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EX-32.1 - CERTIFICATION - OCONEE FINANCIAL CORPoconee_10q-ex32.htm
EX-31.2 - CERTIFICATION - OCONEE FINANCIAL CORPoconee_10q-ex3102.htm
EX-31.1 - CERTIFICATION - OCONEE FINANCIAL CORPoconee_10q-ex3101.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 March 31, 2011
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
Company 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 May 14, 2011 was 899,815.
 



 
 

 


 
INDEX
 
   
Page No.
PART I - FINANCIAL INFORMATION
 
     
 
Item 1.  Financial Statements
 
 
 
Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010
 
1
 
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010
 
2
 
Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2011 and 2010
 
3
 
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010
 
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
 
23
 
Item 4T. Controls and Procedures
 
23
PART II - OTHER INFORMATION
     
 
Item 1. Legal Proceedings
24
     
 
Item 1A. Risk Factors
24
     
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
24
     
 
Item 3. Defaults Upon Senior Securities
24
     
 
Item 5. Other Information
24
     
 
Item 6. Exhibits
24


 
 

 


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Balance Sheets
March 31, 2011 and December 31, 2010

   
March 31, 2011
(unaudited)
   
December 31, 2010
 
Assets
 
             
Cash and due from banks, including reserve requirements of $25,000
  $ 31,358,542       29,958,828  
                 
Investment securities available for sale
    72,047,124       73,997,925  
Restricted equity securities
    556,300       556,300  
Mortgage loans held for sale
    127,500       311,000  
                 
Loans, net of allowance for loan losses of $4,001,389 and $3,527,567
    155,639,919       159,454,155  
                 
Premises and equipment, net
    5,836,798       5,928,381  
Other real estate owned
    5,588,547       5,435,735  
Accrued interest receivable and other assets
    3,644,487       3,726,104  
                 
                   Total assets
  $ 274,799,217       279,368,428  
                 
Liabilities and Stockholders’ Equity
 
                 
Liabilities:
               
Deposits
               
Noninterest-bearing
  $ 30,699,624       27,796,070  
Interest-bearing
    208,860,667       215,121,308  
                 
                   Total deposits
    239,560,291       242,917,378  
                 
Securities sold under repurchase agreements
    11,611,408       13,024,262  
Accrued interest payable and other liabilities
    565,663       491,886  
                 
                   Total liabilities
    251,737,362       256,433,526  
                 
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
    17,210,556       17,226,068  
Accumulated other comprehensive loss
    (191,663 )     (334,128 )
                 
                   Total stockholders’ equity
    23,061,855       22,934,902  
                 
                   Total liabilities and stockholders’ equity
  $ 274,799,217       279,368,428  


See accompanying notes to consolidated financial statements.


 
1

 


OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Operations
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)

   
2011
   
2010
 
Interest Income:
           
     Loans
  $ 2,102,964       2,364,160  
     Investment securities:
               
        Tax exempt
    142,810       130,512  
        Taxable
    506,420       635,415  
     Federal funds sold and other
    13,938       8,487  
           Total interest income
    2,766,132       3,138,574  
                 
Interest Expense:
               
     Deposits
    594,373       972,588  
     Other
    59,448       72,031  
           Total interest expense
    653,821       1,044,619  
                 
           Net interest income
    2,112,311       2,093,955  
                 
Provision for loan losses
    500,000       200,000  
                 
              Net interest income after provision for loan losses
    1,612,311       1,893,955  
                 
Other Income:
               
                 
     Service charges on deposit accounts
    188,597       275,913  
     Mortgage origination fees
    19,312       4,406  
     Securities gains, net
    23,139       -  
     Other operating income
    296,064       421,231  
           Total other income
    527,112       701,550  
                 
 Other Expense:
               
     Salaries and other personnel expense
    1,086,435       1,155,784  
     Net occupancy and equipment expense
    287,477       292,354  
     Other operating expense
    790,745       805,985  
           Total other expense
    2,164,657       2,254,123  
                 
           Earnings (loss) before income taxes
    (25,234 )     341,382  
                 
Income taxes (benefit)
    (9,722 )     73,157  
                 
           Net earnings (loss)
  $ (15,512 )     268,225  
                 
Earnings (loss) per common share based on average outstanding shares of 899,815
  $ (0.02 )     0.30  

See accompanying notes to consolidated financial statements.

 
2

 



OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Comprehensive Income
 
For the Three Months Ended March 31, 2011 and 2010
(Unaudited)
 

 
   
2011
   
2010
 
             
Net earnings (loss)
  $ (15,512 )     268,225  
                 
Other comprehensive gains (loss), net of tax:
               
Unrealized gains on securities available for sale:
               
Holding gains arising during period, net of tax of $95,953 and $154,401
    156,820       252,345  
                 
Reclassification adjustments for gains included in net earnings
               
(loss), net of tax of $8,784 and  $0
    (14,355 )     -  
                 
Total other comprehensive income
    142,465       252,345  
                 
Comprehensive income
  $ 126,953       520,570  



























See accompanying notes to consolidated financial statements.

 
3

 



OCONEE FINANCIAL CORPORATION AND SUBSIDIARY
 
Consolidated Statements of Cash Flows
 
For the Three Months Ended March 31, 2011 and 2010
 
(Unaudited)
 

   
2011
   
2010
 
Cash flows from operating activities:
           
Net earnings (loss)
  $ (15,512 )   $ 268,225  
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
               
Provision for loan losses
    500,000       200,000  
Depreciation, amortization and accretion
    156,182       164,951  
Gain on sales of securities
    (23,139 )     -  
Loss (Gain) on other real estate owned
    13,950       (34,540 )
Change in assets and liabilities:
               
Interest receivable and other assets
    (5,552 )     140,762  
Interest payable and other liabilities
    73,777       325,496  
Mortgage loans held for sale
    183,500       (207,160 )
                 
Net cash provided by operating activities
    883,206       857,734  
                 
Cash flows from investing activities:
               
Proceeds from sales of investment securities available for sale
    718,700       -  
Proceeds from calls, maturities, and paydowns of investment securities available for sale
    3,038,430       6,550,284  
Purchases of investment securities available for sale
    (1,600,910 )     (3,210,328 )
Net change in loans
    3,147,474       3,104,663  
Purchases of premises and equipment
    (17,245 )     (28,539 )
Capital improvements on other real estate
    -       (42,756 )
Proceeds from sales of other real estate
    -       600,215  
                 
Net cash provided by investing activities
    5,286,449       6,973,539  
                 
Cash flows from financing activities:
               
Net change in deposits
    (3,357,087 )     (10,319,279 )
Net change in securities sold under repurchase agreements
    (1,412,854 )     420,731  
                 
Net cash used by financing activities
    (4,769,941 )     (9,898,548 )
                 
Net increase (decrease) in cash and cash equivalents
    1,399,714       (2,067,275 )
                 
Cash and cash equivalents at beginning of period
    29,958,828       24,736,354  
                 
Cash and cash equivalents at end of period
  $ 31,358,542     $ 22,669,079  




 
4

 



OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows, continued

For the Three Months Ended March 31, 2011 and 2010
(Unaudited)

   
2011
   
2010
 
             
             
Supplemental cash flow information:
           
Cash paid for interest
  $ 686,521     $ 1,113,746  
                 
Noncash investing and financing activities:
               
Transfer from loans to other real estate owned
  $ 282,604     $ 2,383,130  
Transfer of other real estate to loans
  $
115,842
      -  
Change in net unrealized gains on investment securities available for sale, net of tax
  $ 142,465     $ 252,345  
                 





























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 “Company”) 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–month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  For further information, refer to the financial statements and footnotes included in the Company’s annual report included on Form 10-K for the year ended December 31, 2010.
 
Critical Accounting Policies
 
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  Some of the Company’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 Company’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, 2010.
 
Many of the Company’s assets and liabilities are recorded using various valuation techniques that require significant judgment as to recoverability.  The collectability of loans is reflected through the Company’s estimate of the allowance for loan losses.  The Company 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 Company 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:
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
             
Balance at beginning of year
  $ 3,527,567       3,497,292  
Amounts charged off
    (38,809 )     (19,116 )
Recoveries on amounts previously charged off
    12,631       6,346  
Provision for loan losses
    500,000       200,000  
                 
Balance at March 31
  $ 4,001,389       3,684,522  
 

 

 
6

 

 

 
 
 (4)       Fair Value Measurements
 
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 and loans held for sale 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 and other real estate owned.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under FASB ASC (Financial Accounting Standards Board Accounting Standards Codification) 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 recorded at fair value on a recurring and non-recurring basis:
 
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 loans 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, and discounted cash flows less selling costs. Those impaired loans not requiring a specific reserve represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, 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 a specific reserve 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

 

 
Other Real Estate: Other real estate is adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate is 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 less selling costs. When the fair value of the collateral is based on an observable market price, the Company records the other real estate 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 other real estate as nonrecurring Level 3.
 
The tables below presents the Company’s assets measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

   
Balance at
March 31, 2011
                   
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
       
(In thousands)
 
Securities
  $ 72,047     $ -     $ 71,173     $ 874  
Loans held for sale
    128       -       128       -  

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the consolidated balance sheet using significant unobservable (Level 3) inputs for the three months ended March 31, 2011 and the year ended December 31, 2010.

   
March 31,
2011
   
December 31,
2010
 
   
(In Thousands)
 
Securities
     
Beginning balance
  $ 4,947     $ 914  
Reclassified to Level 2
    (4,040 )     -  
Purchases
    -       4,040  
Unrealized losses included in other comprehensive income (loss)
    (33 )     (7
    $ 874     $ 4,947  


 
Balance at
December 31, 2010
             
 
(In thousands)
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Assets
   
(In thousands)
 
Securities
  $ 73,998     $ -     $ 69,051     $ 4,947  
Loans held for sale
    311       -       311       -  

 
The table below presents the Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

   
Balance at
March 31, 2011
                         
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total Losses
 
Impaired loans
  $ 9,168     $ -     $ -     $ 9,168     $ 433  
Other real estate
    126       -       -       126       14  
 

   
Balance at
December 31, 2010
                         
   
(In thousands)
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total Losses
 
Impaired loans
  $ 9,505     $ -     $ -     $ 9,505     $ 2,638  
Other real estate
    2,669       -       -       2,669       1,058  
 


 
8

 

 
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. Both the carrying value and estimated fair value are based on fees charged to enter into such commitments and are immaterial.
 
The estimated fair values of the Company’s financial instruments as of March 31, 2011 and December 31, 2010 are as follows:
 
   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
Assets:
 
(In thousands)
   
(In thousands)
 
Cash and cash equivalents
  $ 31,359       31,359       29,959       29,959  
Investment securities
  $ 72,047       72,047       73,998       73,998  
Restricted equity securities
  $ 556       556       556       556  
Loans held for sale
  $ 128       128       311       311  
Loans, net
  $ 155,640       154,491       159,454       159,216  
                                 
Liabilities:
                               
Deposits and securities sold under
                               
       repurchase agreement
  $ 251,172       251,171       255,942       255,964  


 
9

 

(5)       Investments
Investment securities available for sale at March 31, 2011 and December 31, 2010 are as follows:

   
 March 31, 2011
 
   
Amortized
  Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
  Value
 
                         
U.S. Government-sponsored enterprises (GSEs)*
  $ 26,854,173       77,930       (569,491 )     26,362,612  
State, county and municipal
    12,319,515       110,262       (230,190 )     12,199,587  
Mortgage-backed securities – GSE residential
    31,568,128       651,448       (222,935 )     31,996,641  
Corporate bonds
    1,614,242       242       (126,200 )     1,488,284  
                                 
Total
  $ 72,356,058       839,882       (1,148,816 )     72,047,124  


   
 December 31, 2010
 
   
Amortized
  Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
  Value
 
                         
U.S. Government-sponsored enterprises (GSEs)*
  $ 27,857,120       49,346       (605,172 )     27,301,294  
State, county and municipal
    11,967,547       95,890       (419,434 )     11,644,003  
Mortgage-backed securities – GSE residential
    33,097,012       714,320       (251,407 )     33,559,925  
Corporate bonds
    1,614,815       -       (122,112 )     1,492,703  
                                 
Total
  $ 74,536,494       859,556       (1,398,125 )     73,997,925  

 
*
Such as Federal National Mortgage Association, Federal Home Loan Mortgage Company, and Federal Home Loan Banks.

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 March 31, 2011 and December 31, 2010 are summarized as follows:

   
March 31, 2011
 
   
Less than 12 Months
   
12 Months or More
       
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Total Unrealized Losses
 
 
GSEs
  $ 19,416,769       569,491       -       -       569,491  
State, county and municipal
    4,562,733       140,046       1,148,849       90,144       230,190  
Mortgage-backed securities
    19,735,288       222,935       -       -       222,935  
Corporate bonds
    -       -       873,800       126,200       126,200  
                                         
    $ 43,714,790       932,472       2,022,649       216,344       1,148,816  


 
10

 



   
December 31, 2010
 
   
Less than 12 Months
   
12 Months or More
       
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Total
Unrealized
Losses
 
 
 GSEs
  $ 21,031,416       605,172       -       -       605,172  
State, county and municipal
    5,231,891       276,853       1,096,329       142,581       419,434  
Mortgage-backed securities
    18,506,462       251,407       -       -       251,407  
Corporate bonds
    585,703       29,112       907,000       93,000       122,112  
                                         
    $ 45,355,472       1,162,544       2,003,329       235,581       1,398,125  

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

The unrealized losses on these debt securities in a continuous loss position for twelve months or more as of March 31, 2011 and December 31, 2010 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 March 31, 2011 were 12 out of 28 securities issued by state and political subdivisions that contained unrealized losses, 23 of 30 securities issued by government sponsored agencies, 15 of 38 mortgage-backed securities, and  1 of 2 corporate bonds that contained unrealized losses.

GSE debt securities.  The unrealized losses on the twenty-three investments in GSEs were caused by interest rate increases.  Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

Corporate bonds.  The Company’s unrealized losses on investments in one corporate bond relates to investments in companies within the financial services sector.  The unrealized losses are primarily caused by recent decreases in profitability and profit forecasts by industry analysts.  The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments.  Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investments before recovery of its par value, which may be maturity, it does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

GSE residential mortgage-backed securities.  The unrealized losses on the Company’s investment in fifteen GSE mortgage-backed securities were caused by interest rate increases.  The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government.  Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

State, county and municipal securities.  The unrealized losses on the Company’s investment in twelve state and municipal securities are primarily caused by securities no longer being insured and/or ratings being withdrawn given the current economic environment, as well as changes in interest rates.  Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

The amortized cost and fair value of investment securities available for sale at March 31, 2011, 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.

 
11

 


   
Amortized
Cost
   
Estimated
Fair Value
 
Due within one year
  $ -       -  
Due from one to five years
    1,315,127       1,189,436  
Due from five to ten years
    18,718,496       18,437,660  
Due after ten years
    20,754,307       20,423,387  
Mortgage-backed securities
    31,568,128       31,996,641  
                 
    $ 72,356,058       72,047,124  

The proceeds from the sales and gross gains and gross losses realized by the Company from sales of  investment securities for the three months ended March 31 were as follows:

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
             
Proceeds from sales
  $ 718,700       -  
                 
Gross gains realized
  $ 23,139       -  
Gross losses realized
    -       -  
                 
Net gain realized
  $ 23,139       -  

(6)       Loans

Major classifications of loans at March 31, 2011 and December 31, 2010 are summarized as follows:
 
   
March 31, 2011
   
December 31, 2010
 
             
Commercial, financial and agricultural
  $ 23,756,437     $ 25,198,562  
Real estate – mortgage
    113,240,496       115,667,560  
Real estate –construction
    16,859,431       16,334,644  
Consumer
    5,738,967       5,738,297  
                 
Total loans
    159,595,331       162,939,063  
Deferred fees and costs, net
    45,977       42,659  
Less allowance for loan losses
    (4,001,389 )     (3,527,567 )
Net loans
  $ 155,639,919     $ 159,454,155  
 
 
The Bank grants loans and extensions of credit primarily to individuals and a variety of firms and companies located in certain Georgia counties, primarily Oconee and Clarke counties. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market in the Bank’s primary market area.



 
12

 
The following table presents the activity in the allowance for loan losses by portfolio segment as of March 31, 2011:
 
   
Commercial,
 financial and
agricultural
   
Real estate -
mortgage
   
Real estate -
commercial
 construction
   
 
Consumer
 
Balance at beginning of year
  $ 1,095,015     $ 944,649     $ 1,428,254     $ 59,649  
Provision for loan losses
    (23,447 )     258,625       271,136       (6,314 )
Amounts charged off
    (34,942 )     -       (743 )     (3,124 )
Recoveries on amounts previously charged off
    1,250       5,500       -       5,881  
Balance at end of year
  $ 1,037,876     $ 1,208,774     $ 1,698,647     $ 56,092  

 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2011 and December 31, 2010:
 
As of March 31, 2011:
                       
   
Commercial,
 financial and
agricultural
   
 
Real estate -
mortgage
   
Real estate -
commercial
construction
   
 
 
Consumer
 
Allowance for loan losses:
                       
                         
Ending balance attributable to loans:
                       
                         
Individually evaluated for impairment
  $ 261,804     $ 233,769     $ 1,256,095     $ -  
Collectively evaluated for impairment
    7,795       395,104       -       19,158  
                                 
Total ending allowance balance
  $ 269,599     $ 628,873     $ 1,256,095     $ 19,158  
                                 
                                 
Loans:
                               
                                 
Individually evaluated for impairment
  $ 989,190     $ 2,304,994     $ 12,202,421     $ -  
Collectively evaluated for impairment
    28,072       1,422,772       -       68,987  
                                 
Total ending loan balance
  $ 1,017,262     $ 3,727,766     $ 12,202,421     $ 68,987  

 
As of December 31, 2010:
                       
   
Commercial,
financial and
agricultural
   
 
Real estate -
mortgage
   
Real estate -
commercial
construction
   
 
 
Consumer
 
Allowance for loan losses:
                       
                         
Ending balance attributable to loans:
                       
                         
Individually evaluated for impairment
  $ 149,604     $ -     $ 1,172,987     $ -  
Collectively evaluated for impairment
    53,911       451,364       -       21,734  
                                 
Total ending allowance balance
  $ 203,515     $ 451,364     $ 1,172,987     $ 21,734  
                                 
                                 
Loans:
                               
                                 
Individually evaluated for impairment
  $ 583,093     $ 1,670,256     $ 12,492,132     $ -  
Collectively evaluated for impairment
    187,713       1,571,600       -       75,675  
                                 
Total ending loan balance
  $ 770,806     $ 3,241,856     $ 12,492,132     $ 75,675  
 
 
 
 
13

 
 
Impaired loans at March 31, 2011 and December 31, 2010 were as follows:
 
   
March 31, 2011
   
December 31, 2010
 
Loans with no allocated allowance for loan losses
  $ 5,431,655       4,503,896  
                 
Loans with allocated allowance for loan losses
    11,584,781       12,076,573  
                 
     Total
  $ 17,016,436       16,580,469  
                 
Amount of the allowance for loan losses allocated
  $ 2,173,725       1,849,600  
                 
                 
Average of individually impaired loans during year
  $ 16,700,985       15,960,463  
 
The following table presents loans individually evaluated for impairment by portfolio segment as of March 31, 2011 and December 31, 2010:
 
As of March 31, 2011                  
   
Unpaid
Principal
 Balance
   
Recorded
 Investment
   
Allowance for
Loan Losse
Allocated
 
                   
With no related allowance recorded:
                 
Commercial, financial and agricultural
    483,636       483,636       -  
Real estate – mortgage
    1,761,163       1,761,163       -  
Real estate – commercial construction
    3,765,046       3,186,856       -  
Consumer
    -       -       -  
                         
With an allowance recorded:
                       
                         
Commercial, financial and agricultural
    533,626       533,626       269,599  
Real estate – mortgage
    1,966,603       1,966,603       628,873  
Real estate – commercial construction
    11,969,904       9,015,565       1,265,095  
Consumer
    68,987       68,987       19,158  
 
As of December 31, 2010:
                 
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance for
Loan Loss
Allocated
 
                   
With no related allowance recorded:
                 
Commercial, financial and agricultural
    77,539       77,539       -  
Real estate – mortgage
    1,670,256       1,670,256       -  
Real estate – commercial construction
    2,730,055       2,533,712       -  
Consumer
    -       -       -  
                         
With an allowance recorded:
                       
                         
Commercial, financial and agricultural
    693,267       693,267       203,515  
Real estate – mortgage
    1,571,600       1,571,600       451,364  
Real estate – commercial construction
    13,715,472       9,958,420       1,172,987  
Consumer
    75,675       75,675       21,734  
 
This valuation allowance is included in the allowance for loan losses on the statements of condition.
 
The qualitative factors are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:
 
Commercial, financial and agricultural loans – Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending will have an effect on the credit quality in this loan class.
 
 
 
14

 
 
Real Estate – Mortgage loans – Loans in this class include loans secured by residential real estate, both owner-occupied and rental residences, income-producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are generally located largely in our primary market area. Residential real estate loans are made based on the appraised value of the underlying collateral, in addition to the borrower’s ability to service the debt.  Adverse economic conditions may impact the borrower’s financial status and thus affect their ability to repay the debt.  In addition, the value of the collateral may be adversely affected by declining real estate values.  The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.
 
Real Estate – Commercial Construction loans – Loans in this class primarily include land loans to local contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/ units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. Credit risk is affected by construction delays, cost overruns, and market conditions.
 
Consumer loans – Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan (such as automobile, mobile home, etc.). Therefore the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.
 
Nonaccrual loans and loans past due 90 days still on accrual at March 31, 2011, December 31, 2010, and March 31, 2010 are as follows:
 
   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
Loans past due 90 days still on accrual
  $ 40,530     $ 680,992     $ 263  
Nonaccrual Loans
  $ 16,794,047     $ 16,358,081     $ 16,576,582  
 
The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by portfolio segment:
 
As of March 31, 2011:                              
   
 
 
30-89 Days
 Past Due
   
Accruing
Greater
 than 90
 Days Past
Due
   
 
Accruing
Total Past
Due
   
 
 
 
Nonaccrual
   
 
 
Loans Not
Past Due
 
Commercial, financial and agricultural
  $ 243,346     $ -     $ 243,346     $ 1,141,077     $ 22,372,014  
Real estate – mortgage
    3,719,149       34,223       3,753,372       3,381,563       106,105,561  
Real estate – commercial construction
    463,200        -       463,200       12,202,420       4,193,811  
Consumer
    126,503       6,307       132,810       68,987       5,537,170  
     Total
  $ 4,552,198     $ 40,530     $ 4,592,728     $ 16,794,047     $ 138,208,556  
 
 
As of December 31, 2010:
                             
   
 
 
30-89 Days
Past Due
   
Accruing
Greater
than 90
Days Past
Due
   
 
Accruing
Total Past
Due
   
 
 
 
Nonaccrual
   
 
 
Loans No
 Past Due
 
Commercial, financial and agricultural
  $ 438,651     $ -     $ 438,651     $ 2,268,453     $ 22,491,458  
Real estate – mortgage
    1,367,916       680,992       2,048,908       1,521,822       112,096,830  
Real estate – commercial construction
     -        -        -       12,492,131       3,842,513  
Consumer
    63,661       -       63,661       75,675       5,598,961  
     Total
  $ 1,870,228     $ 680,992     $ 2,551,220     $ 16,358,081     $ 144,029,762  

Troubled Debt Restructurings:
 
At March 31, 2011 and December 31, 2010, the Company identified $5,369,602 and $4,574,602, respectively as loans whose terms have been modified in troubled debt restructurings.  Of this total at March 31, 2011, all of the troubled debt restructurings were considered non-performing.  The Company has allocated $613,482 and $267,544 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and December 31, 2010, respectively.  The Company has committed to lend no additional funds to customers with outstanding loans that are classified as troubled debt restructurings.
 
Credit Quality Indicators:
 
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  All loans are analyzed at origination and assigned a risk category.  In addition, on an annual basis, management performs an analysis on loans with an outstanding balance greater than $1,000,000 and non-homogeneous loans, such as commercial and commercial real estate loans.  The Company uses the following definitions for risk ratings:
 
 
 
15

 
 
Special Mention.  Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
 
Substandard. Loans classified as substandard 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.
 
Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans.
 
As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
 
As of March 31, 2011:
                       
   
 
Pass
   
Special
Mention
   
 
Substandard
   
 
Doubtful
 
Commercial, financial and agricultural
  $ 22,909,736     $ 212,644     $ 634,057     $ -  
Real estate – mortgage
    88,824,417       16,581,121       7,834,958       -  
Real estate – commercial construction
    -       2,091,374       14,768,057       -  
Consumer
    5,550,974       40,387       147,606       -  
     Total
  $ 117,285,127     $ 18,925,526     $ 23,384,678     $ -  

 
As of December 31, 2010:
                       
   
 
Pass
   
Special Mention
   
 
Substandard
   
 
Doubtful
 
Commercial, financial and agricultural
  $ 23,831,124     $ 157,336     $ 1,210,102     $ -  
Real estate – mortgage
    89,717,573       12,435,730       13,514,257       -  
Real estate – commercial construction
    -       1,992,743       15,127,039       -  
Consumer
    5,495,391       85,524       157,382       -  
     Total
  $ 118,258,950     $ 14,671,333     $ 30,008,780     $ -  
 
(7)      Accounting Standards Updates

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU No. 2011-02”).  ASU No. 2011-02 requires a creditor to separately conclude that 1.) the restructuring constitutes a concession and 2.) the debtor is experiencing financial difficulties in order for a modification to be considered a troubled debt restructuring (“TDR”).  The guidance was issued to provide clarification and to address diversity in practice in identifying TDR’s.  It is effective for the Bank in the third quarter of 2011 and will be applied retrospectively to the beginning of the year.  Although evaluation of the impact is not complete, it is not expected to have a material impact on the Bank’s results of operations, financial position, or disclosures.
 
In April 2011, the FASB issued Accounting Standards Update No. 2011-03, Reconsideration of Effective Control in Repurchase Agreements (“ASU No. 2011-03”).  ASU No. 2011-03 removes from the assessment of effective control the criterion related to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  In addition, this guidance also eliminates the requirement to demonstrate that a transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.  It is effective for the Bank for the first quarter of 2012, and is not expected to have a material impact on the Bank’s results of operations, financial position, or disclosures.

Item 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 Company 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 Company operates); competition from other providers of financial services offered by the Company; government regulations and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers, all of which are difficult to predict and which may be beyond the control of the Company.  The Company 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.
 
 
 
16

 
 
Financial Condition
 
Like many financial institutions across the United States, the Company’s operations have been negatively affected by the current economic crisis.  The recession has reduced liquidity and credit quality within the banking system and the labor, capital and real estate markets.  Dramatic declines in the housing market have negatively affected the credit performance of our residential construction and development loans.  The economic recession has also lowered commercial and residential real estate values and substantially reduced general business activity and investment.  Combined, the deterioration in the residential and the commercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans over the past two years.  The Bank has seen a slight improvement in its level of nonperforming assets during the first three months of 2011 and will continue to manage these assets aggressively in order to further reduce levels going forward.  These market conditions and the tightening of credit have led to increased delinquencies in our loan portfolio, increased market volatility, added pressure on our capital, a lower net  interest margin and net losses in the prior two years.
 
These factors have magnified the need for careful management of the Bank.  Regulatory scrutiny within the banking industry has increased significantly, and as a result, the Bank’s management team and Board of Directors continue 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 has resulted in a decline in loans, 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, as well as improve regulatory capital ratios.
 
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 Company (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;
 
 
·
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.  The primary focuses continue to be reducing classified and non-performing assets, maintaining adequate levels of capital and returning the Bank to profitable operating levels.  As of March 31, 2011, the Bank was in full compliance with the Order.

 
17

 

Balance Sheet Review
 
Total assets at March 31, 2011 were $274,799,000, representing a $4,569,000 (1.64%) decrease from December 31, 2010.  Investment securities decreased $1,951,000 as compared to December 31, 2010.  Loans decreased $3,341,000 (2.05%) at March 31, 2011 as compared to December 31, 2010, primarily due to loan pay-downs.  Deposits decreased $3,357,000 (1.38%) from December 31, 2010.  The decrease in deposits is primarily attributable to decreases in interest-bearing checking accounts of $5,319,000 and time deposits of $4,729,000 as compared to December 31, 2010 balances, offset by an increase in non-interest bearing checking accounts of $2,904,000, money market accounts of $2,124,000 and savings account balances of $1,664,000.  Securities sold under repurchase agreements decreased $1,413,000 at March 31, 2011 as compared to December 31, 2010.  The allowance for loan losses at March 31, 2011 was $4,001,000, compared to the December 31, 2010 balance of $3,528,000, representing 2.51% of total loans at March 31, 2011, compared to 2.16% of total loans at December 31, 2010. Cash and cash equivalents increased $1,400,000 from December 31, 2010.  Total stockholders’ equity at March 31, 2011 of $23,062,000 increased $127,000 (0.55%) from December 31, 2010.
 
The following table presents a summary of the Bank’s loan portfolio by loan type at March 31, 2011 and December 31, 2010 (dollars are in thousands).
 
   
March 31, 2011
   
December 31, 2010
 
   
Amount
   
Percentage
   
Amount
   
Percentage
 
Commercial, financial and agricultural
  $ 23,756       14.9 %   $ 25,199       15.5 %
Real estate – mortgage
    113,241       71.0 %     115,667       71.0 %
Real estate –construction
    16,859       10.5 %     16,335       10.0 %
Consumer
    5,739       3.6 %     5,738       3.5 %
Total loans
  $ 159,595       100.0 %   $ 162,939       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 $22,434,000 at March 31, 2011, representing a decrease of $52,000 (0.23%) from December 31, 2010.  This decrease is attributable to a decrease of $640,000 in accruing loans 90 days or more past due, offset by increases of $436,000 in non-accrual loans and $153,000 in other real estate owned.  Total nonperforming assets were 14.05% of total loans at March 31, 2011, compared to 13.80% at December 31, 2010.  Nonperforming assets represented 8.16% of total assets at March 31, 2011, compared to 8.05% of total assets at December 31, 2010. Nonaccrual loans represented 10.52% of total loans outstanding at March 31, 2011, compared to 10.04% of total loans outstanding at December 31, 2010.  The Bank continues to focus on reducing nonperforming assets and this will be a major strategic objective going forward.  There were no related party loans which were considered to be nonperforming at March 31, 2011.  A summary of non-performing assets at March 31, 2011, December 31, 2010 and March 31, 2010 is presented in the following table (dollars are in thousands).
 
   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
Other real estate owned
  $ 5,589       5,436       8,775  
Repossessions
    10       10       -  
Non-accrual loans
    16,794       16,358       16,577  
Accruing loans 90 days or more past due
    41       681       -  
    $ 22,434       22,485       25,352  

 

 
18

 


 
The table below details the changes in other real estate owned for the three months ending March 31, 2011 and 2010 (dollars are in thousands).
 
   
2011
   
2010
 
Balance at January 1
  $ 5,436       6,915  
Transfer from loans to other real estate
    283       2,383  
Capital Improvements on other real estate
    -       43  
External and internal sales of other real estate
    (116 )     -  
Net write-downs and loss on sales
    (14 )     (566 )
Balance at March 31
  $ 5,589       8,775  

 
During the first quarter 2009, the Bank formed Motel Holdings Georgia, Inc., a subsidiary Company for the purpose of holding a motel that was foreclosed upon by the Bank in January 2009.  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 contracted with an independent hospitality management company to operate the motel while the Bank marketed the motel for sale.  During the second quarter of 2010, the Bank sold the motel and recognized a loss on the sale of $204,000.  Upon the sale of the motel, Motel Holdings Georgia became inactive and remains inactive as of March 31, 2011.
 
At March 31, 2011, the Company had loan concentrations in the housing industry and in the hotel and motel industry. Total commitment amounts for hotel and motel loans were $21,008,000 at March 31, 2011, of which the full amount was funded and outstanding.  The Company’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry.
 
As of March 31, 2011, the Company had total commitments for construction and development loans of $15,308,000, of which $12,994,000 was funded and outstanding.  The local housing industry has slowed considerably over the past 18 to 24 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.
 
 
Results of Operations
 
Net interest income increased $18,000 (0.86%) in the first three months of 2011 compared to the same period for 2010 as a result of an increase in the interest rate spread.  The Bank’s net interest margin for the first three months of 2011 was 3.32%, compared to 3.28% for the same time period during 2010.  Yield on interest earning assets, including nonaccrual loans, for the three-month period ending March 31, 2011 was 4.35%, compared to 4.92% for the three-month period ending March 31, 2010.  Average rate paid on interest bearing liabilities was 1.19% for the three months ending March 31, 2011, compared to 1.89% for the same period during 2010.  The reduction in the average rate paid on interest bearing liabilities is a result of a lower interest rate environment in 2011 and a reduction of $14,969,000 in average time deposits during the first three months of 2011 as compared to the same time period in 2010.
 
Interest income for the first three months of 2011 was $2,766,000, representing a decrease of $373,000 (11.88%) as compared to the same period in 2010.  Interest expense for the first three months of 2011 decreased $391,000 (37.42%) compared to the same period in 2010.  The decrease in interest income during the first three months of 2011 compared to the same period in 2010 is primarily attributable to a lower average level of outstanding loans in 2011 as compared to 2010.  Year-to-date average loans were $17,573,000 lower during the first three months of 2011 as compared to 2010.  Loan demand continues to be weak in the Bank’s market and loan pay-offs have exceeded production of new loans.  The decrease in average loans was offset by increases in average investment securities of $9,575,000 and an increase in interest-earning due from bank accounts of $7,466,000. The decrease in interest expense is primarily attributable to a lower interest rate market and a decrease in interest-bearing deposits of $4,419,000 during the first three months of 2011 as compared to the same time period for 2010.  The reduction in interest-bearing liabilities is primarily due to decreases in average time deposits of $14,969,000, offset by increases in average interest-bearing demand deposits of $5,524,000 and average savings deposits of $5,026,000.
 

 
19

 

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 three months ended March 31, 2011, the provision for loan losses was $500,000, compared to $200,000 for the same period in 2010. The provision for loan losses increased in 2011 as compared to 2010 as a result of a higher level of historic charge-offs at March 31, 2011 as compared to March 31, 2010.  The historic charge-offs are primarily tied to the construction and real estate development industry, which has continued to experience a prolonged downturn throughout 2010 and the first three months of 2011.  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 Company 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.
 
The following table summarizes information concerning the allowance for loan losses for the three-month periods ended March 31, 2011 and 2010.  Dollar amounts are in thousands.

   
Three Months Ending
 
   
March 31,
 
   
2011
   
2010
 
             
Balance at beginning of period
  $ 3,528     $ 3,497  
Charges-offs:
               
Commercial, financial and agricultural
    35       -  
Installment
    3       -  
Real Estate
    1       19  
Total charge-offs
    39       19  
Recoveries:
               
Commercial, financial and agricultural
    1       2  
Installment
    5       -  
Real Estate
    6       5  
Total recoveries
    12       7  
Net charge-offs
    27       12  
Provisions charged to operations
    500       200  
Balance at end of period
  $ 4,001     $ 3,685  
Ratio of net charge-offs during the period to average loans outstanding during the period
    0.02 %     0.01 %

 
Other income for the first three months of 2011 decreased $175,000 (24.93%) compared to the first three months of 2010. This decrease is primarily attributable to decreases of $132,000 in income on other real estate owned and $84,000 decrease in non-sufficient funds service charges, offset by increases of $23,000 in gains on sales of investment securities, $20,000 in ATM fees and $15,000 in mortgage banking income.
 
The primary source of the Bank’s income on other real estate owned during 2010 was revenue generated by the operation of a motel that the Bank foreclosed on in February of 2009.  The motel was 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.  During the second quarter of 2010, the Bank sold the motel and recognized a loss of $204,000 on the sale.
 

 
20

 

Other expenses for the first three months of 2011 decreased $89,000 (3.95%) compared to the first three months in 2010. The decrease is attributable to a decrease in expenses on other real estate owned of $162,000 and decrease in salaries and employee benefits expense of $69,000, offset by an increase in non-loan related charge-offs and forgeries of $85,000.
 
The reduction in expenses on other real estate owned is due to the sale of the motel mentioned previously.  The reduction in salaries and benefits expense is primarily due the Bank having fewer employees in 2011 as compared to 2010.  This reduction in employees is due to attrition of the Bank’s work force.  As employees have left the Bank over the past year, management has evaluated the ability of the Bank to continue normal operations without replacing the departed employees.  As a result, the Bank has reduced its full-time equivalent employees from 87 full-time equivalent employees at January 1, 2010 to 81.5 full-time equivalent employees at March 31, 2011.
 
The increase in non-loan related charge-offs and forgeries in the first three months of 2011 is primarily due to a significant increase in debit card disputes due to compromised debit cards.  The Bank experienced $78,000 in debit card losses during the first three months of 2011, compared to losses of $2,900 during the same time period in 2010.
 
For the three months ended March 31, 2011, the Bank showed an income tax expense benefit of $10,000.
 
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.
 
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 March 31, 2011, the difference between the Bank’s liabilities and assets repricing or maturing within one year, after applying the betas, was $27,000,000, indicating that the Bank was asset 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 $273,000 on an annual basis if rates increased 100 basis points, and would increase $111,000 on an annual basis if rates decreased 100 basis points.
 
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.
 

 
21

 

Liquidity
 
The Company 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 Company 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 Company to monitor its liquidity to meet regulatory requirements and its local funding requirements.
 
The Company 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 Company’s short-term and marketable assets, including cash, federal funds sold, and unpledged investment securities by the sum of the Company’s deposit liabilities.  At March 31, 2011, the Company’s liquidity ratio was 20.2%.  This level of liquidity is within the Bank’s goal of maintaining a sufficient level of liquidity in all expected economic environments.
 
The Company 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 Company through available Federal Home Loan Bank advances, none of which were outstanding at March 31, 2011.
 
During the first three months of 2011, cash and cash equivalents increased $1,400,000 to a total of $31,359,000 at March 31, 2011.  Cash inflows from operations totaled $883,000 during the first three months of 2011, while outflows from financing activities totaled $4,770,000, comprised of net decreases of $3,357,000 in deposits and net decreases in securities sold under repurchase agreements of $1,413,000.
 
Investing activities provided $5,286,000 of cash and cash equivalents, consisting primarily of proceeds from calls, maturities and paydowns of investment securities of $3,038,000, net decreases in loans of $3,032,000 and proceeds from the sales of investment securities of $719,000, offset by purchases of investment securities of $1,601,000.  At March 31, 2011, the Bank had $72,047,000 of investment securities available for sale.
 
Contractual Obligations and Commitments
 
The Company 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 Company in particular classes of financial instruments.  At March 31, 2011, the contractual amounts of the Company’s commitments to extend credit and standby letters of credit were $19,229,000 and $506,000, 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 Company to guarantee the performance of a customer to a third party.
 

 
22

 


 
Capital
 
The following tables present the Bank’s regulatory capital position at March 31, 2011 and December 31, 2010, based on the regulatory capital requirements of federal banking agencies.  The capital ratios of the Company are essentially the same as those of the Bank at March 31, 2011 and December 31, 2010 and therefore only the Bank’s ratios are presented.
 
Risk-Based Capital Ratios
 
March 31, 2011
 
December 31, 2010
             
Tier 1 Capital, Actual
    13.2 %     12.9 %
Tier 1 Capital minimum requirement
    4.0 %     4.0 %
                 
Excess
    9.2 %     8.9 %
                 
Total Capital, Actual
    14.5 %     14.2 %
Total Capital minimum requirement
    8.0 %     8.0 %
                 
Excess
    6.5 %     6.2 %
                 
Leverage Ratio
               
                 
Tier 1 Capital to adjusted total assets
    8.4 %     8.1 %
Minimum leverage requirement
    4.0 %     4.0 %
                 
Excess
    4.4 %     4.1 %


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 March 31, 2011.  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.
 
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.
 

 
23

 



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
 
Item 3.  Defaults Upon Senior Securities
 
None
 
Item 5.  Other Information
 
None
 
Item 6.    Exhibits
 
(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 Company, 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 Company, 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.


 
24

 


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:    May 16, 2011                                                              
 
 
 
 
By:   /s/ Steven A. Rogers
       Steven A. Rogers, Vice President and CFO
       (Principal Financial Officer)
 
Date:    May 16, 2011                                                              
 
 
   












25