Table of Contents

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20429

**FORM 10-QSB**

**[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

For the Quarterly Period Ended March 31,2004

**[   ]  TRANSITION REPORT UNDER SECTION 13 OR15(d)OF THE EXCHANGE ACT**

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)

            Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days.         Yes**** S         No ****  ̈

State the number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: 899,885 shares of Common Stock, par value $2.00, outstanding as of May 14, 2004.

----

###### **OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

###### **INDEX**

|   |                            |                                                                            | Page No. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|----------|
|   | PART I                                                                                                                                                       | FINANCIAL INFORMATION                                                           |     |
|   |                                                                                                                                                         |                                                                            |     |
|   | Item 1.                                                                                                                                                      | Financial Statements                                                            |     |
|   |                                                                                                                                                         |                                                                            |     |
|   |                                                                                                                                                         | Consolidated Balance Sheet (unaudited) at March 31, 2004                        | 3        |
|   |                                                                                                                                                         |                                                                            |     |
|   |                                                                                                                                                         | Consolidated Statements of Earnings (unaudited) for the Three Months Ended      |          |
|   |                                                                                                                                                         |        March 31, 2004 and 2003               | 4        |
|   |                                                                                                                                                         |                                                                            |     |
|   |                                                                                                                                                         | Consolidated Statements of Comprehensive Income (unaudited) for the ThreeMonths |     |
|   |                                                                                                                                                         |        Ended March 31, 2004 and 2003         | 5        |
|   |                                                                                                                                                         |                                                                            |     |
|   |                                                                                                                                                         | Consolidated Statements of Cash Flows (unaudited) for the Three Months          |     |
|   |                                                                                                                                                         |        Ended March 31, 2004 and 2003         | 6-7      |
|   |                                                                                                                                                         |                                                                            |     |
|   |                                                                                                                                                         | Notes to Financial Statements (unaudited)                                       | 8-9      |
|   |                                                                                                                                                         |                                                                            |     |
|   | Item 2.                                                                                                                                                      | Management's Discussion and Analysis of Financial                               |     |
|   |                                                                                                                                                         |        Condition and Results of Operations   | 10-13    |
|   |                                                                                                                                                         |                                                                            |     |
|   | Item 3.                                                                                                                                                      | Controls and Procedures                                                         | 14       |
|   |                                                                                                                                                         |                                                                            |     |
|   | PART II                                                                                                                                                      | OTHER INFORMATION                                                               |     |
|   |                                                                                                                                                         |                                                                            |     |
|   | Item 1.                                                                                                                                                      | Legal Proceedings                                                               | 15       |
|   |                                                                                                                                                         |                                                                            |     |
|   | Item 2.                                                                                                                                                      | Changes in Securities and Small Business Issuer Purchases of Equity Securities  | 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       |

######  

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Table of Contents

###### **PART I.  FINANCIAL INFORMATION**

Item 1.  Financial Statements

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

ConsolidatedBalance SheetMarch 31, 2004(Unaudited)

| Assets                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |   |
| Cash and due from banks, including reserve requirements of $3,299,000                                                                                             | $ | 11,368,055 |
| Federal funds sold                                                                                                                                                | 6,529,000 |
|                                                                                                                                                              |   |
|                    Cash and cashequivalents                             | 17,897,055 |
|                                                                                                                                                              |   |
| Investment securities available for sale                                                                                                                          | 53,368,354 |
| Other investments                                                                                                                                                 | 765,429 |
| Mortgage loans held for sale                                                                                                                                      | 1,084,550 |
|                                                                                                                                                              |   |
| Loans                                                                                                                                                             | 172,181,105 |
| Less: Allowance for loan losses                                                                                                                                   | 2,804,533 |
|                                                                                                                                                              |   |
|                    Loans,net                                       | 169,376,572 |
|                                                                                                                                                              |   |
| Premises and equipment, net                                                                                                                                       | 5,301,619 |
| Accrued interest receivable and other assets                                                                                                                      | 2,883,270 |
|                                                                                                                                                              |   |
|                    Totalassets                                     | $ | 250,676,849 |
|                                                                                                                                                              |   |
| Liabilities and Stockholders’ Equity                                                                                                                        |
|                                                                                                                                                              |   |
| Liabilities:                                                                                                                                                      |   |
|        Deposit*s*                                                                                                              |   |
|             Noninterest-bearing                                                                       | $ | 29,454,291 |
|             Interest-bearing                                                                          | 197,609,921 |
|                                                                                                                                                              |   |
|                    Totaldeposits                                   | 227,064,212 |
|                                                                                                                                                              |   |
|        Securities sold under repurchaseagreements                                                                              | 1,071,837 |
|        Accrued interest payable and otherliabilities                                                                           | 777,214 |
|                                                                                                                                                              |   |
|                    Totalliabilities                                | 228,913,263 |
|                                                                                                                                                              |   |
| Stockholders’ equity:                                                                                                                                       |   |
|        Common stock, $2 par value;                                                                                             |   |
|              authorized1,500,000 shares;                                                         |   |
|              issued andoutstanding 899,885 shares                                                | 1,799,770 |
|        Additional paid-in capital                                                                                              | 4,246,832 |
|        Retained earnings                                                                                                       | 14,756,813 |
|        Accumulated other comprehensiveincome                                                                                   | 960,171 |
|                                                                                                                                                              |   |
|                    Totalstockholders’ equity                 | 21,763,586 |
|                                                                                                                                                              |   |
|                    Totalliabilities and stockholders’ equity | $ | 250,676,849 |

See accompanying notes to financial statements.

3
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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements ofEarningsFor the Three Months Ended March 31, 2004 and 2003(Unaudited)

 

** **

**2004**

**        **

**2003**

Interest Income:

 

 

 

 

     Loans

 $

2,859,321
 
3,225,059

     Investment securities:

 
   
          Tax exempt

 

211,070
 
179,321

          Taxable

 

331,726
 
191,312

     Federal funds sold and other

 

28,103
 
50,608

             Total interestincome

 

3,430,220
 
3,646,300

 

 
   
Interest Expense:

 
   
     Deposits

 

1,013,639
  
1,311,538

     Other

 

3,768
 
214,515

             Total interestexpense

 

1,017,407
 
1,526,053

 

 
   
             Net interestincome

 

2,412,813
 
2,120,247

 

 
   
Provision for loan losses

 

90,000
 
171,000

 

 
   
                   Netinterest income after provision for loan losses

 

2,322,813
 
1,949,247

 

 
   
Other Income:

 
   
 

 
   
     Service charges on deposit accounts

 

238,967
 
271,757

     Mortgage banking income

 

149,936
 
386,924

     Securities gains, net

 

24,137
 
           -

     Other operating income

 

149,091
 
123,663

             Total otherincome

 

562,131
 
782,344

 

 
   
 Other Expense:

 
   
     Salaries and other personnel expense

 

1,278,825
 
1,215,396

     Net occupancy and equipment expense

 

265,978
 
242,203

     Other operating expense

 

517,398
 
455,582

             Total otherexpense

 

2,062,201
 
1,913,181

 

 
   
             Earnings beforeincome taxes

 

822,743
 
818,410

 

 
   
Income taxes

 

227,508
 
240,426

 

 
  
             Netearnings 

 $

595,235
 
577,984

 

 
  
Earnings per common share based on average

 
  
     outstanding shares of 899,885 ineach of 2004 and 2003:

 $

0.66
 
0.64

 See accompanying notes to financial statements.

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  **OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**
Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2004 and 2003(Unaudited)

 

** **

**2004**

** **

**2003**

 

 

 

 

 

Net earnings 

$

595,235
 
577,984

 

 
   
Other comprehensive income, net of tax:

 
   
     Unrealized gains on securities available for sale:

 
   
          Holding gains arising duringperiod, net of tax

 
   
             of $263,342 and$169,442

 

429,663
 
276,728

          Reclassification adjustments forgains included in net 

 
   
             earnings, net oftax of $9,162 and $0

 

14,975
 
           -

 

 
   
          Total other comprehensiveincome

 

414,688
 
276,728

 

 
   
          Comprehensive income

$

1,009,923
 
854,712

****

****

****

See accompanying notes to financial statements.

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2004 and 2003(Unaudited) 
 
** **

**2004**

**        **

**2003**

Cash flows from operating activities:

 
 
 
 
     Net earnings

$

595,235 
 
577,984 

         Adjustments to reconcile netearnings to net

 
   
            cash provided byoperating activities:

 
   
                Provision for loanlosses

 

90,000 
 
171,000 

                Depreciation, amortizationand accretion

 

207,645 
 
109,018 

                Gain on sale of investmentsecurities

 

(24,137)
 
      -        

                Gain on sale of other realestate owned
 
(27,906)
  
                Change in assets andliabilities:
    
                    Interestreceivable and other assets

 

(104,280)
 
224,972 

                    Interestpayable and other liabilities

 

21,317 
 
309,264 

                    Mortgageloans held for sale

 

2,078,421 
 
1,846,157 
 
 
   
                           Netcash provided by operating activities

 

2,836,295 
 
3,238,395 
 
 
    
Cash flows from investing activities:

 
   
     Proceeds from sale of investment securities

 

1,181,779 
 
      -      

     Proceeds from calls, maturities, and paydowns of

 
   
         investment securities available forsale
 
779,407 
 
11,495,311 

     Purchases of investment securities available forsale

 

(1,235,476)
 
(21,382,042)

     Net change in loans

 

(984,978)
 
2,056,782 

     Purchases of premises and equipment

 

(914,229)
 
(424,617)

     Proceeds from sale of other real estate owned
 
522,331 
 
      -      
 
 
   
                           Net cash (used) by investing activities

 

(651,166)
 
(8,254,566)
 
 
   
Cash flows from financing activities:

 
   
     Net change in deposits

 

(1,556,360)
 
16,506,443 

     Net change in securities sold under repurchaseagreements

 

173,369 
  
60,633 

     Dividends paid

 

(899,885)
 
(899,885)
 
 
   
                           Netcash (used) provided by financing activities

 

(2,282,876)
 
15,667,191 
 
 
   
Net (decrease) increase in cash and cash equivalents

 

(97,747)
 
10,651,020 
 
 
   
Cash and cash equivalents at beginning of period

 

17,994,802 
 
15,865,399 
 
 
   
Cash and cash equivalents at end of period

$

17,897,055 
 
26,516,419 

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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows, continued

For the Three Months Ended March 31, 2004 and 2003(Unaudited)

 

** **

**2004**

**      **

**2003**

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

     Cash paid for interest

$

1,066,774

$

1,550,520

     Cash paid for taxes

$

99,500

$

68,000
     
Noncash investing and financing activities:
    
     Transfer from loans to other real estate owned

$

356,249

$

      -

     Change in dividends payable

$

899,885

$

899,885

     Change in net unrealized gain on investmentsecurities
    
        available for sale, net of tax

$

414,688

$

276,728

****

****

****

****

****

****

****

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.

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-month period ended March 31, 2004 are not necessarilyindicative of the results that may be expected for the year ending December 31, 2004.  For further information, refer to thefinancial statements and footnotes included in the Corporation’s annual report included on Form 10-KSB for the year endedDecember 31, 2003.

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 10-KSB for the year ended December 31,2003. 

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 available or held for sale are reflected at theirestimated fair value in the consolidated financial statements.  Suchamounts are based on either quoted market prices or estimated values derived bythe Corporation using dealer quotes or market comparisons.

(2)          NetEarnings Per Common Share

Net earnings per common share are based on the weighted average number of common sharesoutstanding during the period.
 
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**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Notes to Consolidated Financial Statements, continued(Unaudited)

(3)           Allowance for LoanLosses

Changes in theallowance for loan losses were as follows:

 

** **

**2004**

**      **

**        2003**

 

 

 

 

 

Balance at beginning of year

$

2,669,204 

 

2,098,691 

Amounts charged off

 

(118,299)

 

(20,955)

Recoveries on amounts previously charged off

 

163,628 

 

6,090 

Provision for loan losses

 

90,000 

 

171,000 

 

 

 

Balance at March 31

$

 2,804,533 

 

2,254,826 

  

 

 

 

 

 

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Item 2.

**MANAGEMENT’S DISCUSSION 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 March 31, 2004were $250,676,849, representing a $1,279,541 (0.51%) decrease from December 31, 2003.  Deposits decreased $1,556,360 (0.68%)from December 31, 2003.  The decline in deposits is attributable to decreases in time deposit accounts of $5,730,942 and moneymarket accounts of $3,608,494, offset by increases in savings accounts of $4,374,786, non interest-bearing checking accounts of$1,879,219, and interest-bearing checking deposits of $1,529,073.  Loans increased $1,030,307 (0.60%) from December 31, 2003.Investment securities decreased $106,545 (0.20%) from December 31, 2003.  The allowance for loan losses at March 31, 2004 was$2,804,533, compared to the December 31, 2003 balance of $2,669,204, representing 1.63% of total loans at March 31, 2004, comparedto 1.56% of total loans at December 31, 2003. Cash and cash equivalents decreased $97,747 from December 31,2003.   

               The total amount of nonperforming assets, which includes nonaccruing loans, other real estate owned, repossessed collateral andloans for which payments are more than 90 days past due was $1,528,830 at March 31, 2004, representing adecrease of $1,634,361 (51.67%) from December 31, 2003.  This decrease is attributable to decreases of  $724,131 innonaccrual loans, $498,538 in loans more than 90 days past due, $368,817 in other real estate owned, and $42,875 in repossessedcollateral.  As a result of the decrease, total nonperforming assets were 0.89% of total loans at March31, 2004 compared to 1.85% of total loans at December 31, 2003.  Nonperforming loans represented 0.61% of total assetsat March 31, 2004, compared to 1.26% of total assets at December 31, 2003.  Nonaccrual loansrepresented 0.45% of total loans outstanding at March 31, 2004, compared to 0.88% of total loansoutstanding at December 31, 2003.  There were no related party loans which were considered to be nonperforming at March 31,2003.

                At March 31, 2004, theCorporationhad loan concentrations in the housing industry and in the hotel and motelindustry.  As of March 31, 2004, the Corporation had total commitments for construction and development loans of $67,344,287,of which $42,775,679 was funded and outstanding.  Total funded and unfunded commitment amounts for hotel and motel loans were$25,154,126 at March 31, 2004.  Of the total commitments for hotel and motel loans, $24,917,973 was funded and outstanding atMarch 31, 2004.  The Corporationmonitors these concentrations on a monthly basis.  The primaryrisk relating to the concentration in the housing industry is a downturn in the economy which would adversely affect constructionof new homes and developments of new housing communities.  The Corporation’s construction anddevelopment lending slowed somewhat during 2003 and the first quarter of 2004.  The Corporation’s primary risk relating to the hotel and motel industry is a slowdown in the travel and tourism industry. The Corporationhas established $30,000,000 as the maximum dollar amount of hotel and motel loans that itis willing to fund.  Management of the Corporationis confident that all of theCorporation’s hotel and motel loans are adequately collateralized in the unforeseen event that cash flowsfrom operations of the hotels and motels are not sufficient to meet the terms of repayment outlined in the loanagreements.

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**Results of Operations**

                Net interest income increased$292,566 (13.80%) in the first three months of 2004 compared to the same period for 2003, primarily as a result of improvedmargins.  Interest income for the first three months of 2004 was $3,430,220, representing a decrease of $216,078 (5.93%) ascompared to the same period in 2003.  Interest expense for the first three months of 2004 decreased  $508,646(33.33%)compared to the same period in 2003.  The decrease in interest incomeduring the first three months of 2004 compared to the same period in 2003 is primarily attributable to a decrease in outstandingloans as well as the effect of lower interest rates earned on outstanding loans offset by an increase in investmentsecurities.  The decrease in interest expense is primarily attributable to the payoff of a Federal Home Loan Bank advance of$13,300,000 in August 2003 as well as a decline in interest-bearing deposits and lower rates being paid on interest-bearingdeposits.

                The Bank’s net interestmargin for the first three months of 2004 was 4.25%, compared to 3.69% for the same time period during 2003.  Yield oninterest earning assets for the three-month period ending March 31, 2004 was 5.98%, compared to 6.23% for the three-month periodending March 31, 2003.  Average rate paid on interest bearing liabilities was 2.03% for the three months ending March 31,2004, compared to 2.42% for the same period during 2003.  The primary reason for the reduction in the rate paid on interestbearing liabilities is the payoff of the Federal Home Loan Bank advance of $13,300,000 which was at a rate of 6.34%.

               The Bank analyzes its allowance for loan losses on a monthly basis.  Additions to the allowance for loan losses are made bycharges to the provision for loan losses.  Loans deemed to be uncollectible are charged against theallowance for loan losses.  Recoveries of previously charged off amounts are credited to the allowance for loan losses. For the three months ended March 31, 2004, the provision for loan losses was $90,000, compared to $171,000 forthe same period in 2003.** ** The decrease in the provision for loan losses is primarily due to a reduction innonperforming loans, the Bank having net recoveries of $45,329 year-to-date through March 31, 2004, as well as the Bank’smonthly analysis of the  loan loss reserve showing adequate levels of reserves for anticipated charge-offs.  The natureof the process by which the Corporation determines the appropriate allowance for loan losses requires the exercise of considerablejudgment.  It is management’s belief that the allowance for loan losses is adequate to absorb possible losses inthe portfolio.

               Other income for the first three months of 2004 decreased $220,213 (28.15%) compared to the first threemonths of 2003.  This decrease is primarily attributable to a $236,988 decrease in fee income on mortgageloans originated and sold and a decrease in service charges of $30,694 offset by an increase in income and fees from ATM’s of$30,694 and gains on the sales of investment securities of $24,137.  The decrease in fee income on mortgage loans is due to adecrease in the volume of mortgage loans that the Bank originated during the first three months of 2003 as a result of a slowdownin the demand for refinancing.  This slowdown was anticipated due to the record volume of loans that the bank had originatedin the two previous years.  The demand for both original mortgage financing as well as refinancing has slowed to moretraditional levels. 

                Other expenses for the firstthree months of 2004 increased $149,020 (7.79%) compared to the first three months in 2003. The increase is primarily attributable to a $63,429 (5.22%) increase in salariesand benefits expense primarily due to merit increases for employees based on performance.

                The Bank’s effective taxrate was 28% and 29% for the three months ended March 31, 2004 and 2003, respectively.

**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. 

           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.

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               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 March 31, 2004, the difference between the Bank’s assets and liabilities repricing or maturing within one year, afterapplying the betas, was $43,425,000, indicating that the Bank was asset sensitive.  Rate shock data show that the Bank’snet interest income would increase $103,000 on an annual basis if rates increased 100 basis points, and would decrease $127,000 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 addition, 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, 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 its local funding requirements.

                The Corporation monitors itsliquidity position monthly.  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 and securities sold under agreementto repurchase.  At March 31, 2004, the Corporation’s liquidity ratio was 19.3%.  This level of liquidity is withinthe Bank’s stated guidelines of 15-35%.

                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, none of which were outstanding at March 31, 2004.

               During the first three months of 2004, cash and cash equivalents decreased $97,747 to a total of $17,897,055 atMarch 31, 2004.  Cash inflows from operations totaled $2,836,295 during the first three months of 2004, while outflows fromfinancing activities totaled $2,282,876, most of which were net deposit decreases during the first three months of  $1,556,360as well as cash dividends paid during the first three months of 2004 of $899,885.

                Investing activities used$651,166 of cash and cash equivalents, consisting of purchases of investment securities of $1,235,476 and purchases of premises andequipment of $914,229 as well as net repayments of loans by customers of $984,978, offset by proceeds from the sales, calls,maturities and paydowns of investment securities totaling $1,961,186.  At March 31, 2004, the Bank had $53,368,354 ofinvestment securities available for sale.
**Contractual Obligations and Commitments**
               The Corporation is party to financial instruments with off-balance sheet risk in the normal course ofbusiness 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 inexcess of the amount recognized on the balance sheet.  The contract amounts of these instruments reflect the extent ofinvolvement the Corporation has in particular classes of financial instruments.  At March31, 2004, the contractual amounts of the Corporation’s commitments to extend credit and standby lettersof credit were $37,390,000 and $886,000,respectively.

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                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$37,390,000 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.

**Capital**

               The following tables present Oconee State Bank’s regulatory capital position at March 31, 2004,based on the regulatory capital requirements of federal banking agencies.  The capital ratios of the Corporation areessentially the same as those of the Bank at March 31, 2004 and therefore only the Bank’s ratiosare presented.

Risk-Based Capital Ratios

 

Tier 1 Capital, Actual

 

11.5%

Tier 1 Capital minimum requirement

 

4.0%

 

 

 

Excess

 

7.5%

 

 

 

Total Capital, Actual

 

12.8%

Total Capital minimum requirement

 

8.0%

 

 

 

Excess

 

4.8%

 

 

 

Leverage Ratio

 

 

 

 

 

Tier 1 Capital to adjusted total assets

 

8.2%

Minimum leverage requirement

 

 3.0%

 

 

 

Excess

 

5.2%

 

 

 

 

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Item 3.

**CONTROLS AND PROCEDURES**

               Our management, including our principal executive officer and principal financial officer, supervised and participated in anevaluation of our disclosure controls and procedures (as defined in federal securities rules) and pursuant to such evaluation,concluded that our disclosure controls and procedures are effective as of March 31, 2004.  Disclosure controls and proceduresare those controls and procedures which ensure that information required to be disclosed in this filing is accumulated andcommunicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance with Securitiesand Exchange Commission rules and regulations.

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

 

 

 

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**PART II.  OTHER INFORMATION**

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Item 1.     LegalProceedings

                         None

Item 2.     Changes inSecurities and Small Business Issuer Purchases of Equity Securities

                         None

Item 3.     Defaults UponSenior Securities

                         None

Item 4.    Submission of Matters to a Vote of Security Holders

                         None

Item 5.     OtherInformation

                         None

Item 6.    Exhibits andReports on Form 8-K

(a)  

Exhibits

 

 

31.1

Certification by B. Amrey Harden, CEO and President of the Corporation, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification by Jerry K. Wages,Senior Executive Vice President and ChiefFinancial Officer of the Corporation, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

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Joint Certification of the Chief Executive Officer and the Chief Financial Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(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**

****

               In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

          OCONEE FINANCIALCORPORATION

  

By:    /s/ B. Amrey Harden                                                               B. Amrey Harden, President and CEO        (Principal Executive Officer)

  

Date:      May 14,2004                                                          

  

By:     /s/ Jerry K. Wages                                                              Jerry K. Wages        Senior Executive Vice-President and CFO        (Principal Accounting Officer)

  

Date:      May 14,2004                                                            

 

 

 

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