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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**
Washington, D.C. 20429
**FORM 10-QSB[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**
For the Quarterly Period Ended June 30,2003

**OR**
**[     ] 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 of Incorporation) (I.R.S.Employer Identification No.)   35 North Main Street    Watkinsville, Georgia 30677(Address of principal     executive offices) (Zip Code)
706-769-6611(Telephone Number)
State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate: 899,885 shares of Common Stock, par value $2.00, outstanding as of August 14, 2003.
 
 
 
Table of Contents
**OCONEE FINANCIAL CORPORATION ANDSUBSIDIARY**
**INDEX**
  
Page No.

PART I 

FINANCIAL INFORMATION

     
   
Item 1.    

Financial Statements

   
  
Consolidated Balance Sheet (unaudited) atJune 30, 2003

3
  
  
Consolidated Statements of Earnings(unaudited) for the Three Months and Six Months

  
       Ended June 30, 2003 and 2002

4
  
  
Consolidated Statements of Comprehensive Income (unaudited) for the ThreeMonths and

  
       the Six Months endedJune 30, 2003 and 2002

5
  
  
Consolidated Statements of Cash Flows (unaudited) for theSix Months

  
       EndedJune 30, 2003 and 2002

6-7
  
  
Notes to Financial Statements (unaudited)

8-9
  
 
Item 2.    

Management’s Discussion and Analysis of Financial
  
       Condition and Results ofOperations

10-13
  
 
Item 3.    

Controls and Procedures

14
   
PART II

OTHER INFORMATION
    
Item 1.    

Legal Proceedings

15
   
Item 2.    

Changes in Securities and Use of Proceeds

15
   
Item 3.    

Defaults Upon Senior Securities

15
   
Item 4.    

Submission of Matters to a Vote of Security Holders

15
   
Item 5.    

Other Information

15
   
Item 6.    

Exhibits and Reports on Form 8-K

15-16

**PART I.  FINANCIALINFORMATION**
Item 1.  Financial Statements
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Balance SheetJune 30, 2003(Unaudited)
Assets  
Cash and due from banks, including reserve requirements of $3,249,000

$
8,799,295
Federal funds sold

20,847,000
  
Cash and cash equivalents

29,646,295  
Investment securities available for sale

54,242,817
Other investments

1,090,429
Mortgage loans held for sale

5,746,176   
Loans

176,515,702
Less:  Allowance for loan losses

2,410,505
  
Loans, net

174,105,197
   
Premises and equipment, net

3,897,840
Accrued interest receivable and other assets

2,787,061
  
Total Assets

 $

 271,515,815  
Liabilities and Stockholders’ Equity  
Liabilities:
 
Deposit*s*
 
Noninterest-bearing

$
28,264,020
Interest-bearing

207,300,800
  
Total Deposits

235,564,820  
Securities sold under repurchase agreements

1,010,589
Federal Home Loan Bank advances

13,300,000
Accrued interest payable and other liabilities

960,854
  
Total Liabilities

250,836,263
  
Stockholders’ equity:
 
Common stock, $2 par value;
 
authorized 1,500,000 shares;
 
issued and outstanding 899,885 shares

1,799,770
Additional paid-in capital

4,246,832
Retained earnings

13,617,794
Accumulated other comprehensive income

1,015,156
  
Total stockholders’ equity

20,679,552
  
Total liabilities and stockholders’ equity

$

271,515,815
See accompanying notes to financial statements.

3
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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Statements of EarningsFor  the Three Months and the Six Months Ended June 30, 2003 and 2002(Unaudited) 
  ** **
 **Three MonthsEnded**** **
**Six MonthsEnded** ** **
**2003**
** **
**2002**
** **
**2003**
** **
**2002**

Interest Income:
        
    Loans 

 $
 3,252,651
 
3,218,075
 
 6,477,710
 
6,324,817

     Investment securities:
        
          Tax exempt
 
195,638
 
182,131
 
374,959
 
359,398

          Taxable
 
246,122
 
289,783
 
437,434
 
599,752

     Federal funds sold and other
 
53,433
 
23,969
 
104,041
 
62,718

             Total interestincome
 
3,747,844
 
3,713,958
 
7,394,144
 
7,346,685
         
Interest Expense:
        
     Deposits
 
1,296,534
 
1,309,918
 
2,608,072
 
2,696,386

     Other
 
218,189
 
218,561
 
432,704
 
434,436

             Total interestexpense
 
1,514,723
 
1,528,479
 
3,040,776
 
3,130,822
         
            Net interest income
 
2,233,121
 
2,185,479
 
4,353,368
 
4,215,863
         
Provision for loan losses
 
171,000
 
105,000
 
342,000
 
210,000
         
                   Net interest income after provision for loan losses

 
2,062,121

 
2,080,479

 
4,011,368

 
4,005,863
         
Other Income:
                 
     Service charges on deposit accounts
 
273,808
 
255,739
 
545,565
 
472,633

     Mortgage banking income
 
480,168
 
204,345
 
867,092
 
492,966

     Securities gains, net
 
0
 
4,357
 
0
 
4,357

     Other operating income
 
84,690
 
80,658
 
208,353
 
202,360

             Total otherincome
 
838,666
 
545,099
 
1,621,010
 
1,172,316
         
 Other Expense:
        
     Salaries and other personnel expense
 
1,251,790
 
1,063,838
 
2,467,186
 
2,115,299

     Net occupancy and equipment expense
 
251,212
 
229,310
 
493,415
 
455,772

     Other operating expense
 
459,028
 
420,723
 
914,610
 
840,465

             Total otherexpense
 
1,962,030
 
1,713,871
 
3,875,211
 
3,411,536
         
             Earnings beforeincome taxes
 
938,757
 
911,707
 
1,757,167
 
1,766,643
         
Income taxes
 
282,319
 
273,163
 
522,745
 
531,446
         
             Netearnings 

 $
   656,438
 
638,544
 
1,234,422
 
1,235,197
         
Earnings per common share based on average
        
    outstanding shares of 899,885 in 2003 and 2002:

 $
         0.73
 
0.71
 
          1.37
 
1.37

 See accompanying notes to financial statements.

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Statements of Comprehensive Income
For the Three Months and the Six Months Ended June 30, 2003 and 2002(Unaudited)
 ** ****Three MonthsEnded**** ****Six MonthsEnded** ** **
**2003**
** **
**2002** 
**2003**
** **
**2002**
         
Netearnings 
$
  656,438
 
638,544 
 
1,234,422
 
1,235,197 
         
Other comprehensive income, net of tax:
        
     Unrealized gains on securities available for sale:
        
          Holding gains arising duringperiod, net of tax
        
             of $95,080,$213,490, $264,399, and $198,719
 
155,393
 
348,917 
 
432,121
 
322,776 

          Reclassification adjustments forgains included in net 
        
             earnings, net oftax of $0, $1,654, $0, and $1,654
 
0
 
(2,703)

 
0

 
(2,703)
         
          Total other comprehensiveincome
 
155,393
 
346,214 
 
432,121
 
320,073 
         
         Comprehensive income
$
  811,831
 
984,758 
 
1,666,543
 
1,555,270 

** **

** **

 

See accompanying notes to financial statements.

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Statements of Cash Flows
For the Six  Months Ended June 30, 2003 and 2002(Unaudited)
 
**2003** 
**2002**
Cash flows from operating activities:
   
       Net earnings

$
1,234,422  
1,235,197 
            Adjustments to reconcile net earningsto net
   
                 cash provided by operatingactivities:
   
                      Provision for loan losses

342,000  
210,000 
                      Depreciation, amortization andaccretion

221,950  
220,163                       Gain on sale of investment securities
 0  
 (4,357)
                      Change in assets and liabilities:
   
                             Interest receivable and otherassets

596,731  
642,280 
                             Interest payable and otherliabilities

(363,599) 
(277,517)
                             Mortgage loans held for sale

1,096,281 
 
2,948,135 
    
                                       Net cash provided by operatingactivities

3,127,785 
 
4,973,901 
    
Cash flows from investing activities:
          Proceeds from sale of investment securities
 0  
 995,331 
       Proceeds from calls, maturities, andpaydowns of
   
            investment securities available forsale

14,051,217  
2,597,458 
       Purchases of investment securitiesavailable for sale

(28,678,653) 
0 
       Net change in loans

2,395,993  
(19,560,027)
       Purchases of premises andequipment

(685,230)
 
(1,478,844)
    
                               Net cash used by investingactivities

(12,916,673)
 
(17,446,082)
    
Cash flows from financing activities:
   
       Net change in deposits

24,201,476  
11,244,971 
       Net change in securities sold underrepurchase agreements

268,193  
264,522 
       Dividends paid

(899,885)
 
(899,885)
    
                                Net cash provided by financing activities

23,569,784 
 
 10,609,608 
    
Net increase (decrease) in cash and cash equivalents

13,780,896  
(1,862,573)    
Cash and cash equivalents at beginning of period

15,865,399 
 
13,938,077 
    
Cash and cash equivalents at end of period

$

29,646,295 
 
12,075,504  

6
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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Statements of Cash Flows, continued
For the Six Months Ended March 31, 2003 and 2002(Unaudited) 
**2003** 
**2002**        
Supplemental cash flow information:
   
       Cash paid for interest

$3,053,272 
$2,571,702
       Cash paid for taxes
 $
648,000 
$523,060    
Noncash investing and financing activities:
          Transfer from loans to other real estate owned$610,517
 $91,831
       Change in dividends payable
$
899,885  $
899,885
       Change in net unrealized gain oninvestment securities
    
            available for sale, net of tax

$
432,121 
$322,073
See accompanying notes to financial statements.
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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Notes to Consolidated Financial Statements(Unaudited)
(1)           Basis ofPresentation

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

In September 2002, OSB Services, Inc., a wholly owned subsidiary of the Bank, acquired anownership interest in Community Insurance Group, LLC through an initial capital contribution of $325,000.  Community InsuranceGroup, LLC was formed for the purpose of offering insurance products and services.  The investment in Community InsuranceGroup, LLC is accounted for using the cost method of accounting.

The consolidated financial information furnished herein reflects all adjustments whichare, in the opinion of management, necessary to present a fair statement of the results of operations and financial position forthe periods covered herein.  All such adjustments are of a normal recurring nature.

Operating results for the three and six-month periods ended June 30, 2003 are notnecessarily indicative of the results that may be expected for the year ending December 31, 2003.  For further information,refer to the financial statements and footnotes included in the Corporation’s annual report included on Form 10-KSB for theyear ended December 31, 2002.

Critical Accounting Policies

The Corporation’s accounting policies are fundamental to understandingmanagement’s discussion and analysis of results of operations and financial condition.  Some of the Corporation’saccounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation ofthe specific accounting guidance.  A description of the Corporation’s significant accounting policies can be found inNote 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report to Shareholders for the  yearended December 31, 2002. 

Many of the Corporation’s assets and liabilities are recorded using variousvaluation techniques that require significant judgment as to recoverability.  The collectibilityof loans is reflected through the Corporation’s estimate of the allowance forloan losses.  The Corporation performs periodic detailed reviews of itsloan portfolio in order to assess the adequacy of the allowance for loan lossesin light of anticipated risks and loan losses.  In addition, investmentsecurities and mortgage loans held for sale are reflected at their estimatedfair value in the consolidated financial statements.  Such amounts arebased on either quoted market prices or estimated values derived by theCorporation using dealer quotes or market comparisons. 

  (2)          Cash and CashEquivalents

For presentation in the financial statements, cash and cash equivalents include cash onhand and amounts due from banks, and federal funds sold.

(3)          NetEarnings Per Common Share

Net earnings per common share are based on the weighted average number of common sharesoutstanding during the period while the effects of potential common shares outstanding during the period are included in dilutedearnings per share.  The Corporation had no potential common shares outstanding during 2003 and 2002.

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Notes to Consolidated Financial Statements, continued(Unaudited)

(4)             Allowance for LoanLosses

Changes in theallowance for loan losses were as follows:
 ** **
**2003**
** **
**2002**
     
Balance at beginning of year 

$
2,098,691 
 
1,812,041 

Amounts charged off
 
        (46,369)
 
      (39,598)

Recoveries on amounts previously charged off
 
16,183 
 
23,283 

Provision for loan losses
 
342,000 
 
210,000 
     
Balance at June 30 

$
2,410,505 
 
2,005,726 

 

 

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Item 2.

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**
**Forward-Looking Statements**
Thisdiscussion contains forward-looking statements under the private Securities Litigation Reform Act of 1995 that involve risk anduncertainties.  Although the Corporation believes that the assumptions underlying the forward-looking statements contained inthe discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of theforward-looking statements included in this discussion will be accurate.  Factors that could cause actual results to differfrom results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and inthe 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 andliquidity of the Corporation’s credit customers, all of which are difficult to predict and which may be beyond the control ofthe Corporation.  The Corporation undertakes no obligation to revise forward-looking statements to reflect events or changesafter the date of this discussion or to reflect the occurrence of unanticipated events.

**Financial Condition**

Total assets at June 30, 2003 were $271,515,815, representing a $24,872,733(10.08%) increase from December 31, 2002.  Deposits increased $24,201,476 (11.45%) from December 31, 2002.  The primaryarea of growth in deposits has been in the Bank’s savings accounts, which balances increased $17,255,586 from December 31,2002.  Loans decreased $3,036,696 (1.69%) as a result of a decrease in loandemand, tightened credit standards put in place by the Bank in response to theslowing economy, and the payoff of a $3,000,000 motel loan during the first sixmonths of 2003.  Investment securities increased $15,343,580 (39.44%) from December 31, 2002 dueprimarily to purchases totaling $28,678,653, offset by the maturity of a U.S. Treasury security of $10,000,000 and paydowns ofmortgage-backed securities.  The allowance for loan losses at June 30, 2003 was $2,410,505, compared to the December 31, 2002balance of $2,098,691, representing 1.37% of total loans at June 30, 2003, compared to 1.17% of total loans at December 31, 2002.Cash and cash equivalents increased $13,780,896 from December 31, 2002.  This increase is primarily due to deposit growthoutpacing loan growth.  These excess funds are invested in Federal Funds sold,as the low interest rate market in investment securities was not deemed to be anattractive alternative.  The Corporation anticipates paying off its $13,300,000 outstanding advance with the Federal Home LoanBank in August 2003.  This will result in a decrease in cash and cash equivalents.

The total amount of nonperformingassets, which includes nonaccruing loans, other real estate owned, repossessedcollateral and loans for which payments are more than 90 days past due was$4,865,787 at June 30, 2003, representing an increase of $1,967,225 (67.87%)from December 31, 2002.  This increase is attributable to a $3,258,011increase in loans more than 90 days past due and still accruing and an increaseof $483,913 in other real estate owned, offset by a decrease of $1,774,314 innonaccrual loans.  As a result of the increase, total nonperforming assetswere 2.76% of total loans at June 30, 2003 compared to 1.61% of total loans atDecember 31, 2002.  Nonaccrual loans represented 0.47% of total loansoutstanding at June 30, 2003, compared to 1.45% of total loans outstanding atDecember 31, 2002.  The decrease in nonaccrual loans is due to the payoffsof three loans that were on nonaccrual status at December 31, 2002.  Theincrease in loans more than 90 days past due and still accruing was the mostsignificant factor affecting nonperforming assets and was primarily due to amotel loan with an outstanding balance of $3,140,234 that was 97 days past dueat June 30, 2003.  The loan was not placed in nonaccrual status because theBank was in the process of foreclosing on the property securing the loan at June30, 2003.  Subsequent to June 30, 2003, in lieu of foreclosure, the Bankrenewed the loan at prevailing interest rates upon receiving a partial paymentand additional liquid collateral from the guarantors of the loan.  Threewere no related party loans which were considered to be nonperforming at June30, 2003.

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At June 30, 2003, theCorporation had loan concentrations in the housing industry and in the hotel and motelindustry.    As of June 30, 2003, the Corporation had total commitments for construction and development loans of$67,466,162.  Total funded and unfunded commitment amounts for hotel andmotel loans were $26,311,054 at June 30, 2003.  The Corporation monitors these concentrations on a monthly basis to ensure that they do not exceed established internalguidelines.  The primary risk relating to the concentration in the housing industry is a downturn in the economy which wouldadversely affect construction of new homes and developments of new housing communities.  The Corporation’s housing lending slowed somewhat during the first half of 2003.  The Corporation’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry. The Corporation has established a maximum dollar amount of hotel and motel loans that it is willing tofund.  Management of the Corporation is confident that all of theCorporation’s hotel andmotel loans are adequately collateralized in the unforeseen event that cash flows from operations of the hotels and motels are notsufficient to meet the terms of repayment outlined in the loan agreements.

**Results of Operations**

Net interest income increased $137,505 (3.26%) in the first six months of2003 compared to the same period for 2002.  Interest income for the first six months of 2003 was $7,394,144, representing anincrease of $47,459 (0.65%) as compared to the same period in 2002.  Interest expense for the first six months of 2003decreased  $90,046 (2.88%)compared to the same period in 2002.  The increasein interest income during the first six months of 2003 compared to the same period in 2002 is primarily attributable to an increasein the volume of loans.  The decrease in interest expense is primarily attributable to a lower interest rate environmentduring the first six months of 2003 as compared to the same period in 2002.

The Bank’s net interest margin for the first six months of 2003 was3.69%, compared to 4.35% for the same time period during 2002.  Yield on interest earning assets for the six-month periodending June 30, 2003 was 6.16%, compared to 7.43% for the six-month period ending June 30, 2002.  Interest expense on interestbearing liabilities was 2.33% for the six months ending June 30, 2003, compared to 3.01% for the same period during 2002. Although net interest income increased, the Bank’s net interest margin decreased due to a $43,945,943 (21.49%) increase inaverage interest earning assets from June 30, 2002 to June 30, 2003.  The components of the increase in interest earningassets were a $18,067,412 increase in loans outstanding, an increase of $4,786,832 in mortgage loans originated and held for sale,a $10,895,925 increase in investment securities, and a $10,195,773 increase in federal funds sold.  Another major contributorto the reduction of the Bank’s net interest margin was the continued low rate environment, which was driven down further by a0.25% reduction in the prime rate of interest during the first six months of 2003.

The Bank analyzes its allowance for loan losses on a monthly basis.  Additions to theallowance for loan losses are made by charges to the provision for loan losses.  Loans deemed to be uncollectible are chargedagainst the allowance for loan losses.  Recoveries of previously charged off amounts are credited to the allowance for loanlosses.  For the six months ended June 30, 2003, the provision for loan losses was $342,000, compared to$210,000 for the same period in 2002.  The increase in the provision for loan losses is primarily attributable tothe current economic environment and an increase in nonperforming assets, which was discussedpreviously in this document.** ** The nature of the process by which the Corporation determines the appropriate allowancefor loan losses requires the exercise of considerable judgment.  It is management’s belief that the allowance forloan losses is adequate to absorb possible losses in the portfolio.

Other income for the first six months of 2003 increased $448,694(38.27%) compared to the first six months of 2002.  This increase is primarily attributable to a$374,126 increase in fee income on mortgage loans originated and sold and an increase innon-sufficient funds (NSF) charges of $67,498.  The increasein fee income on mortgage loans held for sale is due to an increase in the volume of mortgage loans that the Bank originated duringthe first six months of 2003 as a result of the continued low mortgage interest rates and strong housing market.  The increasein NSF charges is primarily due to growth in the number of deposit accounts.

Other expenses for the first six months of 2003 increased $463,675 (13.59%)compared to the first six months in 2002. The increaseis primarily attributable to a $351,887 (16.64%) increase in salaries and benefits expense primarily due to an increase incommissions paid to the bank’s mortgage loan originator due to a substantial increase in the volume of mortgage loansoriginated as well as merit increases based on employee performance.

The Bank’s effective tax rate was 30% for the six months ended June30, 2003 and 2002.

**Interest rate sensitivity**

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

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The Bank also measures its short-term exposure to interest rate risk by simulating the impact to net interest income underseveral rate change levels.  Interest-earning assets and interest-bearing liabilities are rate shocked to stress test theimpact to the Bank’s net interest income and margin.  The rate shock levels span three 100 basis point increments up anddown from current interest rates.  This information is used to monitor interest rate exposure risk relative to anticipatedinterest rate trends.  Asset/liability management strategies are developed based on this analysis in an effort to limit theBank’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 ofinterest-bearing deposit accounts.  The betas represent the Bank’s inclination to repricedeposit rates based on historical data provided from a call report drivendatabase.  The betas are used because it is not likely that deposit rateswould change the full amount of a prime rate increase or decrease. 

At June 30, 2003, the difference between the Bank’s assets and liabilities repricing or maturing within one year, afterapplying the betas, was $585,370, indicating that the Bank was asset sensitive.  Rate shock data show that the Bank’snet interest income would increase $169,888 on an annual basis if rates increased 100 basis points, and would decrease $169,888 onan annual basis if rates fell 100 basis points.

Certain shortcomings are inherent in the method of analysis presented in the foregoing paragraph.  For example, althoughcertain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or atdifferent points in time to changes in market interest rates.  Additionally, certain assets, such as adjustable-ratemortgages, 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, amongother factors, may change significantly from the assumptions made above.   In additions, significant rate decreases would notlikely be reflected in the liability repricing and therefore would make the Bank more sensitive in a falling rateenvironment.
**Liquidity**
The Corporation must maintain, on a daily basis, sufficient funds tocover the withdrawals from depositors’ accounts and to supply new borrowers withfunds.  To meet these obligations, the Corporation keeps cash on hand,maintains account balances with its correspondent banks, and purchases and sellsfederal funds and other short-term investments.  Asset and liabilitymaturities 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 regulatoryrequirements and its local funding requirements.

The Corporation monitors its liquidity position regularly.  The primarytool used in this analysis is an internal calculation of a liquidity ratio.  This ratio is arrived at by dividing theCorporation’s short-term and marketable assets, including cash, federal funds sold, and unpledged investment securities, bythe sum of the Corporation’s deposit liabilities and securities sold under agreement to repurchase.  At June30, 2003, the Corporation’s liquidity ratio was 25.2%.  This level ofliquidity is within the Bank’s stated guidelines of 15-35%.

The Corporation maintains relationships with correspondent banks that canprovide funds to it on short notice, if needed.  Presently, the Corporation has arrangements with a commercial bank for shortterm unsecured advances up to $5,600,000.  Additional liquidity is provided to the Corporation through available Federal HomeLoan Bank advances up to $17,558,000, of which $13,300,000 was outstanding at June 30, 2003.

During the first six months of 2003, cash and cash equivalentsincreased $13,780,896 to a total of $29,646,295 at June 30, 2003 as cash provided by operating and financing activities outpacedamounts used by investing activities.  Cash inflows from operations totaled $3,127,785 during the first six months of 2003,while inflows from financing activities totaled $23,569,784, most of which were net deposit increases during the first six monthsof  $24,201,476, offset by cash dividends paid during the first six months of 2003 of $899,885.

Investing activities used $12,916,673 of cash and cash equivalents,consisting of purchases of investment securities of $28,678,653 and purchases of premises and equipment of $685,230, offset by netrepayments of loans by customers of $2,395,993 and proceeds from the sales, calls, maturities and paydownsof investment securities totaling $14,051,217.  At June 30, 2003, the Bankhad $54,242,817 of investment securities available for sale.

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**Contractual Obligations and Commitments**

The Corporation has contractual obligations to make future payments pursuant to itsagreement with the Federal Home Loan Bank (“FHLB”) and is party to certain off-balance sheet arrangements.

AtJune 30, 2003, theCorporation had one advance from the FHLB outstanding in the amount of $13,300,000 which matures in August 2003 and calls forinterest to be paid quarterly at a fixed rate of 6.34%.

The Corporation is party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments include commitments toextend credit, standby letters of credit and financial guarantees.  These instruments involve, to varying degrees, elements ofcredit risk in excess of the amount recognized on the balance sheet.  The contract amounts of these instruments reflect theextent of involvement the Corporation has in particular classes of financial instruments.  At June 30, 2003, the contractual amounts of the Corporation’s commitments to extend credit andstandby letters of credit were $38,711,000and $999,000,respectively.

Commitments to extend credit are agreements to lend to a customer as long asthere is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates andbecause they may expire without being drawn upon, the total commitment amount of $38,711,000 does not necessarily represent futurecash requirements.  Standby letters of credit and financial guarantees written are conditional commitments issued by theCorporation to guarantee the performance of a customer to a third party.

**Capital**

The following tables present Oconee State Bank’s regulatory capital position atJune 30, 2003, based on the regulatory capital requirements of federal banking agencies.  Thecapital ratios of the Corporation are essentially the same as those of the Bank at June 30, 2003 andtherefore only the Bank’s ratios are presented.
Risk-Based Capital Ratios Tier 1 Capital, Actual  
10.8%Tier 1    Capital minimum requirement 
4.0%   Excess 
6.8%   Total    Capital, Actual 
12.0%Total    Capital minimum requirement  
8.0%   Excess 
4.0%   Leverage Ratio     Tier 1    Capital to adjusted total assets  
7.3%Minimum    leverage requirement  
 3.0%   Excess 
4.3%
** **

** **

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Item 3.

**CONTROLS AND PROCEDURES**

Our management, including the chief executive and chief financial officers, supervised andparticipated in an evaluation of our disclosure controls and procedures (as defined in federal securities rules) as of June 30,2003. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective inaccumulating and communicating information to our management, including our  CEO and CFO, as appropriate to allowtimely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules andforms and that our disclosure controls and procedures are designed to ensure that the information we are required to disclose inreports that we file or submit under all applicable federal securities law is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules and forms.

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

 

 

 

 

 

 

 

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**PART II.  OTHER INFORMATION**

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Item 1.     Legal Proceedings

None

Item 2.     Changes in Securities and Use of Proceeds

None

Item 3.     Defaults Upon Senior Securities

None

Item 4.    Submission of Matters to a Vote ofSecurity Holders

(a)       The Corporation’s annual meeting of shareholders was held on May 5, 2003.

(b)       The following is a summary of matters submitted to a vote of security holders:
- The election * of the following directors to serve the current year term:
G. Robert Bishop      Jimmy L. Christopher      Douglas D. Dickens      Walter T. Evans, Sr.       John A. Hale      B. Amrey HardenHenry C. Maxey      Carl R. Nichols      Ann B. Powers      Jerry K. Wages      Virginia S. WellsA tabulation of votes concerning the above issue is as follows:Shares voted by proxy in favor      Shares voted in person in favor      Shares voted in person against      Shares abstained from voting      Broker Non-Votes      Total Shares represented      Total shares outstanding
626,590          69,284          0           0          0           695,874          899,885          
*  Directors were elected by slate, not individually.  Vote      tabulation is therefore by slate.
Item 5.     Other Information

None

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits  31.1Certification by B. Amrey Harden, CEO and President of the Corporation, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. 31.2Certification by Jerry K. Wages, Executive Vice President and Chief Financial Officer of theCorporation, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32Joint    Certification of the Chief Executive Officer and the Chief Financial Officer    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(b)  Reports on Form    8-K There were no 8-K filings during the quarter for which this report isfiled.
 

 

 

 

 

 

 

 

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
**SIGNATURES**
Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized.
            OCONEE FINANCIAL CORPORATION
 
By:   /s/ B. Amrey Harden                                                   B. Amrey Harden, President andC.E.O.       (Principal Executive Officer)
Date:      August14,2003                                                   
 
By:    /s/ Jerry K. Wages                                                             Jerry K. Wages           Executive Vice-President and C.F.O.           (Principal Accounting Officer)
Date:      August14,2003