**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 March 31,2002

**OR**

**[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

For the TransitionPeriod from ________to ________
Commission File number000-25267

**Oconee FinancialCorporation**(Exact name ofregistrant as specified in its charter)
 

Georgia 
 58-2442250 
(Stateof Incorporation)

 (I.R.S. Employer Identification No.)

35 North Main Street

 

Watkinsville, Georgia
 30677
(Address of principal

 (Zip Code)

executive offices)

 

706-769-6611(Telephone Number)
Indicate by check mark whether theregistrant (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 forsuch shorter period that the registrant was required to file such reports), and(2) has been subjected to such filing requirements for the past 90 days.

YES       XX      NO         

Common stock, par value $2 per share: 899,885 sharesoutstanding as of May 10, 2002
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

**INDEX**

 

Page No.

 

PART I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheet (unaudited) at March 31, 2002

3

 

 

Consolidated Statements of Earnings (unaudited) for the Three

 

     Months Ended March 31, 2002 and 2001

4

 

 

Consolidated Statements of Comprehensive Income (unaudited)

 

     for the Three Months Ended March 31, 2002 and 2001

5

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three

 

     Months Ended March 31, 2002 and 2001

6-7

 

 

Notes to Financial Statements (unaudited)

8

 

 

Item 2.

Management's Discussion and Analysis of Financial

 

     Condition and Results of Operations

9-12

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

13

 

 

Item 2.

Changes in Securities

13

 

 

Item 3.

Defaults Upon Senior Securities

13

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

13

 

 

Item 5.

Other Information

13

 

 

Item 6.

Exhibits and Reports on Form 8-K

13

2   **PART I.  FINANCIAL INFORMATION**
Item 1.  Financial Statements

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Balance Sheet

March 31, 2002(Unaudited)
Assets   
Cash and due from banks

$
8,541,385 

Federal funds sold

4,382,000 

Investment securities available for sale   (amortized value of $34,939,758)

35,018,181 
  
Mortgage loans held for sale

2,145,743 
  
Loans

158,568,308 

Less:  Allowance for loan losses

(1,908,812)
        
Loans, net

156,659,496 
   
Premises and equipment, net

2,231,481 

Accrued interest receivable and other assets

3,629,270 
        
Total Assets

$
212,607,556 
       Liabilities and Stockholders’ Equity 
Liabilities:

Deposits

  Noninterest-bearing

$
23,587,386 

  Interest-bearing

156,449,854 
        
Total Deposits

180,037,240 
  
Securities sold under repurchase agreements

1,143,928 

Federal Home Loan Bank advances

13,300,000 

Accrued interest payable and other liabilities

763,155 
         
Total Liabilities

195,244,323 
         
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

11,267,977 

Accumulated other comprehensive income

48,654 
         
Total stockholders’ equity

17,363,233 
        
Total liabilities and stockholders’ equity

$
212,607,556 

See accompanying notes to financial statements.

3
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Earnings

For Each of the Three Months Ended March 31, 2002 and 2001(Unaudited)

**2002     **

**2001     **
**     **
Interest Income:

     Loans

$3,106,742

3,349,236

     Investment securities:

          Tax exempt

177,267

169,014

          Taxable

309,969

265,315

     Federal funds sold and other

38,749

226,620
**     **
             Total interest income

3,632,727

4,010,185
**     **
Interest Expense:

     Deposits

1,386,468

1,757,076

     Other

215,875

220,172
**     **
             Total interest expense

1,602,343

1,977,248
**     **
             Net interest income

2,030,384

2,032,937

Provision for loan losses

105,000

75,000
**     **
     Net interest income after provision for loan losses

1,925,384

1,957,937
**     **
Other Income:

     Service charges on deposit accounts

216,894

233,017

     Other operating income

410,323

269,662
**     **
             Total other income

627,217

502,679
**     **
Other Expense:

     Salaries and other personnel expense

1,051,461

956,117

     Occupancy and equipment expense

226,462

188,068

     Other operating expense

419,742

420,784
**     **
             Total other expense

1,697,665

1,564,969
**     **
             Earnings before income taxes

854,936

895,647

Income taxes

258,280

276,532
**     **
             Net earnings

$   596,656

619,115
**     **
Earnings per common share based on average

     outstanding shares of 899,885 in 2002 and 2001:

$0.66

0.69

See accompanying notes to financial statements.

4
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2002 and 2001(Unaudited)

**2002   **

**2001   **
 
Net earnings

$  596,656 

619,115 
 
Other comprehensive income, net of tax:

     Unrealized gains (losses) on securities available forsale:

          Holding gains (losses) arisingduring period, net of tax

             of ($16,425)and $215,378

(26,844)

352,006 
 
          Total other comprehensiveincome (loss)

(26,844)

352,006 
 
          Comprehensiveincome

$  569,812 

971,121 
 
****

See accompanying notes to financial statements.

5
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows

For Each of the Three Months Ended March 31, 2002 and 2001(Unaudited)

**2002    **

**2001    **
** **
Cash flows from operating activities:

     Net earnings

$     596,656 

619,115 

         Adjustments to reconcile net earnings to net

            cash provided by operating activities:

                Provision for loan losses

105,000 

75,000 

                Depreciation, amortization and accretion

106,113 

89,016 

                Change in assets and liabilities:

                    Interest receivable and other assets

131,222 

(102,450)

                    Interest payable and other liabilities

(377,850)

(208,357)

                    Mortgage loans held for sale

4,757,023 

(1,107,140)
** **
                           Net cash provided by operating activities

5,318,164 

(634,816)
** **
Cash flows from investing activities:

     Proceeds from calls, maturities, and paydowns of

         investment securities available for sale

1,125,765 

2,289,807 

     Purchases of investment securities available for sale

0 

(1,645,877)

     Net change in loans

(7,289,194)

(9,057,852)

     Purchases of premises and equipment

(77,442)

(181,490)
** **
                           Net cash used by investing activities

(6,240,871)

  (8,595,412)
** **
Cash flows from financing activities:

     Net change in deposits

308,988 

10,636,394 

     Net change in securities sold under repurchase agreements

498,912 

202,135 

     Dividends paid

(899,885)

(989,873)
** **
                            Net cash provided by financing activities

(91,985)

9,848,656 
** **
Net decrease in cash and cash equivalents

(1,014,692)

618,428 

Cash and cash equivalents at beginning of period

13,938,077 

22,082,978 
** **
Cash and cash equivalents at end of period

$  12,923,385 

22,701,406 
 
6
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows, continued

For Each of the Three Months Ended March 31, 2002 and 2001(Unaudited)

**2002    **

**2001    **

Supplemental cash flow information:

     Cash paid for interest

$  1,674,024 

1,194,778

     Cash paid for taxes

$     270,890 

268,280

Noncash investing and financing activities:

     Transfer from loans to other real estate owned

$              -   

73,164

     Financed sale of other real estate owned

$              -   

73,164

     Change in dividends payable

$    899,885 

989,873

     Change in net unrealized gain on investment securities

        available for sale, net of tax

$    (26,844)

352,006

See accompanying notes to financial statements.

7
   
**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.

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.

(2)         Cash and CashEquivalents

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

(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 2002 and 2001.

(4)        Stock Split

On April 16, 2001, the Board of Directors of the Corporation declared a 5 for 1 stocksplit payable to shareholders of record on May 8, 2001.  All share and per share amounts have been changed to reflect thestock split as if it had occurred on December 31, 2000.

8
    
Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**
**Forward-Looking Statement**
**               **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 March 31, 2002were $212,607,556, representing an $83,552(0.04%) increasefrom December 31, 2001.  Deposits increased $308,988 (0.17%) from December 31, 2001.  Loans increased $7,280,965(4.81%).  The increase in loan volume is due primarily to an increase in loans to finance commercial real estate. Investment securities decreased $1,176,050 (3.25%) from December 31, 2001 due primarily to paydowns of mortgage-backedsecurities.  The allowance for loan losses at March 31, 2002 was $1,908,812, compared to the December 31, 2001 balance of$1,812,041, representing 1.20% of total loans at both March 31, 2002, and December 31, 2001. Cash and cash equivalents decreased$1,014,692 from December 31, 2001.

                The total of nonperformingassets, which includes nonaccruing loans, other real estate owned, repossessed collateral and loans for which payments are morethan 90 days past due were $983,155 at March 31, 2002, representing an decrease of $5,032 (0.51%) from December 31, 2001. This increase is attributable to a $91,831 increase in other real estate owned, offset by decreases of $58,286 in nonaccrual loans,6,426 in repossessed collateral, and $32,151 in loans more than 90 days past due.  Nonaccrual loans represented 0.54% of totalloans outstanding at March 31, 2002, compared to 0.60% of total loans outstanding at December 31, 2001.  There were norelatedparty loans which were considered nonperforming at March 31, 2002.

                At March 31, 2002, the Companyhad loan concentrations in the housing industry and in the hotel and motel industry.  The Company monitors theseconcentrations on a monthly basis to ensure that they do not exceed established internal guidelines. 

                The primary risk relating to theconcentration in the housing industry is a downturn in the economy which would adversely effect construction of new homes anddevelopments of new housing communities.  Although the overall economy slowed somewhat during the past twelve months, theCompany’s housing lending was not materially impacted.  This is primarily due to a strong local economy, which isattributable to the Company’s proximity to the University of Georgia, which provides significant economic stimuli to thearea.  The Company’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourismindustry.  This industry slowed significantly during the fourth quarter of 2001 as a result of the September 11 terroristattacks.  The Company has established a maximum dollar amount of hotel and motel loans that it is willing to fund as a resultof this slowdown.  Management of the Company is confident that all of the Company’s hotel and motel loans are adequatelycollateralized in the unforeseen event that cash flows from operations of the hotels and motels are not sufficient to meet theterms of repayment outlined in the loan agreements.

                The Corporation’ssubsidiary bank was most recently examined by its primary regulatory authority in May of 2001. There were norecommendations by the regulatory authority that in management’s opinion will have material effects on the Company’sliquidity, capital resources or operations.

9
   
Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, continued**

**Results of Operations**

                Net interest income decreased$2,553 (0.13%) in the first three months of 2002 compared to the same period for 2001.  Interest income for the first threemonths of 2002 was $3,632,727, representing a decrease of $377,458 (9.41%) as compared to the same period in 2001.  Interestexpense for the first three months of 2000 decreased $374,905 (18.96%)compared to the same period in2001.  The decrease in interest income during the first three months of 2002 compared to the same periodin 2001 is primarily attributable to an increase in the volume of loans offset by the effects of a substantial decrease in theBank’s prime lending rate during 2001. The decrease in interestexpense is primarily attributable to a substantially lower interest rate environment during the first three months of 2002 ascompared to the same period in 2001.

                The Bank’s net interestmargin for the first three months of 2002 was 4.24%, compared to 4.88% for the same time period during 2001.  This decrease isprimarily attributable to a 475 basis point decrease in the prime rate during 2001.

               The Bank analyzes its allowance for loan losses on a monthly basis.  As of March 31, 2002, the provision for loan losses was$105,000, compared to $75,000 for the same period in 2001.  The increase in the provision for loan lossesis primarily attributable to additional provisions made in 2001 due to loan growth.  It is management’s beliefthat the allowance for loan losses is adequate to absorb possible losses in the portfolio.

               Other income for the first three months of 2002 increased $124,538 (24.77%) compared to the first threemonths of 2001.  This increase is primarily attributable to a $120,252 increase in fee income on mortgageloans held for sale.  The increase in fee income on mortgage loans held for sale is due to an increase in the number ofmortgage loans that the Bank originated during the first three months of 2002 as a result of mortgage interest rates being lowerthan during the same time period in 2001. 

                Other expenses for the firstthree months of 2002 increased $132,696 (8.48%) compared to the first three months in 2001.  The net increase is primarilyattributable a $95,344 (9.97%) increase in salaries and benefits expense due to the addition of new employees in response to thegrowth of the Bank and to merit increases based on employee performance.
**Liquidity**
                The Corporation must maintain, ona daily basis, sufficient funds to cover 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 correspondentbanks, and purchases and sells federal funds and other short-term investments.  Asset and liability maturities are monitoredin an attempt to match these to meet liquidity needs.  It is the policy of the Corporation to monitor its liquidity to meetregulatory requirements and their local funding requirements.

                The Corporation monitors itsliquidity position on a monthly basis.  The primary tool used in this analysis is an internal calculation of a liquidityratio.  This ratio is arrived at by dividing the Corporation’s short-term and marketable assets, including cash, federalfunds sold, and unpledged investment securities, by the sum of the Corporation’s deposit liabilities and securities soldunder agreement to repurchase.  At March 31, 2002, the Corporation’s liquidity ratio was 16.8%.

                The Corporation maintainsrelationships with correspondent banks that can provide funds to it on short notice, if needed.  Presently, the Corporationhas arrangements with a commercial bank for short term unsecured advances up to $5,600,000.  Additional liquidity is providedto the Corporation through available Federal Home Loan Bank advances up to $16,335,000, of which $13,300,000 was outstanding atMarch 31, 2002.

                During the first three months of2002, cash and cash equivalents decreased $1,014,692 to a total of $12,923,385 at March 31, 2002 as cash used by investing andfinancing activities outpaced amounts provided by operating activities.  Cash inflows from operations totaled $5,318,164during the first three months of 2002, while outflows from financing

10
   **Item 2.**
**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, continued**

activities totaled $91,985, most of which were net deposit increases duringthe first three months of $308,988 and increases in securities sold under repurchase agreements of $498,912, offset by cashdividends paid during the first three months of 2002 of $899,885.

                Investing activities used$6,240,871 of cash and cash equivalents, principally composed of net advances of loans to customers of $7,289,194, offset byproceeds from the maturities and paydowns of investment securities totaling $1,125,765.
**Contractual Obligations and Commitments**
               The Corporation has contractual obligations to make future payments pursuant to its agreement with the Federal Home Loan Bank(“FHLB”) and is party to certain off-balance sheet arrangements.

               At March 31, 2002, the Corporation had one advance from the FHLB outstanding in the amount of $13,300,000 which matures in August2003 and calls for interest to be paid quarterly at a fixed rate of 6.34%.

               The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of creditand financial guarantees.  These instruments involve, to varying degrees, elements of credit risk in excess of the amountrecognized on the balance sheet.  The contract amounts of these instruments reflect the extent of involvement the Corporationhas in particular classes of financial instruments.  At March 31, 2002, the contractual amounts of the Corporation’scommitments to extend credit and standby letters of credit were $23,993,237and $725,941, respectively.

                Commitments to extend credit areagreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitmentsgenerally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of$23,993,237 does not necessarily represent future cash requirements.  Standby letters of credit and financial guaranteeswritten are conditional commitments issued by the Corporation to guarantee the performance of a customer to a thirdparty.

11
   
Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS, continued**

**Capital**

The following tables present Oconee State Bank’s regulatory capital position atMarch 31, 2002, based on the regulatory capital requirements of federal banking agencies.  The capital ratios of theCorporation are essentially the same as those of the Bank at March 31, 2002 and therefore only the Bank’s ratios arepresented.

Risk-Based Capital Ratios

Tier 1 Capital,Actual

 10.7%

Tier 1 Capital minimumrequirement

   4.0%

Excess

    6.7%

Total Capital,Actual

 11.9%

Total Capital minimumrequirement

   8.0%

Excess

  3.9%

Leverage Ratio

Tier 1 Capital to adjusted total assets   (LeverageRatio)

 8.1%

Minimum leveragerequirement

   3.0%

Excess

    5.1%

 

 

12
    
**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 of SecurityHolders

                               None

Item 5.  Other Information

                               None

Item 6.  Exhibits and Reports on Form 8-K

                             (a)     Exhibits

                                       None

                             (b)     Reports on Form 8-K

                                       There were no 8-K filings during the quarter.

13
   
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

**SIGNATURES**

****

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant hasduly 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 C.E.O.                (Principal      Executive Officer)
   
Date:          May 10, 2002         
By         */s/      Jerry K. Wages*  
              Jerry K.      Wages 
              Executive      Vice-President and C.F.O.               (Principal      Accounting Officer)
   
Date:          May 10, 2002