UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM 1-A

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

OCONEE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Georgia		6022		58-2442250
State of Incorporation		Primary Standard Industrial Classification Code		I.R.S. Employer Identification Number

41 N. Main Street

Watkinsville, Georgia 30677

(706) 769-6611

(Address, including zip code, and telephone number, including area code, of principal executive offices)

 

 

CONTACT INFORMATION

Pre-Qualification		Service Agent
T. Neil Stevens President & CEO 41 N. Main Street Watkinsville, Georgia 30677 (706) 769-6611 nstevens@oconeestatebank.com		Oconee Financial Corporation c/o James R. McLemore 35 N. Main Street Watkinsville, GA 30677

 

 

 

Oconee Financial Corporation

Up to 149,066 Shares of Common Stock

at

$28.93 Per Share

 

 

Oconee Financial Corporation, which we refer to herein as “Oconee,” is offering shares of our common stock in connection with the conversion merger of Elberton Federal Savings & Loan Association, which we refer to as “Elberton,” in which Elberton will convert from the mutual to the stock form of organization and simultaneously merge with and into Oconee State Bank, a wholly owned subsidiary of Oconee Financial Corporation. We are offering for sale up to 149,066 shares of our common stock on a “best efforts” basis. We are offering the shares first to eligible members of Elberton Federal Savings & Loan Association and then (if any shares remain available) to residents of Elberton or Elbert County, our existing shareholders and the general public. The purchase price for all subscribers is $28.93 per share. The offering will commence on or about May 8, 2023 and terminate on June 20, 2023, and we will only close the offering if we sell a minimum of 110,180 shares in the offering. We will escrow your subscription funds in a segregated deposit account at Oconee State Bank, our wholly-owned subsidiary.

Although our common stock is quoted on the OTCQX (symbol: OSBK), there has been a very limited trading market in our common stock, and it is not anticipated that an active market will develop as a result of this offering. See “RISK FACTORS.” As of May 4, 2023, the last reported sales price of our common stock was $34.10.

Investing in our common stock involves risks. See “RISK FACTORS” beginning on Page 20.

 

		Price to Public				Underwriting Discounts and Commissions				Other Expenses				Proceeds to Issuer				Proceeds to Other Persons
Per Share		$	28.93			$	2.03			$	3.40	1		$	23.50			$	0
Total Minimum		$	3,187,500			$	223,125			$	375,000			$	2,589,375			$	0
Total Maximum		$	4,312,500			$	301,875			$	375,000			$	3,635,625			$	0

 

1	Expenses fixed at $375,000, per share amount calculated based on sale of 110,180 shares.

Neither the Securities and Exchange Commission, any state securities commission, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System nor the Georgia Department of Banking and Finance has approved or disapproved of the securities to be issued in connection with this offering or determined if the offering circular is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

The securities to be issued in this offering are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of any bank, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

 

For assistance, contact the Stock Information Center at (312) 521-1600.

The date of this offering circular is May 5, 2023

REQUIRED LEGEND FOR WASHINGTON, DC RESIDENTS ONLY:

THESE SECURITIES ARE OFFERED FOR SALE IN THE DISTRICT OF COLUMBIA PURSUANT TO REGISTRATION WITH THE DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE AND SECURITIES REGULATION, BUT REGISTRATION IS PERMISSIVE ONLY AND DOES NOT CONSTITUTE A FINDING THAT THIS PROSPECTUS IS TRUE, COMPLETE, AND NOT MISLEADING, NOR HAS THE DEPARTMENT OF INSURANCE AND SECURITIES REGULATION PASSED IN ANY WAY UPON THE MERITS OF, RECOMMENDED, OR GIVEN APPROVAL TO THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

REQUIRED LEGEND FOR LOUISIANA RESIDENTS ONLY:

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF SECURITIES OF THE STATE OF LOUISIANA OR THE SECURITIES and EXCHANGE COMMISSION NOR HAS THE COMMISSIONER OF SECURITIES OF THE STATE OF LOUISIANA OR THE SECURITIES EXCHANGE COMMISSIONER PASSED UPON ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

REQUIRED LEGEND FOR MARYLAND RESIDENTS ONLY:

THESE SECURITIES ARE OFFERED FOR SALE IN THE STATE OF MARYLAND PURSUANT TO REGISTRATION WITH THE DIVISION OF SECURITIES OF THE DEPARTMENT OF LAW OF MARYLAND, BUT REGISTRATION IS PERMISSIVE ONLY AND DOES NOT CONSTITUTE A FINDING THAT THIS PROSPECTUS IS TRUE, COMPLETE, AND NOT MISLEADING, NOR HAS THE DIVISION OF SECURITIES PASSED IN ANY WAY UPON THE MERITS OF, RECOMMENDED, OR GIVEN APPROVAL TO THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

REQUIRED LEGEND FOR MICHIGAN RESIDENTS ONLY:

THESE SECURITIES ARE OFFERED PURSUANT TO A REGISTRATION ORDER ISSUED BY THE STATE OF MICHIGAN. THE STATE OF MICHIGAN DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF ANY SECURITIES, NOR DOES IT PASS UPON THE TRUTH, MERITS, OR COMPLETENESS OF ANY PROSPECTUS OR ANY OTHER INFORMATION FILED WITH THIS STATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS			1
SUMMARY			2
SUMMARY FINANCIAL DATA			8
Selected Historical Financial Data of Oconee Financial			9
Selected Historical Financial Data of Elberton			11
Unaudited Pro Forma Condensed Combined Financial Information			13
Comparative Historical and Pro Forma Unaudited Share Data			19
RISK FACTORS			20
DILUTION OF EXISTING OCONEE SHAREHOLDERS			32
TERMS OF THE OFFERING			32
General			32
Appraised Value of Elberton; Total Dollar Amount of the Offering and Number of Shares Offered			33
Purchase Price			34
Maximum and Minimum Purchase Limitations			34
Transfer Restrictions on Oconee Common Stock Being Sold			35
Offering Process			35
Timing of Completion of the Merger Conversion and Sale of Shares			38
Conditions to Completion of the Offering and Termination of the Offering			38
Certain Federal Income Tax Consequences			39
DESCRIPTION OF MERGER CONVERSION AND RELATED AGREEMENTS			40
The Merger Agreement			40
Daniel Graves Employment Agreement			48
Stock Award Agreements			48
PLAN OF DISTRIBUTION			48
USE OF PROCEEDS			49
DESCRIPTION OF BUSINESS			49
The Company			49
The Bank			50
Recent Accounting Pronouncements			51
Market Area and Competition			51
Employees			51
Properties			52
Legal Proceedings			52
MANAGEMENT DISCUSSION AND ANALYSIS			52
Critical Accounting Policies			52
Recently Issued Accounting Standards			53
Analysis of Financial Condition			53
Investment Securities			53
Loans and Asset Quality			54
Deposits			59
Income Taxes			60
Borrowing Activities and Liquidity			60
Capital Resources			61
Results of Operations			62
Average Balances and Yields			64
Rate/Volume Analysis			66
Acquisition of Elberton Federal Savings & Loan Association			67
Recent Developments			67

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this offering circular may constitute “forward-looking statements” within the meaning of the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “would,” “endeavor,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “potential,” “plan,” “predict,” “project,” “seek,” “should,” “will” or the negative of such terms and other similar words and expressions of future intent. These forward-looking statements are subject to certain known and unknown risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 

•

significant volatility and deterioration in the credit and financial markets;

 

•

adverse changes in general economic conditions, including any potential recessionary conditions;

 

•

the effect of the COVID-19 pandemic on us and our customers, employees and third-party service providers;

 

•

deterioration in our asset or credit quality, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses and provision for loan losses that may be impacted by deterioration in the residential and commercial real estate markets;

 

•

inflation and changes in the interest rate environment (including changes in the shape of the yield curve) that reduce our margins or the fair value of financial instruments;

 

•

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;

 

•

the availability of capital;

 

•

changes in laws or government regulations affecting financial institutions, including changes in regulatory costs and capital requirements, as well as changes in monetary and fiscal policies;

 

•

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

 

•

our ability to attract and retain deposits and loans in view of increased competitive pressures and other factors;

 

•

increases in premiums for deposit insurance;

 

•

our ability to control general operating costs and expenses;

 

•

the soundness of other financial institutions;

 

•

the potential for regulatory action against us or the Bank, which could require us to increase our allowance for credit losses, write down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

 

1

•

environmental conditions, including natural disasters, or the impacts of war or terrorist attacks, any of which may disrupt our business, our operations or our borrowers;

 

•

the failure or security breach of computer systems on which we depend;

 

•

the effects of changes in laws, regulations, and accounting rules, or their interpretations;

 

•

general economic or business conditions in Georgia and other regions where the Bank has operations, including, but not limited to, adverse changes in economic conditions resulting from a prolonged economic downturn;

 

•

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

 

•

changes in consumer spending, borrowing and savings habits;

 

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board;

 

•

other risks that are described in this offering circular under “RISK FACTORS;” and

 

•

our ability to manage the risks involved in the foregoing.

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed elsewhere in this report or otherwise disclosed by us. Forward-looking statements included herein speak only as of the date hereof and should not be relied upon as representing our expectations or beliefs as of any date after the date of this report. Except as required by law, we undertake no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in our securities.

SUMMARY

 

 

2

 

3

 

4

Time Period for Offering		The Subscription Offering and the Community Offering will run concurrently with each other. The Offering will commence on May 8, 2023 and will expire on June 20, 2023, unless earlier terminated or extended by Oconee.
Eligible Subscribers in Subscription Offering		The following persons will receive nontransferable subscription rights to purchase shares of Oconee Common Stock in the Subscription Offering in the following descending order of priority:   1)  Each person that held deposits of $50 or more in Elberton on March 31, 2020.   2)  Because the Eligibility Record Date is more than 15 months before the date of the latest amendment to the Application filed prior to OCC approval as described in the “Supplemental Eligibility Record Date” definition in 12 C.F.R. § 192.25, each person, other than Elberton’s directors, officers and their Associates, that held deposits of $50 or more in Elberton on the last day of the calendar quarter preceding approval of the Plan of Conversion by the OCC; and   3)  Any other person who is a member of Elberton as of the date fixed by the Elberton Board in accordance with Elberton’s Bylaws and OCC regulations for determining the members eligible to vote at the Elberton Special Meeting.
Eligible Subscribers in Community Offering		To the extent there are shares of Oconee Common Stock available for purchase after allocation of shares in the Subscription Offering, the following persons will have the right to subscribe to shares of Oconee Common Stock in the Community Offering:   1)  Natural persons, including trusts of natural persons, residing in Elberton, Georgia or Elbert County, Georgia;   2)  Shareholders of record of Oconee on the last day of the month immediately preceding the effectiveness of this offering circular; and   3)  The general public.
Valuation of Elberton		Federal regulations require that in connection with the Merger Conversion, at a minimum, the aggregate purchase price of the securities sold in the Offering be based upon the estimated pro forma market value of Elberton as determined by an independent appraisal. Elberton has retained RP Financial, LC, which is experienced in the evaluation and appraisal of financial institutions, to prepare the appraisal. Pursuant to the regulatory conversion guidelines, the 15% valuation range indicates a minimum value of $3,187,500 and a maximum value of $4,312,500, with a midpoint of $3,750,000, for Elberton as of October 28, 2022.

 

5

Minimum Investment		No person may purchase fewer than 17 shares of Oconee Common Stock. That means all investors in the offering must invest a minimum of $491.81 in the Community Offering.
Maximum Investment		The maximum aggregate amount of Oconee Common Stock which any person, together with any associate or group of persons acting in concert may, directly or indirectly, subscribe for or purchase in the Offering shall not exceed 5% of the total number of shares of Oconee Common Stock sold in the offering.
Price Per Share		$28.93 per share.
OTCQX Symbol		OSBK
Limited Market for Oconee Common Stock		Although our common stock is quoted on the OTCQX market, there has been a very limited trading market in our common stock, and it is not anticipated that an active market will develop as a result of this Offering.
No Preemptive Rights		Holders of shares of Oconee Common Stock are generally entitled to preemptive rights in the same class of shares in proportion to their holdings of shares of such class, but they are not entitled to preemptive rights in connection with this Offering because these shares are issued pursuant to an acquisition of Elberton.
Restrictions on Transfer		Purchasers of Oconee Common Stock in the Offering will be prohibited from transferring any Oconee Common Stock for a period of 60 days following the date on which the Merger Conversion is consummated in accordance with the Merger Agreement and the Plan of Conversion. In addition, shares of Oconee Common Stock that are purchased by Elberton’s directors, officers and their Associates in the Offering may not be sold for one year after the Closing Date, except that in the event of the death of such director, officer or Associate, the successor in interest may sell the shares.
Shares of Oconee common stock outstanding		896,497 as of May 4, 2023.   1,045,563 after consummation of this Offering, assuming the maximum number of shares are sold.

 

6

Dividends and Distributions		Oconee currently pays a dividend on its common stock on an annual basis, and it anticipates declaring and paying an annual dividend after the completion of the Merger Conversion. Oconee has no current intention to change its dividend strategy, but has and will continue to evaluate that decision on an annual basis. In 2023, 2022, and 2021, Oconee declared annual dividends of $0.85, $0.70, and $0.65 per share, respectively. After the Merger Conversion, the final determination of the timing, amount and payment of dividends on Oconee common stock will be at the discretion of its board of directors and will depend upon the earnings of Oconee and its subsidiary, the financial condition of Oconee and other factors, including general economic conditions and applicable governmental regulations and policies.
Plan of Distribution		We are offering these shares on a “best efforts” basis through our directors and officers and with the assistance of Performance Trust Capital Partners LLC. Our directors and officers will not be entitled to receive any discounts or commissions for selling any shares. The offering is not underwritten, but we have retained the services of Performance Trust as placement agent to assist us on a best-efforts basis with the Offering. Performance Trust is not obligated to sell or to purchase any of the shares.
Participation of Oconee Directors and Officers		Our executive officers and directors may subscribe to purchase shares in the Community Offering in their discretion, but they have made no commitments to do so, and any such subscription will not receive any preference or priority above other similarly-situated Community Offerees.
Participation of Elberton Directors and Officers		Elberton’s directors, officers and their Associates may subscribe to purchase shares in the Subscription Offering, but they have made no commitments to do so. In the event of an oversubscription, subscription rights received by Elberton’s directors, officers and their Associates based on their increased deposits in Elberton during the one-year period preceding the Eligibility Record Date, will be subordinated to all other subscriptions of Eligible Members in the Subscription Offering.   Additionally, Elberton’s directors and officers are receiving certain other financial payments and incentives in connection with the Merger Conversion. See page 48.
How to Subscribe		To subscribe for shares of Oconee Common Stock, Eligible Members and Community Offerees must complete the enclosed Stock Order Form and return it, with full payment. A Stock Order Form, once received by Oconee, cannot be amended, modified, or rescinded by the Subscriber.   You may submit your Stock Order Form by (1) overnight delivery to the indicated address on the Stock Order Form and (2) hand delivery to the Bank’s office located at 41 N. Main Street, Watkinsville, Georgia or Elberton’s office located at 6 East Church Street, Elberton, Georgia, during normal business hours or (3) by mail using the postage-paid return envelope accompanying this Offering Circular. Overnight or hand delivery is strongly encouraged. Subscribers who have deposit accounts with Elberton may, instead of providing full payment with the Stock Order Form, include instructions on the Stock Order Form as to withdrawal from such deposit accounts. See “TERMS OF THE OFFERING—Method of Payment.”

 

7

SUMMARY FINANCIAL DATA

The following table presents selected historical financial information concerning Oconee, which should be read in conjunction with our audited consolidated financial statements, including the related notes, and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” included in this offering circular. The selected financial data as of December 31, 2021 and 2022 is derived from our audited consolidated financial statements and related notes which are included in this offering circular. Throughout this offering circular, information is for Oconee and its subsidiaries on a consolidated basis unless otherwise stated.

 

8

Selected Historical Financial Data of Oconee Financial

The following table sets forth certain of Oconee’s consolidated financial data as of the end of and for the years ended December 31, 2022 and December 31, 2021, which are derived from Oconee’s audited consolidated financial statements, which are included in this Offering Circular. The selected historical financial data below is only a summary and should be read in conjunction with Oconee’s consolidated financial statements.

 

		December 31,
		2022				2021
		(Amounts in thousands)
Results of Operations:
Interest income		$	17,852			$	17,272
Interest expense			1,443				1,646
Net interest income			16,409				15,626
Provision for loan losses			—				456
Net interest income after provision for loan losses			16,409				15,170
Noninterest income			4,850				4,381
Noninterest expenses			15,930				15,819
Income before income taxes			5,329				3,732
Income tax expense			1,205				732
Net income		$	4,124			$	3,000
Financial Condition:
Total assets		$	536,748			$	571,142
Investment securities available for sale			159,640				162,165
Loans, net of unearned income			300,130				302,523
Allowance for loan losses			(4,549	)			(4,542	)
Total deposits			494,870				519,694
Subordinated notes			9,818				9,794
Total stockholders’ equity			29,083				39,333

 

9

		December 31,
		2022				2021
Performance Ratios:
Return on average assets			0.75	%			0.56	%
Return on average equity			13.29	%			7.73	%
Net interest margin			3.20	%			3.05	%
Efficiency ratio			75.54	%			80.02	%
Dividend payout ratio			15.21	%			19.41	%
Average equity to average assets			5.66	%			7.19	%
Net loans to deposits at period end			60.57	%			58.25	%
Asset Quality:
Allowance for loan losses to total loans			1.52	%			1.50	%
Non-accrual loans to total loans, gross			1.77	%			1.86	%
Nonperforming assets to total loans and other real estate owned			1.77	%			1.86	%
Allowance for loan losses to non-performing loans			85.45	%			80.70	%
Net loan losses (recoveries) to average loans			0.00	%			-0.01	%
Per Share Data:
Earnings per share, basic			4.60				3.35
Earnings per share, diluted			4.60				3.35
Cash dividends paid			0.70				0.65
Book value per common share			32.43				43.88
Weighted average shares outstanding, basic			896,991				896,260
Weighted average shares outstanding, diluted			896,991				896,260
Regulatory Capital Ratios:
Tier 1 capital to adjusted average assets (Leverage ratio)			9.09	%			8.09	%
Common equity Tier 1 capital to risk-weighted assets			13.39	%			12.88	%
Tier 1 capital to risk-weighted assets			13.39	%			12.88	%
Total capital to risk-weighted assets			14.63	%			14.13	%

 

10

Selected Historical Financial Data of Elberton

The following table sets forth certain of Elberton’s financial data as of the end of and for the years ended December 31, 2022 and 2021. The historical financial information as of the end of and for the years ended December 31, 2022 and 2021 is derived from Elberton’s audited financial statements, which are included in this offering circular. The selected historical financial data below is only a summary and should be read in conjunction with Elberton’s financial statements.

 

		December 31,
		2022				2021
		(Amounts in thousands)
Results of Operations:
Interest income		$	935			$	956
Interest expense			142				174
Net interest income			793				782
Provision for loan losses			—				—
Net interest income after provision for loan losses			793				782
Noninterest income			1				2
Noninterest expenses			900				929
Income before income taxes			(106	)			(145	)
Income tax expense			—				—
Net income		$	(106	)		$	(145	)
Financial Condition:
Total assets		$	27,884			$	28,325
Investment securities available for sale			2,239				2,733
Loans, net of unearned income			23,287				22,495
Allowance for loan losses			(41	)			(41	)
Total deposits			20,601				21,308
Total capital			4,762				4,983

 

11

		December 31,
		2022				2021
Performance Ratios:
Return on average assets			(0.40	%)			(0.51	%)
Return on average equity			(2.23	%)			(2.80	%)
Net interest margin			3.02	%			3.02	%
Efficiency ratio			113.60	%			118.44	%
Net loans to deposits at period end			113.04	%			105.57	%
Average interest-earning assets of average interest-bearing			120.94	%			111.31	%
Asset Quality:
Allowance for loan losses to total loans			0.17	%			0.18	%
Non-accrual loans to total loans, gross			0.77	%			2.17	%
Nonperforming assets to total loans and other real estate owned			0.77	%			2.17	%
Allowance for loan losses to non-performing loans			22.91	%			8.34	%
Net loan losses (recoveries) to average loans			0.00	%			0.00	%
Regulatory Capital Ratios:
Tier 1 capital to adjusted average assets (Leverage ratio)			18.02	%			17.58	%
Common equity Tier 1 capital to risk-weighted assets (1)			N/A				N/A
Tier 1 capital to risk-weighted assets (1)			N/A				N/A
Total capital to risk-weighted assets (1)			N/A				N/A

 

(1)	Elberton elected to use the community bank leverage ratio (CBLR) for December 31, 2022 and 2021. Therefore, they were not required to calculate tier 2 capital nor make any deductions that would have been taken from tier 2 capital for December 31, 2022 and 2021.

 

12

Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information combines the historical consolidated financial position and results of operations of Oconee and Elberton, as an acquisition by the Bank using the acquisition method of accounting and giving effect to the related pro forma adjustments described in the accompanying notes. Under the acquisition method of accounting, the assets and liabilities of Elberton will be recorded by Oconee at their respective fair values as of the date the Merger Conversion is completed. In addition, the unaudited pro forma condensed combined financial information includes the effect of Oconee’s sale of 129,623 shares of stock. Certain reclassifications have been made to the historical financial statements of Elberton to conform to the presentation in Oconee’s financial statements.

The unaudited pro forma condensed combined balance sheet gives effect to the Merger Conversion and sale of Oconee Common Stock as if the transaction had occurred on December 31, 2022. The unaudited pro forma condensed combined income statements for the year ended December 31, 2021 give effect to the Merger Conversion and to the sale of Oconee Common Stock as if the transaction had occurred on January 1, 2021.

A final determination of the fair values of Elberton’s assets and liabilities, which cannot be made prior to the completion of the Merger Conversion, will be based on the actual net tangible and intangible assets of Elberton that exist as of the date of completion of the transaction. Consequently, fair value adjustments and amounts preliminarily allocated to a bargain purchase or goodwill and identifiable intangibles could change significantly from those allocations used in the unaudited pro forma combined condensed consolidated financial statements presented herein and could result in a material change in amortization of acquired intangible assets.

The unaudited pro forma condensed combined financial information included herein is presented for informational purposes only and does not necessarily reflect the financial results of the combined companies had the companies actually been combined at the beginning of the periods presented. The adjustments included in this unaudited pro forma condensed combined financial information are preliminary and may be revised and may not agree to actual amounts recorded by Oconee upon consummation of the Merger Conversion. This financial information does not reflect the benefits of the expected cost savings and expense efficiencies, opportunities to earn additional revenue, potential impacts of current market conditions on revenues or asset dispositions, among other factors, and includes various preliminary estimates and may not necessarily be indicative of the financial position or results of operations that would have occurred if the Merger Conversion had been consummated on the date or at the beginning of the period indicated or which may be attained in the future.

The unaudited pro forma condensed combined financial information should be read in conjunction with and is qualified in its entirety by reference to the historical consolidated financial statements and related notes thereto of Oconee and its subsidiaries, which are included in this offering circular, and the historical consolidated financial statements and related notes thereto of Elberton, which are also included in this offering circular.

 

13

Oconee Financial Corporation and Elberton Federal

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet

As of December 31, 2022

(Dollars in thousands)

 

										Merger				Pro Forma
		Oconee Financial				Elberton Federal				Pro Forma				for Stock				Pro Forma
		(As Reported)				(As Reported)				Adjustments				Offering				Combined
Assets
Cash and cash equivalents		$	51,430			$	1,727			$	(600	)		$	3,750			$	56,307
Investment securities available for sale			159,640				2,239				(500	)			—				161,379
Restricted stock, at cost			285				121				—				—				406
Loans held for sale			140				—				—				—				140
Loans, net of unearned income			300,131				23,287				(41	)			—				323,377
Allowance for loan losses			(4,549	)			(41	)			41				—				(4,549	)
Loans, net			295,582				23,246				—				—				318,828
Premises and equipment, net			8,001				215				—				—				8,216
Core deposit intangible			—				—				234				—				234
Goodwill			—				—				—				—				—
Accrued interest receivable and other assets			21,670				336				—				—				22,006
Total Assets		$	536,748			$	27,884			$	(866	)		$	3,750			$	567,516
Liabilities and Stockholder’s Equity
Liabilities:
Deposits:
Demand		$	120,057			$	—			$	—			$	—			$	120,057
Interest-bearing demand			248,623				10,523				—				—				259,146
Savings			83,798				1,426				—				—				85,224
Time			42,392				8,652				—				—				51,044
Total deposits			494,870				20,601				—				—				515,471
Accrued interest payable and other liabilities			2,977				21				—				—				2,998
Other borrowed funds			—				2,500				—				—				2,500
Subordinated notes, net of issuance costs			9,818				—				(500	)			—				9,318
Total liabilities			507,665				23,122				(500	)			—				530,287
Stockholder’s equity:
Contributed Capital			5,928				—				—				3,750				9,678
Retained earnings			36,765				4,824				(366	)			—				41,223
Accumulated other comprehensive income			(13,610	)			(62	)			—				—				(13,672	)
			29,083				4,762				(366	)			3,750				37,229
Total liabilities and stockholders’ equity		$	536,748			$	27,884			$	(866	)		$	3,750			$	567,516

 

14

Oconee Financial Corporation and Elberton Federal

Unaudited Pro Forma Condensed Combined Consolidated Statements of Income

For the Year Ended December 31, 2022

(Dollars in thousands)

 

										Merger				Pro Forma
		Oconee Financial				Elberton Federal				Pro Forma				for Stock				Pro Forma
		(As Reported)				(As Reported)				Adjustments				Offering				Combined
Interest income:
Interest and fees on loans		$	13,860			$	828			$	14			$	—			$	14,702
Interest and dividends on securities			3,249				95				—				—				3,344
Other interest income			743				12				—				—				755
Total interest income			17,852				935				14				—				18,801
Interest expense:
Interest on deposits			783				116				—				—				899
Other interest expense			660				26				—				—				686
Total interest expense			1,443				142				—				—				1,585
Net interest income			16,409				793				14				—				17,216
Provision for loan losses			—				—				—				—				—
Net interest income after provision for loan losses			16,409				793				14				—				17,216
Other income:
Service charges			646				—				—				—				646
Net gain on sale of securities			1				—				—				—				1
Mortgage origination income			1,018				—				—				—				1,018
Gain on sale of loans			1,074				—				—				—				1,074
Miscellaneous			2,111				1				—				—				2,112
Total other income			4,850				1				—				—				4,851
Other expenses:
Salaries and employee benefits			9,496				428				—				—				9,924
Occupancy			1,181				93				—				—				1,274
Other operating			5,253				379				23				—				5,655
Total other expenses			15,930				900				23				—				16,853
Income before income tax			5,329				(106	)			(9	)			—				5,214
Income tax			1,205				—				—				—				1,205
Net income		$	4,124			$	(106	)		$	(9	)		$	—			$	4,009
Net income per share		$	4.60				N/A											$	3.91

 

15

Oconee Financial Corporation and Elberton Federal

Unaudited Pro Forma Condensed Combined Consolidated Statements of Income

For the Year Ended December 31, 2021

(Dollars in thousands)

 

										Merger				Pro Forma
		Oconee Financial				Elberton Federal				Pro Forma				for Stock				Pro Forma
		(As Reported)				(As Reported)				Adjustments				Offering				Combined
Interest income:
Interest and fees on loans		$	15,262			$	846			$	14			$	—			$	16,122
Interest and dividends on securities			1,908				102				—				—				2,010
Other interest income			102				8				—				—				110
Total interest income			17,272				956				14				—				18,242
Interest expense:
Interest on deposits			1,001				121				—				—				1,122
Other interest expense			645				53				—				—				698
Total interest expense			1,646				174				—				—				1,820
Net interest income			15,626				782				14				—				16,422
Provision for loan losses			456				—				—				—				456
Net interest income after provision for loan losses			15,170				782				14				—				15,966
Other income:
Service charges			459				—				—				—				459
Net gain on sale of securities			172				—				—				—				172
Mortgage origination income			2,068				—				—				—				2,068
Gain on sale of loans			179				—				—				—				179
Miscellaneous			1,503				2				—				—				1,505
Total other income			4,381				2				—				—				4,383
Other expenses:
Salaries and employee benefits			9,300				396				—				—				9,696
Occupancy			1,425				89				—				—				1,514
Other operating			5,094				444				1,125				—				6,663
Total other expenses			15,819				929				1,125				—				17,873
Income before income tax			3,732				(145	)			(1,111	)			—				2,476
Income tax			732				—				(233	)			—				499
Net income		$	3,000			$	(145	)		$	(878	)		$	—			$	1,977
Net income per share		$	3.35				N/A											$	1.93

 

16

Note A – Basis of Presentation

On December 15, 2022, Oconee entered into the Merger Agreement with Elberton. The Merger Agreement provides that Elberton will convert from mutual form to a federal stock savings association and simultaneously merge with and into the Bank, with the Bank as the surviving institution. The separate corporate existence of Elberton will terminate upon consummation of the Merger Conversion, and the Bank will assume and succeed to all of the rights, obligations, duties, and liabilities of Elberton. Oconee will acquire all 1,000 shares of Elberton common stock at a par value of $1.00 per share, to be authorized and issued by Elberton in its stock form as part of the Merger Conversion, in exchange for $1.00 in cash, without interest, for each share, or $1,000 total.

The unaudited pro forma condensed combined financial information of Oconee’s financial condition and results of operations, including per share data, are presented after giving effect to the Merger Conversion and Offering. The pro forma financial information assumes that the Merger Conversion was consummated on January 1, 2021 for purposes of the unaudited pro forma condensed combined statements of income and on December 31, 2022 for purposes of the unaudited pro forma condensed combined balance sheet and gives effect to the Merger Conversion, for purposes of the unaudited pro forma condensed combined statement of income, as if it had been effective during the entire period presented.

The Merger Conversion will be accounted for under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date. In addition, the difference between the purchase price over the estimated fair value of the assets acquired (including identifiable intangible assets) and liabilities assumed will be recorded as goodwill. However, because the pro forma goodwill is negative, this transaction is considered a bargain purchase.

The pro forma financial information includes estimated adjustments to record the assets and liabilities of Elberton at their respective fair values and represents management’s estimates based on available information. The pro forma adjustments included herein may be revised as additional information becomes available and as additional analysis is performed. The final allocation of the purchase price will be determined after the Merger Conversion is completed and after completion of a final analysis to determine the fair values of Elberton’s tangible, and identifiable intangible, assets and liabilities as of the effective date of the Merger Conversion.

Note B – Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current valuations, estimates, and assumptions. Subsequent to the completion of the Merger Conversion, Oconee will engage an independent third-party valuation firm to determine the fair value of the assets acquired and liabilities assumed which could significantly change the amount of the estimated fair values used in pro forma financial information presented.

 

•

A fair value adjustment was recorded to Elberton’s outstanding loan portfolio. This fair value adjustment consists of an adjustment for credit deterioration of the acquired portfolio in the amount of $41,000 which represented a mark of 0.18% on Elberton’s outstanding loan portfolio. To determine the adjustment related to credit deterioration, Oconee estimated the credit deterioration based upon the amount of Elberton’s recorded allowance for loan loss.

 

•

Elimination of Elberton’s allowance for loan losses. Purchased loans acquired in a business combination are recorded at fair value and the recorded allowance of the acquired company is not carried over.

 

•

Assumes no fair value adjustments of acquired fixed assets as of acquisition date.

 

•

Oconee’s estimate of the fair value of the core deposit intangible asset. This will be amortized over ten years using the straight-line method. This estimate represents a 2% premium on Elberton’s core deposits based on current market data for similar transactions.

 

•

Assumes no fair value adjustment on deposits and on other borrowed funds as of acquisition date.

 

17

•

Represents the net premium amortization on acquired loans assuming the Merger Conversion closed on January 1, 2022 (see Note D). Premium will be amortized over 3 years using the straight-line method.

 

•

Represents amortization of core deposit premium assuming the Merger Conversion closed on January 1, 2022 (see Note E). Premium will be amortized over ten years using the straight-line method.

 

•

Represents one-time estimated transaction related costs of $1.1 million.

 

•

Weighted average basic and diluted shares outstanding were adjusted to effect the transaction.

Note C – Pro Forma Allocation of Purchase Price

The following table shows the pro forma allocation of the consideration paid for the conversion of Elberton’s equity to the acquired identifiable assets and liabilities assumed and the pro forma goodwill generated from the transaction (unaudited, dollars in thousands):

 

Purchase Price:
Fair value of consideration from conversion		$	1,151
Total pro forma purchase price		$	1,151
Fair value of assets acquired:
Cash and cash equivalents			1,727
Securities available for sale			2,239
Restricted stock, at cost			121
Loans, net			23,246
Premises and equipment, net			215
Core deposit intangible			234
Other assets			336
Total assets			28,118
Fair value of liabilities assumed:
Deposits			20,601
Other borrowed funds			2,500
Other liabilities			21
Total liabilities			23,122
Net assets acquired		$	4,996
Preliminary pro forma goodwill (Bargain Purchase Gain)		$	(3,845	)

The pro forma purchase price was determined using the assumed discount from the average market price of the Oconee Common Stock plus an estimated $600,000 in expenses relating to this Offering. Due to the pro forma goodwill being negative, this transaction is considered a bargain purchase. Oconee plans to record the bargain purchase as a gain in the noninterest income section of the Company’s Consolidated Statements of Income when the acquisition occurs.

 

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Note D – Estimated Amortization/Accretion of Acquisition Accounting Adjustments

The following table sets forth an estimate of the expected effects of the estimated aggregate acquisition accounting adjustments reflected in the pro forma combined financial statements on the future pre-tax net income of Oconee after the Merger Conversion (unaudited, dollars in thousands):

 

		For the Years Ended December 31,
		2022				2023				2024				2025				2026				Thereafter				Total
Loans		$	14			$	14			$	13			$	—			$	—			$	—			$	41
Core Deposit Intangible			(23	)			(23	)			(23	)			(23	)			(23	)			(119	)			(234	)

The actual effect of purchase accounting adjustments on the future pre-tax income of Oconee Financial will differ from these estimates based on the closing date estimates of fair values and the use of different amortization methods than assumed above.

Note E – Estimated Cost Savings

Estimated cost savings, expected to approximate 14% of Elberton’s annualized pre-tax non-interest expenses, are excluded from the pro forma analysis. Cost savings are estimated to be realized at 100% beginning in 2022.

Comparative Historical and Pro Forma Unaudited Share Data

Summarized below is historical unaudited per share information for Oconee and Elberton and additional information as if the companies had been combined for the period shown, which is referred to as “pro forma” information.

It is expected that both Oconee and Elberton will incur merger and integration charges as a result of the Merger Conversion. Also anticipated is that the Merger Conversion will provide the combined company with financial benefits that may include reduced operating expenses. The information set forth below, which is helpful in illustrating the financial characteristics of the combined company under one set of assumptions, may not reflect all of these anticipated financial expenses and does not reflect all of these anticipated financial benefits or consider any potential impacts of current market conditions or the Merger Conversion on revenues, expense efficiencies, asset dispositions, and share repurchases, among other factors, and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during the period presented.

In addition, the information set forth below has been prepared based on preliminary estimates of merger consideration and fair values attributable to the Merger Conversion; the actual amounts recorded for the Merger Conversion may differ from the information presented. The estimation and allocations of merger consideration are subject to change pending further review of the fair value of the assets acquired and liabilities assumed and actual transaction costs. A final determination of fair value will be based on the actual net tangible and intangible assets and liabilities of Elberton that will exist on the date of completion of the Merger Conversion.

 

19

The information in the following table is based on, and should be read together with, the historical financial information and the notes thereto for Oconee and Elberton incorporated by reference into, or contained in, this offering circular.

 

		Historical								Pro Forma
		Oconee				Elberton				Combined
Basic Earnings Per Common Share
For the year ended December 31, 2021		$	3.35				N/A			$	1.93
For the year ended December 31, 2022		$	4.60				N/A			$	3.91
Diluted Earnings Per Common Share
For the year ended December 31, 2021		$	3.35				N/A			$	1.93
For the year ended December 31, 2022		$	4.60				N/A			$	3.91
Cash Dividends Per Common Share
For the year ended December 31, 2021		$	0.65				N/A			$	0.57
For the year ended December 31, 2022		$	0.70				N/A			$	0.62
Book Value Per Common Share
For the year ended December 31, 2021		$	43.88				N/A			$	46.01
For the year ended December 31, 2022		$	32.43				N/A			$	36.27

RISK FACTORS

In addition to general investment risks and the other information contained in this offering circular, you should carefully consider the following risk factors in deciding whether to participate in our offering. The risk factors described below are not inclusive of all risk factors but highlight those that Oconee believes are significant. You should also consider the other information in this offering circular.

Risks Related to the Offering

Because the trading market for Oconee stock is not active, you may not be able to sell your shares at the times and in the amounts you want. Shares of our common stock are not listed on any exchange or quoted by the Nasdaq^® Stock Market, although they are quoted on the OTCQX under the ticker symbol “OSBK.” The OTCQX is an electronic, screen-based market maintained and operated by the OTC Markets Group, which imposes considerably less stringent listing standards than the Nasdaq. The volume of trading in our common stock is limited and does not constitute an active trading market, and it is not anticipated that a more active trading market will develop as a result of this stock offering. Oconee does not expect to qualify for or seek a listing on any securities exchange in the foreseeable future. Thus, there can be no assurance that you will be able to sell your shares of our common stock at any time in the future or at all, or that an active trading market will develop in the foreseeable future, if ever. See “MARKET FOR COMMON STOCK AND DIVIDENDS.”

The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock at times or at prices you find attractive. The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock.

 

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Among the factors that could affect our stock price in the future are:

 

•

actual or anticipated quarterly fluctuations in our operating results and financial condition;

 

•

changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;

 

•

speculation in the press or investment community;

 

•

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

•

actions by shareholders;

 

•

fluctuations in the stock price, trading volumes, and operating results of our competitors;

 

•

general market conditions and, in particular, market conditions for the financial services industry;

 

•

proposed or adopted regulatory changes or developments;

 

•

regulatory action against us;

 

•

anticipated or pending investigations, proceedings, or litigation that involve or affect us; and

 

•

domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility over the past several years. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock also depends on many other factors which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified elsewhere in this offering circular. The capital and credit markets have been experiencing volatility and disruption for several years, at times reaching unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength.

There is limited public information concerning Oconee and its business, operations and financial condition. There is limited publicly available information about Oconee. Our common stock is not registered, and Oconee does not file reports with the U.S. Securities and Exchange Commission under the Exchange Act. Oconee provides investors with periodic financial and other information, but does not make periodic disclosures of the type that would be available if it were subject to the reporting requirements of the Exchange Act.

The offering may not be fully subscribed. The subscription offering is only being made to qualifying Elberton members, and the community offering is being made to residents of Elberton and Elbert County, our existing shareholders and to the general public. However, there can be no assurance that all or any portion of the shares offered will be sold. To the extent that less than all of the shares offered are sold, we will have fewer funds for the uses described in “USE OF PROCEEDS.”

We may pursue additional capital in the future, which may not be available on acceptable terms or at all, could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock. In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at relatively attractive prices present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future. Our ability to

 

21

raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot provide any assurance that such capital will be available to us on acceptable terms or at all. Any such capital raising alternatives could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock and our performance measures such as earnings per share.

Your investment may be diluted because of the ability of management to offer stock to others. Although the shares of our common stock have preemptive rights, you may not be entitled to buy additional shares if shares are offered to others in the future under certain circumstances. We are authorized to issue 1,500,000 shares of common stock, and as of December 31, 2022 we had 896,824 shares of our common stock outstanding. Under certain circumstances, we may offer additional shares of stock for fair value to others in the future without you having the right to purchase additional shares. Any such issuances of common stock would dilute our shareholders’ ownership interests and may dilute the per share book value of our common stock.

Risks Related to Oconee and the Banking Business

We have paid annual dividends in the past but may not be able to pay dividends in the future. Oconee currently pays a dividend on its common stock on an annual basis, and we anticipate declaring and paying an annual dividend following the completion of the Merger Conversion. While Oconee currently has no intention to change its dividend strategy, we will continue to evaluate that decision on an annual basis. In 2023, 2022, and 2021, Oconee declared annual dividends of $0.85, $0.70, and $0.65 per share, respectively. The final determination of the timing, amount and payment of dividends on Oconee common stock will be at the discretion of our Board of Directors and will depend upon the earnings of Oconee and our subsidiary, the Bank, the financial condition of Oconee, and other factors, including general economic conditions and applicable governmental regulations and policies. Information concerning our dividend policy and historical dividend practices is set forth below under “MARKET FOR COMMON STOCK AND DIVIDENDS.”

We rely heavily on the payment of dividends from our subsidiary, the Bank, which may be restricted by applicable laws and regulations. Other than $2.5 million in cash available at the holding company level at December 31, 2022, our ability to meet debt service requirements and to pay dividends depends on the ability of the Bank to pay dividends to us, as we have no other source of significant income. The Bank is subject to regulations limiting the amount of dividends it may pay. For example, the payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the FDIC. If (i) any capital ratio requirements are increased; (ii) the total risk-weighted assets of the Bank increase significantly; and/or (iii) the Bank’s income declines significantly, the Bank’s Board of Directors may decide or be required to retain a greater portion of the Bank’s earnings to achieve and maintain the required capital or asset

 

22

ratios. This would reduce the amount of funds available for the payment of dividends by the Bank to us. Further, the FDIC could prohibit the Bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices. The Bank’s ability to pay dividends to us is also limited by Georgia state law.

Because we have discretion in the use of the proceeds, we may not apply these funds effectively which could have an adverse effect on our business. We cannot specify with certainty the amounts we will spend on particular uses from the net proceeds we will receive from the offering, and you may not agree with the manner in which our Board of Directors chooses to allocate and spend the proceeds. Our Board of Directors will have broad discretion in the application of the net proceeds. Our Board of Directors currently intends to use the net proceeds as described in “USE OF PROCEEDS.” The failure by our Board of Directors to apply these funds effectively could have an adverse effect on our financial position, liquidity and results of operations by reducing or eliminating our net income from operations.

The holders of our debentures have rights that are senior to those of our shareholders. In 2020 we issued $10 million in fixed-to-floating rate subordinated notes due August 7, 2030 to institutional accredited investors. These debt securities are senior to the shares of our common stock. As a result, we must make interest payments on the debentures before any dividends can be paid on our common stock, and in the event of our bankruptcy, dissolution or liquidation, the holders of the debt securities must be paid in full before any distributions may be made to the holders of our common stock. In addition, we have the right to defer interest payments on the junior subordinated debt securities for up to five years, during which time no dividends may be paid to holders of our common stock. In the event that the Bank is unable to pay dividends to us, then we may be unable to pay the amounts due to the holders of the junior subordinated debt securities and, thus, we would be unable to declare and pay any dividends on our common stock.

Our directors and executive officers control a large amount of our stock, and your interests may not always be the same as those of the board and management. As of the date of this offering circular, our directors and executive officers together with their affiliates beneficially owned approximately 33% of Oconee’s outstanding voting stock. As a result, if all of these shareholders were to take a common position, they might be able to affect the election of directors as well as the outcome of corporate actions requiring shareholder approval, such as the approval of mergers or other business combinations. Such concentration may also have the effect of delaying or preventing a change in control of our company. In some situations, the interests of our directors and executive officers may be different from the shareholders. However, our directors and executive officers have a fiduciary duty to act in the best interest of the shareholders, rather than in their own best interests, when considering a proposed business combination or any of these types of matters.

Our business has been and may in the future be adversely affected by volatile conditions in the financial markets and unfavorable economic conditions generally. National and global economies are constantly in flux, as evidenced by recent market volatility resulting from, among other things, the COVID-19 pandemic, Russia’s military action in Ukraine, a new presidential administration and new economic policies associated therewith and the ever-changing landscape of the energy industry. Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a whole or in our markets could have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could cause the market price of our stock to decline.

If the economy goes into recession or weakens considerably, the ensuing economic weakness could have one or more of the following undesirable effects on our business:

 

•

a lack of demand for loans, or other products and services offered by us;

 

•

a decline in the value of our loans or other assets secured by real estate;

 

•

a decrease in deposit balances due to increased pressure on the liquidity of our customers;

 

23

•

an impairment of our investment securities; or

 

•

an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us, which in turn could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses.

Inflation could adversely affect our business and our customers. Inflation is the decrease in the purchasing power of money, reflected in a general increase in prices. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the purchasing power of money. Recently, inflation has risen sharply and the Federal Reserve Board has raised, and will likely continue to raise, certain benchmark interest rates in an effort to combat inflation. As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease; however, this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

Concentrations of real estate and real estate secured loans could subject us to increased risks in the event of a prolonged real estate recession, pandemic or natural disaster. At December 31, 2022, approximately $270.6 million or 90.2% of our loan portfolio consisted of loans secured by real property, including approximately $217.6 million in loans secured by commercial real estate, $51.3 million in loans secured by single family residences and $1.7 million in loans secured by construction real estate. Real estate lending presents additional credit related risks, including a borrower’s inability to pay and deterioration in the value of real estate held as collateral. Recent market trends demonstrate that the real estate markets can be extremely volatile and unpredictable. At December 31, 2022, nonperforming loans were approximately $5.3 million and 98.6% of these loans were secured by real property. The Bank had no OREO at December 31, 2022.

Our concentration of commercial real estate loans exposes us to increased lending risks. Commercial real estate loans, totaling approximately $217.6 million or 72.5% of our total loan portfolio as of December 31, 2022, expose us to a greater risk of loss than residential real estate and consumer loans, which are a smaller percentage of our total loan portfolio. Commercial real estate loans, typically involve larger loan balances to a borrower or group of related borrowers compared to residential loans, and an adverse development with respect to a larger commercial loan relationship would expose us to greater risk of loss than an adverse development with respect to a smaller residential mortgage loan.

Repayment of our commercial loans is often dependent on the cash flows of the borrowers, which may be unpredictable, and the collateral securing these loans may fluctuate in value. At December 31, 2022, we had $28.1 million or 9.4% of total loans in commercial loans. Commercial lending involves risks that are different from those associated with real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of a borrower default. Our commercial loans are primarily made based on the cash flows of the borrowers and secondarily on any underlying collateral provided by the borrowers. A borrower’s cash flow may be unpredictable, and collateral securing those loans may fluctuate in value. Although commercial loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things.

 

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We may experience loan losses in excess of our allowance for credit losses. We endeavor to limit the risk that borrowers might fail to repay; nevertheless, losses can and do occur. We create an allowance for credit losses in our accounting records, based on estimates of the following:

 

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historical experience with our loans;

 

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evaluation of economic conditions;

 

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regular reviews of the quality mix and size of the overall loan portfolio;

 

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a detailed cash flow analysis for nonperforming loans;

 

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regular reviews of delinquencies; and

 

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the quality of the collateral underlying our loans.

We maintain our allowance for credit losses at a level that we believe is adequate to absorb specifically identified probable losses as well as any other losses inherent in our loan portfolio at any given date. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans in the portfolio that could result in losses, but that have not been identified as nonperforming or potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that have been identified. Changes in economic, operating and other conditions, including changes in interest rates, deteriorating values in underlying collateral (most of which consists of real estate), and the financial condition of borrowers, which are beyond our control, may cause our estimate of probable losses or actual loan losses to exceed our current allowance. In addition, the FDIC and the GDBF, as part of their supervisory functions, periodically review our allowance for credit losses. Based upon periodic reviews by the FDIC or the GDBF, management may determine that an increase or decrease in our provision for loan losses or the recognition of further losses is necessary. Any increase in the allowance could reduce our earnings.

Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real property collateral. In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an error in fact or judgment could adversely affect the reliability of an appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors, the value of collateral backing a loan may be less than supposed, and if a default occurs, we may not recover the outstanding balance of the loan.

We are exposed to risk of environmental liabilities with respect to properties to which we obtain title. Approximately $270.6 million or 90.2% of our loan portfolio as of December 31, 2022 was secured by real estate. In the normal course of business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business and prospects.

Adverse changes in the economic conditions of the markets where Oconee will operate could have a negative effect on the business. Oconee’s success will depend significantly on growth, or lack thereof, in population, income levels, job creation, deposits and housing starts in the geographic markets in which it will operate. Specifically, the local economic conditions in these areas will have a significant impact on Oconee’s commercial and real estate loans, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. Adverse changes in the economic conditions in Oconee’s primary markets could negatively affect its financial condition, results of operations and profitability.

 

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Our expenses could increase as a result of increases in FDIC insurance premiums or other regulatory assessments. The FDIC charges insured financial institutions a premium to maintain the DIF at a certain level. In the event that deteriorating economic conditions increase bank failures, the FDIC ensures payments of deposits up to insured limits from the DIF. Although the Bank’s FDIC insurance assessments have not increased recently, there can be no assurance that the FDIC will not increase assessment rates in the future or that the Bank will not be subject to higher assessment rates as a result of a change in its risk category, either of which could have an adverse effect on the Bank’s earnings.

Our business has been, and may continue to be, affected by a significant concentration of deposits with two customers. As of December 31, 2022, the Bank had a concentration of deposits with two municipal customers of $54.4 million.

We may not be able to continue to attract and retain banking customers at current levels, and our efforts to compete may reduce our profitability. Competition in the banking industry in the markets we serve may limit our ability to continue to attract and retain banking customers. The banking business in our current and intended future market areas is highly competitive with respect to virtually all products and services. In Georgia generally, and in our service areas specifically, branches of major banks dominate the commercial banking industry. Such banks have substantially greater lending limits than we have, offer certain services we cannot offer directly, and often operate with “economies of scale” that result in lower operating costs than ours on a per loan or per asset basis. We also compete with numerous financial and quasi-financial institutions for deposits and loans, including providers of financial services over the Internet. New technology and other changes are allowing parties to effectuate financial transactions that previously required the involvement of banks. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Furthermore, customers have become more concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely affect our funding costs and net income. Ultimately, competition can and does increase our cost of funds, reduce loan yields and drive down our net interest margin, thereby reducing profitability. It can also make it more difficult for us to continue to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale borrowings which are generally more expensive than retail deposits.

New or acquired banking offices may not be profitable. Oconee may seek to identify additional locations for new banking offices. The costs to start up new banking offices or to acquire existing branches and the additional costs to operate these facilities may increase Oconee’s non-interest expense and decrease its earnings in the short term. It may be difficult to adequately and profitably manage Oconee’s growth through the establishment of additional banking offices and Oconee can provide no assurance that any such banking offices will successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices will be subject to regulatory approval, and there can be no assurance that Oconee will succeed in securing such approval.

Negative public opinion surrounding Oconee and the banking industry generally could damage Oconee’s reputation and adversely impact its earnings. Reputation risk, or the risk to Oconee’s business, earnings and capital from negative public opinion surrounding Oconee and the financial institutions industry generally, is inherent in the banking business. Negative public opinion can result from actual or alleged conduct in any number of activities,

 

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including lending practices, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect Oconee’s ability to keep and attract customers and employees and can expose Oconee to litigation and regulatory action.

If we are not able to successfully keep pace with technological changes affecting the industry, our business could be hurt. The financial services industry is constantly undergoing technological change with the frequent introduction of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better service clients and reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our operations. Some of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients. Failure to successfully keep pace with technological change in the financial services industry could have a material adverse impact on our business and, in turn, on our financial condition and results of operations.

Our operations could be adversely impacted if our third-party service providers experience difficulty. We depend on a number of relationships with third-party service providers, including core systems processing and web hosting. These providers are well established vendors that provide these services to a significant number of financial institutions. If these third-party service providers experience difficulty or terminate their services, and we are unable to replace them with other providers, our operations could be interrupted which would adversely impact our business.

Unauthorized disclosure of sensitive or confidential customer information, whether through a cyber-attack, other breach of our computer systems or any other means, could severely harm our business. In the normal course of business we collect, process and retain sensitive and confidential customer information. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.

In recent periods there has been a rise in fraudulent electronic activity, security breaches, and cyber-attacks within the financial services industry, especially in the banking sector. Some financial institutions have reported breaches of their websites and systems which have involved sophisticated and targeted attacks intended to misappropriate sensitive or confidential information, destroy or corrupt data, disable or degrade service, disrupt operations or sabotage systems. These breaches can remain undetected for an extended period of time. Furthermore, our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications that may appear to be legitimate messages sent by the Bank, in attempts to misappropriate passwords, card numbers, bank account information or other personal information or to introduce viruses or malware to personal computers. Information security risks for financial institutions have increased in part because of new technologies, mobile services and other Internet or web-based products used to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. The secure maintenance and transmission of confidential information, as well as the secure and reliable execution of transactions over our systems, are essential to protect us and our customers and to maintain our customers’ confidence. Despite our efforts to identify, contain and mitigate these threats through detection and response mechanisms, product improvement, the use of encryption and authentication technology, and customer and employee education, such attempted fraudulent activities directed against us, our customers, and third party service providers remain a serious issue. The pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and continue to evolve.

We also face risks related to cyber-attacks and other security breaches in connection with debit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on third party service providers to conduct certain other aspects of our business operations, and face similar risks relating to them. While we regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or security breach.

 

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Any cyber-attack or other security breach involving the misappropriation or loss of Bank assets or those of its customers, or unauthorized disclosure of confidential customer information, could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations, and have a material adverse effect on our business.

If our information systems were to experience a system failure, our business and reputation could suffer. We rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to minimize service disruptions by protecting our computer equipment, systems, and network infrastructure from physical damage due to fire, power loss, telecommunications failure or a similar catastrophic event. We have protective measures in place to prevent or limit the effect of the failure or interruption of our information systems, and will continue to upgrade our security technology and update procedures to help prevent such events. However, if such failures or interruptions were to occur, they could result in damage to our reputation, a loss of customers, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations. We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could occur, for example, if information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions may further increase the risk that technical flaws or employee tampering or manipulation of those systems could result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.

Previously enacted and potential future financial regulatory reforms could have a significant impact on our business, financial condition and results of operations. Dodd-Frank, which was enacted in 2010, had a broad impact on the financial services industry, including significant regulatory and compliance changes, and similar sweeping changes are possible in the coming years. Given the uncertainty associated with the manner in which any regulatory changes will be implemented, the extent to which such changes could impact our operations is unclear. These

 

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changes may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. In particular, the potential impact of regulatory changes on our operations and activities, both currently and prospectively, include, among others:

 

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an increase in our cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

 

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the limitation of our ability to expand consumer product and service offerings due to more stringent consumer protection laws and regulations;

 

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a material negative impact on our cost of funds in a rising interest rate environment, since financial institutions can now pay interest on business checking accounts;

 

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a potential reduction in fee income, due to limits on interchange fees applicable to larger institutions which could ultimately lead to a competitive-driven reduction in the fees we receive; and

 

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a potential increase in competition due to our lack of ability to compete with nonbank financial service companies that are not subject to the same regulatory regimes as us.

Further, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements, which could negatively impact results of operations and financial condition. We cannot predict whether there will be additional laws or reforms that would affect the U.S. financial system or financial institutions, when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse effect on our financial condition and results of operations.

Reductions in service charge income or failure to comply with payment network rules could negatively impact our earnings. We derive significant revenue from service charges on deposit accounts, the bulk of which comes from overdraft-related fees. We have seen a drop in our service charge income, which is primarily attributable to lower insufficient funds and overdraft fees due to a general decline in customer spending activity driven by the economic impact of COVID-19 and inflation. In addition, changes in banking regulations could have an adverse impact on our ability to derive income from service charges. Increased competition from other financial institutions or changes in consumer behavior could lead to declines in our deposit balances, which would result in a decline in service charge fees. Such a reduction could have a material impact on our earnings.

Reductions in interchange income could negatively impact our earnings. Interchange income is derived from fees paid by merchants to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation. These fees are paid to card issuers to compensate them for the costs associated with issuance and operation. We earn interchange fees on card transactions from debit cards, including $985,000 during the year ended December 31, 2022. Merchants have attempted to negotiate lower interchange rates, and the Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that may be charged for certain debit card transactions. Merchants may also continue to pursue alternative payment platforms, such as Apple Pay, to lower their processing costs. Any such new payment system may reduce our interchange income. Our failure to comply with the operating regulations set forth by payment card networks, which may change, could subject us to penalties, fees or the termination of our license to use the networks. Any of these scenarios could have a material impact on our business, financial condition and results of operations.

We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the loss of their services. We believe that our continued growth and success depends in large part upon the skills of our management team and other key personnel. The competition for qualified personnel in the financial services industry is intense, and the loss of key personnel or an inability to continue to attract, retain or motivate key personnel could adversely affect our business. If we are not able to retain our existing key personnel or attract additional qualified personnel, our business operations would be hurt.

 

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We may be adversely affected by the financial stability of other financial institutions. Our ability to engage in routine funding transactions could be adversely affected by the actions and liquidity of other financial institutions. Financial institutions are often interconnected as a result of trading, clearing, counterparty, or other business relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. Even if the transactions are collateralized, credit risk could exist if the collateral held by us cannot be liquidated at prices sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could materially and adversely affect our business, financial condition or results of operations.

Changes in interest rates could adversely affect our profitability, business and prospects. Net interest income, and therefore earnings, can be adversely affected by differences or changes in the interest rates on, or the re-pricing frequency of, our financial instruments. In addition, fluctuations in interest rates can affect the demand of customers for products and services, and an increase in the general level of interest rates may adversely affect the ability of certain borrowers to make variable-rate loan payments. Accordingly, changes in market interest rates could have a material adverse effect on our asset quality, loan origination volume, financial condition, results of operations and cash flows. This interest rate risk can arise from the Federal Reserve Board monetary policies, as well as other economic, regulatory and competitive factors that are beyond our control, and thus, we may be unable to anticipate changes in market interest rates.

The value of the securities in our investment portfolio may be negatively affected by market disruptions, adverse credit events or fluctuations in interest rates, which could have a material adverse impact on regulatory capital levels. Our available-for-sale investment securities are reported at their estimated fair values, and fluctuations in fair values can result from changes in market interest rates, rating agency actions, issuer defaults, illiquid markets and limited investor demand, among other things. As long as the change in the fair value of a security is not considered to be “other than temporary,” we directly increase or decrease our shareholders’ equity by the amount of the change in fair value, net of the tax effect. A relatively large increase in market interest rates, in particular, could result in a material drop in fair values and, by extension, in our capital. Investment securities that have an amortized cost in excess of their current fair value at the end of a reporting period are also evaluated for other-than-temporary impairment. If such impairment is indicated, the difference between the amortized cost and the fair value of those securities will be recorded as a charge in our income statement, which could also have a material adverse effect on our results of operations and capital levels.

Non-compliance with USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and curtail expansion opportunities. Financial institutions are required under the USA PATRIOT Act and the Bank Secrecy Act to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these and other regulations could result in fines or penalties, curtailment of expansion opportunities, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. Oconee cannot be assured that the policies it establishes to prevent violations of these laws and regulations will effectively protect it.

 

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