Oconee Financial Corporation

What they do

Oconee Financial Corporation, incorporated in Georgia in 1998, conducts all activities through its wholly owned subsidiary, Oconee State Bank, which was incorporated in 1959. The Bank is a community-oriented full-service commercial bank headquartered in Oconee County, Georgia, with four full-service banking offices and five ATMs. It emphasizes retail and small business banking and offers consumer and commercial checking, NOW accounts, money market and savings accounts, CDs, IRAs, safe deposit facilities, money transfers, secured and unsecured loans, lines of credit, and VISA and MasterCard accounts.

Revenue drivers

• Net interest income — Earned from interest on loans and investment securities, less interest paid on deposits and borrowings; net interest income was $8.7 million in 2011, up from $8.5 million in 2010.
• Loan portfolio — At December 31, 2011, loans totaled $143.9 million, with real estate mortgage loans making up 75.7% ($109.0 million), commercial, financial and agricultural loans 12.9% ($18.6 million), real estate construction 7.7% ($11.1 million), and consumer loans 3.7% ($5.3 million).
• Deposit funding — Deposits totaled $236.6 million at December 31, 2011, including $53.5 million in NOW accounts, $45.1 million in time deposits under $100,000, $41.5 million in savings, $38.7 million in time deposits of $100,000 or more, $34.0 million in non-interest bearing demand deposits, $11.8 million in money market accounts, and $12.1 million in IRAs.
• Other income — Non-interest income from service charges, fees and other banking services was $2.2 million in 2011, down from $2.9 million in 2010.

Recent performance

The Company reported a net loss of $2.1 million in 2011, or $2.36 per diluted share, compared with a net loss of $1.1 million, or $1.19 per diluted share, in 2010. The provision for loan losses rose to $4.3 million in 2011 from $3.4 million in 2010, reflecting continued asset quality pressure. Net interest income increased slightly to $8.7 million in 2011 from $8.5 million in 2010, while other income declined to $2.2 million from $2.9 million. As of March 31, 2012, total assets were $277.3 million, total liabilities were $254.7 million, and shareholder equity was $22.6 million. Operating cash flow was $2.3 million in 2011, down from $3.6 million in 2010.

Strategy

Management has focused on strategies to increase revenues and control expenses in an effort to return the Bank to profitability. Loan underwriting standards have been tightened and credit risk will continue to be closely monitored. Balance sheet management strategies have been developed which have resulted in a decline in loans, deposit balances and total assets in order to reduce interest expense, better match funding with funding needs, and improve regulatory capital ratios. The Bank continues to operate under a 2009 Consent Agreement with the FDIC and the Georgia Department of Banking and Finance, which imposes requirements including maintaining a Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 10%, collecting or charging off problem loans, reducing adversely classified assets, and strengthening lending and collection policies.

Risks

• Asset quality deterioration — Nonperforming assets and charge-offs of problem loans have materially increased over the past three years, and the provision for loan losses rose to $4.3 million in 2011 from $3.4 million in 2010.
• Regulatory restrictions — The Bank operates under a 2009 cease-and-desist order that imposes capital ratio requirements (Tier 1 leverage of at least 8% and total risk-based capital of at least 10%), restricts brokered deposits, and prohibits the Bank from paying cash dividends to Oconee Financial Corporation.
• Prolonged economic weakness — Management states that the recession has reduced liquidity and credit quality, lowered real estate values, and increased delinquencies in the loan portfolio, leading to net losses in each of the past three years.
• Declining balance sheet — Total assets have declined by $76.7 million, or 22.8%, over the past five years, with loans declining to $143.9 million in 2011 from $217.9 million in 2006 and deposits declining to $236.6 million from $304.0 million over the same period.

Outlook

Management has not provided specific earnings guidance, but it is focused on returning the Bank to profitability through revenue enhancement and expense control. It plans to continue tight underwriting and balance sheet management to improve regulatory capital ratios and match funding with funding needs. The Bank remains subject to the 2009 regulatory order and must continue to comply with its requirements.