oconee_10q-093011.htm

10-Q 1 oconee_10q-093011.htm FORM 10-Q oconee_10q-093011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from ________ to _______

Commission File Number 000-25267

OCONEE FINANCIAL CORPORATION

(Exact name of Registrant as specified in its Charter)

Georgia		58-2442250
(State or other jurisdiction of Company or organization)		(I.R.S. Employer Identification No.)


35 North Main Street Watkinsville, Georgia		30677
(Address of principal executive offices)		(Zip Code)

706-769-6611

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes þ No o

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

Large accelerated filer: o	Accelerated filer: o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of the issuer’s common stock as of November 14, 2011 was 899,815.

INDEX

		Page No.
PART I - FINANCIAL INFORMATION

	Item 1. Financial Statements	3

	Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010	3

	Consolidated Statements of Operations (unaudited) for the Three Months and the Nine Months Ended September 30, 2011 and 2010	4

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months and the Nine Months Ended September 30, 2011 and 2010	5

	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2011 and 2010	6

	Notes to Consolidated Financial Statements (unaudited)	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	27

	Item 4T. Controls and Procedures	27

PART II - OTHER INFORMATION

	Item 1. Legal Proceedings	28

	Item 1A. Risk Factors	28

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 3. Defaults Upon Senior Securities	28

	Item 5. Other Information	28

	Item 6. Exhibits	28

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

	September 30, 2011 (unaudited)		December 31, 2010
Assets

Cash and due from banks, including reserve requirements of $25,000	$	22,557,778		29,958,828

Investment securities available for sale		73,183,073		73,997,925
Restricted equity securities		486,100		556,300
Mortgage loans held for sale		426,000		311,000

Loans, net of allowance for loan losses of $5,052,111 and $3,527,567		149,056,206		159,454,155

Premises and equipment, net		5,685,444		5,928,381
Other real estate owned		5,707,937		5,435,735
Accrued interest receivable and other assets		2,678,864		3,726,104

Total assets	$	259,781,402		279,368,428

Liabilities and Stockholders’ Equity

Liabilities:
Deposits
Noninterest-bearing	$	35,318,840		27,796,070
Interest-bearing		199,731,331		215,121,308

Total deposits		235,050,171		242,917,378

Securities sold under repurchase agreements		-		13,024,262
Accrued interest payable and other liabilities		453,082		491,886

Total liabilities		235,503,253		256,433,526

Stockholders’ equity:
Common stock, $2 par value; authorized 1,500,000 shares; issued and outstanding 899,815 shares		1,799,630		1,799,630
Additional paid-in capital		4,243,332		4,243,332
Retained earnings		16,824,857		17,226,068
Accumulated other comprehensive income (loss)		1,410,330		(334,128	)

Total stockholders’ equity		24,278,149		22,934,902

Total liabilities and stockholders’ equity	$	259,781,402		279,368,428

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

For the Three Months and the Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	Three Months Ended					Nine Months Ended
	2011		2010			2011			2010
Interest Income:
Loans	$	2,063,835		2,285,556		$	6,161,306			7,074,177
Investment securities:
Tax exempt		157,384		134,945			449,902			393,696
Taxable		546,290		550,921			1,613,241			1,836,257
Federal funds sold and other		8,268		10,947			36,126			29,926
Total interest income		2,775,777		2,982,369			8,260,575			9,334,056

Interest Expense:
Deposits		485,030		797,277			1,611,090			2,604,160
Other		6,024		86,930			96,352			236,031
Total interest expense		491,054		884,207			1,707,442			2,840,191

Net interest income		2,284,723		2,098,162			6,553,133			6,493,865

Provision for loan losses		610,000		1,350,000			2,410,000			2,770,000

Net interest income after provision for loan losses		1,674,723		748,162			4,143,133			3,723,865

Other Income:

Service charges on deposit accounts		232,776		241,719			624,971			778,916
Mortgage origination fees		50,305		44,202			80,472			91,569
Securities gains, net		71,236		-			174,157			250,461
Income (loss) on other real estate owned		11,100		(933	)		17,600			223,174
Other operating income		272,810		256,928			854,002			804,690
Total other income		638,227		541,916			1,751,202			2,148,810

Other Expense:
Salaries and other personnel expense		1,138,793		1,130,736			3,361,005			3,430,984
Net occupancy and equipment expense		265,148		294,663			815,876			897,084
Net write-downs and loss on sales of other real estate owned		8,471		647,974			62,315			687,612
Other operating expense		611,968		761,781			2,213,606			2,403,667
Total other expense		2,024,380		2,835,154			6,452,802			7,419,347

Earnings (loss) before income taxes (benefit)		288,570		(1,545,076	)		(558,467	)		(1,546,672	)

Income taxes (benefit)		180,726		(596,253	)		(157,256	)		(721,582	)

Net earnings (loss)	$	107,844		(948,823	)	$	(401,211	)		(825,090	)


Earnings (loss) per common share based on average outstanding shares of 899,815	$	0.12		(1.05	)	$	(0.45	)		(0.92	)

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

For the Three Months and the Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	Three Months Ended						Nine Months Ended
	2011			2010			2011			2010

Net earnings (loss)	$	107,844			(948,823	)	$	(401,211	)		(825,090	)

Other comprehensive gains, net of tax:
Unrealized gains on securities available for sale:
Holding gains arising during period, net of tax of $559,895, $69,421, $1,133,480, and $476,412		915,065			113,458			1,852,505			778,625

Reclassification adjustments for gains included in net Earnings (Loss), net of tax of $27,041, $0, $66,110, and $95,075		(44,195	)		-			(108,047	)		(155,386	)

Total other comprehensive income		870,870			113,458			1,744,458			623,239

Comprehensive income (loss)	$	978,714			(835,365	)	$	1,343,247			(201,851	)

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net loss	$	(401,211	)	$	(825,090	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		2,410,000			2,770,000
Depreciation, amortization and accretion		429,087			393,127
Loss on sales and disposals of fixed assets		-			355
Gain on sales of securities		(174,157	)		(250,461	)
Loss on other real estate owned		62,315			687,613
Change in assets and liabilities:
Interest receivable and other assets		(20,129	)		(684,146	)
Interest payable and other liabilities		(38,804	)		391,821
Mortgage loans held for sale		(115,000	)		(296,500	)

Net cash provided by operating activities		2,152,101			2,186,719

Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		13,769,947			9,235,775
Proceeds from calls, maturities, and paydowns of investment securities available for sale		19,049,413			42,501,148
Purchases of investment securities available for sale		(29,163,024	)		(50,969,080	)
Proceeds from redemptions of restricted equity securities		70,200			-
Net change in loans		7,497,466			8,277,917
Purchases of premises and equipment		(41,650	)		(95,438	)
Capital improvements on other real estate		(237,814	)		(211,085	)
Proceeds from sales of other real estate		393,780			1,352,173

Net cash provided by investing activities		11,338,318			10,091,410

Cash flows from financing activities:
Net change in deposits		(7,867,207	)		(12,127,175	)
Net change in securities sold under repurchase agreements		(13,024,262	)		3,488,190

Net cash used by financing activities		(20,891,469	)		(8,638,985	)

Net increase (decrease) in cash and cash equivalents		(7,401,050	)		3,639,144

Cash and cash equivalents at beginning of period		29,958,828			24,736,354

Cash and cash equivalents at end of period	$	22,557,778		$	28,375,498

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows, continued

For the Nine Months Ended September 30, 2011 and 2010

(Unaudited)

	2011		2010


Supplemental cash flow information:
Cash paid for interest	$	1,788,429	$	2,950,916

Noncash investing and financing activities:
Transfer from loans to other real estate owned	$	1,043,103	$	3,023,074
Transfer of other real estate to loans	$	552,620	$	2,127,850
Change in net unrealized gains on investment securities available for sale, net of tax	$	1,744,458	$	623,239

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

(1)	Basis of Presentation

The financial statements include the accounts of Oconee Financial Corporation (the “Company”) and its wholly-owned subsidiary, Oconee State Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations and financial position for the periods covered herein. All such adjustments are of a normal recurring nature.

Operating results for the nine–month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the financial statements and footnotes included in the Company’s annual report included on Form 10-K for the year ended December 31, 2010.

Critical Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Some of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 10-K for the year ended December 31, 2010.

Many of the Company’s assets and liabilities are recorded using various valuation techniques that require significant judgment as to recoverability. The collectability of loans is reflected through the Company’s estimate of the allowance for loan losses. The Company performs periodic detailed reviews of its loan portfolio in order to assess the adequacy of the allowance for loan losses in light of anticipated risks and loan losses. In addition, investment securities available for sale and mortgage loans held for sale are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived by the Company using dealer quotes or market comparisons.

(2)	Net Earnings (Loss) Per Common Share

Net earnings (loss) per common share are based on the weighted average number of common shares outstanding during the period.

(3)	Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Nine Months Ended September 30,
	2011			2010

Balance at beginning of year	$	3,527,567			3,497,292
Amounts charged off		(934,551	)		(2,734,149	)
Recoveries on amounts previously charged off		49,095			36,891
Provision for loan losses		2,410,000			2,770,000

Balance at September 30	$	5,052,111			3,570,034

(4)	Fair Value Measurements

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and mortgage loans held for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under FASB ASC (Financial Accounting Standards Board Accounting Standards Codification) Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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

Level 3 – Generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments recorded at fair value on a recurring and non-recurring basis:

Securities Available-for-Sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at the lower of cost or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, management classifies loans subjected to recurring fair value adjustments as Level 2.

Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures its impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, and discounted cash flows less selling costs. Those impaired loans not requiring a specific reserve represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with FASB ASC Topic 820, impaired loans where a specific reserve is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate: Other real estate is adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral less selling costs. When the fair value of the collateral is based on an observable market price, the Company records the other real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the other real estate as nonrecurring Level 3.

The tables below presents the Company’s assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Balance at September 30, 2011
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Securities	$	73,183	$	-	$	72,224	$	959
Mortgage nLoans held for sale		426		-		426		-

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

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the consolidated balance sheet using significant unobservable (Level 3) inputs for the nine months ended September 30, 2011 and the year ended December 31, 2010.

	September 30, 2011			December 31, 2010
	(In Thousands)
Securities
Beginning balance	$	4,947		$	914
Reclassified to Level 2		(4,040	)		-
Purchases		-			4,040
Unrealized gains (losses) included in other comprehensive income (loss)		52			(7	)
	$	959		$	4,947

The table below presents the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Balance at September 30, 2011
	(In thousands)		(Level 1)		(Level 2)		(Level 3)		Total Losses
Impaired loans	$	14,255	$	-	$	-	$	14,255	$	893
Other real estate		-		-		-		-		-

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

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

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

Investment Securities Available for Sale

Fair values for investment securities are based on quoted market prices.

Restricted Equity Securities

The carrying amount of restricted equity securities approximates fair value.

Loans and Mortgage Loans Held for Sale

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

Deposits and Securities Sold Under Repurchase Agreements

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

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term and carry variable interest rates. Both the carrying value and estimated fair value are based on fees charged to enter into such commitments and are immaterial.

The estimated fair values of the Company’s financial instruments as of September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:	(In thousands)				(In thousands)
Cash and cash equivalents	$	22,558		22,558		29,959		29,959
Investment securities	$	73,183		73,183		73,998		73,998
Restricted equity securities	$	486		486		556		556
Mortgage Loans held for sale	$	426		426		311		311
Loans, net	$	149,056		148,998		159,454		159,216

Liabilities:

Deposits and securities sold under repurchase agreement	$	235,050		235,943		255,942		255,964

(5)	Investments

Investment securities available for sale at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	7,542,736		20,259		-			7,562,995
State, county and municipal		13,112,328		425,062		-			13,537,390
Mortgage-backed securities – GSE residential		49,254,749		1,869,089		-			51,123,838
Corporate bonds		1,000,000		-		(41,150	)		958,850

Total	$	70,909,813		2,314,410		(41,150	)		73,183,073

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	27,857,120		49,346		(605,172	)		27,301,294
State, county and municipal		11,967,547		95,890		(419,434	)		11,644,003
Mortgage-backed securities – GSE residential		33,097,012		714,320		(251,407	)		33,559,925
Corporate bonds		1,614,815		-		(122,112	)		1,492,703

Total	$	74,536,494		859,556		(1,398,125	)		73,997,925

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

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011
	Less than 12 Months				12 Months or More
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Unrealized Losses
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Unrealized Losses
GSEs	$	-		-		-		-		-
State, county and municipal		-		-		-		-		-
Mortgage-backed securities		-		-		-		-		-
Corporate bonds		-		-		958,850		41,150		41,150

	$	-		-		958,850		41,150		41,150

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

	$	45,355,472		1,162,544		2,003,329		235,581		1,398,125

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

The unrealized losses on these debt securities in a continuous loss position for twelve months or more as of September 30, 2011 and December 31, 2010 are considered to be temporary because they arose due to changing interest rates and the repayment sources of principal and interest are government backed or are securities of investment grade issuers. Included in the table above as of September 30, 2011 was 1 of 1 corporate bond that contained unrealized losses.

Corporate bonds. The Company’s unrealized losses on investments in one corporate bond relates to investments in companies within the financial services sector. The unrealized losses are primarily caused by recent decreases in profitability and profit forecasts by industry analysts. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investments before recovery of its par value, which may be maturity, it does not consider these investments to be other-than-temporarily impaired at September 30, 2011.

The amortized cost and fair value of investment securities available for sale at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Estimated Fair Value
Due within one year	$	1,569,119		1,573,765
Due from one to five years		1,220,070		1,179,453
Due from five to ten years		5,888,719		5,969,177
Due after ten years		12,977,156		13,336,840
Mortgage-backed securities		49,254,749		51,123,838

	$	70,909,813		73,183,073

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011			2010

Proceeds from sales	$	1,803,252		-		13,769,947			9,235,775

Gross gains realized	$	71,236		-		239,774			250,461
Gross losses realized		-		-		(65,617	)		-

Net gain realized	$	71,236		-		174,157			250,461

(6)

Loans

Major classifications of loans at September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011			December 31, 2010

Commercial, financial and agricultural	$	19,701,382		$	25,198,562
Real estate – mortgage		112,169,780			115,667,560
Real estate –construction		16,891,536			16,334,644
Consumer		5,299,094			5,738,297

Total loans		154,061,792			162,939,063
Deferred fees and costs, net		46,525			42,659
Less allowance for loan losses		(5,052,111	)		(3,527,567	)
Net loans	$	149,056,206		$	159,454,155

The Bank grants loans and extensions of credit primarily to individuals and a variety of firms and companies located in certain Georgia counties, primarily Oconee and Clarke counties. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market in the Bank’s primary market area.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2011:

	Commercial, financial and agricultural			Real estate - mortgage			Real estate - construction		Consumer
Balance at July 1, 2011	$	946,658		$	1,403,409		$	2,044,269	$	95,305
Provision for loan losses		(78,335	)		167,781			517,113		3,442
Amounts charged off		-			(49,629	)		-		(8,781	)
Recoveries on amounts previously charged off		1,946			-			2,141		6,792
Balance at September 30, 2011	$	870,269		$	1,521,561		$	2,563,523	$	96,758

	Commercial, financial and agricultural			Real estate - mortgage			Real estate - \construction			Consumer
Balance at January 1, 2011	$	1,095,015		$	944,649		$	1,428,254		$	59,649
Provision for loan losses		78,715			852,164			1,377,885			101,236
Amounts charged off		(309,749	)		(280,752	)		(258,545	)		(85,505	)
Recoveries on amounts previously charged off		6,288			5,500			15,929			21,378
Balance at September 30, 2011	$	870,269		$	1,521,561		$	2,563,523		$	96,758

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2011 and December 31, 2010:

As of September 30, 2011:
	Commercial, financial and a gricultural		Real estate - mortgage		Real estate - construction		Consumer
Allowance for loan losses:

Ending balance attributable to loans:

Individually evaluated for impairment	$	73,173	$	949,916	$	2,312,597	$	11,957
Collectively evaluated for impairment		797,096		571,645		250,926		84,801

Total ending allowance balance	$	870,269	$	1,521,561	$	2,563,523	$	96,758


Loans:

Individually evaluated for impairment	$	765,754	$	19,422,163	$	12,164,223	$	94,118
Collectively evaluated for impairment		18,935,628		92,747,617		4,727,313		5,204,976

Total ending loan balance	$	19,701,382	$	112,169,780	$	16,891,536	$	5,299,094

As of December 31, 2010:
	Commercial, financial and agricultural		Real estate - mortgage		Real estate - construction		Consumer
Allowance for loan losses:

Ending balance attributable to loans:

Individually evaluated for impairment	$	149,604	$	-	$	1,172,987	$	-
Collectively evaluated for impairment		945,411		944,649		255,267		59,649

Total ending allowance balance	$	1,095,015	$	944,649	$	1,428,254	$	59,649


Loans:

Individually evaluated for impairment	$	583,093	$	1,670,256	$	12,492,132	$	-
Collectively evaluated for impairment		24,615,469		113,997,304		3,842,512		5,738,297

Total ending loan balance	$	25,198,562	$	115,667,560	$	16,334,644	$	5,738,297

Impaired loans at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011		December 31, 2010
Loans with no allocated allowance for loan losses	$	15,740,447		4,503,896

Loans with allocated allowance for loan losses		16,705,811		12,076,573

Total	$	32,446,258		16,580,469

Amount of the allowance for loan losses allocated	$	3,347,643		1,849,600

Average of individually impaired loans during year	$	23,622,801		15,960,463

The following table presents the average balances of impaired loans and income recognized on impaired loans for the three months and the nine months ended September 30, 2011:

	Three Months Ended September 30, 2011		Nine Months Ended September 30, 2011

Average of individually impaired loans	$	32,945,606		23,622,801

Interest income recognized during impairment	$	189,727		527,828

The following table presents loans individually evaluated for impairment by portfolio segment as of September 30, 2011 and December 31, 2010:

As of September 30, 2011:
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:
Commercial, financial and agricultural		461,979		461,979		-
Real estate – mortgage		12,143,725		12,143,725		-
Real estate –construction		3,102,484		3,102,484		-
Consumer		32,259		32,259		-

With an allowance recorded:

Commercial, financial and agricultural		303,775		303,775		73,173
Real estate – mortgage		7,409,423		7,278,438		949,916
Real estate –construction		12,555,725		9,061,739		2,312,597
Consumer		61,859		61,859		11,957

As of December 31, 2010:
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:
Commercial, financial and agricultural		77,539		77,539		-
Real estate – mortgage		1,670,256		1,670,256		-
Real estate –construction		2,730,055		2,533,712		-
Consumer		-		-		-

With an allowance recorded:

Commercial, financial and agricultural		693,267		693,267		203,515
Real estate – mortgage		1,571,600		1,571,600		451,364
Real estate –construction		13,715,472		9,958,420		1,172,987
Consumer		75,675		75,675		21,734

This above-mentioned valuation allowance is included in the allowance for loan losses on the statements of condition.

The qualitative factors are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:

Commercial, financial and agricultural loans – Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending will have an effect on the credit quality in this loan class.

Real Estate – Mortgage loans – Loans in this class include loans secured by residential real estate, both owner-occupied and rental residences, income-producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are generally located largely in our primary market area. Residential real estate loans are made based on the appraised value of the underlying collateral, in addition to the borrower’s ability to service the debt. Adverse economic conditions may impact the borrower’s financial status and thus affect their ability to repay the debt. In addition, the value of the collateral may be adversely affected by declining real estate values. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

Real Estate – Construction loans – Loans in this class primarily include land loans to local contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/ units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. Credit risk is affected by construction delays, cost overruns, and market conditions.

Consumer loans – Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan (such as automobile, mobile home, etc.). Therefore the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.

Nonaccrual loans and loans past due 90 days still on accrual at September 30, 2011, December 31, 2010, and September 30, 2010 are as follows:

	September 30, 2011		December 31, 2010		September 30, 2010
Loans past due 90 days still on accrual	$	536,791	$	680,992	$	-
Nonaccrual Loans	$	18,271,009	$	16,358,081	$	15,972,380

The following table presents the aging of the recorded investment in past due loans as of September 30, 2011 and December 31, 2010 by portfolio segment:

As of September 30, 2011:
	30-89 Days Past Due		Accruing Greater than 90 Days Past Due		Accruing Total Past Due		Nonaccrual		Loans Not Past Due
Commercial, financial and agricultural	$	57,681	$	-	$	57,681	$	765,754	$	18,877,947
Real estate – mortgage		7,326,190		536,094		7,862,284		6,603,617		97,703,879
Real estate –construction		-		-		-		10,807,520		6,084,016
Consumer		50,826		697		51,523		94,118		5,153,453
Total	$	7,434,697	$	536,791	$	7,971,488	$	18,271,009	$	127,819,295

As of December 31, 2010:
	30-89 Days Past Due		Accruing Greater than 90 Days Past Due		Accruing Total Past Due		Nonaccrual		Loans Not Past Due
Commercial, financial and agricultural	$	438,651	$	-	$	438,651	$	2,268,453	$	22,491,458
Real estate – mortgage		1,367,916		680,992		2,048,908		1,521,822		112,096,830
Real estate –construction		-		-		-		12,492,131		3,842,513
Consumer		63,661		-		63,661		75,675		5,598,961
Total	$	1,870,228	$	680,992	$	2,551,220	$	16,358,081	$	144,029,762

Troubled Debt Restructurings:

The following table presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre and post modification recorded investment. (dollars in thousands).

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

As of September 30, 2011
Commercial, financial and agricultural		-	$	-	$	-
Real estate – mortgage		4		12,818		12,818
Real estate –construction		4		4,124		4,124
Consumer		-		-		-
Total loans		8	$	16,942	$	16,942


As of December 31, 2010
Commercial, financial and agricultural		-	$	-	$	-
Real estate – mortgage		1		222		222
Real estate –construction		5		4,353		4,353
Consumer		-		-		-
Total loans		6	$	4,575	$	4,575

At September 30, 2011 and December 31, 2010, the Company identified $16,942,458 and $4,574,602, respectively as loans whose terms have been modified in troubled debt restructurings. Of this total at September 30, 2011, $4,123,912 of the troubled debt restructurings were considered non-performing. The Company has allocated $1,584,466 and $267,544 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011 and December 31, 2010, respectively. The loans are considered troubled debt restructurings because the Bank made concessions to the borrowers, including lengthening amortization periods beyond the Bank’s standard terms and shifting loans to interest only payments. During the first quarter of 2011, the Bank foreclosed on a property securing a loan that was considered a troubled debt restructuring at December 31, 2010. No other loans that were considered troubled debt restructurings at December 31, 2010 have defaulted as of September 30, 2011. The Company has committed to lend no additional funds to customers with outstanding loans that are classified as troubled debt restructurings.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. All loans are analyzed at origination and assigned a risk category. In addition, on an annual basis, management performs an analysis on loans with an outstanding balance greater than $1,000,000 and non-homogeneous loans, such as commercial and commercial real estate loans. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

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

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

Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans.

As of September 30, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

As of September 30, 2011:
	Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural	$	18,784,396	$	117,771	$	799,215	$	-
Real estate – mortgage		80,178,775		11,610,149		20,380,856		-
Real estate –construction		219,203		3,122,301		13,550,032		-
Consumer		5,139,237		25,294		134,563		-
Total	$	104,321,611	$	14,875,515	$	34,864,666	$	-

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

(7)	Accounting Standards Updates

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU No. 2011-02”). ASU No. 2011-02 requires a creditor to separately conclude that 1.) the restructuring constitutes a concession and 2.) the debtor is experiencing financial difficulties in order for a modification to be considered a troubled debt restructuring (“TDR”). The guidance was issued to provide clarification and to address diversity in practice in identifying TDR’s. It is effective for the Bank in the third quarter of 2011 and will be applied retrospectively to the beginning of the year. Although evaluation of the impact is not complete, it is not expected to have a material impact on the Bank’s results of operations, financial position, or disclosures.

In April 2011, the FASB issued Accounting Standards Update No. 2011-03, Reconsideration of Effective Control in Repurchase Agreements (“ASU No. 2011-03”). ASU No. 2011-03 removes from the assessment of effective control the criterion related to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. In addition, this guidance also eliminates the requirement to demonstrate that a transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. It is effective for the Bank for the first quarter of 2012, and is not expected to have a material impact on the Bank’s results of operations, financial position, or disclosures.

Item 2.

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

Forward-Looking Statements

This discussion contains forward-looking statements under the private Securities Litigation Reform Act of 1995 that involve risk and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of the forward-looking statements included in this discussion will be accurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Company operates); competition from other providers of financial services offered by the Company; government regulations and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Company’s credit customers, all of which are difficult to predict and which may be beyond the control of the Company. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

Financial Condition

Like many financial institutions across the United States, the Company’s operations have been negatively affected by the current economic crisis. The recession has reduced liquidity and credit quality within the banking system and the labor, capital and real estate markets. Dramatic declines in the housing market have negatively affected the credit performance of our residential construction and development loans. The economic recession has also lowered commercial and residential real estate values and substantially reduced general business activity and investment. Combined, the deterioration in the residential and the commercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans over the past three years. These market conditions and the tightening of credit have led to increased delinquencies in our loan portfolio, increased market volatility, added pressure on our capital, a lower net interest margin and net losses in the prior three years.

These factors have magnified the need for careful management of the Bank. Regulatory scrutiny within the banking industry has increased significantly, and as a result, the Bank’s management team and Board of Directors continue to guide the Bank through this difficult market. Management has focused on strategies to increase revenues and control expenses in an effort to return the Bank to profitability. In addition, loan underwriting standards have been tightened and credit risk will continue to be closely monitored. Balance sheet management strategies have been developed which has resulted in a decline in loans, deposit balances and in total assets in order to reduce interest expense and produce a better match in the bank’s funding and its funding needs, as well as improve regulatory capital ratios.

On August 18, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Consent Agreement”) with the Federal Deposit Insurance Company (the “FDIC”) and the Georgia Department of Banking and Finance (the “GDBF”), whereby the Bank consented to the issuance of an Order to Cease and Desist (the “Order”).

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

the Board of Directors of the Bank must increase its participation in the affairs of the Bank and establish a Board committee responsible for ensuring compliance with the Order;

the Bank must have and retain qualified management and notify the FDIC and the GDBF in writing when it proposes to add any individual to the Bank’s Board of Directors or employ any individual as a senior executive officer;

the Bank must have and maintain a Tier 1 (Leverage) Capital ratio of not less than 8% and a Total Risk-based Capital ratio of at least 10%;

the Bank must collect or charge-off problem loans;

the Bank must formulate a written plan to reduce the Bank’s adversely classified assets in accordance with a defined asset reduction schedule;

the Bank may not extend any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged-off or adversely classified and is uncollected;

the Bank must strengthen its lending and collection policy to provide effective guidance and control over the Bank’s lending functions;

the Bank must perform a risk segmentation analysis with respect to concentrations of credit and reduce such concentrations;

the Board of Directors of the Bank must review the adequacy of the allowance for loan and lease losses (the “ALLL”) and establish a comprehensive policy for determining the adequacy of the ALLL;

the Bank must revise its budget and include formal goals and strategies to improve the Bank’s net interest margin, increase interest income, reduce discretionary expenses and improve and sustain earnings of the Bank;

the Bank may not pay a cash dividend to Oconee Financial Corporation;

the Board of Directors of the Bank must strengthen its asset/liability management and interest rate risk policies and liquidity contingency funding plan,

the Bank may not accept, renew or rollover brokered deposits without obtaining a brokered deposit waiver from the FDIC.

the Bank must eliminate or correct all violations of law and contraventions of policy;

the Bank must submit quarterly reports to the FDIC and GDBF regarding compliance with the Order.

The provisions of the Order will remain effective until modified, terminated, suspended or set aside by the FDIC. The primary focuses continue to be reducing classified and non-performing assets, maintaining adequate levels of capital and returning the Bank to profitable operating levels. As of September 30, 2011, the Bank was in compliance with the Order with the exception of the stipulation requiring the Bank to maintain a Tier 1 (Leverage) Capital ratio of not less than 8%. As of September 30, 2011, the Bank’s Tier 1 (Leverage) Capital ratio was 7.92%.

Balance Sheet Review

Total assets at September 30, 2011 were $259,781,000, representing a $19,587,000 (7.01%) decrease from December 31, 2010. Investment securities decreased $815,000 as compared to December 31, 2010. Loans decreased $8,874,000 (5.44%) at September 30, 2011 as compared to December 31, 2010, primarily due to loan pay-downs. Deposits decreased $7,867,000 (3.24%) from December 31, 2010. The decrease in deposits is primarily attributable to decreases in time deposits of $15,186,000, offset by increases in money market accounts of $2,058,000 and non-interest checking accounts of $7,523,000 as compared to December 31, 2010 balances. Due to changes in bank regulations allowing the payment of interest on corporate checking accounts, the Bank eliminated its securities sold under repurchase agreements effective July 31, 2011, which resulted in a decrease of $13,024,000 in those accounts as compared to December 31, 2010. The allowance for loan losses at September 30, 2011 was $5,052,000, compared to the December 31, 2010 balance of $3,528,000, representing 3.28% of total loans at September 30, 2011, compared to 2.16% of total loans at December 31, 2010. Cash and cash equivalents decreased $7,401,000 from December 31, 2010. Total stockholders’ equity at September 30, 2011 of $24,278,000 increased $1,343,000 (5.86%) from December 31, 2010 due to an increase in unrealized gains on securities of $1,744,000, offset by a reduction in retained earnings due to a net loss for the period of $401,000.

The following table presents a summary of the Bank’s loan portfolio by loan type at September 30, 2011 and December 31, 2010 (dollars are in thousands).

	September 30, 2011					December 31, 2010
	Amount		Percentage			Amount		Percentage
Commercial, financial and agricultural	$	19,701		12.8	%	$	25,199		15.5	%
Real estate – mortgage		112,170		72.8	%		115,667		71.0	%
Real estate –construction		16,892		11.0	%		16,335		10.0	%
Consumer		5,299		3.4	%		5,738		3.5	%
		154,062		100.0	%	$	162,939		100.0	%

The total amount of nonperforming assets, which includes nonaccruing loans, other real estate owned, repossessed collateral and loans for which payments are more than 90 days past due was $24,684,000 at September 30, 2011, representing an increase of $2,199,000 (9.78%) from December 31, 2010. This increase is attributable to an increase of $1,913,000 in nonaccrual loans, $272,000 in other real estate owned and $158,000 in repossessions, offset by a decrease of $144,000 in accruing loans 90 days or more past due. Total nonperforming assets were 16.02% of total loans at September 30, 2011, compared to 13.80% at December 31, 2010. Nonperforming assets represented 9.50% of total assets at September 30, 2011, compared to 8.05% of total assets at December 31, 2010. Nonaccrual loans represented 11.86% of total loans outstanding at September 30, 2011, compared to 10.04% of total loans outstanding at December 31, 2010. The Bank continues to focus on reducing nonperforming assets and this will be a major strategic objective going forward. There were no related party loans which were considered to be nonperforming at September 30, 2011. A summary of non-performing assets at September 30, 2011, December 31, 2010 and September 30, 2010 is presented in the following table (dollars are in thousands).

	September 30, 2011		December 31, 2010		September 30, 2010
Other real estate owned	$	5,708		5,436		5,982
Repossessions		168		10		-
Non-accrual loans		18,271		16,358		15,972
Accruing loans 90 days or more past due		537		681		-
	$	24,684		22,485		21,954

The table below details the changes in other real estate owned for the nine months ending September 30, 2011 and 2010 (dollars are in thousands).

	2011			2010
Balance at January 1	$	5,436			6,915
Transfer from loans to other real estate		1,043			3,023
Capital Improvements on other real estate		237			211
External and internal sales of other real estate		(946	)		(3,480	)
Net write-downs and loss on sales		(62	)		(687	)
Balance at September 30	$	5,708			5,982

During the first quarter 2009, the Bank formed Motel Holdings Georgia, Inc., a subsidiary Company for the purpose of holding a motel that was foreclosed upon by the Bank in January 2009. This subsidiary was set up to limit the Bank’s liability on the operations of the motel and to make a more clear separation of the income and expenses relating to the motel and the Bank’s ordinary lines of business. The Bank contracted with an independent hospitality management company to operate the motel while the Bank marketed the motel for sale. During the second quarter of 2010, the Bank sold the motel and recognized a loss on the sale of $204,000. Upon the sale of the motel, Motel Holdings Georgia became inactive and remains inactive as of September 30, 2011.

At September 30, 2011, the Company had loan concentrations in the housing industry and in the hotel and motel industry. Total commitment amounts for hotel and motel loans were $19,828,000 at September 30, 2011, of which the full amount was funded and outstanding. The Company’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry.

As of September 30, 2011, the Company had total commitments for construction and development loans of $14,234,000, of which $11,615,000 was funded and outstanding. The local housing industry has slowed considerably over the past 18 to 24 months, as has occurred at the state and national level. New loan requests have been down as compared to prior periods due to this slowdown. The immediate challenge for the Bank is to finance builders and developers with the financial strength to deal with the current weaker demand, while working with financially weaker builders in an attempt to help them work through this economic downturn.

Results of Operations

Net interest income increased $59,000 (0.91%) in the first nine months of 2011 compared to the same period for 2010. The Bank’s net interest margin for the first nine months of 2011 was 3.46%, compared to 3.34% for the same time period during 2010. Yield on interest earning assets, including nonaccrual loans, for the nine-month period ending September 30, 2011 was 4.36%, compared to 4.80% for the nine-month period ending September 30, 2010. Average rate paid on interest bearing liabilities was 1.06% for the nine months ending September 30, 2011, compared to 1.69% for the same period during 2010. The reduction in the average rate paid on interest bearing liabilities is a result of a lower interest rate environment in 2011 and a reduction of $15,245,000 in average time deposits during the first nine months of 2011 as compared to the same time period in 2010.

Interest income for the first nine months of 2011 was $8,261,000, representing a decrease of $1,073,000 (11.50%) as compared to the same period in 2010. Interest expense for the first nine months of 2011 decreased $1,133,000 (39.89%) compared to the same period in 2010. The decrease in interest income during the first nine months of 2011 compared to the same period in 2010 is primarily attributable to a lower average level of outstanding loans in 2011 as compared to 2010. Year-to-date average loans were $17,428,000 lower during the first nine months of 2011 as compared to 2010. Loan demand continues to be weak in the Bank’s market and loan pay-offs have exceeded production of new loans. The decrease in average loans was offset by increases in average investment securities of $9,072,000 and an increase in interest-earning due from bank accounts of $1,598,000. The decrease in interest expense is primarily attributable to a lower interest rate market and a decrease in interest-bearing liabilities of $9,004,000 during the first nine months of 2011 as compared to the same time period for 2010. The reduction in interest-bearing liabilities is primarily due to decreases in average time deposits of $15,245,000, offset by increases in average interest-bearing demand deposits of $4,133,000 and average savings deposits of $5,784,000.

Net interest income for the quarterly period ended September 30, 2011 was $2,285,000, as compared to $2,098,000 for the same time period in 2010. The increase in net interest income in 2011 was due to a decline in interest income of $207,000, offset by a decrease in interest expense of $393,000. The decline in interest expense was primarily due to lower levels of interest-bearing liabilities in 2011 as compared to 2010, as well as a lower interest rate environment for deposits. The decrease in interest income is due to lower average levels of interest-earning assets in 2011 as compared to 2010.

The Bank analyzes its allowance for loan losses on a monthly basis. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. For the nine months ended September 30, 2011, the provision for loan losses was $2,410,000, compared to $2,770,000 for the same period in 2010. The provision for loan losses decreased in 2011 as compared to 2010 as a result of a lower level of historic charge-offs at September 30, 2011 as compared to September 30, 2010. The historic charge-offs are primarily tied to the construction and real estate development industry, which has continued to experience a prolonged downturn throughout 2010 and the first nine months of 2011. However, the Bank has seen its outstanding balances in these categories of loans decline as a result of the overall slowdown in the housing market. The historic charge-offs are part of the calculation used to determine the adequacy of the loan loss reserve. The nature of the process by which the Company determines the appropriate allowance for loan losses requires the exercise of considerable judgment. It is management’s belief that the allowance for loan losses is adequate to absorb possible losses in the portfolio.

For the quarterly period ended September 30, 2011, the Bank provided $610,000 to the allowance for loan losses. This is a decrease of $690,000 compared to the second quarter of 2011 and a decrease of $740,000 compared to the same time period during 2010.

The following table summarizes information concerning the allowance for loan losses for the three-month and nine-month periods ended September 30, 2011 and 2010. Dollar amounts are in thousands.

	Three Months Ending						Nine Months Ending
	September 30,						September 30,
	2011			2010			2011			2010

Balance at beginning of period	$	4,490		$	3,552		$	3,528		$	3,497
Charges-offs:
Commercial, financial and agricultural		-			150			310			150
Installment		9			13			86			32
Real Estate		50			1,186			539			2,552
Total charge-offs		59			1,349			935			2,734
Recoveries:
Commercial, financial and agricultural		2			-			6			6
Installment		7			17			21			24
Real Estate		2			-			22			7
Total recoveries		11			17			49			37
Net charge-offs		48			1,332			886			2,697
Provisions charged to operations		610			1,350			2,410			2,770
Balance at end of period	$	5,052		$	3,570		$	5,052		$	3,570
Ratio of net charge-offs during the period to average loans outstanding during the period		0.04	%		0.77	%		0.56	%		1.54	%

Other income for the first nine months of 2011 decreased $398,000 (18.52%) compared to the first nine months of 2010. This decrease is primarily attributable to decreases of $206,000 in income on other real estate owned, $76,000 in net gains on the sale of investment securities, and a $151,000 decrease in non-sufficient funds service charges, offset by an increase of $50,000 in ATM fees.

The primary source of the Bank’s income on other real estate owned during 2010 was revenue generated by the operation of a motel that the Bank foreclosed on in February of 2009. The motel was owned by Motel Holdings Georgia, Inc., a wholly-owned subsidiary of the Bank, and is operated through a management contract with a hospitality company. The revenues and expenses from the motel operations are consolidated with the Bank operations for purposes of financial statement disclosure. During the second quarter of 2010, the Bank sold the motel and recognized a loss of $204,000 on the sale.

Other expenses for the first nine months of 2011 decreased $966,000 (13.02%) compared to the first nine months in 2010. The decrease is attributable to a decrease in losses on other real estate owned of $625,000, a decrease in loan and a decrease in salaries and employee benefits expense of $70,000, offset by an increase in non-loan related charge-offs and forgeries of $84,000.

The reduction in losses on other real estate owned is due to fewer write-downs on foreclosed properties. The Bank continues to acquire updated appraisals as required by banking regulations. During 2010, the Bank sold a motel and realized a loss of $204,000 on the sale in addition to writing down several properties as updated appraisals were received. The reduction in salaries and benefits expense is primarily due the Bank having fewer employees in 2011 as compared to 2010. This reduction in employees is due to attrition of the Bank’s work force and a reduction in force initiative implemented by management of the Bank in late July 2011. The goal of the reduction in force initiative was to reduce salaries expense by 10% on an annualized basis. This reduction was accomplished through a combination of lay-offs, salary cuts, hour reductions and furlough days for employees. As a result, the Bank has reduced its full-time equivalent employees from 87 full-time equivalent employees at January 1, 2010 to 76.5 full-time equivalent employees at September 30, 2011.

The increase in non-loan related charge-offs and forgeries during the first nine months of 2011 is primarily due to a significant increase in debit card disputes due to compromised debit cards. The Bank experienced $90,000 in debit card losses during the first nine months of 2011, compared to losses of $20,000 during the same time period in 2010.

For the nine months ended September 30, 2011, the Company showed an income tax expense benefit of $157,000.

Interest rate sensitivity

Interest rate sensitivity is a function of the repricing characteristics of the Bank’s portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest earning assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. One method to measure interest rate sensitivity is through a repricing gap. The gap is calculated by taking all assets that reprice or mature within a given time frame and subtracting all liabilities that reprice or mature during that time frame. A negative gap (more liabilities repricing than assets) generally indicates that the Bank’s net interest income will decrease if interest rates rise and will increase if interest rates fall. A positive gap generally indicates that the Bank’s net interest income will decrease if rates fall and will increase if rates rise.

The Bank also measures its short-term exposure to interest rate risk by simulating the impact to net interest income under several rate change levels. Interest-earning assets and interest-bearing liabilities are rate shocked to stress test the impact to the Bank’s net interest income and margin. The rate shock levels span three 100 basis point increments up and down from current interest rates. This information is used to monitor interest rate exposure risk relative to anticipated interest rate trends. Asset/liability management strategies are developed based on this analysis in an effort to limit the Bank’s exposure to interest rate risk.

The Bank tracks its interest rate sensitivity on a monthly basis using a model, which applies betas to various types of interest-bearing deposit accounts. The betas represent the Bank’s expected repricing of deposit rates based on historical data provided from a call report driven database. The betas are used because it is not likely that deposit rates would change the full amount of a prime rate increase or decrease.

At September 30, 2011, the difference between the Bank’s liabilities and assets repricing or maturing within one year, after applying the betas, was $48,124,000, indicating that the Bank was asset sensitive. Due to a large percentage of the Bank’s floating rate loans being currently priced at floor rates, meaning that the loans will not reprice in a falling rate environment, rate shock data show that the Bank’s net interest income would increase $454,000 on an annual basis if rates increased 100 basis points, and would decrease $101,000 on an annual basis if rates decreased 100 basis points.

Certain shortcomings are inherent in the method of analysis presented in the foregoing paragraph. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from the assumptions made above. In addition, significant rate decreases would not likely be reflected in liability repricing and therefore would make the Bank more sensitive in a falling rate environment.

Liquidity

The Company must maintain, on a daily basis, sufficient funds to cover the withdrawals from depositors’ accounts and to supply new borrowers with funds. To meet these obligations, the Company keeps cash on hand, maintains account balances with its correspondent banks, and purchases and sells federal funds and other short-term investments. Asset and liability maturities are monitored in an attempt to match these to meet liquidity needs. It is the policy of the Company to monitor its liquidity to meet regulatory requirements and its local funding requirements.

The Company monitors its liquidity position weekly. The primary tool used in this analysis is an internal calculation of a liquidity ratio. This ratio is calculated by dividing the Company’s short-term and marketable assets, including cash, federal funds sold, and unpledged investment securities by the sum of the Company’s deposit liabilities. At September 30, 2011, the Company’s liquidity ratio was 25.2%. This level of liquidity is within the Bank’s goal of maintaining a sufficient level of liquidity in all expected economic environments.

The Company maintains relationships with correspondent banks that can provide it with funds on short notice, if needed through secured lines of credit and securities repurchase agreements. Additional liquidity is provided to the Company through available Federal Home Loan Bank advances, none of which were outstanding at September 30, 2011.

During the first nine months of 2011, cash and cash equivalents decreased $7,401,000 to a total of $22,558,000 at September 30, 2011. Cash inflows from operations totaled $2,152,000 during the first nine months of 2011, while outflows from financing activities totaled $20,891,000, comprised of net decreases of $7,867,000 in deposits and net decreases in securities sold under repurchase agreements of $13,024,000.

Investing activities provided $11,338,000 of cash and cash equivalents, consisting primarily of proceeds from calls, maturities and paydowns of investment securities of $19,049,000, net decreases in loans of $7,497,000 and proceeds from the sales of investment securities of $13,770,000, offset by purchases of investment securities of $29,163,000. At September 30, 2011, the Bank had $73,183,000 of investment securities available for sale.

Contractual Obligations and Commitments

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet. The contract amounts of these instruments reflect the extent of the involvement of the Company in particular classes of financial instruments. At September 30, 2011, the contractual amounts of the Company’s commitments to extend credit and standby letters of credit were $20,720,000 and $437,000, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

Capital

The following tables present the Bank’s regulatory capital position at September 30, 2011 and December 31, 2010, based on the regulatory capital requirements of federal banking agencies. The capital ratios of the Company are essentially the same as those of the Bank at September 30, 2011 and December 31, 2010 and therefore only the Bank’s ratios are presented.

Risk-Based Capital Ratios	September 30, 2011			December 31, 2010

Tier 1 Capital, Actual		12.7	%		12.9	%
Tier 1 Capital minimum requirement		4.0	%		4.0	%

Excess		8.7	%		8.9	%

Total Capital, Actual		13.9	%		14.2	%
Total Capital minimum requirement		8.0	%		8.0	%

Excess		5.9	%		6.2	%

Leverage Ratio

Tier 1 Capital to adjusted total assets		7.9	%		8.1	%
Minimum leverage requirement		4.0	%		4.0	%

Excess		3.9	%		4.1	%

Item 3. Qualitative and Quantitative Disclosures about Market Risk.

Not applicable because the registrant is a smaller reporting company.

Item 4T. Controls and Procedures.

Our management, including our principal executive officer and principal financial officer, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934) and pursuant to such evaluation, concluded that our disclosure controls and procedures were effective as of September 30, 2011. Disclosure controls and procedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rules and regulations.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

Not applicable because the registrant is a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

Item 6. Exhibits

(a)	Exhibits
	10.1	Order to Cease and Desist, dated August 18, 2009, and Stipulation and Consent thereto.*

	31.1	Certification by B. Amrey Harden, CEO and President of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification by Steven A. Rogers, Vice President and Chief Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101.INS	XBRL Instance Document

	101.SCH	XBRL Schema Document

	101.CAL	XBRL Calculation Linkbase Document

	101.DEF	XBRL Definition Linkbase Document

	101.LAB	XBRL Label Linkbase Document

	101.PRE	XBRL Presentation Linkbase Document

______________

*Previously filed.

SIGNATURES

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

	OCONEE FINANCIAL CORPORATION By: /s/ B. Amrey Harden B. Amrey Harden, President and CEO (Principal Executive Officer) Date: November 14, 2011 By: /s/ Steven A. Rogers Steven A. Rogers, Vice President and CFO (Principal Accounting Officer) Date: November 14, 2011