 compared with $422 thousand for the six months ended December 31, 2015. Net charge-offs for the six months ended December 31, 2016 were $15 thousand compared to $282 thousand for the six months ended December 31, 2015. Primarily all of the charge-offs for the six months ended December 31, 2016 and 2015 were related to loans we acquired. The lower provision is due to lower net charge-offs, a smaller balance of PCI loans and the length of time that the PCI loans have been on the books.

To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the six months ended December 31, 2016 and 2015. There have been no changes to our allowance for loan loss methodology.

Noninterest Income. Noninterest income decreased $545 thousand, or 36.1%, to $963 thousand for the six months ended December 31, 2016 from $1.5 million for the six months ended December 31, 2015. Gains on the disposition of PCI loans of $809 thousand were recognized for the six months ended December 31, 2015 compared to $196 thousand for the six months ended December 31, 2016. Gains on sales of investment securities available for sale increased from $9 thousand for the six months ended December 31, 2015 to $125 thousand for the six months ended December 31, 2016. Gains on sales of securities are largely market driven, as we generally have no need to sell securities and would only expect to do so if a gain will be realized.

Noninterest Expense. Noninterest expense for the six months ended December 31, 2016 decreased by $629 thousand, or 11.1%, to $5.0 million from $5.7 million for the same period in 2015. Expenses related to foreclosed assets decreased from $222 thousand for the six months ended December 31, 2015 to $37 thousand for the six months ended December 31, 2016. Total expenses related to foreclosed assets were offset by net gains realized on sales of real estate owned of $86 thousand for the six months ended December 31, 2016. A net loss of $69 thousand was recognized on sales of real estate owned for the six months ended December 31, 2015. There were also more properties held in real estate owned at December 31, 2015 compared to December 31, 2016 resulting in higher expenses. Real estate owned is carried at the lower of its carrying value or fair value, less costs to sell. We typically do not experience large gains or losses on real estate properties sold.

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. For the six months ended December 31, 2016, we recognized income for the increase in the loan servicing asset of $173 thousand compared to an expense of $86 thousand for the six months ended December 31, 2015. 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.

Salaries and employee benefits decreased $205 thousand from the six months ended December 31, 2015 to the six months ended December 31, 2016 due to decreases in the discretional contributions to the ESOP and profit sharing plans in 2016.

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Income Tax Expense. Income tax expense for both the six month periods ended December 31, 2016 and 2015 was $1.2 million. Our effective income tax rate was 32.2% and 34.1% for the same periods, respectively. The decrease in our effective tax rate is primarily due to a higher volume of tax-free investment securities.

Liquidity and Capital Resources

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

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term U.S. Government sponsored agencies and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 25% of total assets (as of December 31, 2016), or approximately $120.6 million.

Common Stock Dividends. On August 25, 2016 and November 25, 2016, the Company paid a $0.10 per share cash dividend on its common stock for a total of $1.1 million.

Equity Compensation Plans. During the three months ended December 31, 2016, no shares of restricted stock or stock options were issued to management.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2016, there have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

(a) None.

(b) Not applicable.

(c) Issuer Repurchases. On November 24, 2015, the Board of Directors authorized the repurchase of up to 175,000 of the Company’s common stock, which represents approximately 10.2% of the Company’s issued and outstanding shares (excluding shares that Oconee Federal, MHC currently holds).

In connection with the authorization of this stock repurchase program, the Board of Directors terminated the Company’s existing stock repurchase program, which had authorized the Company to purchase up to 150,000 shares of its issued and outstanding common stock. The Company had previously purchased a total of 113,400 shares of its common stock at a weighted average price of $16.04 per share under the existing stock repurchase program.

The following table sets forth information in connection with repurchases of the Company’s common stock for the period October 1, 2016 through December 31, 2016.

								Approximate Maximum
	Total				Total Number of			Dollar Value or Number
	Number of		Average Price		Shares Purchased			of Shares That May Yet
	Shares		Paid Per		as Part of Publicly			be Purchased Under
	Purchased		Share		Announced Plan			Publicly Announced Plan
October 1 - October 31, 2016		-	$	-		-			89,169
November 1 - November 30, 2016		2,315		23.05		2,315			86,854
December 1 - December 31, 2016		1,029		23.05		1,029			85,825	(2)
Total		3,344	$	23.05		3,344	(1)

(1)

All shares were purchased pursuant to a publicly announced repurchase program that was approved by the Board of Directors on November 24, 2015.

(2)

Represents the maximum number of shares available for repurchase under the November 24, 2015 plan at December 31, 2016.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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SIGNATURES

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

	Oconee Federal Financial Corp.

Date: February 10, 2017

	/s/ Curtis T. Evatt
	Curtis T. Evatt
	President, Chief Executive Officer and Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit number		Description

10.1		Amended and Restated Employment Agreement by and between Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp. and T. Rhett Evatt

10.2		Amended and Restated Employment Agreement by and between Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp. and Curtis T. Evatt

31		Certification of Curtis T. Evatt, President, Chief Executive Officer and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32		Certification of Curtis T. Evatt, President, 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.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, formatted in XBRL (Extensible Business Reporting Language):

(i)

Consolidated Balance Sheets

(ii)

Consolidated Statements of Income and Comprehensive Income

(iii)

Consolidated Statements of Changes In Shareholders’ Equity

(iv)

Consolidated Statements of Cash Flows, and

(v)

Notes to The Consolidated Financial Statements

Exhibit 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (this “Agreement”) is made effective as of January 1, 2017 (the “Effective Date”), by and between Oconee Federal Savings and Loan Association, a federally chartered savings and loan association (the “Association”) and T.R. Evatt (“Executive”). The Association and Executive are sometimes collectively referred to herein as the “parties.” Any reference to the “Company” shall mean Oconee Federal Financial Corp., the mid-tier holding company of the Association. The Company is a signatory to this Agreement for the purpose of guaranteeing the Association’s performance hereunder.

WITNESSETH

WHEREAS , Executive is currently employed as Chief Executive Officer of the Association pursuant to an employment agreement between the Association and Executive entered into as of January 13, 2011 (the “Original Agreement”); and

WHEREAS , the Company and the Association desire to amend and restate the Original Agreement in order to reflect the Executive’s new position as provided in this Agreement; and

WHEREAS , the Company and the Association desire to ensure the continued availability of the Executive’s services as provided in this Agreement; and

WHEREAS , the Executive is willing to serve the Association on the terms and conditions hereinafter set forth.

NOW, THEREFORE , in consideration of the mutual covenants herein contained, and upon the terms and conditions hereinafter provided, the parties hereby agree as follows:

POSITION AND RESPONSIBILITIES

During the term of this Agreement, Executive shall serve as a member of the board of directors of the Association (the “Board”), and as Executive Chairman of the Association, and will perform all duties incident to the office of the Executive Chairman. As Executive Chairman, Executive will serve as a resource to the President and Chief Executive Officer, and will be responsible for ensuring effective lines of communication between the executive management team and the Board. Executive will also be responsible for synchronizing the activities of the Board and the executive management team and he will perform such duties as may be reasonably assigned to him from time to time by the President and Chief Executive Officer and the Board.

TERM AND DUTIES

(a) Three Year Contract; Annual Renewal . The term of this Agreement will begin as of the Effective Date and shall continue thereafter for a period of three (3) years. Beginning on the first annual anniversary date of this Agreement, and on each annual anniversary date thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term; provided that (1) the Association has not given notice to the Executive in writing at least ninety (90) days prior to such renewal date that the term of this Agreement shall not be extended further; and (2) prior to such renewal date, the disinterested members of the Board of Directors of the Association (the “Board”) have explicitly reviewed and approved the extension and the results thereof shall be included in the minutes of the Board’s meeting. On an annual basis prior to the deadline for the notice period referenced above, the Board shall conduct a performance review of the Executive for purposes of determining whether to provide notice of non-renewal. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

(b) Termination of Agreement . Notwithstanding anything contained in this Agreement to the contrary, either Executive or the Association may terminate Executive’s employment with the Association at any time during the term of this Agreement, subject to the terms and conditions of this Agreement.

(c) Continued Employment Following Expiration of Term . Nothing in this Agreement shall mandate or prohibit a continuation of Executive’s employment following the expiration of the term of this Agreement, upon such terms and conditions as the Association and Executive may mutually agree.

(d) Duties; Membership on Other Boards . During the term of this Agreement, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence approved by the Board, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Association; provided, however, that, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business or civic organizations, which, in the Board’s judgment, will not present any conflict of interest with the Association, or materially affect the performance of Executive’s duties pursuant to this Agreement. Executive shall provide the Board of Directors annually for its approval a list of organizations for which the Executive acts as a director or officer.

COMPENSATION, BENEFITS AND REIMBURSEMENT

(a) Base Salary . In consideration of Executive’s performance of the duties set forth in Section 2, the Association shall provide Executive the compensation specified in this Agreement. The Association shall pay Executive a salary of $198,500 per year (“Base Salary”). The Base Salary shall be payable biweekly, or with such other frequency as officers of the Association are generally paid. During the term of this Agreement, the Base Salary shall be reviewed at least annually by the Board or by a committee designated by the Board, and the Association may increase, but not decrease (except for a decrease that is generally applicable to all employees) Executive’s Base Salary. Any increase in Base Salary shall become “Base Salary” for purposes of this Agreement.

(b) Bonus and Incentive Compensation . Executive shall be entitled to equitable participation in incentive compensation and bonuses in any plan or arrangement of the Association or the Company in which Executive is eligible to participate. Nothing paid to Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement.

(c) Employee Benefits . The Association shall provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or from which he was deriving benefit immediately prior to the commencement of the term of this Agreement, and the Association shall not, without Executive’s prior written consent, make any changes in such plans, arrangements or perquisites that would adversely affect Executive’s rights or benefits thereunder, except as to any changes that are applicable to all participating employees; provided, however, that the Executive and the Executive’s spouse shall not participate in any medical, dental and vision plans unless otherwise agreed to by the Association and the Executive. Without limiting the generality of the foregoing provisions of this Section 3(c), Executive will be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, accident insurance plans, or any other employee benefit plan or arrangement made available by the Association and/or the Company in the future to its senior executives, including any stock benefit plans, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.

(d) Paid Time Off . Executive shall be entitled to paid vacation time each year during the term of this Agreement (measured on a fiscal or calendar year basis, in accordance with the Association’s usual practices), as well as sick leave, holidays and other paid absences in accordance with the Association’s policies and procedures for senior executives. Any unused paid time off during an annual period shall be treated in accordance with the Association’s personnel policies as in effect from time to time.

(e) Expense Reimbursements . The Association shall also pay or reimburse Executive for all reasonable travel, entertainment and other reasonable expenses incurred by Executive during the course of performing his obligations under this Agreement, including, without limitation, fees for memberships in such clubs

and organizations as Executive and the Board shall mutually agree are necessary and appropriate in connection with the performance of his duties under this Agreement, upon presentation to the Association of an itemized account of such expenses in such form as the Association may reasonably require, provided that such payment or reimbursement shall be made as soon as practicable but in no event later than March 15 of the year following the year in which such right to such payment or reimbursement occurred.

(f) Automobile and Social Club . The Association shall provide Executive with either (i) the use of an automobile suitable to the Executive’s position, or (ii) a monthly cash allowance to cover the expenses of such an automobile. The Association shall annually include on Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile. In addition, the Association shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social or otherwise) which will benefit the Association (including such fees or dues relating to the use of the club or organization).

PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION

(a) Upon the occurrence of an Event of Termination (as herein defined) during the term of this Agreement, the provisions of this Section 4 shall apply; provided, however, that in the event such Event of Termination occurs within eighteen (18) months following a Change in Control (as defined in Section 5 hereof), Section 5 shall apply instead. As used in this Agreement, an “Event of Termination’’ shall mean and include any one or more of the following:

(i) the involuntary termination of Executive’s employment hereunder by the Association for any reason other than termination governed by Section 5 (in connection with or following a Change in Control), Section 6 (due to Disability or death), Section 7 (due to Retirement), or Section 8 (for Cause), provided that such termination constitutes a “Separation from Service” within the meaning of Section 409A of the Internal Revenue Code (“Code”); or

(ii) Executive’s resignation from the Association’s employ upon any of the following, unless consented to by Executive:

(A) failure to appoint Executive to the position set forth in Section 1, or a material change in Executive’s function, duties, or responsibilities, which change would cause Executive’s position to become one of lesser responsibility, importance, or scope from the position and responsibilities described in Section 1, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement by the Association);

(B) a relocation of Executive’s principal place of employment to a location that is more than 20 miles from the location of the Association’s principal executive offices as of the date of this Agreement;

(C) a material reduction in the benefits and perquisites, including Base Salary, to Executive from those being provided as of the Effective Date (except for any reduction that is part of a reduction in pay or benefits that is generally applicable to officers or employees of the Association);

(D) a liquidation or dissolution of the Association; or

(E) a material breach of this Agreement by the Association.

Upon the occurrence of any event described in clause (ii) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation for “Good Reason” upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed ninety (90) days) after the event giving rise to the right to elect, which termination by Executive shall be an Event of Termination. The Association shall have

thirty (30) days to cure the condition giving rise to the Event of Termination, provided that the Association may elect to waive said thirty (30) day period.

(b) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, the Base Salary and bonuses that Executive would be entitled to for the remaining unexpired term of the Agreement. For purposes of determining the bonus(es) payable hereunder, the bonus(es) will be deemed to be (i) equal to the highest bonus paid at any time during the prior three years, and (ii) otherwise paid at such time as such bonus would have been paid absent an Event of Termination. Such payments shall be paid in a lump sum within ten (10) days of the Executive’s Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination. Notwithstanding the foregoing, Executive shall not be entitled to any payments or benefits under this Section 4 unless and until Executive executes a release of his claims against the Association, the Company and any affiliate, and their officers, directors, successors and assigns, releasing said persons from any and all claims, rights, demands, causes of action, suits, arbitrations or grievances relating to the employment relationship, including claims under the Age Discrimination in Employment Act, but not including claims for benefits under tax-qualified plans or other benefit plans in which Executive is vested, claims for benefits required by applicable law or claims with respect to obligations set forth in this Agreement that survive the termination of this Agreement.

(c) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on the Executive’s behalf under the Association’s defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for the remaining unexpired term of the Agreement following such Event of Termination, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executive’s Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination.

(d) For purposes of this Agreement, a “Separation from Service” shall have occurred if the Association and Executive reasonably anticipate that either no further services will be performed by the Executive after the date of the Event of Termination (whether as an employee or as an independent contractor) or the level of further services performed will not exceed 49% of the average level of bona fide services in the 12 months immediately preceding the Event of Termination. For all purposes hereunder, the definition of Separation from Service shall be interpreted consistent with Treasury Regulation Section 1.409A-1(h)(ii). If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under sub-paragraph (b) or (c) of this Section 4 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executive’s Separation from Service.

CHANGE IN CONTROL

(a) Any payments made to Executive pursuant to this Section 5 are in lieu of any payments that may otherwise be owed to Executive pursuant to this Agreement under Section 4, such that Executive shall either receive payments pursuant to Section 4 or pursuant to Section 5, but not pursuant to both Sections.

(b) For purposes of this Agreement, the term “Change in Control” shall mean:

(i) a change in control of a nature that would be required to be reported in response to Item 5.01(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or

(ii) a change in control of the Association within the meaning of the Home Owner’s Loan Act, as amended (“HOLA”), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or

(iii) any of the following events, upon which a Change in Control shall be deemed to have occurred:

(A) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Association or the Company representing 25% or more of the combined voting power of such outstanding securities, except for any securities purchased by any employee stock ownership plan or trust established by the Association or the Company; or

(B) individuals who constitute the Board on the Effective Date (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by stockholders of the Association or the Company was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this subsection (B), considered as though they were members of the Incumbent Board; or

(C) a sale of all or substantially all the assets of the Association or the Company, or a plan of reorganization, merger, consolidation, or similar transaction occurs in which the security holders of the Association or the Company immediately prior to the consummation of the transaction do not own at least 50.1% of the securities of the surviving entity to be outstanding upon consummation of the transaction; or

(D) a proxy statement is issued soliciting proxies from stockholders of the Association or the Company by someone other than the current management of the Association or the Company of the Association, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Association or the Company, or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Association or the Company; or

(E) a tender offer is made for 25% or more of the voting securities of the Association or the Company, and stockholders owning beneficially or of record 25% or more of the outstanding securities of the Association or the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.

(F) Notwithstanding anything herein to the contrary, a Change in Control shall not be deemed to have occurred in connection with the initial reorganization and conversion of the Association to a stock Association as a subsidiary of the Company, or upon any subsequent second-step conversion of Oconee Federal, MHC to stock form.

(c) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), Executive, shall receive as severance pay or liquidated damages, or both, a lump sum cash payment equal to three times the sum of (i) Executive’s highest annual rate of Base Salary paid to Executive at any time under this Agreement, plus (ii) the highest bonus paid to Executive with respect to the three completed fiscal years prior to the Change in Control. Such payment shall be paid in a lump sum within ten (10) days of the Executive’s Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination.

estimated to be equal to the present value of the contributions that would have been made on Executive’s behalf under the Association’s defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for thirty-six (36) months after the effective date of such termination of employment, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executive’s Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination. If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under this sub-paragraph (c) or (d) of this Section 5 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executive’s Separation from Service.

(e) Notwithstanding the preceding paragraphs of this Section 5, in the event that the aggregate payments or benefits to be made or afforded to Executive in the event of a Change in Control would be deemed to include an “excess parachute payment” under Section 280G of the Internal Revenue Code or any successor thereto, then such payments or benefits shall be reduced to an amount, the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive’s “base amount,” as determined in accordance with Section 280G of the Code. In the event a reduction is necessary, then the cash severance payable by the Association pursuant to Section 5 shall be reduced by the minimum amount necessary to result in no portion of the payments and benefits payable by the Association under Section 5 being non-deductible to the Association pursuant to Section 280G of the Code and subject to excise tax imposed under Section 4999 of the Code.

TERMINATION FOR DISABILITY OR DEATH

(a) Termination of Executive’s employment based on “Disability” shall be construed to comply with Section 409A of the Internal Revenue Code and shall be deemed to have occurred if: (i) Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months, Executive is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Association or the Company; or (iii) Executive is determined to be totally disabled by the Social Security Administration. The provisions of Sections 6(b) and (c) shall apply upon the termination of the Executive’s employment based on Disability. Upon the determination that Executive has suffered a Disability, disability payments hereunder shall commence within thirty (30) days.

(b) Executive shall be entitled to receive benefits under any short-term or long-term disability plan maintained by the Association. To the extent such benefits are less than Executive’s Base Salary, the Association shall pay Executive an amount equal to the difference between such disability plan benefits and the amount of Executive’s Base Salary for the longer of one (1) year following the termination of his employment due to Disability or the remaining term of this Agreement, which shall be payable in accordance with the regular payroll practices of the Association.

(c) In the event of Executive’s death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive’s Base Salary at the rate in effect at the time of Executive’s death in accordance with the regular payroll practices of the Association for a period of one (1) year from the date of Executive’s death. Such payments are in addition to any other life insurance benefits that Executive’s beneficiaries may be entitled to receive under any employee benefit plan maintained by the Association for the benefit of Executive, including, but not limited to, the Association’s tax-qualified retirement plans.

TERMINATION UPON RETIREMENT

[Reserved]

TERMINATION FOR CAUSE

(a) The Association may terminate Executive’s employment at any time, but any termination other than termination for “Cause,” as defined herein, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for “Cause.” The term “Cause” as used herein, shall exist when there has been a good faith determination by the Board that there shall have occurred one or more of the following events with respect to the Executive:

(i) personal dishonesty;

(ii) incompetence;

(iii) willful misconduct;

(iv) breach of fiduciary duty involving personal profit;

(v) intentional failure to perform stated duties under this Agreement;

(vi) willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or any violation of a final cease-and-desist order; or

(vii) material breach by Executive of any provision of this Agreement.

Notwithstanding the foregoing, Cause shall not be deemed to exist unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct described above and specifying the particulars thereof. Prior to holding a meeting at which the Board is to make a final determination whether Cause exists, if the Board determines in good faith at a meeting of the Board, by not less than a majority of its entire membership, that there is probable cause for it to find that the Executive was guilty of conduct constituting Cause as described above, the Board may suspend the Executive from his duties hereunder for a reasonable period of time not to exceed fourteen (14) days pending a further meeting at which the Executive shall be given the opportunity to be heard before the Board. Upon a finding of Cause, the Board shall deliver to the Executive a Notice of Termination, as more fully described in Section 10 below.

(b) For purposes of this Section 8, no act or failure to act, on the part of Executive, shall be considered “willful” unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive’s action or omission was in the best interests of the Association. Any act, or failure to act, based upon the direction of the Board or based upon the advice of counsel for the Association shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Association.

RESIGNATION FROM BOARDS OF DIRECTORS

In the event of Executive’s termination of employment due to an Event of Termination, Executive’s service as a director of the Association, the Company, and any affiliate of the Association or the Company shall immediately terminate. This Section 9 shall constitute a resignation notice for such purposes.

10.

NOTICE

(a) Any purported termination by the Association for Cause shall be communicated by Notice of Termination to Executive. If, within thirty (30) days after any Notice of Termination for Cause is given, Executive notifies the Association that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration, as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall

discontinue paying Executive’s compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 or 5, the payment of such compensation and benefits by the Association shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in The Wall Street Journal from time to time).

(b) Any other purported termination by the Association or by Executive shall be communicated by a “Notice of Termination” (as defined in Section 10(c)) to the other party. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall continue to pay Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause); provided, however, that such payments and benefits shall not continue beyond the date that is 36 months from the date the Notice of Termination is given. In the event the voluntary termination by Executive of his employment is disputed by the Association, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in The Wall Street Journal from time to time, if it is determined in arbitration that Executive’s voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. If it is determined that Executive is entitled to receive severance benefits under this Agreement, then any continuation of Base Salary and other compensation and benefits made to Executive under this Section 10 shall offset the amount of any severance benefits that are due to Executive under this Agreement.

(c) For purposes of this Agreement, a “Notice of Termination” shall mean a written notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.

11.

POST-TERMINATION OBLIGATIONS

(a) Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Association, he shall not, without the written consent of the Association, either directly or indirectly:

(i) solicit, offer employment to, or take any other action intended (or that a reasonable person acting in like circumstances would expect) to have the effect of causing any officer or employee of the Association or the Company, or any of their respective subsidiaries or affiliates, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any business whatsoever that competes with the business of the Association or the Company, or any of their direct or indirect subsidiaries or affiliates or has headquarters or offices within 20 miles of the locations in which the Association or the Company has business operations or has filed an application for regulatory approval to establish an office;

(ii) become an officer, employee, consultant, director, independent contractor, agent, sole proprietor, joint venturer, greater than 5% equity owner or stockholder, partner or trustee of any savings bank, savings and loan association, savings and loan holding company, credit union, bank or bank holding company, insurance company or agency, any mortgage or loan broker or any other financial services entity or business that competes with the business of the Association or its affiliates or has headquarters or offices within twenty-five (25) miles of any office of the Association as of the date of this Agreement; provided, however, that this restriction shall not apply if Executive’s employment is terminated following a Change in Control or if Executive does not have any right to or waives (or returns to the Association) any payments under Section 4 hereof; or

(b) As used in this Agreement, “Confidential Information” means information belonging to the Association which is of value to the Association in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Association. Confidential Information includes, without

limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Association. Confidential Information includes information developed by the Executive in the course of the Executive’s employment by the Association, as well as other information to which the Executive may have access in connection with the Executive’s employment. Confidential Information also includes the confidential information of others with which the Association has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain. The Executive understands and agrees that the Executive’s employment creates a relationship of confidence and trust between the Executive and the Association with respect to all Confidential Information. At all times, both during the Executive’s employment with the Association and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Association, except as may be necessary in the ordinary course of performing the Executive’s duties to the Association.

(c) Executive shall, upon reasonable notice, furnish such information and assistance to the Association as may reasonably be required by the Association, in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party; provided, however, that Executive shall not be required to provide information or assistance with respect to any litigation between the Executive and the Association or any of its subsidiaries or affiliates.

(d) All payments and benefits to Executive under this Agreement shall be subject to Executive’s compliance with this Section 11. The parties hereto, recognizing that irreparable injury will result to the Association, its business and property in the event of Executive’s breach of this Section 11, agree that, in the event of any such breach by Executive, the Association will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive and all persons acting for or with Executive. Executive represents and admits that Executive’s experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Association, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Association or the Company from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from Executive.

12.

SOURCE OF PAYMENTS

All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Association. The Company may accede to this Agreement but only for the purpose of guaranteeing payment and provision of all amounts and benefits due hereunder to Executive.

13.

EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS

This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Association and Executive, including the Original Agreement, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.

14.

NO ATTACHMENT; BINDING ON SUCCESSORS

(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void, and of no effect.

(b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Association and their respective successors and assigns.

15.

MODIFICATION AND WAIVER

(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto; provided, however, that if the Company or Association determines, after a review of the regulations and guidance issued under The Patient Protection and Affordable Care Act, or similar laws, and all applicable IRS guidance, that this Agreement should be further amended to avoid triggering the tax penalties or other restrictions imposed by the Insurance Coverage restrictions, the Company or Association may amend this Agreement to the extent necessary to avoid triggering the tax and interest penalties imposed by the Insurance Coverage restrictions.

(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.

16.

REQUIRED PROVISIONS

(a) The Association may terminate Executive’s employment at any time, but any termination by the Board other than termination for Cause shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.

(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Association’s affairs by a notice served under Section 8(e)(3) [12 USC §1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, the Association’s obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

(c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Association’s affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(d) If the Association is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

(e) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Association, (i) by either the Office of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System (collectively, the “Regulator”) or his or her designee, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) [12 USC §1823(c)] of the Federal Deposit Insurance Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.

(f) Notwithstanding anything herein contained to the contrary, any payments to Executive by the Association or the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.

17.

SEVERABILITY

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

18.

HEADINGS FOR REFERENCE ONLY

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

19.

GOVERNING LAW

This Agreement shall be governed by the laws of the State of South Carolina except to the extent superseded by federal law.

20.

ARBITRATION

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, as an alternative to civil litigation and without any trial by jury to resolve such claims, conducted by a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the main office of the Association, in accordance with the rules of the American Arbitration Association’s National Rules for the Resolution of Employment Disputes (“National Rules”) then in effect. One arbitrator shall be selected by Executive, one arbitrator shall be selected by the Association and the third arbitrator shall be selected by the arbitrators selected by the parties. If the arbitrators are unable to agree within fifteen (15) days upon a third arbitrator, the arbitrator shall be appointed for them from a panel of arbitrators selected in accordance with the National Rules. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

21.

INDEMNIFICATION

(a) Executive shall be provided with coverage under a standard directors’ and officers’ liability insurance policy, and shall be indemnified for the term of this Agreement and for a period of six years thereafter to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Association or any affiliate (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys’ fees and the cost of reasonable settlements (such settlements must be approved by the Board), provided, however, Executive shall not be indemnified or reimbursed for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by Executive. Any such indemnification shall be made consistent with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(k), and the regulations issued thereunder in 12 C.F.R. Part 359.

(b) Any indemnification by the Association shall be subject to compliance with any applicable regulations of the Federal Deposit Insurance Corporation.

22.

Notice.

For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:

To the Association:

T. Curtis Evatt

115 E. North 2 ^nd Street

Seneca, South Carolina 29678-1039

To Executive:

T.R. Evatt

At the address last appearing on

the personnel records of the Association

SIGNATURES

IN WITNESS WHEREOF , the Association and the Company have caused this Agreement to be executed by their duly authorized representatives, and Executive has signed this Agreement, on the date first above written.

	OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

	By:	/s/ Robert N. McLellan, Jr.
		Chairman of the Board

	OCONEE FEDERAL FINANCIAL CORP.

	By:	/s/ Robert N. McLellan, Jr.
		Chairman of the Board

	EXECUTIVE

	/s/ T. Rhett Evatt
	T.R. Evatt

Exhibit 10.2

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (this “Agreement”) is made effective as of January 1, 2017 (the “Effective Date”), by and between Oconee Federal Savings and Loan Association, a federally chartered savings and loan association (the “Association”) and Curtis T. Evatt (“Executive”). The Association and Executive are sometimes collectively referred to herein as the “parties.” Any reference to the “Company” shall mean Oconee Federal Financial Corp., the mid-tier holding company of the Association. The Company is a signatory to this Agreement for the purpose of guaranteeing the Association’s performance hereunder.

WITNESSETH

WHEREAS , Executive is currently employed as President and Chief Financial Officer of the Association pursuant to an employment agreement between the Association and Executive entered into as of January 13, 2011, as amended (the “Original Agreement”); and

WHEREAS , the Company and the Association desire to amend and restate the Original Agreement to reflect the Executive’s promotion to the position of President, Chief Executive Officer and Chief Financial Officer; and

WHEREAS , the Company and the Association desire to ensure the continued availability of the Executive’s services as provided in this Agreement; and

WHEREAS , the Executive is willing to serve the Company and the Association on the terms and conditions hereinafter set forth.

NOW, THEREFORE , in consideration of the mutual covenants herein contained, and upon the terms and conditions hereinafter provided, the parties hereby agree as follows:

POSITION AND RESPONSIBILITIES

During the term of this Agreement, Executive shall serve as a member of the boards of directors of the Company and the Association (together, the “Board”) and as President, Chief Executive Officer and Chief Financial Officer of the Company and the Association, and will perform all duties and will have all powers that are generally incident to the position of the President, Chief Executive Officer and Chief Financial Officer. Without limiting the generality of the foregoing, Executive will be responsible for the overall management of the Company and the Association, and will be responsible for establishing the business objectives, policies and strategic plans of the Company and the Association in conjunction with the Board. Executive also will be responsible for providing leadership and direction to all departments or divisions of the Company and the Association, and will be the primary contact between the Board and other officers and employees of the Company and the Association. As President, Chief Executive Officer and Chief Financial Officer, Executive will report directly to the Board.

TERM AND DUTIES

whether to provide notice of non-renewal. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

COMPENSATION, BENEFITS AND REIMBURSEMENT

(a) Base Salary . In consideration of Executive’s performance of the duties set forth in Section 2, the Association shall provide Executive the compensation specified in this Agreement. The Association shall pay Executive a salary of $208,560 per year (“Base Salary”). The Base Salary shall be payable biweekly, or with such other frequency as officers of the Association are generally paid. During the term of this Agreement, the Base Salary shall be reviewed at least annually by the Board or by a committee designated by the Board, and the Association may increase, but not decrease (except for a decrease that is generally applicable to all employees) Executive’s Base Salary. Any increase in Base Salary shall become “Base Salary” for purposes of this Agreement.

(c) Employee Benefits . The Association shall provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or from which he was deriving benefit immediately prior to the commencement of the term of this Agreement, and the Association shall not, without Executive’s prior written consent, make any changes in such plans, arrangements or perquisites that would adversely affect Executive’s rights or benefits thereunder, except as to any changes that are applicable to all participating employees. Without limiting the generality of the foregoing provisions of this Section 3(c), Executive will be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident insurance plans, medical coverage or any other employee benefit plan or arrangement made available by the Association and/or the Company in the future to its senior executives, including any stock benefit plans, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.

(e) Expense Reimbursements . The Association shall also pay or reimburse Executive for all reasonable travel, entertainment and other reasonable expenses incurred by Executive during the course of

performing his obligations under this Agreement, including, without limitation, fees for memberships in such clubs and organizations as Executive and the Board shall mutually agree are necessary and appropriate in connection with the performance of his duties under this Agreement, upon presentation to the Association of an itemized account of such expenses in such form as the Association may reasonably require, provided that such payment or reimbursement shall be made as soon as practicable but in no event later than March 15 of the year following the year in which such right to such payment or reimbursement occurred.

PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION

(ii) Executive’s resignation from the Association’s employ upon any of the following, unless consented to by Executive:

(A) failure to appoint Executive to the position of President, Chief Executive Officer and Chief Financial Officer, or a material change in Executive’s function, duties, or responsibilities, which change would cause Executive’s position to become one of lesser responsibility, importance, or scope from the position and responsibilities described in Section 1, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement by the Association); however, notwithstanding the foregoing, this Section 4(a)(ii)(A) shall not apply if the Executive relinquishes, for any reason, his duties as Chief Financial Officer (and retains the sole title of President and Chief Executive Officer);

(D) a liquidation or dissolution of the Association; or

(E) a material breach of this Agreement by the Association.

(d) Upon the occurrence of an Event of Termination, the Association shall provide, at the Association’s expense, for the remaining unexpired term of the Agreement, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to the Event of Termination, except to the extent such coverage may be changed in its application to all Association employees (the “Insurance Coverage”). Notwithstanding the foregoing, if the Insurance Coverage is not permitted by applicable law (including, but not limited to, laws prohibiting discriminating in favor of highly compensated employees) or to the extent such coverage will result in an excise tax or additional tax to the Company, Association or Executive (other than ordinary income tax), the Association shall pay the Executive a lump sum payment equal to the monthly premiums payable by the Executive to obtain similar benefits, with such payment made within ten (10) days of the Executive’s Separation from Service, to the extent that such payment does not violate the Insurance Coverage restrictions (other than ordinary income tax).

(e) For purposes of this Agreement, a “Separation from Service” shall have occurred if the Association and Executive reasonably anticipate that either no further services will be performed by the Executive after the date of the Event of Termination (whether as an employee or as an independent contractor) or the level of further services performed will not exceed 49% of the average level of bona fide services in the 12 months immediately preceding the Event of Termination. For all purposes hereunder, the definition of Separation from Service shall be interpreted consistent with Treasury Regulation Section 1.409A-1(h)(ii). If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under sub-paragraph (b) or (c) of this Section 4 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executive’s Separation from Service.

CHANGE IN CONTROL

(b) For purposes of this Agreement, the term “Change in Control” shall mean:

(iii) any of the following events, upon which a Change in Control shall be deemed to have occurred:

(d) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on Executive’s behalf under the Association’s defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for thirty-six (36) months after the effective date of such termination of employment, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executive’s Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination. If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under this sub-paragraph (c) or (d) of this Section 5 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executive’s Separation from Service.

(e) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association (or its successor) shall provide at the Association’s (or its successor’s) expense, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Association employees and then the coverage provided to Executive shall be commensurate with such changed coverage. Such coverage shall cease thirty-six (36) months following the termination of Executive’s employment. Notwithstanding the foregoing, if the Insurance Coverage is not permitted by applicable law (including, but not limited to, laws prohibiting discriminating in favor of highly compensated employees) or to the extent such coverage will result in an excise tax or additional tax to the Company, Association or Executive (other than ordinary income tax), the Association shall pay the Executive a lump sum payment equal to the monthly premiums payable by the Executive to obtain similar benefits, with such payment made within ten (10) days of the Executive’s Separation from Service, to the extent that such payment does not violate the Insurance Coverage restrictions (other than ordinary income tax).

(f) Notwithstanding the preceding paragraphs of this Section 5, in the event that the aggregate payments or benefits to be made or afforded to Executive in the event of a Change in Control would be deemed to include an “excess parachute payment” under Section 280G of the Internal Revenue Code or any successor thereto, then such payments or benefits shall be reduced to an amount, the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive’s “base amount,” as determined in accordance with Section 280G of the Code. In the event a reduction is necessary, then the cash severance payable by the Association pursuant to Section 5 shall be reduced by the minimum amount necessary to result in no portion of the payments and benefits payable by the Association under Section 5 being non-deductible to the Association pursuant to Section 280G of the Code and subject to excise tax imposed under Section 4999 of the Code.

TERMINATION FOR DISABILITY OR DEATH

engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months, Executive is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Association or the Company; or (iii) Executive is determined to be totally disabled by the Social Security Administration. The provisions of Sections 6(b) and (c) shall apply upon the termination of the Executive’s employment based on Disability. Upon the determination that Executive has suffered a Disability, disability payments hereunder shall commence within thirty (30) days.

(c) The Association shall cause to be continued life insurance coverage and non-taxable medical and dental coverage substantially comparable, as reasonable available, to the coverage maintained by the Association for Executive prior to the termination of his employment based on Disability, except to the extent such coverage may be changed in its application to all Association employees or not available on an individual basis to an employee terminated based on Disability. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Association; (ii) Executive’s full-time employment by another employer; (iii) expiration of the remaining term of this Agreement; or (iv) Executive’s death. Notwithstanding the foregoing, if the Insurance Coverage is not permitted by applicable law (including, but not limited to, laws prohibiting discriminating in favor of highly compensated employees) or to the extent such coverage will result in an excise tax or additional tax to the Company, Association or Executive (other than ordinary income tax), the Association shall pay the Executive a lump sum payment equal to the monthly premiums payable by the Executive to obtain similar benefits, with such payment made within ten (10) days of the Executive’s Separation from Service, to the extent that such payment does not violate the Insurance Coverage restrictions (other than ordinary income tax).

(d) In the event of Executive’s death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive’s Base Salary at the rate in effect at the time of Executive’s death in accordance with the regular payroll practices of the Association for a period of one (1) year from the date of Executive’s death, and the Association shall continue to provide non-taxable medical, dental and other insurance benefits normally provided for Executive’s family (in accordance with its customary co-pay percentages) for twelve (12) months after Executive’s death. Such payments are in addition to any other life insurance benefits that Executive’s beneficiaries may be entitled to receive under any employee benefit plan maintained by the Association for the benefit of Executive, including, but not limited to, the Association’s tax-qualified retirement plans. Notwithstanding the foregoing, if the Insurance Coverage is not permitted by applicable law (including, but not limited to, laws prohibiting discriminating in favor of highly compensated employees) or to the extent such coverage will result in an excise tax or additional tax to the Company, Association or Executive (other than ordinary income tax), the Association shall pay the Executive a lump sum payment equal to the monthly premiums payable by the Executive to obtain similar benefits, with such payment made within ten (10) days of the Executive’s Separation from Service, to the extent that such payment does not violate the Insurance Coverage restrictions (other than ordinary income tax).

TERMINATION UPON RETIREMENT

Termination of Executive’s employment based on “Retirement” shall mean termination of Executive’s employment at any time after Executive reaches age 65 or in accordance with any retirement policy established by the Board with Executive’s consent with respect to him. Upon termination of Executive based on Retirement, no amounts or benefits shall be due Executive under this Agreement, and Executive shall be entitled to all benefits under any retirement plan of the Association and other plans to which Executive is a party.

TERMINATION FOR CAUSE

(i) personal dishonesty;

(ii) incompetence;

(iii) willful misconduct;

(iv) breach of fiduciary duty involving personal profit;

(v) intentional failure to perform stated duties under this Agreement;

(vi) willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or any violation of a final cease-and-desist order; or

(vii) material breach by Executive of any provision of this Agreement.

RESIGNATION FROM BOARDS OF DIRECTORS

10.

NOTICE

11.

POST-TERMINATION OBLIGATIONS

12.

SOURCE OF PAYMENTS

13.

EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS

14.

NO ATTACHMENT; BINDING ON SUCCESSORS

(b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Association and their respective successors and assigns.

15.

MODIFICATION AND WAIVER

16.

REQUIRED PROVISIONS

17.

SEVERABILITY

18.

HEADINGS FOR REFERENCE ONLY

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

19.

GOVERNING LAW

This Agreement shall be governed by the laws of the State of South Carolina except to the extent superseded by federal law.

20.

ARBITRATION

21.

INDEMNIFICATION

(b) Any indemnification by the Association shall be subject to compliance with any applicable regulations of the Federal Deposit Insurance Corporation.

22.

Notice

To the Association:

T. R. Evatt

115 E. North 2 ^nd Street

Seneca, South Carolina 29678-1039

To Executive:

Curtis T. Evatt

At the address last appearing on

the personnel records of the Association

SIGNATURES


	OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

	By:	/s/ Robert N. McLellan, Jr.
		Chairman of the Board

	OCONEE FEDERAL FINANCIAL CORP.

	By:	/s/ Robert N. McLellan, Jr.
		Chairman of the Board

	EXECUTIVE

	/s/ Curtis T. Evatt
	Curtis T. Evatt

Exhibit 31

CERTIFICATION

I, Curtis T. Evatt, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Oconee Federal Financial Corp.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2017

/s/ Curtis T. Evatt
Curtis T. Evatt
President, Chief Executive Officer and Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Oconee Federal Financial Corp. (the “Company”) on Form 10-Q for the period ended December 31, 2016 as filed with the Securities and Exchange Commission (the “Report”), the undersigned, Curtis T. Evatt, President, Chief Executive Officer and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to best of his knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Curtis T. Evatt		Date: February 10, 2017
Curtis T. Evatt
President, Chief Executive Officer and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Oconee Federal Financial Corp. and will be retained by Oconee Federal Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request.