10-Q 1 oconee_10q-093009.htm FORM 10-Q oconee_10q-093009.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 

FORM 10-Q


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

For the quarterly period ended September 30, 2009
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________  to  __________

Commission File Number 000-25267

OCONEE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its Charter)


Georgia
 
58-2442250
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
     
35 North Main Street
Watkinsville, Georgia
 
 
30677
(Address of principal executive offices)
 
(Zip Code)

706-769-6611
(Registrant’s telephone number, including area code)

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 þ   No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.      Yes o   No o

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

Large accelerated filer:   o
Accelerated filer: o
   
Non-accelerated filer:   o   (Do not check if a smaller reporting company)
Smaller reporting company: þ

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

The number of shares outstanding of the issuer’s common stock as of November 16, 2009 was 899,815.
 


 

 
INDEX
 
     Page No 
 
PART I - FINANCIAL INFORMATION
 
     
 
Item 1.  Financial Statements
 
 
 
Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
 
1
 
Consolidated Statements of Operations (unaudited) for the Three Months and the Nine Months Ended September 30, 2009 and 2008
 
2
 
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months and the Nine Months Ended September 30, 2009 and 2008
 
3
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009 and 2008
 
4
 
Notes to Consolidated Financial Statements (unaudited)
 
6
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
22
 
Item 4T. Controls and Procedures
 
22
PART II - OTHER INFORMATION
     
 
Item 1. Legal Proceedings
23
     
 
Item 1A. Risk Factors
23
     
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
23
     
 
Item 3. Defaults Upon Senior Securities
23
     
 
Item 4.  Submission of Matters to a Vote of Security Holders
23
     
 
Item 5.  Other Information
23
     
 
Item 6.  Exhibits
23


 
 

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008

   
September 30, 2009
(unaudited)
   
December 31, 2008
 
Assets
 
             
Cash and due from banks, including reserve requirements of $25,000
  $ 23,834,149       4,353,492  
Federal funds sold
    -       15,709,000  
                 
                   Cash and cash equivalents
    23,834,149       20,062,492  
                 
Investment securities available for sale
    69,976,505       79,761,570  
Other investments
    556,300       679,229  
Mortgage loans held for sale
    1,810,471       1,638,561  
                 
Loans, net of allowance for loan losses of $4,597,659 and $4,215,262
    177,228,347       191,557,145  
                 
Premises and equipment, net
    6,456,789       6,903,890  
Other real estate owned
    5,665,233       1,776,960  
Accrued interest receivable and other assets
    5,736,741       5,775,732  
                 
                   Total assets
  $ 291,264,535       308,155,549  
                 
Liabilities and Stockholders’ Equity
 
                 
Liabilities:
               
       Deposits
               
            Noninterest-bearing
  $ 28,688,748       27,413,165  
            Interest-bearing
    224,729,830       247,624,987  
                 
                   Total deposits
    253,418,578       275,038,152  
                 
       Securities sold under repurchase agreements
    11,324,052       6,453,272  
       Accrued interest payable and other liabilities
    867,909       866,937  
                 
                   Total liabilities
    265,610,539       282,358,361  
                 
Stockholders’ equity:
               
       Common stock, $2 par value;
               
             authorized 1,500,000 shares;
               
             issued and outstanding 899,815 shares
    1,799,630       1,799,630  
       Additional paid-in capital
    4,243,332       4,243,332  
       Retained earnings
    18,885,042       19,500,772  
       Accumulated other comprehensive income
    725,992       253,454  
                 
                   Total stockholders’ equity
    25,653,996       25,797,188  
                 
                   Total liabilities and stockholders’ equity
  $ 291,264,535       308,155,549  
See accompanying notes to consolidated financial statements.

 
1

 


OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Operations
For the Three Months and the Nine Months Ended September 30, 2009 and 2008
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
2009
   
2008
   
2009
   
2008
 
Interest Income:
                       
     Loans
  $ 2,383,214       2,751,772     $ 7,152,619       9,088,741  
     Investment securities:
                               
        Tax exempt
    173,934       197,037       557,341       648,964  
        Taxable
    660,230       867,770       2,144,829       2,761,744  
     Federal funds sold and other
    12,175       48,431       13,168       277,840  
           Total interest income
    3,229,553       3,865,010       9,867,957       12,777,289  
                                 
Interest Expense:
                               
     Deposits
    1,380,413       1,728,579       4,339,981       6,201,210  
     Other
    99,099       72,746       288,950       103,385  
           Total interest expense
    1,479,512       1,801,325       4,628,931       6,304,595  
                                 
           Net interest income
    1,750,041       2,063,685       5,239,026       6,472,694  
                                 
Provision for loan losses
    240,000       368,000       1,340,000       598,000  
                                 
              Net interest income after provision for loan losses
    1,510,041       1,695,685       3,899,026       5,874,694  
                                 
Other Income:
                               
                                 
     Service charges on deposit accounts
    337,357       398,774       963,543       1,150,663  
     Mortgage origination fees
    73,464       104,205       357,248       263,378  
     Securities gains, net
    44,343       -       150,291       197,264  
     Income on other real estate owned
    171,637       -       439,552       -  
     Other operating income
    221,795       200,904       644,310       670,704  
           Total other income
    848,596       703,883       2,554,944       2,282,009  
                                 
 Other Expense:
                               
     Salaries and other personnel expense
    1,208,095       1,087,865       3,800,094       4,013,963  
     Net occupancy and equipment expense
    340,000       340,017       1,042,153       1,039,328  
     Other operating expense
    782,502       707,782       2,569,593       2,001,461  
           Total other expense
    2,330,597       2,135,664       7,411,840       7,054,752  
                                 
           Earnings (loss) before income taxes
    28,040       263,904       (957,870 )     1,101,951  
                                 
Income taxes (benefit)
    11,146       24,705       (342,140 )     158,900  
                                 
           Net earnings (loss)
  $ 16,894       239,199     $ (615,730 )     943,051  
                                 
Earnings (loss) per common share based on average
                               
     outstanding shares of 899,815
  $ 0.02       0.27     $ (0.68 )     1.05  

See accompanying notes to consolidated financial statements.

 
2

 



OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months and the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
 

 

   
Three Months Ended
   
Nine Months Ended
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net earnings (loss)
  $ 16,894       239,199     $ (615,730 )     943,051  
                                 
Other comprehensive income (loss), net of tax benefit:
                               
   Unrealized gains (losses) on securities available for sale:
                               
         Holding gains (losses) arising during period, net of tax
                               
            (benefit) of  $623,378, $358,057, $346,179 and ($106,688)
    1,018,820       585,191       565,779       (174,365 )
                                 
    Reclassification adjustments for gains included in net
                               
      earnings (loss), net of tax of $16,832, $0, $57,050 and $74,881
    (27,511 )      -       (93,241 )     (122,383 )
                                 
         Total other comprehensive income (loss)
    991,309       585,191       472,538       (296,748 )
                                 
         Comprehensive income (loss)
  $ 1,008,203       824,390     $ (143,192 )     646,303  


























See accompanying notes to consolidated financial statements.

 
3

 



OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
 

   
2009
   
2008
 
Cash flows from operating activities:
           
     Net earnings (loss)
  $ (615,730 )   $ 943,051  
         Adjustments to reconcile net earnings (loss) to net
               
            cash provided by operating activities:
               
                Provision for loan losses
    1,340,000       598,000  
                Depreciation, amortization and accretion
    441,840       496,168  
                Gains on sales of securities
    (150,291 )     (197,264 )
                Loss on sales of other real estate owned
    184,055       -  
                Change in assets and liabilities:
               
                    Interest receivable and other assets
    (250,138 )     (230,863 )
                    Interest payable and other liabilities
    972       (547,338 )
                    Mortgage loans held for sale
    (171,910 )     536,987  
                 
                           Net cash provided by operating activities
    778,798       1,598,741  
                 
Cash flows from investing activities:
               
     Proceeds from sales of investment securities available for sale
    12,937,169       7,320,481  
     Proceeds from calls, maturities, and paydowns of
               
         investment securities available for sale
    141,315,102       27,205,789  
     Purchases of investment securities available for sale
    (143,423,909 )     (22,566,435 )
     Proceeds from redemption of other investments
    22,500       27,500  
     Net change in loans
    8,619,687       1,727,903  
     Purchases of premises and equipment
    (25,649 )     (188,031 )
     Proceeds from sales of other real estate
    296,753       157,306  
                 
                            Net cash provided by investing activities
    19,741,653       13,684,513  
                 
Cash flows from financing activities:
               
     Net change in deposits
    (21,619,574 )     (20,424,969 )
     Net change in securities sold under repurchase agreements
    4,870,780       8,803,785  
     Dividends paid
    -       (1,034,787 )
                 
                           Net cash used by financing activities
    (16,748,794 )     (12,655,971 )
                 
Net increase in cash and cash equivalents
    3,771,657       2,627,283  
                 
Cash and cash equivalents at beginning of period
    20,062,492       20,889,937  
                 
Cash and cash equivalents at end of period
  $ 23,834,149     $ 23,517,220  



 
4

 

 
OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows, continued

For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)


   
2009
   
2008
 
             
Supplemental cash flow information:
           
     Cash paid for interest
  $ 4,694,453     $ 6,724,678  
     Cash paid for taxes
  $ -     $ 281,500  
                 
Noncash investing and financing activities:
               
     Transfer from loans to other real estate owned
  $ 4,215,782     $ 319,770  
     Change in net unrealized losses on investment securities
               
        available for sale, net of tax benefit
  $ 472,538     $ (296,748 )
     Change in dividends payable
  $ -     $ 1,034,787  
 
























See accompanying notes to consolidated financial statements.

 
5

 

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Notes to Consolidated Financial Statements
(Unaudited)
 
(1)           Basis of Presentation
 
The financial statements include the accounts of Oconee Financial Corporation (the “Corporation”) and its wholly-owned subsidiary, Oconee State Bank (the “Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  The consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations and financial position for the periods covered herein.  All such adjustments are of a normal recurring nature.
 
Operating results for the three and nine –month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the financial statements and footnotes included in the Corporation’s annual report included on Form 10-K for the year ended December 31, 2008.
 
Critical Accounting Policies
 
The Corporation’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  Some of the Corporation’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance.  A description of the Corporation’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 10-K for the year ended December 31, 2008.
 
Many of the Corporation’s assets and liabilities are recorded using various valuation techniques that require significant judgment as to recoverability.  The collectibility of loans is reflected through the Corporation’s estimate of the allowance for loan losses.  The Corporation performs periodic detailed reviews of its loan portfolio in order to assess the adequacy of the allowance for loan losses in light of anticipated risks and loan losses.  In addition, investment securities available for sale and mortgage loans held for sale are reflected at their estimated fair value in the consolidated financial statements.  Such amounts are based on either quoted market prices or estimated values derived by the Corporation using dealer quotes or market comparisons.
 
(2)           Net Earnings (Loss) Per Common Share
 
Net earnings (loss) per common share are based on the weighted average number of common shares outstanding during the period.
 
(3)           Allowance for Loan Losses
 
Changes in the allowance for loan losses were as follows:
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Balance at beginning of year
  $ 4,215,262       3,335,825  
Amounts charged off
    (985,924 )     (125,828 )
Recoveries on amounts previously charged off
    28,321       24,584  
Provision for loan losses
    1,340,000       598,000  
                 
Balance at September 30
  $ 4,597,659       3,832,581  
 

 
6

 

 
(4)       Fair Value Measurements
 
Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, which provides a framework for measuring fair value under generally accepted accounting principles.  FASB ASC Topic 820 applies to all financial instruments that are being measured and reported on a fair value basis.
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available-for-sale, derivatives and certain deposits are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, foreclosed property and held-to-maturity securities.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at 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, and other inputs that are observable or can be corroborated by observable market data.
 
Level 3 – Generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
 
Securities Available-for-Sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
 
Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, management classifies loans subjected to recurring fair value adjustments as Level 2.
 
Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures its impairment.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2009, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with FASB ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

 
7

 

 
Foreclosed Assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
 
The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

   
Balance at
September 30, 2009
                   
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
Securities
  $ 69,977     $ -     $ 69,977     $ -  
Loans held for sale
    1,810       -       1,810       -  


   
Balance at
December 31, 2008
                   
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
Securities
  $ 79,762     $ -     $ 79,762     $ -  
Loans held for sale
    1,639       -       1,639       -  

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. Generally Accepted Accounting Principles. These include assets that are measured at the lower of cost or fair value. The table below presents the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2009 and December 31, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
   
Balance at
 September 30, 2009
                   
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
Impaired loans
  $ 8,610     $ -     $ -     $ 8,610  
Foreclosed assets
    5,665       -       -       5,665  
 

   
Balance at
 December 31, 2008
                   
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
Impaired loans
  $ 17,531     $ -     $ -     $ 17,531  
Foreclosed assets
    1,782       -       -       1,782  
 

 
8

 

 
For the nine-month period ending September 30, 2009, the Bank recognized $654,000 in charge-offs of impaired loans and foreclosed assets reported in the table above.  These charge-offs were primarily due to declining appraised value of real estate securing the impaired loan.  The Bank will continue to update appraisals regularly and will recognize any declines in collateral value through further charge-offs.
 
Fair Value of Financial Instruments
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
 

Cash and Cash Equivalents
For cash, due from banks, and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale
Fair values for investment securities are based on quoted market prices.

Restricted Equity Securities
The carrying amount of restricted equity securities approximates fair value.

Loans and Mortgage Loans Held for Sale
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral value, where applicable.  Mortgage loans held for sale are valued based on the current price at which these loans could be sold into the secondary market.

Deposits and Securities Sold Under Repurchase Agreements
The fair value of demand deposits, interest-bearing demand deposits, savings, and securities sold under repurchase agreements is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally short-term and carry variable interest rates.  Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.
 
The estimated fair values of the Company’s financial instruments as of September 30, 2009 are as follows:
 
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
 
Assets:
 
(In thousands)
 
Cash and cash equivalents
  $ 23,834       23,834  
Investment securities
  $ 69,977       69,977  
Restricted equity securities
  $ 556       556  
Mortgage loans held for sale
  $ 1,810       1,810  
Loans, net
  $ 177,228       182,595  
                 
Liabilities:
               
Deposits and securities sold under
               
       repurchase agreement
  $ 264,743       265,688  


 
9

 


(5)       Investments
 
Investment securities available for sale at September 30, 2009 and December 31, 2008 are as follows:

   
 September 30, 2009
 
   
Amortized
  Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
  Value
 
                         
Government sponsored agencies
  $ 29,922,926       429,729       60,211       30,292,444  
State, county and municipal
    11,211,070       250,986       81,656       11,380,400  
Mortgage-backed securities
    26,054,029       838,767       5,692       26,887,104  
Other debt securities
    1,618,279       -       201,722       1,416,557  
                                 
Total
  $ 68,806,304       1,519,482       349,281       69,976,505  

   
 December 31, 2008
 
   
Amortized
  Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
  Value
 
                         
Government sponsored agencies
  $ 37,171,757       959,666       -       38,131,423  
State, county and municipal
    17,714,238       84,212       993,961       16,804,489  
Mortgage-backed securities
    22,846,975       517,867       790       23,364,052  
Other debt securities
    1,620,067       -       158,461       1,461,606  
                                 
Total
  $ 79,353,037       1,561,745       1,153,212       79,761,570  

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009 and December 31, 2008 are summarized as follows:

   
September 30, 2009
 
   
Less than 12 Months
   
12 Months or More
 
   
Estimated
Fair
Value
   
Unrealized
Losses
   
Estimated
Fair
Value
   
Unrealized
Losses
 
 
Government sponsored agencies
  $ 6,217,188       60,211       -       -  
State, county and municipal
    -       -       1,192,219       81,656  
Mortgage-backed securities
    5,436,209       5,692       -       -  
Other debt securities
    -       -       1,416,557       201,722  
                                 
    $ 11,653,397       65,903       2,608,776       283,378  

   
December 31, 2008
 
   
Less than 12 Months
   
12 Months or More
 
   
Estimated
Fair
Value
   
Unrealized
Losses
   
Estimated
Fair
Value
   
Unrealized
Losses
 
 
Government sponsored agencies
  $ -       -       -       -  
State, county and municipal
    10,833,908       907,749       692,675       86,212  
Mortgage-backed securities
    208,311       790       -       -  
Other debt securities
    1,620,067       158,461       -       -  
                                 
    $ 12,662,286       1,067,000       692,675       86,212  


 
10

 

 
The unrealized losses on these debt securities in a continuous loss position for twelve months or more as of September 30, 2009 and December 31, 2008 are considered to be temporary because they arose due to changing interest rates and the repayment sources of principal and interest are government backed or are securities of investment grade issuers.  Included in the table above as of September 30, 2009 were 0 out of 25 securities issued by U.S. government sponsored agencies, 3 out of 27 securities issued by state and political subdivisions, 0 of 28 mortgage-backed securities, and 2 of 2 other debt securities that contained unrealized losses.  Included in the table above as of December 31, 2008 were 30 out of 44 securities issued by state and political subdivisions that contained unrealized losses, 1 of 22 mortgage-backed securities, and 2 of 2 other debt securities that contained unrealized losses.  The entire investment portfolio is classified as available for sale.  However, management has no specific intent to sell any securities, and it is more likely than not that the Company will not have to sell any security before recovery of its cost basis.

Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include duration and magnitude of the decline in value, the financial condition of the issuer or issuers, structure of the security and Oconee’s intent to sell the security or whether it’s more likely than not that Oconee would be required to sell the security before its anticipated recovery in market value. At September 30, 2009, management performed its quarterly analysis of all securities with an unrealized loss and concluded no  individual securities were other-than-temporarily impaired.

The amortized cost and fair value of investment securities available for sale at September 30, 2009, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
  Cost
   
Estimated
Fair Value
 
Due within one year
  $ 430,000       439,821  
Due from one to five years
    910,263       917,163  
Due from five to ten years
    12,877,738       13,067,323  
Due after ten years
    28,534,274       28,665,094  
Mortgage-backed securities
    26,054,029       26,887,104  
                 
    $ 68,806,304       69,976,505  
 

The proceeds from the sales and gross gains and gross losses realized by Oconee from sales of  investment securities for the three months and the nine months ended September 30 were as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Proceeds from sales
  $ 5,448,403       -       12,937,169       7,320,481  
                                 
Gross gains realized
  $ 52,497       -       258,874       197,264  
Gross losses realized
    8,154       -       108,583       -  
                                 
Net gain realized
  $ 44,343       -       150,291       197,264  

Securities with a carrying value of approximately $50,252,000 and $63,014,000 at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and for other purposes as required by law.



 
11

 


Restricted equity securities consist of the following:

   
September 30, 2009
   
December 31, 2008
 
Federal Home Loan Bank Stock
  $ 556,300       606,300  
Silverton Financial Services, Inc. Stock
    -       100,429  
    $ 556,300       706,729  

During the first quarter of 2009, Oconee recognized an impairment loss of $100,429 on an equity investment in Silverton Financial Services, the parent company of Silverton Bank, a financial institution that failed during the quarter. The impairment loss represents the full amount of Oconee’s investment in Silverton.
 
(6)       Subsequent Events
 
 
Subsequent events have been evaluated through November 16, 2009, which is the date the financial statements were available to be issued.  No material subsequent events have occurred as of that date which would warrant disclosure in the Company’s Form 10-Q for the period ending September 30, 2009.
 
(7)       Recent Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 – Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards Codification (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This Statement was effective for Oconee’s financial statements beginning in the interim period ended September 30, 2009.

Following this Statement, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB does not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“Statement 162”), which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Statement 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Upon becoming effective, all of the content of the Codification carries the same level of authority, effectively superseding Statement 162. In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, this Statement replaces Statement 162 to indicate this change to the GAAP hierarchy. The adoption of the Codification and ASU 2009-01 did not have any effect on Oconee’s results of operations or financial position. All references to accounting literature included in the notes to the financial statements have been changed to reference the appropriate sections of the Codification.

In June 2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU 2009-02”), Omnibus Update – Amendments to Various Topics for Technical Corrections. The adoption of ASU 2009-02 did not have any effect on Oconee’s results of operations, financial position or disclosures.

In August 2009, the FASB issued Accounting Standards Update No. 2009-03 (“ASU 2009-03”), SEC Update – Amendments to Various Topics Containing SEC Staff Accounting Bulletins. ASU 2009-03 represents technical corrections to various topics containing SEC Staff Accounting Bulletins to update cross-references to Codification text. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

In August 2009, the FASB issued Accounting Standards Update No. 2009-04 (“ASU 2009-04”), Accounting for Redeemable Equity Instruments – Amendment to Section 480-10-S99. ASU 2009-04 represents an update to Section 480-10-S99, Distinguishing Liabilities from Equity, per Emerging Issues Task Force (“EITF”) Topic D-98, Classification and Measurement of Redeemable Securities. ASU 2009-04 did not have any effect on Oconee’s results of operations, financial position or disclosures.

 
12

 


In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
 
1.) 
A valuation technique that uses:
a. 
The quoted price of the identical liability when traded as an asset
 b. 
Quoted prices for similar liabilities or similar liabilities when traded as assets.
 2.) 
Another valuation technique that is consistent with the principles of ASC Topic 820. Two examples would be an income approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.
 
The amendments in ASU 2009-5 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is effective for Oconee in the fourth quarter of 2009. Because Oconee does not currently have any liabilities that are recorded at fair value, the adoption of this guidance will not have any impact on results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-06 (“ASU 2009-06”), Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes by addressing 1.) whether income taxes paid by an entity are attributable to the entity or its owners, 2.) what constitutes a tax position for a pass-through entity or a tax-exempt not-for-profit entity, and 3.) how accounting for uncertainty in income taxes should be applied when a group of related entities comprise both taxable and nontaxable entities. ASU 2009-06 also eliminates certain disclosure requirements for nonpublic entities. The guidance and disclosure amendments included in ASU 2009-06 were effective for Oconee in the third quarter of 2009 and had no impact on results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-07 (“ASU 2009-07”), Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2009-07 represents technical corrections to various topics containing SEC guidance. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-08 (“ASU 2009-08”), Earnings Per Share – Amendments to Section 260-10-S99. ASU 2009-08 represents technical corrections to Topic 260-10-S99, Earnings per Share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that Includes a Redemption or an Induced Conversion of Preferred Stock. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

 
13

 


In September 2009, the FASB issued Accounting Standards Update No. 2009-09 (“ASU 2009-09”), Accounting for Investments – Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees – Amendments to Sections 323-10-S99 and 505-50-S99. ASU 2009-09 represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. Section 323-10-S99-4 was originally entered into the Accounting Standards Codification incorrectly. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-10 (“ASU 2009-10”), Financial Services – Broker and Dealers: Investments – Other – Amendment to Subtopic 940-325. ASU 2009-10 codifies the Observer comment in paragraph 17 of EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-11 (“ASU 2009-11”), Extractive Activities – Oil and Gas – Amendment to Section 932-10-S99. ASU 2009-11 represents a technical correction to the SEC Observer comment in EITF 90-22, Accounting for Gas-Balancing Arrangements. This ASU is not applicable to Oconee and therefore did not have any effect on Oconee’s results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (“ASU 2009-12”), Fair Value Measurements and Disclosures (Topic 820) – Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2009-12 is not applicable to Oconee and therefore did not have any effect on Oconee’s results of operations, financial position or disclosures.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force. ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements, establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. Specifically, this subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amendments in this ASU will be effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. This ASU is not expected to have any effect on Oconee’s results of operations, financial position or disclosures.

 
14

 

 
In October 2009, the FASB issued Accounting Standards Update No. 2009-14 (“ASU 2009-14”), Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force. ASU 2009-14 addresses concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. This ASU is not applicable to Oconee and therefore did not have any effect on Oconee’s results of operations, financial position or disclosures.
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (“ASU 2009-15”), Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 provides accounting guidance for own-share lending arrangements issued in contemplation of the issuance of convertible debt or other financing arrangements. An entity, for which the cost to an investment banking firm or third-party investors of borrowing its shares is prohibitive, may enter into share-lending arrangements that are executed separately but in connection with a convertible debt offering. Although the convertible debt instrument is ultimately sold to investors, the share-lending arrangement is an agreement between the entity and an investment bank and is intended to facilitate the ability of investors to hedge the conversion option in the entity’s convertible debt. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. If dividends on the loaned shares are not reimbursed to the entity, any amounts, including contractual dividends and participation rights in undistributed earnings, attributable to the loaned shares shall be deducted in computing income available to common shareholders, in a manner consistent with the two-class method in paragraph 260-10-45-60B. This ASU did not have any effect on Oconee’s results of operations, financial position or disclosures.

 
15

 

tem 2.

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

Forward-Looking Statements
 
This discussion contains forward-looking statements under the private Securities Litigation Reform Act of 1995 that involve risk and uncertainties.  Although the Corporation believes that the assumptions underlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of the forward-looking statements included in this discussion will be accurate.  Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Corporation operates); competition from other providers of financial services offered by the Corporation; government regulations and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Corporation’s credit customers, all of which are difficult to predict and which may be beyond the control of the Corporation.  The Corporation undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.
 
Financial Condition
 
Since mid-2007, and particularly during the second half of 2008 and into 2009, the financial markets and economic conditions generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity.  This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all commercial and residential mortgages as property prices declined rapidly and to nearly all asset classes.  The effect of the market and economic downturn also spread to other areas of the credit markets and in the availability of liquidity.  The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions.  During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers.  Unemployment has also increased significantly.
 
These factors have magnified the need for careful management of the Bank going forward.  Regulatory scrutiny within the banking industry has increased significantly, and as a result, the Bank’s management team and Board of Directors have implemented, and will continue to implement strategies to guide the Bank through this difficult market.  Management has focused on strategies to increase revenues and control expenses in an effort to return the Bank to profitability.  In addition, loan underwriting standards have been tightened and credit risk will continue to be closely monitored.  Balance sheet management strategies have been developed which will, in all likelihood, result in a decline in investment securities and deposit balances and in total assets in order to reduce interest expense and produce a better match in the bank’s funding and its funding needs.  In addition, the Board of Directors has engaged a consultant to evaluate the Bank’s current capital base and develop a strategy for capital management going forward.
 
Total assets at September 30, 2009 were $291,265,000, representing a $16,891,000 (5.48%) decrease from December 31, 2008.  Investment securities decreased $9,785,000 as compared to December 31, 2008, primarily as a result of the Bank’s decision to allow the maturities and calls of investment securities to provide liquidity to replace deposits in a designed effort to shrink the Bank’s balance sheet.  Loans decreased $18,563,000 (9.48%) at September 30, 2009 as compared to December 31, 2008, primarily due to loan pay-downs and the shifting of $4,216,000 from loans to other real estate owned during the first nine months of 2009.  Deposits decreased $21,619,000 (7.86%) from December 31, 2008.  The decrease in deposits is primarily attributable to decreases in interest-bearing checking accounts of $21,097,000 as compared to December 31, 2008 balances.  Securities sold under repurchase agreements increased $4,871,000 at September 30, 2009 as compared to December 31, 2008, primarily due to two significant deposit relationships shifting their deposit relationships from interest-bearing checking and time deposit accounts into  repurchase agreements.  The allowance for loan losses at September 30, 2009 was $4,598,000, compared to the December 31, 2008 balance of $4,215,000, representing 2.59% of total loans at September 30, 2009, compared to 2.15% of total loans at December 31, 2008. Cash and cash equivalents increased $3,772,000 from December 31, 2008.  Total stockholders’ equity at September 30, 2009 of $25,687,000 decreased $110,000 (0.43%) from December 31, 2008 due to a net loss for the first nine months of 2009 of $616,000, offset by an increase in market value of investment securities, net of tax, of $473,000.
 

 
16

 


 
The following table presents a summary of the Bank’s loan portfolio by loan type at September 30, 2009 (dollars are in thousands).

                                                                               
 
Amount
   
Percentage
 
   
(In thousands)
       
Commercial, financial and agricultural
  $ 28,258       15.6%  
Real estate – mortgage
    107,078       58.9%  
Real estate – commercial construction
    38,725       21.3%  
Real estate – consumer construction
    799       0.4%  
Consumer
    6,966       3.8%  
Total loans
  $ 181,826       100.0%  
 
The total amount of nonperforming assets, which includes nonaccruing loans, other real estate owned, repossessed collateral and loans for which payments are more than 90 days past due was $28,442,000 at September 30, 2009, representing a decrease of $2,135,000 (6.98%) from December 31, 2008.  This decrease is primarily attributable to a decrease of $6,569,000 in nonaccrual loans, offset by increases of $3,888,000 in other real estate owned and $550,000  in loans 90 days or more past due.  The decrease in nonaccrual loans is primarily attributable to the payoff of a $4,100,000 loan that was on nonaccrual status.  The payoff occurred during the third quarter of 2009 and was for the full carrying amount of the loan, so there was no charge-off associated with the reduction in outstanding balance. Total nonperforming assets were 16.05% of total loans at September 30, 2009, compared to 15.62% at December 31, 2008.  Nonperforming assets represented 9.76% of total assets at September 30, 2009, compared to 9.92% of total assets at December 31, 2008.  Nonaccrual loans represented 12.53% of total loans outstanding at September 30, 2009, compared to 14.70% of total loans outstanding at December 31, 2008.  There were no related party loans which were considered to be nonperforming at September 30, 2009.  A summary of non-performing assets at September 30, 2009, December 31, 2008 and September 30, 2008 is presented in the following table (dollars are in thousands).
 
   
September 30, 2009
   
December 31, 2008
   
September 30, 2008
 
Other real estate
  $ 5,665       1,777       150  
Repossessions
    -       5       4  
Non-accrual loans
    22,203       28,772       19,656  
Accruing loans 90 days or more
past due
    550       24       6  

 
The table below details the changes in other real estate owned for the nine months ending September 30, 2009 and 2008 (dollars are in thousands).
 
   
2009
   
2008
 
Balance at January 1
    1,777       -  
Transfer from loans to other real estate
    4,216       320  
Capital improvements on other real estate
    165       -  
Sales of other real estate
    (297 )     (157 )
Write-downs on other real estate
    (196 )     (13 )
Balance at September 30
    5,665       150  

 

 
17

 

As of September 30, 2009, the allowance for loan losses was allocated as follows (dollars are in thousands).
 
   
Allocation of Allowance for Loan Losses
   
% of Allowance for Loan Losses
   
% of Loans by Category to
Total Loans
 
Commercial, financial and agricultural
  $ 1,004       21.8 %     15.6 %
Real Estate - Commercial Construction
    1,567       34.1 %     21.3 %
Consumer
    278       6.1 %     3.8 %
Real Estate - Mortgage
    1,738       37.8 %     58.9 %
Unallocated
    11       0.2 %     0.4 %
Total
  $ 4,598       100.0 %     100.0 %

 
During the first quarter 2009, the Bank formed Motel Holdings Georgia, Inc., a subsidiary corporation for the purpose of holding a motel that was foreclosed upon by the Bank in January 2009.  At September 30, 2009, the carrying amount of the hotel in other real estate owned was $2,537,000.  This subsidiary was set up to limit the Bank’s liability on the operations of the motel and to make a more clear separation of the income and expenses relating to the motel and the Bank’s ordinary lines of business.  The Bank has contracted with an independent hospitality management company to operate the motel while the Bank markets the motel for sale.
 
At September 30, 2009, the Corporation had loan concentrations in the housing industry and in the hotel and motel industry.  Total commitment amounts for hotel and motel loans were $19,917,000 at September 30, 2009, of which $19,449,000 was funded and outstanding.  The Corporation’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry.
 
As of September 30, 2009, the Corporation had total commitments for construction and development loans of $28,059,000, of which $24,975,000 was funded and outstanding.  The local housing industry has slowed considerably over the past 12 to 18 months, as has occurred at the state and national level.  New loan requests have been down as compared to prior periods due to this slowdown.  The immediate challenge for the Bank is to finance builders and developers with the financial strength to deal with the current weaker demand, while working with financially weaker builders in an attempt to help them work through this economic downturn.
 
On August 18, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Consent Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Georgia Department of Banking and Finance (the “GDBF”), whereby the Bank consented to the issuance of an Order to Cease and Desist (the “Order”).

Among other things, the Order provides that, unless otherwise agreed by the FDIC and GDBF:

 
·
the Board of Directors of the Bank must increase its participation in the affairs of the Bank and establish a Board committee responsible for ensuring compliance with the Order;
 
 
·
the Bank must have and retain qualified management and notify the FDIC and the GDBF in writing when it proposes to add any individual to the Bank’s Board of Directors or employ any individual as a senior executive officer;
 
 
·
the Bank must have and maintain a Tier 1 (Leverage) Capital ratio of not less than 8% and a Total Risk-based Capital ratio of at least 10%;
 
 
·
the Bank must collect or charge-off problem loans;
 
 
·
the Bank must formulate a written plan to reduce the Bank’s adversely classified assets in accordance with a defined asset reduction schedule;
 
 
·
the Bank may not extend any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged-off or adversely classified and is uncollected;
 

 
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·
the Bank must strengthen its lending and collection policy to provide effective guidance and control over the Bank’s lending functions;
 
 
·
the Bank must perform a risk segmentation analysis with respect to concentrations of credit and reduce such concentrations;
 
 
·
the Board of Directors of the Bank must review the adequacy of the allowance for loan and lease losses (the “ALLL”) and establish a comprehensive policy for determining the adequacy of the ALLL;
 
 
·
the Bank must revise its budget and include formal goals and strategies to improve the Bank’s net interest margin, increase interest income, reduce discretionary expenses and improve and sustain earnings of the Bank;
 
 
·
the Bank may not pay a cash dividend to Oconee Financial Corporation;
 
 
·
the Board of Directors of the Bank must strengthen its asset/liability management and interest rate risk policies and liquidity contingency funding plan,
 
 
·
the Bank may not accept, renew or rollover brokered deposits without obtaining a brokered deposit waiver from the FDIC.
 
 
·
the Bank must eliminate or correct all violations of law and contraventions of policy;
 
 
·
the Bank must submit quarterly reports to the FDIC and GDBF regarding compliance with the Order.
 
The provisions of the Order will remain effective until modified, terminated suspended or set aside by the FDIC.  Management of the Bank has developed a plan for compliance with the Order and has been given authority by the Board of Directors to institute that plan.  The primary focuses of the plan going forward will be reducing classified and non-performing assets, maintaining adequate levels of capital and returning the Bank to profitable operating levels.  The Bank submitted its first quarterly report to the FDIC and GBBF on October 30.  As of that date, the Bank was in full compliance with the Order.

 
Results of Operations
 
Net interest income decreased $1,234,000 (19.06%) in the first nine months of 2009 compared to the same period for 2008 as a result of a decline in the interest rate spread and a decrease in average interest-earning assets.  The Bank’s net interest margin for the first nine months of 2009 was 2.54%, compared to 3.07% for the same time period during 2008.  Yield on interest earning assets for the nine-month period ending September 30, 2009 was 4.79%, compared to 5.91% for the nine-month period ending September 30, 2008.  Average rate paid on interest bearing liabilities was 2.43% for the nine months ending September 30, 2009, compared to 2.84% for the same period during 2008.  The primary reasons for the changes in yield on interest earning assets are a significant increase in the average balances of nonaccrual loans in the first nine months of 2009 as compared to the same time period for 2008 and a lower interest rate environment in the first nine months of 2009 as compared 2008.  The reduction in the average rate paid on interest bearing liabilities is a result of the lower interest rate environment in 2009 and a reduction of $2,425,000 in average interest-bearing deposits during the first nine months of 2009 as compared to the same time period in 2008.
 
Interest income for the first nine months of 2009 was $9,868,000, representing a decrease of $2,909,000 (22.77%) as compared to the same period in 2008.  Interest expense for the first nine months of 2009 decreased $1,676,000 (26.58%) compared to the same period in 2008.  The decrease in interest income during the first nine months of 2009 compared to the same period in 2008 is primarily attributable to a lower average level of interest-earning assets at lower interest rate levels in 2009 as compared to 2008.  Year-to-date average interest earning assets were $22,281,000 lower during the first nine months of 2009 as compared to 2008.  This is primarily due to a reduction in average interest-earning loans of $3,776,000 and federal funds sold of $11,300,000.  The decrease in interest expense is primarily attributable to a lower interest rate environment for deposits.
 
Net interest income for the quarterly period ended September 30, 2009 was $1,750,000, as compared to $2,064,000 for the same time period in 2008.  The reduction in net interest income in 2009 was due to a decline in interest income of $635,000, offset by a decrease in interest expense of $322,000.  The decline in interest income was primarily due to lower levels of interest-earning assets in 2009 as compared to 2008.  The decrease in interest expense is due to a lower interest rate environment in 2009 as well as lower average levels of interest-bearing liabilities in 2009 as compared to 2008.
 

 
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The Bank analyzes its allowance for loan losses on a monthly basis.  Additions to the allowance for loan losses are made by charges to the provision for loan losses.  Loans deemed to be uncollectible are charged against the allowance for loan losses.  Recoveries of previously charged off amounts are credited to the allowance for loan losses.  For the nine months ended September 30, 2009, the provision for loan losses was $1,340,000, compared to $598,000 for the same period in 2008. The provision for loan losses increased in 2009 as compared to 2008 as a result of a higher level of higher levels of historic charge-offs at September 30, 2009 as compared to September 30, 2008.  The historic charge-offs are primarily tied to the construction and real estate development industry, which has continued to experience a prolonged downturn throughout 2009.  The historic charge-offs are part of the calculation used to determine the adequacy of the loan loss reserve.  The nature of the process by which the Corporation determines the appropriate allowance for loan losses requires the exercise of considerable judgment.  It is management’s belief that the allowance for loan losses is adequate to absorb possible losses in the portfolio.
 
Other income for the first nine months of 2009 increased $273,000 (11.96%) compared to the first nine months of 2008.  This increase is primarily attributable to increases of $440,000 in income on other real estate and $94,000 in mortgage origination fees, offset by a $168,000 decline in non-sufficient funds service charges and a $47,000 reduction in net gains on sales of investment securities.  The net gain on sales of investment securities during 2009 includes a loss of $100,000 on Silverton Financial Services stock.  The loss on Silverton Financial Services stock was incurred due to the failure of Silverton Bank, N.A., a subsidiary of Silverton Financial Services.
 
The income on other real estate owned is revenue generated by the operation of a motel that the Bank foreclosed on in February of 2009.  The motel is owned by Motel Holdings Georgia, Inc., a wholly-owned subsidiary of the Bank, and is operated through a management contract with a hospitality company.  The revenues and expenses from the motel operations are consolidated with the Bank operations for purposes of financial statement disclosure.
 
Other expenses for the first nine months of 2009 increased $357,000 (5.06%) compared to the first nine months in 2008. The increase is primarily attributable to an increase in Federal Deposit Insurance Corporation (FDIC) insurance assessments of $357,000 and an increase in expenses on other real estate of $424,000, offset by reductions of salaries and other personnel expense of $214,000 and advertising and marketing expense of $320,000.  The increase in FDIC insurance assessments was primarily due to a one-time assessment that the FDIC enacted as of June 30, 2009 to all of its member institutions.  The increase in expenses on other real estate was due to operating expenses of $386,000 associated with the foreclosed motel mentioned in the previous paragraph.
 
Other income increased during the third quarter 2009 by $145,000 as compared to 2008 due to an increase in income on other real estate owned of $172,000 from the operation of a foreclosed motel.  Other expenses for the third quarter of 2009 were $2,331,000, an increase of $195,000 over 2008 expenses.  The increase is primarily attributable to an increase in other operating expenses of $75,000 and an increase in salary and personnel expenses of $120,000.
 
Effective July 31, 2009, the Bank closed its Athens branch due to continued decline in transaction activity.  The branch is leased until June 2010, and the Bank is actively pursuing a sub-lease for the remainder of the lease term.
 
The Bank’s effective tax rate was 36% and 14% for the nine months ended September 30, 2009 and 2008, respectively. The increase in the effective tax rate in 2009 is due to projected tax benefits due to the Bank’s net operating loss position. In addition, for the nine-month period ended September 30, 2008, the Bank was showing profitable operating income.  The taxable portion of the income was decreased by tax-free income on investment securities when calculating income taxes.  Because the percentage of tax-free income was considerable when compared to total income, the resulting increase in the Bank’s effective tax rate was more significant than in past periods.
 
Interest rate sensitivity
 
Interest rate sensitivity is a function of the repricing characteristics of the Bank’s portfolio of assets and liabilities.  These repricing characteristics are the time frames within which the interest earning assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments.  One method to measure interest rate sensitivity is through a repricing gap.  The gap is calculated by taking all assets that reprice or mature within a given time frame and subtracting all liabilities that reprice or mature during that time frame.  A negative gap (more liabilities repricing than assets) generally indicates that the Bank’s net interest income will decrease if interest rates rise and will increase if interest rates fall.  A positive gap generally indicates that the Bank’s net interest income will decrease if rates fall and will increase if rates rise.
 

 
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The Bank also measures its short-term exposure to interest rate risk by simulating the impact to net interest income under several rate change levels.  Interest-earning assets and interest-bearing liabilities are rate shocked to stress test the impact to the Bank’s net interest income and margin.  The rate shock levels span three 100 basis point increments up and down from current interest rates.  This information is used to monitor interest rate exposure risk relative to anticipated interest rate trends.  Asset/liability management strategies are developed based on this analysis in an effort to limit the Bank’s exposure to interest rate risk.
 
The Bank tracks its interest rate sensitivity on a monthly basis using a model, which applies betas to various types of interest-bearing deposit accounts.  The betas represent the Bank’s expected repricing of deposit rates based on historical data provided from a call report driven database.  The betas are used because it is not likely that deposit rates would change the full amount of a prime rate increase or decrease.
 
At September 30, 2009, the difference between the Bank’s liabilities and assets repricing or maturing within one year, after applying the betas, was $11,212,000, indicating that the Bank was liability sensitive.  Due to a large percentage of the Bank’s floating rate loans being currently priced at floor rates, meaning that the loans will not reprice in a falling rate environment, rate shock data show that the Bank’s net interest income would increase $175,000 on an annual basis if rates decreased 100 basis points, and would increase $19,000 on an annual basis if rates increased 100 basis points.  The primary reason for the Bank’s shift to a liability sensitive position during the first three quarters of 2009 from an asset sensitive position at December 31, 2008 was the Bank’s decision to shift assets from fed funds sold to a non-interest bearing account at its primary correspondent bank, as discussed earlier.  This shift resulted in a decrease in the Bank’s short-term interest bearing assets and an increase in its non-interest earning assets, which resulted in the Bank’s rate sensitivity shift.
 
Certain shortcomings are inherent in the method of analysis presented in the foregoing paragraph.  For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates.  Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset.  Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from the assumptions made above.  In addition, significant rate decreases would not likely be reflected in liability repricing and therefore would make the Bank more sensitive in a falling rate environment.
 
Liquidity
 
The Corporation must maintain, on a daily basis, sufficient funds to cover the withdrawals from depositors’ accounts and to supply new borrowers with funds.  To meet these obligations, the Corporation keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells federal funds and other short-term investments.  Asset and liability maturities are monitored in an attempt to match these to meet liquidity needs.  It is the policy of the Corporation to monitor its liquidity to meet regulatory requirements and its local funding requirements.
 
The Corporation monitors its liquidity position weekly.  The primary tool used in this analysis is an internal calculation of a liquidity ratio.  This ratio is calculated by dividing the Corporation’s short-term and marketable assets, including cash, federal funds sold, unpledged investment securities and other secondary sources of liquidity, such as borrowing capacity from correspondent banks, by the sum of the Corporation’s deposit liabilities.  At September 30, 2009, the Corporation’s liquidity ratio was 21.1%.  This level of liquidity is within the Bank’s goal of maintaining a sufficient level of liquidity in all expected economic environments.
 
The Corporation maintains relationships with correspondent banks that can provide it with funds on short notice, if needed through secured lines of credit and securities repurchase agreements.  Additional liquidity is provided to the Corporation through available Federal Home Loan Bank advances, none of which were outstanding at September 30, 2009.
 
During the first nine months of 2009, cash and cash equivalents increased $3,772,000 to a total of $23,834,000 at September 30, 2009.  Cash inflows from operations totaled $779,000 during the first nine months of 2009, while inflows from financing activities totaled $16,749,000, comprised primarily of net decreases of $21,620,000 in deposits, offset by net increases in securities sold under repurchase agreements of $4,871,000.
 

 
21

 


 
Investing activities provided $19,742,000 of cash and cash equivalents, consisting primarily of proceeds from calls, maturities and paydowns of investment securities of $141,315,000, proceeds from the sales of investment securities of $12,937,000 and net decreases in loans of $8,620,000, offset by purchases of investment securities of $143,424,000.  At September 30, 2009, the Bank had $69,977,000 of investment securities available for sale.
 
Contractual Obligations and Commitments
 
The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet.  The contract amounts of these instruments reflect the extent of the involvement of the Corporation in particular classes of financial instruments.  At September 30, 2009, the contractual amounts of the Corporation’s commitments to extend credit and standby letters of credit were $27,826,000 and $447,000, respectively.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party.
 
Capital
 
The following tables present the Bank’s regulatory capital position at September 30, 2009, based on the regulatory capital requirements of federal banking agencies.  The capital ratios of the Corporation are essentially the same as those of the Bank at September 30, 2009 and therefore only the Bank’s ratios are presented.
 
Risk-Based Capital Ratios
 
Tier 1 Capital, Actual
 
12.3%
Tier 1 Capital minimum requirement
 
4.0%
     
Excess
 
8.3%
     
Total Capital, Actual
 
13.5%
Total Capital minimum requirement
 
8.0%
     
Excess
 
5.5%
     
Leverage Ratio
   
     
Tier 1 Capital to adjusted total assets
 
8.2%
Minimum leverage requirement
 
 4.0%
     
Excess
 
4.2%


Item 3.     Qualitative and Quantitative Disclosures about Market Risk.

Not applicable because the registrant is a smaller reporting company.

 
Item 4T.  Controls and Procedures.
 
Our management, including our principal executive officer and principal financial officer, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934) and pursuant to such evaluation, concluded that our disclosure controls and procedures were effective as of September 30, 2009.  Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.
 

 
22

 

 

 
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
PART II.  OTHER INFORMATION

 
Item 1.     Legal Proceedings
 
None
 
Item 1A.  Risk Factors
 
Not applicable because the registrant is a smaller reporting company.
 
 
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
 
 
None
 
 
None
 
Item 5.    Other Information
 
None
 
 
(a)  
Exhibits
 
 
10.1
Order to Cease and Desist, dated August 18, 2009, and Stipulation and Consent thereto.
     
 
31.1
Certification by B. Amrey Harden, CEO and President of the Corporation, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
31.2
Certification by Steven A. Rogers, Vice President and Chief Financial Officer of the Corporation, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
32
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
23

 


SIGNATURES
 


In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
          OCONEE FINANCIAL CORPORATION
 
 
By:   /s/ B. Amrey Harden                                                     
       B. Amrey Harden, President and CEO
       (Principal Executive Officer)
 
Date:    November 16, 2009                                                     
 
 
By:   /s/ Steven A. Rogers                                                    
       Steven A. Rogers, Vice President and CFO
       (Principal Financial Officer)
 
Date:    November 16, 2009                                                     
 
   




 
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