OFED 10-Q Quarter ended Dec. 31, 2010

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period ended December 31, 2010

Or

For transition period from              to

Commission File Number 001-35033

Oconee Federal Financial Corp.

(Exact Name of Registrant as Specified in Charter)

(864) 882-2765

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

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 ¨ No x .

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

6,348,000 shares of Common Stock, par value $.01 per share, were issued and outstanding as of February 11, 2011.

Table of Contents

OCONEE FEDERAL FINANCIAL CORP.

Form 10-Q Quarterly Report

Table of Contents

EXPLANATORY NOTE

On January 13, 2011, Oconee Federal Financial Corp. (the “Registrant”), headquartered in Seneca, South Carolina, became the stock holding company for Oconee Federal Savings and Loan Association following the mutual-to-stock conversion of Oconee Federal Savings and Loan Association. As of December 31, 2010, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature. Accordingly, the information presented in this quarterly report is for Oconee Federal Savings and Loan Association.

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

BALANCE SHEETS

(Dollars in thousands)

See accompanying notes to the financial statements

1

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands)

See accompanying notes to the financial statements

2

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

See accompanying notes to the financial statements

3

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

See accompanying notes to the financial statements

4

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The accompanying unaudited financial statements of Oconee Federal Savings and Loan Association (referred to herein as “the Association,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Association’s financial position as of December 31, 2010 and June 30, 2010 and the results of operations and cash flows for the interim periods ended December 31, 2010 and 2009. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the full final year. These financial statements should be read in conjunction with the Association’s audited financial statements and notes thereto filed as part of Oconee Federal Financial Corp.’s Prospectus dated November 12, 2010, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on November 22, 2010.

In January 2010, the FASB issued an update to previously issued accounting standards for fair value measurements and disclosures. This update enhances disclosures for recurring and nonrecurring fair value measurements. An entity will be required to disclose the amounts of significant transfers in and out of Levels 1 and 2 and a description of the reasons for the transfers. Additionally, within the reconciliation of assets and liabilities measured at fair value using Level 3 inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements at their gross amounts instead of net. This amendment also provided clarification on the level of disaggregation of each class of assets and liabilities measured at fair value and the level of disclosure required for inputs and valuation techniques used to measure fair value for both recurring and nonrecurring assets and liabilities that fall in either Level 2 or Level 3. This amendment is effective for interim and annual reporting periods beginning after December 31, 2009, except for the disclosures related to the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Association adopted the disclosure standards required for periods beginning after December 31, 2009. The effects of adopting this guidance were not significant to the financial statements. The effects of adopting the amended standards effective for fiscal years beginning after December 15, 2010 are not expected to be significant to the financial statements.

In July 2010, FASB issued an update to previously issued accounting standards with regard to disclosures about the credit quality of financing receivables and the allowance for credit losses. This update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in this update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Association has implemented the new standards as required for the period ending after December 15, 2010. The Association has evaluated the impact of the adoption of the portion of the guidance effective for interim periods beginning after December 15, 2010 and intends to comply with those disclosure requirements, ending with the interim reporting period ending September 30, 2011.

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

5

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The allowance consists of specific and general components. The specific component consists of the amount of impairment related to loans that have been evaluated on an individual basis, and the general component consists of the amount of impairment related to loans that have been evaluated on a collective basis. Loans are considered impaired when, based on current information and events, it is probable that the Association will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings.

Management utilizes an internal loan grading system to grade each loan either pass, special mention, substandard, or doubtful, which is more fully explained in Note 4. All loans, regardless of size, graded other than pass are individually evaluated for impairment. The amount of impairment, if any, is measured by a comparison of the loan’s carrying value to the net present value of future cash flows using the loan’s exiting rate or at the fair value of collateral if repayment is expected solely from the collateral.

All pass rated loans are collectively evaluated for impairment by grouping these loans by portfolio segment and class. Each of the Association’s portfolio segments and classes represent loans that share common collateral types and risk characteristics. The amount of impairment is measured by applying the balances of loans per portfolio segment and class by internally calculated loss factors.

We estimate our loss factors by taking into consideration both quantitative and qualitative aspects that would affect our estimation of impairment. These aspects include, but are not limited to historical charge-offs; loan delinquencies and foreclosure trends; current economic trends and demographic data within Oconee County and the other surrounding areas, such as unemployment rates and population trends; current trends in real estate values within the Oconee County market area; charge-off trends of other comparable institutions; the results of any internal loan reviews; loan to value ratios; our historically conservative credit risk policy; the strength of our underwriting and ongoing credit monitoring function; and other relevant factors.

6

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The components of loans receivable at December 31, 2010 and June 30, 2010 were as follows:

Activity in the allowance for loan losses for the three and six months ended is as follows:

7

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and class based on impairment method at December 31, 2010:

8

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The following table presents loans individually evaluated for impairment by portfolio segment and class of loans at December 31, 2010:

Loans individually evaluated for impairment at June 30, 2010 were as follows:

The average balance of loans individually evaluated for impairment for the six months ended December 31, 2010 was $4,280. Interest income recognized and cash basis interest income during the impairment period ended December 31, 2010 and June 30, 2010 was not significant.

9

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by portfolio segment and class of loans at December 31, 2010:

Nonaccrual and loans past due over 90 days and still on accrual at June 30, 2010 were as follows:

Non-performing loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are both individually and collectively evaluated for impairment.

There were no troubled debt restructures at December 31, 2010 or June 30, 2010.

10

Table of Contents

OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

The Association utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of 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. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.

The Association uses the following definitions for loan grades:

Loans not meeting the criteria above are graded Pass. These loans are included within groups of homogenous pools of loans based upon portfolio segment and class for estimation of the allowance for loan losses on a collective basis. Loans graded special mention through doubtful are individually evaluated for impairment, regardless of size.

At December 31, 2010, and based on the most recent analysis performed, the loan grade for each loan by portfolio segment and class is as follows: