oconee_10q-033112.htm

10-Q 1 oconee_10q-033112.htm OCONEE FINANCIAL CORPORATION oconee_10q-033112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

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 May 15, 2012 was 899,815.

INDEX

			Page No.
PART I - FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011	1

		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2012 and 2011	2

		Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	3

		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2012 and 2011	4

		Notes to Consolidated Financial Statements (unaudited)	6

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

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

	Item 4T.	Controls and Procedures	27


PART II - OTHER INFORMATION

	Item 1.	Legal Proceedings	27

	Item 1A.	Risk Factors	27

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

	Item 3.	Defaults Upon Senior Securities	27

	Item 5.	Other Information	27

	Item 6.	Exhibits	27

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2012 and December 31, 2011

	March 31, 2012 (unaudited)		December 31, 2011
Assets

Cash and due from banks, including reserve requirements of $25,000	$	45,174,914		18,194,898

Investment securities available for sale		77,137,632		83,374,233
Restricted equity securities		461,100		461,100
Mortgage loans held for sale		368,550		1,027,815

Loans, net of allowance for loan losses of $2,738,252 and $2,760,160		138,623,645		141,221,602

Premises and equipment, net		5,533,797		5,646,012
Other real estate owned		7,615,574		6,610,674
Accrued interest receivable and other assets		2,344,270		3,309,621

Total assets	$	277,259,482		259,845,955

Liabilities and Stockholders’ Equity

Liabilities:
Deposits
Noninterest-bearing	$	38,155,331		34,022,991
Interest-bearing		216,036,691		202,589,045

Total deposits		254,192,022		236,612,036

Accrued interest payable and other liabilities		461,051		1,051,432

Total liabilities		254,653,073		237,663,468

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		15,477,756		15,101,470
Accumulated other comprehensive income		1,085,691		1,038,055

Total stockholders’ equity		22,606,409		22,182,487

Total liabilities and stockholders’ equity	$	277,259,482		259,845,955

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012		2011
Interest Income:
Loans	$	1,934,191		2,102,964
Investment securities:
U.S. government agencies		505,386		506,420
State, county and municipal		139,432		142,810
Federal funds sold and other		17,063		13,938
Total interest income		2,596,072		2,766,132

Interest Expense:
Deposits		442,671		594,373
Other		-		59,448
Total interest expense		442,671		653,821

Net interest income		2,153,401		2,112,311

Provision for loan losses		100,000		500,000

Net interest income after provision for loan losses		2,053,401		1,612,311

Other Income:
Service charges on deposit accounts		189,387		188,597
Mortgage origination fees		78,540		19,312
Securities gains, net		-		23,139
Other operating income		250,779		296,064
Total other income		518,706		527,112

Other Expense:
Salaries and other personnel expense		1,026,567		1,086,435
Net occupancy and equipment expense		211,363		287,477
Other operating expense		707,493		790,745
Total other expense		1,945,423		2,164,657

Earnings (loss) before income taxes (benefit)		626,684		(25,234	)

Income taxes (benefit)		250,397		(9,722	)

Net earnings (loss)	$	376,287		(15,512	)

Earnings (loss) per common share based on average outstanding shares of 899,815	$	0.42		(0.02	)

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012		2011

Net earnings (loss)	$	376,287		(15,512	)

Other comprehensive gains, net of tax:
Unrealized gains on securities available for sale:
Holding gains arising during period, net of tax of $29,147 and $95,953		47,636		156,820


Reclassification adjustments for gains included in net loss, net of tax of $0 and $8,784		-		(14,355	)

Total other comprehensive income		47,636		142,465

Comprehensive income	$	423,923		126,953

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012			2011
Cash flows from operating activities:
Net earnings (loss)	$	376,287		$	(15,512	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Provision for loan losses		100,000			500,000
Depreciation, amortization and accretion		183,533			156,182
Loss on sales and disposals of fixed assets		57,887			-
Gain on sales of securities		-			(23,139	)
Loss on other real estate owned		1,467			13,950
Change in assets and liabilities:
Interest receivable and other assets		936,203			(5,552	)
Interest payable and other liabilities		(590,381	)		73,777
Mortgage loans held for sale		659,265			183,500

Net cash provided by operating activities		1,724,261			883,206

Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		-			718,700
Proceeds from calls, maturities, and paydowns of investment securities available for sale		7,315,515			3,038,430
Purchases of investment securities available for sale		(1,110,465	)		(1,600,910	)
Net change in loans		1,419,461			3,147,474
Purchases of premises and equipment		(20,871	)		(17,245	)
Proceeds from sales of other real estate		72,129			-

Net cash provided by investing activities		7,675,769			5,286,449

Cash flows from financing activities:
Net change in deposits		17,579,986			(3,357,087	)
Net change in securities sold under repurchase agreements		-			(1,412,854	)

Net cash provided by (used in) financing activities		17,579,986			(4,769,941	)

Net increase in cash and cash equivalents		26,980,016			1,399,714

Cash and cash equivalents at beginning of period		18,194,898			29,958,828

Cash and cash equivalents at end of period	$	45,174,914		$	31,358,542

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows, continued

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012		2011


Supplemental cash flow information:
Cash paid for interest	$	447,192	$	686,521

Noncash investing and financing activities:
Transfer from loans to other real estate owned	$	1,347,044	$	282,604
Transfer of other real estate to loans	$	268,548	$	115,842

Change in net unrealized gains on investment securities available for sale, net of tax	$	47,636	$	142,465

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 three–month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

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, 2011.

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

(2)	Net Earnings (Loss) Per Common Share

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

(3)	Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

	Three Months Ended March 31,
	2012			2011

Balance at beginning of year	$	2,760,160			3,527,567
Amounts charged off		(132,805	)		(38,809	)
Recoveries on amounts previously charged off		10,897			12,631
Provision for loan losses		100,000			500,000

Balance at March 31	$	2,738,252			4,001,389

(4)	Fair Value Measurements

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

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

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

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

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

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

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

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

Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures its impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, and discounted cash flows less selling costs. Those impaired loans not requiring a specific reserve represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, 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 Owned: Other real estate owned 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 owned 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 owned as nonrecurring Level 3.

Valuation Techniques: Generally, for all debt securities, fair value is determined by reference to quoted market prices and other relevant information generated by market transactions. For certain debt securities, fair value is estimated as the present value of expected future cash inflows, taking into account (1) the type of security, its terms, and any underlying collateral, (2) the seniority level of the debt security, and (3) quotes received from brokers and pricing services. In applying the valuation model, significant inputs include the probability of default for debt securities, the estimated prepayment rate, and the projected yield based on estimated future market rates for similar securities.

The tables below presents the Company’s assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Balance at March 31, 2012
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Securities	$	77,138	$	-	$	76,160	$	978

	Balance at December 31, 2011
	(In thousands)			(Level 1)			(Level 2)			(Level 3)
Assets				(In thousands)
Securities		$	83,374		$	-		$	82,406		$	968

The Company’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances. For the period ended March 31, 2012 and year ended December 31, 2011, there were no transfers between Level 1 and Level 2.

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the consolidated balance sheet using significant unobservable (Level 3) inputs for the three months ended March 31, 2012 and the year ended December 31, 2011.

	March 31, 2012		December 31, 2011
	(In Thousands)
Securities
Beginning balance	$	968	$	4,947
Reclassified to Level 2		-		(4,040	)
Purchases		-		-
Unrealized gains (losses) included in other comprehensive income (loss)		10		61
	$	978	$	968

The table below presents the Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

Balance at March 31, 2012

(In thousands)

(Level 1)

(Level 2)

(Level 3)

Total Losses

Impaired loans

Other real estate

	Balance at December 31, 2011
	(In thousands)		(Level 1)		(Level 2)		(Level 3)		Total Losses
Impaired loans	$	11,853	$	-	$	-	$	11,853	$	3,981
Other real estate		1,452		-		-		1,452		232

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Restricted Equity Securities

The carrying amount of restricted equity securities approximates fair value.

Loans and Mortgage Loans Held for Sale

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

Deposits and Securities Sold Under Repurchase Agreements

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

Commitments to Extend Credit and Standby Letters of Credit

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

The estimated fair values of the Company’s financial instruments as of March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012				December 31, 2011
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:	(In thousands)				(In thousands)
Cash and cash equivalents	$	45,175		45,175		18,195		18,195
Investment securities	$	77,138		77,138		83,374		83,374
Restricted equity securities	$	461		461		461		461
Loans held for sale	$	369		369		1,028		1,028
Loans, net	$	138,624		138,509		141,222		140,956

Liabilities:
Deposits and securities sold under
repurchase agreement	$	254,192		253,916		236,612		236,491

(5)	Investments

Investment securities available for sale at March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	10,005,472		1,384		(92,481	)		9,914,375
State, county and municipal		12,261,973		476,298		(59,550	)		12,678,721
Mortgage-backed securities – GSE residential		52,120,201		1,451,541		(4,706	)		53,567,036
Corporate bonds		1,000,000		-		(22,500	)		977,500

Total	$	75,387,646		1,929,223		(179,237	)		77,137,632

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	12,745,487		28,631		(13,176	)		12,760,942
State, county and municipal		12,747,899		409,184		(8,790	)		13,148,293
Mortgage-backed securities – GSE residential		55,207,644		1,307,877		(18,723	)		56,496,798
Corporate bonds		1,000,000		-		(31,800	)		968,200

Total	$	81,701,030		1,745,692		(72,489	)		83,374,233

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

Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2012 and December 31, 2011 are summarized as follows:

	March 31, 2012
	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	$	8,402,802		92,481		-		-		92,481
State, county and municipal		1,800,443		59,550		-		-		59,550
Mortgage-backed securities		2,962,042		4,706		-		-		4,706
Corporate bonds		-		-		977,500		22,500		22,500

	$	13,165,287		156,737		977,500		22,500		179,237

	December 31, 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	$	3,236,824		13,176		-		-		13,176
State, county and municipal		1,027,910		8,790		-		-		8,790
Mortgage-backed securities		9,627,150		18,723		-		-		18,723
Corporate bonds		-		-		968,200		31,800		31,800

	$	13,891,884		40,689		968,200		31,800		72,489

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

The unrealized losses on these debt securities in a continuous loss position for twelve months or more as of March 31, 2012 and December 31, 2011 are considered to be temporary because they arose due to changing interest rates and the repayment sources of principal and interest are government backed or are securities of investment grade issuers. Included in the table above as of March 31, 2012 were 3 out of 27 securities issued by state and political subdivisions that contained unrealized losses, 8 of 11 securities issued by government sponsored agencies, 3 of 51 mortgage-backed securities, and 1 of 1 corporate bonds that contained unrealized losses.

GSE debt securities. The unrealized losses on the eight investments in GSEs were caused by interest rate increases. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2012.

Corporate bonds. The Company’s unrealized loss on investment in one corporate bond relates to investments in companies within the financial services sector. The unrealized loss is 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 investment. 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 investment before recovery of its par value, which may be maturity, it does not consider this investment to be other-than-temporarily impaired at March 31, 2012.

GSE residential mortgage-backed securities. The unrealized losses on the Company’s investment in three GSE mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2012.

State, county and municipal securities. The unrealized losses on the Company’s investment in three state and municipal securities are primarily caused by securities no longer being insured and/or ratings being withdrawn given the current economic environment, as well as changes in interest rates. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2012.

The amortized cost and fair value of investment securities available for sale at March 31, 2012, 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 from one to five years	$	1,353,659		1,341,700
Due from five to ten years		3,335,209		3,381,962
Due after ten years		18,578,577		18,846,934
Mortgage-backed securities		52,120,201		53,567,036

	$	75,387,646		77,137,632

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

	2012		2011

Proceeds from sales	$	-		718,700

Gross gains realized	$	-		23,139
Gross losses realized		-		-

Net gain realized	$	-		23,139

(6)

Loans

Major classifications of loans at March 31, 2012 and December 31, 2011 are summarized as follows:

	March 31, 2012			December 31, 2011

Commercial, financial and agricultural	$	16,284,668		$	18,581,723
Real estate – mortgage		109,803,363			108,974,230
Real estate – construction		10,063,315			11,057,312
Consumer		5,147,086			5,317,356
Total loans		141,298,432			143,930,621

Deferred fees and costs, net		63,465			51,141
Allowance for loan losses		(2,738,252	)		(2,760,160	)
Net loans	$	138,623,645		$	141,221,602

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 months ended March 31, 2012 and March 31, 2011:

March 31, 2012:
	Commercial, financial and agricultural			Real estate - mortgage			Real estate - construction			Consumer			Unallocated		Total
Balance at beginning of year	$	743,784		$	1,515,752		$	371,242		$	106,075		$	23,307	$	2,760,160
Provision for loan losses		(31,541	)		193,178			(81,095	)		6,067			13,391		100,000
Amounts charged off		-			(50,800	)		(75,802	)		(6,203	)		-		(132,805	)
Recoveries on amounts previously charged off		582			2,000			5,000			3,315			-		10,897
Balance at end of period	$	712,825		$	1,660,130		$	219,345		$	109,254		$	36,698	$	2,738,252

March 31, 2011:
	Commercial, financial and agricultural			Real estate - mortgage		Real estate - construction			Consumer			Unallocated		Total
Balance at beginning of year	$	1,040,336		$	905,884	$	1,417,410		$	55,772		$	108,165	$	3,527,567
Provision for loan losses		(945	)		272,201		274,915			(4,882	)		41,289		500,000
Amounts charged off		(34,942	)		-		(743	)		(3,124	)		-		(38,889	)
Recoveries on amounts previously charged off		1,250			5,500		-			5,881			-		12,631
Balance at end of period	$	1,005,699		$	1,183,585	$	1,691,582		$	53,647		$	66,875	$	4,001,389

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2012, March 31, 2011 and December 31, 2011:

As of March 31, 2012:
	Commercial, financial and agricultural		Real estate - mortgage		Real estate - construction		Consumer
Allowance for loan losses:

Ending balance attributable to loans:

Individually evaluated for impairment	$	-	$	679,131	$	136,849	$	-
Collectively evaluated for impairment		712,825		980,999		82,496		109,254

Total ending allowance balance	$	712,825	$	1,660,130	$	219,345	$	109,254


Loans:

Individually evaluated for impairment	$	633,495	$	18,362,952	$	3,927,987	$	30,317
Collectively evaluated for impairment		15,651,173		91,440,411		6,135,328		5,116,769

Total ending loan balance	$	16,284,668	$	109,803,363	$	10,063,315	$	5,147,086

As of March 31, 2011:
	Commercial, financial and agricultural		Real estate - mortgage		Real estate -commercial construction		Consumer
Allowance for loan losses:

Ending balance attributable to loans:

Individually evaluated for impairment	$	261,804	$	233,769	$	1,256,095	$	-
Collectively evaluated for impairment		7,795		395,104		-		19,158

Total ending allowance balance	$	269,599	$	628,873	$	1,256,095	$	19,158


Loans:

Individually evaluated for impairment	$	989,190	$	2,304,994	$	12,202,421	$	-
Collectively evaluated for impairment		28,072		1,422,772		-		68,987

Total ending loan balance	$	1,017,262	$	3,727,766	$	12,202,421	$	68,987

As of December 31, 2011:
	Commercial, financial and agricultural		Real estate - mortgage		Real estate - construction		Consumer
Allowance for loan losses:

Ending balance attributable to loans:

Individually evaluated for impairment	$	12,176	$	582,443	$	280,093	$	-
Collectively evaluated for impairment		731,608		933,309		91,149		106,075

Total ending allowance balance	$	743,784	$	1,515,752	$	371,242	$	106,075


Loans:

Individually evaluated for impairment	$	748,558	$	19,098,416	$	4,965,700	$	31,288
Collectively evaluated for impairment		17,833,165		89,875,814		6,091,612		5,286,068

Total ending loan balance	$	18,581,723	$	108,974,230	$	11,057,312	$	5,317,356

Impaired loans at March 31, 2012 and December 31, 2011 were as follows:

	March 31, 2012		December 31, 2011
Loans with no allocated allowance for loan losses	$	15,360,617		16,081,151

Loans with allocated allowance for loan losses		8,698,783		9,949,152

Total	$	24,059,400		26,030,303

Amount of the allowance for loan losses allocated	$	1,029,951		1,092,644

Average of individually impaired loans during year	$	24,595,958		21,305,386

The Bank recognized interest income on the cash basis for loans that were impaired during the periods ended March 31, 2011 and 2010 of $32,331 and $0, respectively.

The following table presents loans individually evaluated for impairment by portfolio segment as of March 31, 2012 and December 31, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Balance		Interest Recognized
March 31, 2012:

With no related allowance recorded:
Commercial, financial and agricultural		633,495		633,495		-		670,641		31,607
Real estate – mortgage		12,867,919		12,867,919		-		13,222,651		-
Real estate – construction		3,378,660		1,828,886		-		1,796,791		107
Consumer		30,317		30,317		-		30,803		-
Total with no allowance recorded		16,910,391		15,360,617		-		15,720,886		31,714

With an allowance recorded:

Commercial, financial and agricultural		101,094		101,094		19,582		89,457		265
Real estate – mortgage		6,449,415		6,449,415		863,995		6,531,998		13
Real estate – construction		5,052,730		2,099,099		136,849		2,650,053		-
Consumer		49,175		49,175		9,525		52,461		339
Total with allowance recorded		11,652,414		8,698,783		1,029,951		9,323,969		617

Total impaired loans		28,562,805		24,059,400		1,029,951		25,044,855		32,331

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Balance		Interest Recognized
December 31, 2011:

With no related allowance recorded:
Commercial, financial and agricultural		707,787		707,787		-		392,663		527
Real estate – mortgage		13,577,383		13,577,383		-		7,623,820		548,009
Real estate – construction		1,764,694		1,764,694		-		2,247,375		885
Consumer		31,288		31,288		-		15,644		1,414
Total with no allowance recorded		16,081,152		16,081,152		-		10,181,330		550,835

With an allowance recorded:

Commercial, financial and agricultural		77,819		77,819		18,982		385,543		49
Real estate – mortgage		6,614,580		6,614,580		783,328		4,093,090		35,901
Real estate – construction		7,772,120		3,201,006		280,093		6,579,713		7,882
Consumer		55,746		55,746		10,241		65,711		43
Total with allowance recorded		14,520,265		9,949,151		1,092,644		11,124,057		43,875

Total impaired loans		30,601,417		26,030,303		1,092,644		21,305,386		594,710

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 March 31, 2012, December 31, 2011, and March 31, 2011 are as follows:

	March 31, 2012		December 31, 2011		March 31, 2011
Loans past due 90 days still on accrual	$	4,174	$	6,548	$	40,530
Nonaccrual Loans	$	11,258,693	$	13,226,260	$	16,794,047

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by portfolio segment:

March 31, 2012:
	30-89 Days Past Due		Accruing Greater than 90 Days Past Due		Accruing Total Past Due		Nonaccrual		Loans Not Past Due		Total
Commercial, financial and agricultural	$	266,148	$	-	$	266,148	$	734,590	$	15,283,930	$	16,284,668
Real estate – mortgage		296,840		-		296,840		6,516,624		102,989,899		109,803,363
Real estate – construction		-		-		-		3,927,987		6,135,328		10,063,315
Consumer		67,343		4,174		71,517		79,492		4,996,077		5,147,086
Total	$	630,331	$	4,174	$	634,505	$	11,258,693	$	129,405,234	$	141,298,432

December 31, 2011:
	30-89 Days Past Due		Accruing Greater than 90 Days Past Due		Accruing Total Past Due		Nonaccrual		Loans Not Past Due		Total
Commercial, financial and agricultural	$	62,775	$	-	$	62,775	$	785,606	$	17,733,342	$	18,581,723
Real estate – mortgage		138,712		-		138,712		7,387,920		101,447,598		108,974,230
Real estate – construction		25,847		-		25,847		4,965,700		6,065,765		11,057,312
Consumer		92,509		6,548		99,057		87,034		5,131,265		5,317,356
Total	$	319,843	$	6,548	$	326,391	$	13,226,260	$	130,377,970	$	143,930,621

Troubled Debt Restructurings:

At March 31, 2012, impaired loans included loans that were classified as Troubled Debt Restructurings “TDRs”. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.

The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of March 31, 2012, the Company had $14,418,307 in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at March 31, 2012, $1,617,600 met the criteria for restructured. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

The following table summarizes the loans that were modified as a TDR during the three-month period ended March 31, 2012 and the year-ended December 31, 2011:

March 31, 2012

Recorded

Investment

Impact on the

Number

Prior to

After

Allowance for

of Loans

Modification

Loan Losses

Commercial, financial and agricultural

Real estate – mortgage

Real estate – construction

Consumer

Total

December 31, 2011
			Recorded			Recorded
			Investment			Investment			Impact on the
	Number		Prior to			After			Allowance for
	of Loans		Modification			Modification			Loan Losses

Commercial, financial and agricultural		-		$	-		$	-		$	-
Real estate – mortgage		4			12,844,916			12,844,916			-
Real estate – construction		1			795,000			795,000			-
Consumer		-			-			-			-
Total		5		$	13,639,916		$	13,639,916		$	-

There were no loans modified as a TDR over the last twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three-month period ended March 31, 2012 and the year ended December 31, 2011.

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 March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

March 31, 2012:
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	15,345,820	$	229,975	$	708,873	$	-	$	16,284,668
Real estate – mortgage		78,049,200		11,730,381		20,023,782		-		109,803,363
Real estate – construction		820,472		4,332,693		4,910,150		-		10,063,315
Consumer		4,980,922		50,754		115,410		-		5,147,086
Total	$	99,196,414	$	16,343,803	$	25,758,215	$	-	$	141,298,432

December 31, 2011:
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	17,600,857	$	160,450	$	820,416	$	-	$	18,581,723
Real estate – mortgage		73,307,632		14,803,191		20,863,407		-		108,974,230
Real estate – construction		-		2,153,921		8,903,391		-		11,057,312
Consumer		5,159,003		27,777		130,576		-		5,317,356
Total	$	96,067,492	$	17,145,339	$	30,717,790	$	-	$	143,930,621

(7)	Accounting Standards Updates

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 March 31, 2012, 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 March 31, 2012, the Bank’s Tier 1 (Leverage) Capital ratio was 7.34%.

Balance Sheet Review

Total assets at March 31, 2012 were $277,259,000, representing a $17,413,000 (6.70%) increase from December 31, 2011. Investment securities decreased $6,236,000 as compared to December 31, 2011. Loans decreased $2,620,000 (1.82%) at March 31, 2012 as compared to December 31, 2011, primarily due to loan pay-downs. Deposits increased $17,580,000 (7.43%) from December 31, 2011. The increase in deposits is primarily attributable to increases in interest-bearing checking accounts of $8,454,000, in non-interest checking accounts of $4,132,000 and time deposits of $4,994,000. During the first quarter of 2012, the Bank had an increase in public funds deposits in both interest-bearing and non-interest bearing checking accounts as the result of two bond issues by local public entities. The allowance for loan losses at March 31, 2012 was $2,738,000, compared to the December 31, 2011 balance of $2,760,000, representing 1.94% of total loans at March 31, 2012, compared to 1.92% of total loans at December 31, 2011. Cash and cash equivalents increased $26,980,000 from December 31, 2011. Total stockholders’ equity at March 31, 2012 of $22,606,000 increased $424,000 (1.91%) from December 31, 2011.

The following table presents a summary of the Bank’s loan portfolio by loan type at March 31, 2012 and December 31, 2011 (dollars are in thousands).

	March 31, 2012			December 31, 2011
	Amount		Percentage	Amount		Percentage
Commercial, financial and agricultural	$	16,285	11.5%	$	18,582	12.9%
Real estate – mortgage	109,803		77.7%	108,974		75.7%
Real estate –construction	10,063		7.1%	11,057		7.7%
Consumer	5,147		3.7%	5,317		3.7%
Total loans	$	141,298	100.0%	$	143,931	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 $18,884,000 at March 31, 2012, representing a decrease of $960,000 (4.84%) from December 31, 2011. This decrease is primarily attributable to a decrease of $1,968,000 in nonaccrual loans, offset by an increase of $1,005,000 other real estate owned. Total nonperforming assets were 13.36% of total loans at March 31, 2012, compared to 13.78% at December 31, 2011. Nonperforming assets represented 6.81% of total assets at March 31, 2012, compared to 7.64% of total assets at December 31, 2011. Nonaccrual loans represented 7.96% of total loans outstanding at March 31, 2012, compared to 9.19% of total loans outstanding at December 31, 2011. The Bank continues to focus on reducing nonperforming assets and this will be a major strategic objective going forward. There were no related party loans which were considered to be nonperforming at March 31, 2012. A summary of non-performing assets at March 31, 2012, December 31, 2011 and March 31, 2011 is presented in the following table (dollars are in thousands).

	March 31, 2012		December 31, 2011		March 31, 2011
Other real estate owned	$	7,616		6,611		5,589
Repossessions		5		-		10
Non-accrual loans		11,259		13,226		16,794
Accruing loans 90 days or more past due		4		7		41
	$	18,884		19,844		22,434

The table below details the changes in other real estate owned for the three months ending March 31, 2012 and 2011 (dollars are in thousands).

	2012			2011
Balance at January 1	$	6,611			5,436
Transfer from loans to other real estate		1,347			283
External and internal sales of other real estate		(341	)		(116	)
Net write-downs and loss on sales		(1	)		(14	)
Balance at March 31	$	7,616			5,589

At March 31, 2012, 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 $19,750,000 at March 31, 2012, of which the full amount was funded and outstanding. The Company’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry.

As of March 31, 2012, the Company had total commitments for construction and development loans of $11,611,000, of which $8,162,000 was funded and outstanding. The local housing industry has slowed considerably over the past 24 to 36 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 $41,000 (1.94%) in the first three months of 2012 compared to the same period for 2011. The Bank’s net interest margin for the first three months of 2012 was 3.53%, compared to 3.32% for the same time period during 2011. Yield on interest earning assets, including nonaccrual loans, for the three-month period ending March 31, 2012 was 4.26%, compared to 4.36% for the three-month period ending March 31, 2011. Average rate paid on interest bearing liabilities was 0.85% for the three months ending March 31, 2012, compared to 1.19% for the same period during 2011. The reduction in the average rate paid on interest bearing liabilities is a result of a lower interest rate environment in 2012 and a reduction of $10,958,000 in average time deposits during the first three months of 2012 as compared to the same time period in 2011.

Interest income for the first three months of 2012 was $2,596,000, representing a decrease of $170,000 (6.15%) as compared to the same period in 2011. Interest expense for the first three months of 2012 decreased $211,000 (32.26%) compared to the same period in 2011. The decrease in interest income during the first three months of 2012 compared to the same period in 2011 is primarily attributable to a lower average level of outstanding loans in 2012 as compared to 2011. Year-to-date average loans were $18,106,000 lower during the first three months of 2012 as compared to 2011. 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 $4,752,000. The decrease in interest expense is primarily attributable to a lower interest rate market and a decrease in interest-bearing liabilities of $12,863,000 during the first three months of 2012 as compared to the same time period for 2011. The reduction in interest-bearing liabilities is primarily due to decreases in average time deposits of $10,958,000, offset by increases in average interest-bearing demand deposits of $9,373,000 and average savings deposits of $899,000.

The Bank analyzes its allowance for loan losses on a monthly basis. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. For the three months ended March 31, 2012, the provision for loan losses was $100,000, compared to $500,000 for the same period in 2011. The provision for loan losses decreased in 2012 as compared to 2011 as a result of a lower level of historic charge-offs at March 31, 2012 as compared to March 31, 2011. The historic charge-offs are primarily tied to the construction and real estate development industry, which has continued to experience a prolonged downturn. 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.

The following table summarizes information concerning the allowance for loan losses for the three-month period ended March 31, 2012 and 2011. Dollar amounts are in thousands.

	Three Months Ending
	March 31,
	2012			2011
Balance at beginning of period	$	2,760		$	3,528
Charges-offs:
Commercial, financial and agricultural		-			35
Installment		6			3
Real Estate		127			1
Total charge-offs		133			39
Recoveries:
Commercial, financial and agricultural		1			1
Installment		3			5
Real Estate		7			6
Total recoveries		11			12
Net charge-offs		122			27
Provisions charged to operations		100			500
Balance at end of period	$	2,738		$	4,001
Ratio of net charge-offs during the period to average loans outstanding during the period		0.09	%		0.02	%

Other income for the first three months of 2012 decreased $8,000 (1.59%) compared to the first three months of 2011. This decrease is primarily attributable to increases of $59,000 in fee income on mortgage loans held for sale and $16,000 in other fee income, offset by $58,000 in charge-offs of fixed assets associated with terminating the lease for a branch in the first quarter of 2012 and a reduction of $23,000 in gains on sales of investment securities during the first quarter of 2012 as compared to the same period in 2011.

Other expenses for the first three months of 2012 decreased $219,000 (10.13%) compared to the first three months in 2011. The decrease is attributable to decreases in salaries and benefits expense of $60,000, in occupancy and equipment expenses of $76,000 and other operating expenses of $83,000.

The reduction in salaries and benefits expense in 2012 as compared to 2011 stems from the implementation of a reduction in force initiative put into place by management in mid-2011. This initiative involved a combination of employee lay-offs, reduction in pay and furlough days. Management does not anticipate additional reductions in salaries and benefits through similar measures during 2012.

The reduction in occupancy and equipment expense is primarily due to the Bank closing a branch in late 2011 and terminating the lease agreement with that branch. Branch personnel were relocated to other branches and the Bank does not anticipate any negative effects regarding this branch closure going forward.

Other operating expenses for the first three months of 2012 decreased primarily as the result of decreases of $58,000 in regulatory fees. These fees decreased as a result of a new calculation method implemented by the FDIC for payments of FDIC insurance premiums.

The Company had an effective tax rate of 39.87% for the three months ended March 31, 2012.

Interest rate sensitivity

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

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

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

At March 31, 2012, the difference between the Bank’s liabilities and assets repricing or maturing within one year, after applying the betas, was $40,091,000, 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 $222,000 on an annual basis if rates increased 100 basis points, and would increase $51,000 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 March 31, 2012, the Company’s liquidity ratio was 28.1%. This level of liquidity is within the Bank’s goal of maintaining a sufficient level of liquidity in all expected economic environments.

The Company maintains relationships with correspondent banks that can provide it with funds on short notice, if needed through secured lines of credit and securities repurchase agreements. Additional liquidity is provided to the Company through available Federal Home Loan Bank advances, none of which were outstanding at March 31, 2012.

During the first three months of 2012, cash and cash equivalents increased $26,980,000 to a total of $45,175,000 at March 31, 2012. Cash inflows from operations totaled $1,724,000 during the first three months of 2012, while inflows from financing activities totaled $17,580,000, comprised of net increases in deposits.

Investing activities provided $7,676,000 of cash and cash equivalents, consisting primarily of proceeds from calls, maturities and paydowns of investment securities of $7,316,000 and net decreases in loans of $1,419,000, offset by purchases of investment securities of $1,110,000. At March 31, 2012, the Bank had $77,138,000 of investment securities available for sale.

Contractual Obligations and Commitments

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet. The contract amounts of these instruments reflect the extent of the involvement of the Company in particular classes of financial instruments. At March 31, 2012, the contractual amounts of the Company’s commitments to extend credit and standby letters of credit were $22,565,000 and $323,000, 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 March 31, 2012 and December 31, 2011, based on the regulatory capital requirements of federal banking agencies, along with the minimum ratios established by those banking agencies. According to the Bank's Consent Order with the FDIC and the GDBF, the Bank must have and maintain a Tier I (Leverage) Capital ratio of not less than 8% and a Total Risk-based Cpital ratio of at least 10%. The capital ratios of the Company are essentially the same as those of the Bank at March 31, 2012 and December 31, 2011 and therefore only the Bank’s ratios are presented.

Risk-Based Capital Ratios	March 31, 2012			March 31, 2011

Tier 1 Capital, Actual		12.4	%		12.0	%
Tier 1 Capital minimum requirement		4.0	%		4.0	%

Excess		8.4	%		8.0	%

Total Capital, Actual		13.7	%		13.3	%
Total Capital minimum requirement		8.0	%		8.0	%

Excess		5.7	%		5.3	%

Leverage Ratio

Tier 1 Capital to adjusted total assets		7.3	%		7.2	%
Minimum leverage requirement		4.0	%		4.0	%

Excess		3.3	%		3.2	%

Item 3. Qualitative and Quantitative Disclosures about Market Risk.

Not applicable because the registrant is a smaller reporting company.

Item 4T. Controls and Procedures.

Our management, including our principal executive officer and principal financial officer, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934) and pursuant to such evaluation, concluded that our disclosure controls and procedures were effective as of March 31, 2012. 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:	May 15, 2012




	By:	/s/ Steven A. Rogers
		Steven A. Rogers, Vice President and CFO (Principal Accounting Officer)


	Date:	May 15, 2012