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, 2010

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 incorporation or organization)		(I.R.S. Employer Identification No.)


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

706-769-6611

(Registrant’s telephone number, including area code)

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

Yes þ No o

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

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


Large accelerated filer: o	Accelerated filer: o

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

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

Yes o No þ

The number of shares outstanding of the issuer’s common stock as of November 15, 2010 was 899,815.

INDEX



		Page No.
PART I - FINANCIAL INFORMATION

	Item 1. Financial Statements
	Consolidated Balance Sheets at September 30, 2010 (unaudited) and December 31, 2009	1
	Consolidated Statements of Operations (unaudited) for the Three Months and the Nine Months Ended September 30, 2010 and 2009	2
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months and the Nine Months Ended September 30, 2010 and 2009	3
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2010 and 2009	4
	Notes to Consolidated Financial Statements (unaudited)	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4T. Controls and Procedures	20
PART II - OTHER INFORMATION

	Item 1. Legal Proceedings	21

	Item 1A. Risk Factors	21

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21

	Item 3. Defaults Upon Senior Securities	21

	Item 5. Other Information	21

	Item 6. Exhibits	21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

	September 30, 2010 (unaudited)		December 31, 2009
Assets

Cash and due from banks, including reserve requirements of $25,000	$	28,375,498		24,736,354
Federal funds sold		-		-

Cash and cash equivalents		28,375,498		24,736,354

Investment securities available for sale		67,373,352		66,903,283
Restricted equity securities		556,300		556,300
Mortgage loans held for sale		296,500		-

Loans, net of allowance for loan losses of $3,570,034 and $3,497,292		164,397,349		176,340,490

Premises and equipment, net		6,032,050		6,312,968
Other real estate owned		5,981,684		6,915,161
Accrued interest receivable and other assets		3,837,252		3,534,444

Total assets	$	276,849,985		285,299,000

Liabilities and Stockholders’ Equity

Liabilities:
Deposits
Noninterest-bearing	$	29,168,054		28,957,212
Interest-bearing		209,147,089		221,485,106

Total deposits		238,315,143		250,442,318

Securities sold under repurchase agreements		13,302,213		9,814,023
Accrued interest payable and other liabilities		748,867		357,046

Total liabilities		252,366,223		260,613,387

Stockholders’ equity:
Common stock, $2 par value; authorized 1,500,000 shares; issued and outstanding 899,815 shares		1,799,630		1,799,630
Additional paid-in capital		4,243,332		4,243,332
Retained earnings		17,475,973		18,301,063
Accumulated other comprehensive income		964,827		341,588

Total stockholders’ equity		24,483,762		24,685,613

Total liabilities and stockholders’ equity	$	276,849,985		285,299,000

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, 2010 and 2009

(Unaudited)

	Three Months Ended					Nine Months Ended
	2010			2009		2010			2009
Interest Income:
Loans	$	2,285,556			2,383,214	$	7,074,177			7,152,619
Investment securities:
Tax exempt		134,945			173,934		393,696			557,341
Taxable		550,921			660,230		1,836,257			2,144,829
Federal funds sold and other		10,947			12,175		29,926			13,168
Total interest income		2,982,369			3,229,553		9,334,056			9,867,957

Interest Expense:
Deposits		797,277			1,380,413		2,604,160			4,339,981
Other		86,930			99,099		236,031			288,950
Total interest expense		884,207			1,479,512		2,840,191			4,628,931

Net interest income		2,098,162			1,750,041		6,493,865			5,239,026

Provision for loan losses		1,350,000			240,000		2,770,000			1,340,000

Net interest income after provision for loan losses		748,162			1,510,041		3,723,865			3,899,026

Other Income:

Service charges on deposit accounts		241,719			337,357		778,916			963,543
Mortgage origination fees		44,202			73,464		91,569			357,248
Securities gains, net		-			44,343		250,461			250,720
Impairment loss on restricted equity securities		-			-		-			(100,429	)
Income (loss) on other real estate owned		(933	)		171,637		223,174			439,552
Other operating income		256,928			221,795		804,690			644,310
Total other income		541,916			848,596		2,148,810			2,554,944

Other Expense:
Salaries and other personnel expense		1,130,736			1,208,095		3,430,984			3,800,094
Net occupancy and equipment expense		294,663			340,000		897,084			1,042,153
Loss/Write-downs on other real estate owned		647,974			-		687,612			36,206
Other operating expense		761,781			782,502		2,403,667			2,533,387
Total other expense		2,835,154			2,330,597		7,419,347			7,411,840

Earnings (loss) before income taxes		(1,545,076	)		28,040		(1,546,672	)		(957,870	)

Income taxes (benefit)		(596,253	)		11,146		(721,582	)		(342,140	)

Net earnings (loss)	$	(948,823	)		16,894	$	(825,090	)		(615,730	)


Earnings (loss) per common share based on average outstanding shares of 899,815	$	(1.05	)		0.02	$	(0.92	)		(0.68	)

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, 2010 and 2009

(Unaudited)

	Three Months Ended						Nine Months Ended
	2010			2009			2010			2009

Net earnings (loss)	$	(948,823	)		16,894		$	(825,090	)		(615,730	)

Other comprehensive gains (loss), net of tax:
Unrealized gains on securities available for sale:
Holding gains arising during period, net of tax of $69,421, $623,378, $476,412, and $346,179		113,458			1,018,820			778,625			565,779

Reclassification adjustments for gains included in net Earnings (Loss), net of tax of $0, $16,832, $95,075 and $57,050		-			(27,511	)		(155,386	)		(93,241	)

Total other comprehensive income		113,458			991,309			623,239			472,538

Comprehensive income (loss)	$	(835,365	)		1,008,203		$	(201,851	)		(143,192	)

See accompanying notes to consolidated financial statements.

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2010 and 2009

(Unaudited)

	2010			2009
Cash flows from operating activities:
Net earnings (loss)	$	(825,090	)	$	(615,730	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Provision for loan losses		2,770,000			1,340,000
Depreciation, amortization and accretion		393,127			441,840
Impairment loss on restricted equity securities		-			100,429
Loss on sales and disposal of fixed assets		355			-
Gain on sales of securities		(250,461	)		(250,720	)
Loss on sales of other real estate owned		687,613			195,692
Change in assets and liabilities:
Interest receivable and other assets		(684,146	)		(96,810	)
Interest payable and other liabilities		391,821			972
Mortgage loans held for sale		(296,500	)		(171,910	)

Net cash provided by operating activities		2,186,719			943,763

Cash flows from investing activities:
Proceeds from sales of investment securities available for sale		9,235,775			12,937,169
Proceeds from calls, maturities, and paydowns of investment securities available for sale		42,501,148			141,315,102
Purchases of investment securities available for sale		(50,969,080	)		(143,423,909	)
Proceeds from redemption of other investments		-			22,500
Net change in loans		8,277,917			8,619,687
Purchases of premises and equipment		(95,438	)		(25,649	)
Capital improvements on other real estate		(211,085	)		(164,965	)
Proceeds from sales of other real estate		1,352,173			296,753

Net cash provided by investing activities		10,091,410			19,576,688

Cash flows from financing activities:
Net change in deposits		(12,127,175	)		(21,619,574	)
Net change in securities sold under repurchase agreements		3,488,190			4,870,780

Net cash used by financing activities		(8,638,985	)		(16,748,794	)

Net increase in cash and cash equivalents		3,639,144			3,771,657

Cash and cash equivalents at beginning of period		24,736,354			20,062,492

Cash and cash equivalents at end of period	$	28,375,498		$	23,834,149

OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows, continued

For the Nine Months Ended September 30, 2010 and 2009

(Unaudited)

	2010		2009


Supplemental cash flow information:
Cash paid for interest	$	2,950,916	$	4,694,453

Noncash investing and financing activities:
Transfer from loans to other real estate owned	$	3,023,074	$	4,215,782
Internally financed sales of other real estate owned	$	2,127,850	$	-
Change in net unrealized gains (losses) on investment securities available for sale, net of tax benefit	$	623,239	$	472,538

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 “Corporation”) 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 and nine–month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the financial statements and footnotes included in the Corporation’s annual report included on Form 10-K for the year ended December 31, 2009.

Critical Accounting Policies

The Corporation’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Some of the Corporation’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 Corporation’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Corporation’s 10-K for the year ended December 31, 2009.

Many of the Corporation’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 Corporation’s estimate of the allowance for loan losses. The Corporation 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 Corporation 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,
	2010			2009

Balance at beginning of year	$	3,497,292			4,215,262
Amounts charged off		(2,734,149	)		(985,924	)
Recoveries on amounts previously charged off		36,891			28,321
Provision for loan losses		2,770,000			1,340,000

Balance at September 30	$	3,570,034			4,597,659

(4)	Fair Value Measurements

The Corporation 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 Corporation 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 Corporation 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 Corporation’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 September 30, 2010, 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 Corporation 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 Corporation 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 Corporation 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 Corporation records the other real estate as nonrecurring Level 3.

The tables below presents the Corporation’s assets measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Balance at September 30, 2010
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Securities	$	67,373	$	-	$	67,373	$	-
Loans held for sale		297		-		297		-

	Balance at December 31, 2009
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Securities	$	66,903	$	-	$	66,903	$	-

The table below presents the Corporation’s assets measured at fair value on a nonrecurring basis as of September 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Balance at September 30, 2010
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Impaired loans	$	14,221	$	-	$	-	$	14,221
Other real estate		5,982		-		-		5,982

	Balance at December 31, 2009
	(In thousands)		(Level 1)		(Level 2)		(Level 3)
Assets			(In thousands)
Impaired loans	$	17,706	$	-	$	-	$	17,706
Other real estate		6,915		-		-		6,915

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 Corporation’s financial instruments as of September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:	(In thousands)				(In thousands)
Cash and cash equivalents	$	28,375		28,375		24,736		24,736
Investment securities	$	67,373		67,373		66,903		66,903
Restricted equity securities	$	556		556		556		556
Mortgage loans held for sale	$	297		297		-		-
Loans, net	$	164,397		163,597		176,340		174,696

Liabilities:
Deposits and securities sold under
repurchase agreement	$	251,617		251,607		260,256		260,651

(5)	Investments

Investment securities available for sale at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	28,968,666		458,043		(10,897	)		29,415,812
State, county and municipal		11,368,066		242,532		(73,660	)		11,536,938
Mortgage-backed securities – GSE residential		23,865,918		1,032,213		-			24,898,131
Corporate bonds		1,615,533		-		(93,062	)		1,522,471

Total	$	65,818,183		1,732,788		(177,619	)		67,373,352

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

U.S. Government-sponsored enterprises (GSEs)*	$	28,989,082		191,702		(226,629	)		28,954,155
State, county and municipal		11,223,018		124,977		(193,576	)		11,154,419
Mortgage-backed securities – GSE residential		24,522,979		800,214		(12,795	)		25,310,398
Corporate bonds		1,617,611		-		(133,300	)		1,484,311

Total	$	66,532,690		1,116,893		(566,300	)		66,903,283

Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, 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, 2010 and December 31, 2009 are summarized as follows:

	September 30, 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	$	1,739,103		10,897		-		-		10,897
State, county and municipal		-		-		1,237,560		73,660		73,660
Corporate bonds		608,821		6,712		913,650		86,350		93,062

	$	2,347,924		17,609		2,151,210		160,010		177,619

	December 31, 2009
	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	$	16,378,577		226,629		-		-		226,629
State, county and municipal		2,117,963		71,729		1,178,181		95,351		167,080
Mortgage-backed securities		5,861,084		39,291		-		-		39,291
Corporate bonds		-		-		1,484,311		133,300		133,300

	$	24,357,624		337,649		2,662,492		228,651		566,300

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, 2010 and December 31, 2009 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, 2010 were 2 out of 27 securities issued by state and political subdivisions that contained unrealized losses, 1 of 38 securities issued by government sponsored agencies, and 2 of 2 other debt securities that contained unrealized losses.

GSE debt securities. The unrealized losses on the one investment in GSEs was caused by interest rate increases. Because the Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider the investments to be other-than-temporarily impaired at September 30, 2010.

Corporate bonds. The Corporation’s unrealized losses on investments in two corporate bonds 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 Corporation 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 Corporation does not intend to sell the investment and it is not more likely than not that the Corporation 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, 2010.

State and municipal securities. The unrealized losses relate to two municipal securities. The unrealized losses 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 Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

The amortized cost and fair value of investment securities available for sale at September 30, 2010, 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	$	999,827		999,888
Due from one to five years		1,315,153		1,229,387
Due from five to ten years		22,151,158		22,547,360
Due after ten years		17,486,127		17,698,586
Mortgage-backed securities		23,865,918		24,898,131

	$	65,818,183		67,373,352

The proceeds from the sales and gross gains and gross losses realized by the Corporation 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,
	2010		2009		2010		2009

Proceeds from sales	$	-		5,448,403		9,235,775		12,937,169

Gross gains realized	$	-		52,497		250,461		258,874
Gross losses realized		-		8,154		-		8,154

Net gain realized	$	-		44,343		250,461		250,720

(6)	Accounting Standards Updates

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (“ASC No. 2010-09”). ASU No. 2010-09 removes some contradictions between the requirements of GAAP and the filing rules of the Securities and Exchange Commission (“SEC”). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on Oconee’s results of operations, financial position or disclosures.

In February 2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation: Amendments for Certain Investment Funds (“ASU No. 2010-10”). ASU No. 2010-10 indefinitely defers the effective date for certain investment funds, the amendments made to FASB ASC 810-10 related to variable interest entities by Statement of Financial Accounting Standard (“SFAS”) No. 167, however this deferral does not apply to the disclosure requirements of SFAS No. 167. ASU No. 2010-10 also clarifies that (1) interests of related parties must be considered in determining whether fees paid to decision makers or service providers constitute a variable interest, and (2) a quantitative calculation should not be the only basis on which such determination is made. This guidance is effective as of the beginning of the first annual period beginning after November 15, 2009, and for interim periods within that first annual reporting period. It is not expected to have an impact on Oconee’s results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (“ASU No. 2010-18”). ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30. ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification. ASU No. 2010-18 clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. ASU 2010-18 is not expected to have a material impact on Oconee’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 Corporation 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 Corporation operates); competition from other providers of financial services offered by the Corporation; government regulations and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Corporation’s credit customers, all of which are difficult to predict and which may be beyond the control of the Corporation. The Corporation 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 Corporation’s operations have been negatively affected by the current economic crisis. The recession has reduced liquidity and credit quality within the banking system and the labor, capital and real estate markets. Dramatic declines in the housing market have negatively affected the credit performance of our residential construction and development loans. The economic recession has also lowered commercial and residential real estate values and substantially reduced general business activity and investment. Combined, the deterioration in the residential and the commercial real estate markets has materially increased our level of nonperforming assets and charge-offs of problem loans over the past two years. The Bank has seen an improvement in its level of nonperforming assets during the first nine months of 2010 and will continue to manage these assets aggressively in order to further reduce levels going forward. These market conditions and the tightening of credit have led to increased delinquencies in our loan portfolio, increased market volatility, added pressure on our capital, a lower net interest margin and net losses in the prior two years.

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

On August 18, 2009, the Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Consent Agreement”) with the Federal Deposit Insurance Corporation (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, 2010, the Bank was in full compliance with the Order.

Balance Sheet Review

Total assets at September 30, 2010 were $276,850,000, representing an $8,449,000 (2.96%) decrease from December 31, 2009. Investment securities increased $470,000 as compared to December 31, 2009. Loans decreased $11,871,000 (6.60%) at September 30, 2010 as compared to December 31, 2009, primarily due to loan pay-downs and the shifting of $3,023,000 from loans to other real estate owned during the first nine months of 2010. Deposits decreased $12,127,000 (4.84%) from December 31, 2009. The decrease in deposits is primarily attributable to decreases in time deposits of $14,553,000 as compared to December 31, 2009 balances, offset by an increase in savings account balances of $3,710,000. Securities sold under repurchase agreements increased $3,488,000 at September 30, 2010 as compared to December 31, 2009. The allowance for loan losses at September 30, 2010 was $3,570,000, compared to the December 31, 2009 balance of $3,497,000, representing 2.13% of total loans at September 30, 2010, compared to 1.94% of total loans at December 31, 2009. Cash and cash equivalents increased $3,639,000 from December 31, 2009. Total stockholders’ equity at September 30, 2010 of $25,534,000 increased $848,000 (3.44%) from December 31, 2009.

The following table presents a summary of the Bank’s loan portfolio by loan type at September 30, 2010 and December 31, 2009 (dollars are in thousands).

	September 30, 2010				December 31, 2009
	Amount		Percentage		Amount		Percentage
Commercial, financial and agricultural	$	25,655		15.3%	$	28,393		15.8%
Real estate – mortgage		116,651		69.4%		114,253		63.6%
Real estate – commercial construction		19,703		11.7%		29,568		16.4%
Real estate – consumer construction		151		0.1%		801		0.4%
Consumer		5,807		3.5%		6,768		3.8%
Total loans	$	167,967		100.0%	$	179,783		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 $21,954,000 at September 30, 2010, representing a decrease of $2,717,000 (11.00%) from December 31, 2009. This decrease is attributable to decreases of $1,733,000 in non-accrual loans, $933,000 in other real estate owned, and $50,000 in repossessed collateral. Total nonperforming assets were 13.07% of total loans at September 30, 2010, compared to 13.72% at December 31, 2009. Nonperforming assets represented 7.93% of total assets at September 30, 2010, compared to 8.65% of total assets at December 31, 2009. Nonaccrual loans represented 9.51% of total loans outstanding at September 30, 2010, compared to 9.85% of total loans outstanding at December 31, 2009. Total nonperforming assets at September 30, 2010 were $6,464,000 less as compared to September 30, 2009. This reduction is primarily due to a reduction in nonaccrual loans of $6,231,000, offset by an increase in other real estate owned of $317,000. 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, 2010. A summary of non-performing assets at September 30, 2010, December 31, 2009 and September 30, 2009 is presented in the following table (dollars are in thousands).

	September 30, 2010		December 31, 2009		September 30, 2009
Other real estate owned	$	5,982		6,915		5,665
Repossessions		-		50		-
Non-accrual loans		15,972		17,706		22,203
Accruing loans 90 days or more past due		-		-		550
	$	21,954		24,671		28,418

The table below details the changes in other real estate owned for the nine months ending September 30, 2010 and 2009 (dollars are in thousands).

	2010			2009
Balance at January 1	$	6,915			1,777
Transfer from loans to other real estate		3,023			4,216
Capital Improvements on other real estate		211			165
External and internal sales of other real estate		(3,480	)		(297	)
Net write-downs and loss on sales		(687	)		(196	)
Balance at September 30	$	5,982			5,665

As of September 30, 2010, the allowance for loan losses was allocated as follows (dollars are in thousands).

	Allocation of Allowance for Loan Losses		% of Allowance for Loan Losses		% of Loans by Category to Total Loans
Commercial, financial and agricultural	$	798		22.3%		15.3%
Real Estate - Construction		1,711		47.9%		11.8%
Consumer		111		3.1%		3.5%
Real Estate - Mortgage		917		25.7%		69.4%
Unallocated		33		1.0%		0.0%
Total	$	3,570		100.0%		100.0%

During the first quarter 2009, the Bank formed Motel Holdings Georgia, Inc., a subsidiary corporation 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.

At September 30, 2010, the Corporation had loan concentrations in the housing industry and in the hotel and motel industry. Total commitment amounts for hotel and motel loans were $21,049,000 at September 30, 2010, of which $20,877,000 was funded and outstanding. The Corporation’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry.

As of September 30, 2010, the Corporation had total commitments for construction and development loans of $18,541,000, of which $16,371,000 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 $1,255,000 (23.95%) in the first nine months of 2010 compared to the same period for 2009 as a result of an increase in the interest rate spread. The Bank’s net interest margin for the first nine months of 2010 was 3.34%, compared to 2.48% for the same time period during 2009. Yield on interest earning assets, including nonaccrual loans, for the nine-month period ending September 30, 2010 was 4.80%, compared to 4.68% for the nine-month period ending September 30, 2009. Average rate paid on interest bearing liabilities was 1.69% for the nine months ending September 30, 2010, compared to 2.44% for the same period during 2009. The primary reasons for the changes in yield on interest earning assets are interest rate floors on floating rate loans that were implemented during 2009 to minimize the Bank’s exposure to a low interest rate environment. The floors were raised to higher levels as loans matured or renewed during 2009. The reduction in the average rate paid on interest bearing liabilities is a result of the continued lower interest rate environment in 2010 and a reduction of $19,441,000 in average time deposits during the first nine months of 2010 as compared to the same time period in 2009.

Interest income for the first nine months of 2010 was $9,334,000, representing a decrease of $534,000 (5.41%) as compared to the same period in 2009. Interest expense for the first nine months of 2010 decreased $1,789,000 (38.64%) compared to the same period in 2009. The decrease in interest income during the first nine months of 2010 compared to the same period in 2009 is primarily attributable to a lower average level of interest-earning assets in 2010 as compared to 2009. Year-to-date average interest earning assets were $22,201,000 lower during the first nine months of 2010 as compared to 2009. This is primarily due to a reduction in average loans of $17,479,000 and investment securities of $12,801,000, offset by an increase in interest-earning due from bank accounts of $8,079,000. The decrease in interest expense is primarily attributable to a decrease in interest-bearing deposits of $26,951,000 during the first nine months of 2010 as compared to the same time period for 2009. The reduction in interest-bearing liabilities is primarily due to decreases in average time deposits of $19,441,000 and average interest-bearing demand deposits of $9,842,000, offset by an increase in average savings deposits of $2,332,000.

Net interest income for the quarterly period ended September 30, 2010 was $2,098,000, as compared to $1,750,000 for the same time period in 2009. The increase in net interest income in 2010 was due to a decline in interest expense of $595,000, offset by a decrease in interest income of $247,000. The decline in interest expense was primarily due to lower levels of interest-bearing liabilities in 2010 as compared to 2009, 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 2010 as compared to 2009.

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, 2010, the provision for loan losses was $2,770,000, compared to $1,340,000 for the same period in 2009. The provision for loan losses increased in 2010 as compared to 2009 as a result of a higher level of historic charge-offs at September 30, 2010 as compared to September 30, 2009 as well as the Bank receiving updated appraisals on collateral securing three non-accrual loan relationships during the third quarter of 2010 which resulted in additional required reserves of $981,000. The historic charge-offs are primarily tied to the construction and real estate development industry, which has continued to experience a prolonged downturn throughout 2009 and the first nine months of 2010. 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 Corporation 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, 2010, the Bank provided $1,350,000 to the allowance for loan losses. This is an increase of $130,000 compared to the second quarter of 2010 and an increase of $1,110,000 compared to the same time period during 2009. The significant increase in provision expense during the second and third quarters of 2010 was primarily due to the Bank receiving updated real estate appraisals on properties securing nonaccrual loan relationships during the quarters. The write-downs associated with these new appraisals totaled $1,302,000 and required the Bank to replenish the reserve for loan losses based on its analysis after these write-downs. The primary reason for the increase in net charge-offs in the third quarter of 2010 as compared to 2009 was due to the write-downs mentioned above as well a write-down on a construction loan of $336,000 in the third quarter of 2010. The loan was written down as a result of an updated appraisal of the property prior to the loan being foreclosed upon and taken into other real estate owned during the third quarter of 2010.

The following table summarizes information concerning the allowance for loan losses for the three-month and nine-month periods ended September 30, 2010 and 2009. Dollar amounts are in thousands.

	Three Months Ending				Nine Months Ending
	September 30,				September 30,
	2010		2009		2010		2009

Balance at beginning of period	$	3,552	$	4,689	$	3,497	$	4,215
Charges-offs:
Commercial, financial and agricultural		150		139		150		194
Installment		13		19		32		57
Real Estate		1,186		181		2,552		734
Total charge-offs		1,349		339		2,734		985
Recoveries:
Commercial, financial and agricultural		-		1		6		5
Installment		17		7		24		23
Real Estate		-		-		7		-
Total recoveries		17		8		37		28
Net charge-offs		1,332		331		2,697		957
Provisions charged to operations		1,350		240		2,770		1,340
Balance at end of period	$	3,570	$	4,598	$	3,570	$	4,598
Ratio of net charge-offs during the period to average loans outstanding during the period		0.77%		0.18%		1.54%		0.50%

Other income for the first nine months of 2010 decreased $406,000 (15.90%) compared to the first nine months of 2009. This decrease is primarily attributable to decreases of $266,000 in mortgage origination fees and an $180,000 decrease in non-sufficient funds service charges, offset by an increase of $112,000 in commissions on sales of investment products to customers. During the first quarter of 2009, the Bank recognized a permanent impairment on a restricted equity security which resulted in a $100,000 write-down. The loss on restricted equity security was incurred due to the failure of Silverton Bank, N.A., a subsidiary of Silverton Financial Services.

The primary source of the Bank’s income on other real estate owned during 2010 and 2009 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 2010 increased $8,000 (0.10%) compared to the first nine months in 2009. The increase is attributable to an increase in losses and write-downs on other real estate owned of $652,000, offset by a decrease in salaries and employee benefits expense of $369,000, a decrease in occupancy expense of $145,000, and a decrease in other operating expense of $119,000.

The reduction in salaries and benefits expense is primarily due to salaries expense for the first nine months of 2010 being $235,000 lower than for the same period during 2009. This reduction is primarily due to the Bank having fewer employees in 2010 as compared to 2009. This reduction in employees is due to attrition of the Bank’s work force. As employees have left the Bank over the past year, management has evaluated the ability of the Bank to continue normal operations without replacing the departed employees. As a result, the Bank has reduced its full-time equivalent employees from 95.0 full-time equivalent employees at January 1, 2009 to 84.0 full-time equivalent employees at September 30, 2010. In addition, the Bank eliminated matching contributions for employees 401(K) retirement accounts effective July 1, 2009. Total benefits expense decreased $134,000 during the first nine months of 2010 as compared to the same time period during 2009.

The reduction in occupancy expense during the first nine months of 2010 as compared to 2009 of $145,000 is primarily due to a decline in depreciation expense of $97,000 and repairs and maintenance expense of $48,000. The reduction in depreciation expense is primarily due to management’s decision to eliminate purchasing fixed assets unless they were vital to the Bank’s operations. Management has sought ways to extend the operating lives of existing assets in an effort to control and reduce these expenditures and the depreciation expense associated with the new assets. The reduction in repairs and maintenance expense is primarily due to management re-negotiating maintenance agreements for fixed assets with vendors.

The reduction in other operating expenses is primarily due to the enactment of an expense reduction plan by management during the last half of 2009. The plan focused on reducing overall operating expenses by focusing on non-essential expenses and reducing other expenses as opportunities allowed. Management then focused on different ways to reduce those expenses.

For the nine months ended September 30, 2010, the Bank showed an income tax expense benefit of $722,000.

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, 2010, the difference between the Bank’s liabilities and assets repricing or maturing within one year, after applying the betas, was $29,672,000, 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 $335,000 on an annual basis if rates increased 100 basis points, and would increase $131,000 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 Corporation 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 Corporation 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 Corporation to monitor its liquidity to meet regulatory requirements and its local funding requirements.

The Corporation 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 Corporation’s short-term and marketable assets, including cash, federal funds sold, and unpledged investment securities by the sum of the Corporation’s deposit liabilities. At September 30, 2010, the Corporation’s liquidity ratio was 19.0%. This level of liquidity is within the Bank’s goal of maintaining a sufficient level of liquidity in all expected economic environments.

The Corporation 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 Corporation through available Federal Home Loan Bank advances, none of which were outstanding at September 30, 2010.

During the first nine months of 2010, cash and cash equivalents increased $3,639,000 to a total of $28,375,000 at September 30, 2010. Cash inflows from operations totaled $2,187,000 during the first nine months of 2010, while outflows from financing activities totaled $8,639,000, comprised of net decreases of $12,127,000 in deposits, offset by net increases in securities sold under repurchase agreements of $3,488,000.

Investing activities provided $10,091,000 of cash and cash equivalents, consisting primarily of proceeds from calls, maturities and paydowns of investment securities of $42,501,000, proceeds from the sales of investment securities of $9,236,000, and net decreases in loans of $6,150,000, offset by purchases of investment securities of $50,969,000. At September 30, 2010, the Bank had $67,373,000 of investment securities available for sale.

Contractual Obligations and Commitments

The Corporation 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 Corporation in particular classes of financial instruments. At September 30, 2010, the contractual amounts of the Corporation’s commitments to extend credit and standby letters of credit were $23,857,000 and $507,000, 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 Corporation 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, 2010 and December 31, 2009, based on the regulatory capital requirements of federal banking agencies. The capital ratios of the Corporation are essentially the same as those of the Bank at September 30, 2010 and December 31, 2009 and therefore only the Bank’s ratios are presented.

Risk-Based Capital Ratios	September 30, 2010			December 31, 2009

Tier 1 Capital, Actual		12.8	%		12.2	%
Tier 1 Capital minimum requirement		4.0	%		4.0	%

Excess		8.8	%		8.2	%

Total Capital, Actual		14.2	%		13.5	%
Total Capital minimum requirement		8.0	%		8.0	%

Excess		6.2	%		5.5	%

Leverage Ratio

Tier 1 Capital to adjusted total assets		8.3	%		8.3	%
Minimum leverage requirement		4.0	%		4.0	%

Excess		4.3	%		4.3	%

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, 2010. 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 Corporation, 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 Corporation, 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.

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 15, 2010 By: /s/ Steven A. Rogers Steven A. Rogers, Vice President and CFO (Principal Financial Officer) Date: November 15, 2010

OCONEE FINANCIAL CORP 10-Q