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 June 30, 2004

** **

**[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(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 the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes****  S                     No ****  ̈

State the number of shares outstanding of each 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 16, 2004.

----

###### OCONEE FINANCIAL CORPORATION AND SUBSIDIARY

###### INDEX

|   |                            |                                                                                      | Page No. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|----------|
|   | PART I                                                                                                                                                       | FINANCIAL INFORMATION                                                                     |     |
|   |                                                                                                                                                         |                                                                                      |     |
|   | Item 1.                                                                                                                                            | Financial Statements                                                                      |     |
|   |                                                                                                                                                         |                                                                                      |     |
|   |                                                                                                                                                         | Consolidated Balance Sheet (unaudited) at June 30, 2004 and December 31, 2003             | 3        |
|   |                                                                                                                                                         |                                                                                      |     |
|   |                                                                                                                                                         | Consolidated Statements of Earnings (unaudited) for the Three Months and the Six Months   |     |
|   |                                                                                                                                                         |        Ended June 30, 2004 and 2003                    | 4        |
|   |                                                                                                                                                         |                                                                                      |     |
|   |                                                                                                                                                         | Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months   |     |
|   |                                                                                                                                                         |        and the Six Months Ended June 30, 2004 and 2003 | 5        |
|   |                                                                                                                                                         |                                                                                      |     |
|   |                                                                                                                                                         | Consolidated Statements of Cash Flows (unaudited) for the Six Months                      |     |
|   |                                                                                                                                                         |        Ended June 30, 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                                                          | 16       |

 

----

**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

**Consolidated Balance SheetJune 30, 2004 and December 31, 2003(Unaudited)**

|                                                                                                                                                              | **June 30, 2004** |                                            | **December 31, 2003** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--------------------------------------------|-----------------------|
| Assets                                                                                                                                                            |
|                                                                                                                                                              |
| Cash and due from banks, including reserve requirements of $3,737,000     of $3,737,000 and $3,766,000                                   | $                 | 7,344,772                             |                       | 9,206,802 |
| Federal funds sold                                                                                                                                                | 6,235,000    |         | 8,788,000             |
|                                                                                                                                                              |              |                                       |                  |
|                    Cash and cashequivalents                             | 13,579,772   |                                       | 17,994,802            |
|                                                                                                                                                              |              |                                       |                  |
| Investment securities available for sale                                                                                                                          | 50,615,689   |                                       | 53,474,899            |
| Other investments                                                                                                                                                 | 708,629      |                                       | 765,429               |
| Mortgage loans held for sale                                                                                                                                      | 809,520      |                                       | 3,162,971             |
|                                                                                                                                                              |              |                                       |                  |
| Loans                                                                                                                                                             | 174,337,749  |                                       | 171,150,798           |
| Less: Allowance for loan losses                                                                                                                                   | 2,882,355    |                                       | 2,669,204             |
|                                                                                                                                                              |              |                                       |                  |
|                    Loans, net                                      | 171,455,394  |                                       | 168,481,594           |
|                                                                                                                                                              |              |                                       |                  |
| Premises and equipment, net                                                                                                                                       | 6,000,961    |                                       | 4,521,644             |
| Accrued interest receivable and other assets                                                                                                                      | 3,919,746    |                                       | 3,555,051             |
|                                                                                                                                                              |              |                                       |                  |
|                    Totalassets                                     | $                 | 247,089,711                           |                  | 251,956,390 |
|                                                                                                                                                              |              |                                       |                  |
| Liabilities and Stockholders’ Equity                                                                                                                        |
| Liabilities:                                                                                                                                                      |              |                                       |                  |
|        Deposit*s*                                                                                                              |              |                                       |                  |
|             Noninterest-bearing                                                                       | $                 | 28,616,979                            |                  | 27,575,073 |
|             Interest-bearing                                                                          | 194,725,887  |                                       | 201,045,499           |
|                                                                                                                                                              |              |                                       |                  |
|                    Totaldeposits                                   | 223,342,866  |                                       | 228,620,572           |
|                                                                                                                                                              |              |                                       |                  |
|        Securities sold under repurchase agreements                                                                             | 1,653,315    |                                       | 898,468               |
|        Accrued interest payable and other liabilities                                                                          | 874,476      |                                       | 1,683,688             |
|                                                                                                                                                              |              |                                       |                  |
|                    Totalliabilities                                | 225,870,657  |                                       | 231,202,728           |
|                                                                                                                                                              |              |                                       |                  |
| Stockholders’ equity:                                                                                                                                       |              |                                       |                  |
|        Common stock, $2 par value;                                                                                             |              |                                       |                  |
|              authorized 1,500,000 shares;                                                        |              |                                       |                  |
|              issued and outstanding 899,885 shares                                               | 1,799,770    |                                       | 1,799,770             |
|        Additional paid-in capital                                                                                              | 4,246,832    |                                       | 4,246,832             |
|        Retained earnings                                                                                                       | 15,370,842   |                                       | 14,161,577            |
|        Accumulated other comprehensive income (loss)                                                                           | (198,390)         |                                       | 545,483               |
|                                                                                                                                                              |              |                                       |                  |
|                    Totalstockholders’ equity                 | 21,219,054   |                                       | 20,753,662            |
|                                                                                                                                                              |              |                                       |                  |
|                    Totalliabilities and stockholders’ equity | $                 | 247,089,711                           |                  | 251,956,390 |

See accompanying notes to financial statements.

3
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of EarningsFor the Three Months and the Six Months Ended June 30, 2004 and 2003(Unaudited)

 

** **

**Three Months Ended**

** **

**Six Months Ended**

 

** **

**2004**

**         **

**2003**

**         **

**2004**

**         **

**2003**

Interest Income:

 

 

 

 

 

 

 

 

     Loans

 $

2,779,949

3,252,651

5,639,270
 
6,477,710

     Investment securities:

 
       
          Tax exempt

 

198,496
 
195,638
 
409,566
 
374,959

          Taxable

 

323,409
 
246,122
 
655,135
 
437,434

     Federal funds sold and other

 

22,818
 
53,433
 
50,921
 
104,041

             Total interest income

 

3,324,672
 
3,747,844
 
6,754,892
 
7,394,144

 

 
       
Interest Expense:

 
       
     Deposits

 

826,061
 
1,296,534
 
1,839,700
 
2,608,072

     Other

 

5,449
 
218,189
 
9,217
 
432,704

             Total interest expense

 

831,510
 
1,514,723
 
1,848,917
 
3,040,776

 

 
      
             Net interest income

 

2,493,162
 
2,233,121
 
4,905,975
 
4,353,368

 

 
       
Provision for loan losses

 

90,000
 
171,000
 
180,000
 
342,000

 

 
       
                   Net interestincome after provision for loan losses

 

2,403,162
 
2,062,121
 
4,725,975
 
4,011,368

 

 
       
Other Income:

 
       
 

 
       
     Service charges on deposit accounts

 

264,162
 
273,808
 
503,129
 
545,565

     Mortgage banking income

 

119,650
 
480,168
 
269,586
 
867,092

     Securities gains, net

 

-
 
-
 
24,137
 
-

     Other operating income

 

240,868
 
84,690
 
389,959
 
208,353

             Total other income

 

624,680
 
838,666
 
1,186,811
 
1,621,010

 

 
       
 Other Expense:

 
       
     Salaries and other personnel expense

 

1,253,186
 
1,251,790
 
2,532,011
 
2,467,186

     Net occupancy and equipment expense

 

346,248
 
251,212
 
612,226
 
493,415

     Other operating expense

 

573,688
 
459,028
 
1,091,086
 
914,610

             Total other expense

 

2,173,122
 
1,962,030
 
4,235,323
 
3,875,211

 

 
       
             Earnings before income taxes

 

854,720
 
938,757
 
1,677,463
 
1,757,167

 

 
       
Income taxes

 

240,690
 
282,319
 
468,198
 
522,745

 

 
       
             Net earnings 

 $

614,030
 
656,438
 
1,209,265
 
1,234,422

 

 
       
Earnings per common share based on average

 
       
     outstanding shares of 899,885 in 2004 and 2003:

 $

0.68
 
0.73
 
1.34
 
1.37

See accompanying notes to financial statements.

4
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Comprehensive Income (Loss)

For the Three Months and the Six Months Ended June 30, 2004 and 2003(Unaudited)

 

** **

**Three Months Ended**

** **

**Six Months Ended**

 

** **

**2004**

**        **

**2003**

       

**2004**

**        **

**2003**

 

 

 

 

 

 

 

 

 

Net earnings 

$

614,030 
 
656,438
 
1,209,265 
 
1,234,422

 

 
       
Other comprehensive income, net of tax:

 
       
     Unrealized gains on securities available for sale:

 
       
          Holding gains (losses) arising during period, net of tax (benefit)

 
       
             of  ($708,880), $95,080, ($440,174), and$264,399

 

(1,158,561)
 
155,393
 
(758,848)
 
432,121

          Reclassification adjustments for gains included in net 

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

 

-
 
-
 
14,975 
 
-

 

 
       
          Total other comprehensive income (loss)

 

(1,158,561)
 
155,393
 
(743,873)
 
432,121

 

 
       
          Comprehensive income(loss)

$

(544,531)
 
811,831
 
465,392 
 
1,666,543

See accompanying notes to financial statements.

5
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2004 and 2003(Unaudited)
 
** **

**2004**

** **

**2003**

Cash flows from operating activities:

 
 
        
 
     Net earnings

$

1,209,265 
 
1,234,422 

         Adjustments to reconcile net earnings to net

 
   
            cash provided by operating activities:

 
   
                Provision for loan losses

 

180,000 
 
342,000 

                Depreciation, amortization andaccretion

 

434,273 
 
221,950 

                Gain on sale of premises andequipment
 
(127,479)
 
           -

                Gain on sale of investmentsecurities

 

(24,137)
 
           -

                Gain on sale of other realestate owned
 
(27,906)
 
           -

                Change in assets andliabilities:
    
                    Interestreceivable and other assets

 

(403,971)
 
596,731 

                    Interestpayable and other liabilities

 

90,673 
 
  (363,599)

                    Mortgageloans held for sale

 

2,353,451 
 
1,096,281 
 
 
   
                           Netcash provided by operating activities

 

3,684,169 
 
3,127,785 
 
 
   
Cash flows from investing activities:

 
   
     Proceeds from sale of investment securities

 

853,580 
 
           -

     Proceeds from calls, maturities, and paydowns of

 
   
         investment securities available for sale
 
5,406,405 
 
14,051,217 

     Purchases of investment securities available for sale

 

(4,662,452)
 
(28,678,653)

     Net change in loans

 

(3,153,800)
 
2,395,993 

     Proceeds from sale of premises and equipment
 
261,777 
 
           -

     Purchases of premises and equipment

 

(1,904,296)
 
(685,230)

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

 

(2,676,455)
 
(12,916,673)
 
 
   
Cash flows from financing activities:

 
   
     Net change in deposits

 

(5,277,706)
 
24,201,476 

     Net change in securities sold under repurchase agreements

 

754,847 
 
268,193 

     Dividends paid

 

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

 

(5,422,744)
 
23,569,784 
 
 
   
Net (decrease) increase in cash and cash equivalents

 

(4,415,030)
 
13,780,896 
 
 
   
Cash and cash equivalents at beginning of period

 

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

$

13,579,772 
 
29,646,295 

6
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Consolidated Statements of Cash Flows, continued

For the Six Months Ended June 30, 2004 and 2003(Unaudited)

 

** **

**2004**

**         **

**2003**

 

 

 

 

 

 

  

 

  

 

Supplemental cash flow information:

 

 

 

 

     Cash paid for interest

$

1,950,727 

$

3,053,272

     Cash paid for taxes

$

632,000 

$

648,000
     
Noncash investing and financing activities:
    
     Transfer from loans to other real estate owned

$

468,884 

$

610,517

     Change in dividends payable

$

899,885 

$

899,885

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

$

(743,873)

$

432,121
               
** **

** **

** **

** **

** **

** **

** **

** **

** **

See accompanying notes to financial statements.

7
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Notes to Consolidated Financial Statements(Unaudited)

(1)          Basis of Presentation

The financial statements include the accounts of Oconee Financial Corporation (the “Corporation”) and itswholly-owned subsidiary, Oconee State Bank (the “Bank”).  All significant intercompany accounts and transactionshave been eliminated in consolidation.

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

Operating results for the three-month and six-month period ended June 30, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2004.  For further information, refer to the financial statements andfootnotes included in the Corporation’s annual report included on Form 10-KSB for the year ended December 31, 2003.

Critical Accounting Policies

The Corporation’s accounting policies are fundamental to understanding management’s discussion and analysis ofresults of operations and financial condition.  Some of the Corporation’s accounting policies require significantjudgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Corporation’s significant accounting policies can be found in Note 1 of the Notes to ConsolidatedFinancial 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 various valuation techniques that require significantjudgment as to recoverability.  The collectibility of loans is reflected through the Corporation’s estimate of theallowance for loan losses.  The Corporation performs periodic detailed reviews of its loan portfolio in order to assess theadequacy of the allowance for loan losses in light of anticipated risks and loan losses.  In addition, investment securitiesand mortgage loans available or held for sale are reflected at their estimated fair value in the consolidated financialstatements.  Such amounts are based on either quoted market prices or estimated values derived by the Corporation using dealerquotes or market comparisons.       

(2)           Net Earnings Per Common Share

Net earnings per common share are based on the weighted average number of common shares outstanding during the period.  TheCompany has no common stock equivalents outstanding.

 

 

8
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Notes to Consolidated Financial Statements, continued(Unaudited)

(3)            Allowance for LoanLosses

Changes in the allowance for loanlosses were as follows:

 

 

** **

**2004**

**        **

**        2003**

 

 

 

 

 

Balance at beginning of year

$

2,669,204 
 
2,098,691 

Amounts charged off

 

(140,123)
 
(46,369)

Recoveries on amounts previously charged off

 

173,274 
 
16,183 

Provision for loan losses

 

180,000 
 
342,000 

 

 
   
Balance at June 30

$

2,882,355 
 
2,410,505 

 

 

 

 

9
Item 2.

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**
Forward-Looking Statements
**               ** This discussion containsforward-looking statements under the private Securities Litigation Reform Act of 1995 that involve risk and uncertainties. Although the Corporation believes that the assumptions underlying the forward-looking statements contained in the discussion arereasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of the forward-lookingstatements included in this discussion will be accurate.  Factors that could cause actual results to differ from resultsdiscussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the marketswhere the Corporation operates); competition from other providers of financial services offered by the Corporation; governmentregulations and legislation; changes in interest rates; and material unforeseen changes in the financial stability and liquidity ofthe Corporation’s credit customers, all of which are difficult to predict and which may be beyond the control of theCorporation.  The Corporation undertakes no obligation to revise forward-looking statements to reflect events or changes afterthe date of this discussion or to reflect the occurrence of unanticipated events.

**Financial Condition**

                Total assets at June 30, 2004 were$247,090,000, representing a $4,866,000 (1.93%) decrease from December 31, 2003.  Deposits decreased $5,278,000 (2.31%) fromDecember 31, 2003.  The decline in deposits is attributable to decreases in time deposit accounts of $13,391,000 and moneymarket accounts of $4,330,000, offset in part by increases in savings accounts of $9,041,000, non interest-bearing checkingaccounts of $1,042,000, and interest-bearing checking deposits of $2,360,000.  Loans increased $3,187,000 (1.86%) fromDecember 31, 2003. Investment securities decreased $2,859,000 (5.35%) from December 31, 2003.  The allowance for loan lossesat June 30, 2004 was $2,882,000, compared to the December 31, 2003 balance of $2,669,204, representing 1.65% of total loans at June30, 2004, compared to 1.56% of total loans at December 31, 2003. Cash and cash equivalents decreased $4,415,000 from December 31,2003.   

                The total amount of nonperformingassets, which includes nonaccruing loans, other real estate owned, repossessed collateral and loans for which payments are morethan 90 days past due was $1,651,000 at June 30, 2004, representing a decrease of $1,512,000 (47.80%) from December 31, 2003. This decrease is attributable to decreases of  $699,000 in nonaccrual loans, $543,000 in loans more than 90 days past due,$212,000 in other real estate owned, and $58,000 in repossessed collateral.  As a result of the decrease, total nonperformingassets were 0.95% of total loans at June 30, 2004 compared to 1.85% of total loans at December 31, 2003.  Nonperforming assetsrepresented 0.67% of total assets at June 30, 2004, compared to 1.26% of total assets at December 31, 2003.  Nonaccrual loansrepresented 0.46% of total loans outstanding at June 30, 2004, compared to 0.88% of total loans outstanding at December 31,2003.  There were no related party loans which were considered to be nonperforming at June 30, 2004.

                At June 30, 2004, theCorporation had loan concentrations in the housing industry and in the hotel and motel industry.  As of June 30, 2004, theCorporation had total commitments for necessary construction and development loans of $71,327,000, of which $43,514,000 was fundedand outstanding.  Total funded and unfunded commitment amounts for hotel and motel loans were $25,064,000 at June 30,2004.  Of the total commitments for hotel and motel loans, $24,818,000 was funded and outstanding at June 30, 2004.  Ofthe $24,818,000 funded and outstanding balances at June 30, 2004, $5,991,000 was adversely classified by regulatoryexaminers.  The Corporation monitors these concentrations on a monthly basis.  The primaryrisks relating to the concentration in the housing industry are a downturn in the economy which would adversely affect constructionof new homes and developments of new housing communities and a significant increase in interest rates.  TheCorporation’s construction and development lending slowed somewhat during 2003 and the first two quartersof 2004.  The Corporation’s primary risk relating to the hotel and motel industry is aslowdown in the travel and tourism industry.  The Corporation  has established $30,000,000 as themaximum dollar amount of hotel and motel loans that it is willing to fund. 

10
**Results of Operations**

                Net interest income increased$553,000 (12.70%) in the first six months of 2004 compared to the same period for 2003, primarily as a result of improvedmargins.  Interest income for the first six months of 2004 was $6,755,000, representing a decrease of $639,000 (8.64%) ascompared to the same period in 2003.  Interest expense for the first six months of 2004 decreased  $1,192,000 (39.20%)compared to the same period in 2003.  The decrease in interest income during the first six months of 2004 compared to the sameperiod in 2003 is primarily attributable to a decrease in outstanding loans as well as the effect of lower interest rates earned onoutstanding loans offset by a large investment securities portfolio.  The decrease in interest expense is primarilyattributable to the payoff of a Federal Home Loan Bank advance of $13,300,000 in August 2003 as well as a decline ininterest-bearing deposits.

                The Bank’s net interest marginfor the first six months of 2004 was 4.36%, compared to 3.67% for the same time period during 2003.  Yield on interest earningassets for the six-month period ending June 30, 2004 was 5.95%, compared to 6.13% for the six-month period ending June 30,2003.  Average rate paid on interest bearing liabilities was 1.88% for the six months ending June 30, 2004, compared to 2.90%for the same period during 2003.  The primary reason for the reduction in the rate paid on interest bearing liabilities is thepayoff of the Federal Home Loan Bank advance of $13,300,000 which was at a rate of 6.34%.

                The Bank analyzes its allowance forloan losses on a monthly basis.  Additions to the allowance for loan losses are made by charges to the provision for loanlosses.  Loans deemed to be uncollectible are charged against the allowance for loan losses.  Recoveries of previouslycharged off amounts are credited to the allowance for loan losses.  For the six months ended June 30, 2004, the provision forloan losses was $180,000, compared to $342,000 for the same period in 2003.** ** The decrease in the provision for loanlosses is primarily due to a reduction in nonperforming loans, the Bank having net recoveries of $33,000 year-to-date through June30, 2004, as well as the Bank’s monthly analysis of the loan loss reserve showing adequate levels of reserves for anticipatedcharge-offs.  This analysis takes into account historical levels of charge-offs for various types of loans as well as thecurrent levels of loans that have been classified as substandard and doubtful by regulatory examiners.  The nature of theprocess 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 in theportfolio.

                Other income for the first six monthsof 2004 decreased $434,000 (26.77%) compared to the first six months of 2003.  This decrease is primarily attributable to a$598,000 decrease in fee income on mortgage loans originated and sold and a decrease in service charges of $42,000 offset by anincrease in income and fees from ATM’s of $50,000, gains on the sales of investment securities of $24,000, and gains on thesales of premises and equipment of $120,000.  The decrease in fee income on mortgage loans is due to a decrease in the volumeof mortgage loans that the Bank originated during the first six months of 2004 as a result of a slowdown in the demand forrefinancing.  This slowdown was anticipated as loan volumes returned to more normal levels coming off of record volumes ofloans in the two previous years.  The demand for both purchase money mortgage financing as well as refinancing has slowed tomore traditional levels.  The gains on the sales of premises and equipment were a result of the Bank selling two officecondominiums which were previously used to house operational support personnel.  The condominiums became expendable upon thecompletion of an operations center to house all of the Bank’s backroom support personnel.  The operations center wascompleted and occupied by the Bank during May 2004.  The Bank has a contract for the sale of one remaining condominium at June30, 2004.  It is anticipated that this sale will close during the third quarter. 

                Other expenses for the first sixmonths of 2004 increased $360,000 (9.29%) compared to the first six months in 2003.  The increase is primarily attributable toa $65,000 (2.63%) increase in salaries and benefits expense primarily due to merit increases for employees based on performance andan increase of $119,000 in occupancy and equipment expense primarily due to the completion of the operations center and movingexpenses associated with the relocation of employees.

                The Bank’s effective tax ratewas 28% and 30% for the six months ended June 30, 2004 and 2003, respectively.

**Interest rate sensitivity**

                Interest rate sensitivity is afunction of the repricing characteristics of the Bank’s portfolio of assets and liabilities.  These repricingcharacteristics are the time frames within which the interest earning assets and liabilities are subject to change in interestrates either at replacement, repricing or maturity during the life of the instruments.  One method to measure interest ratesensitivity is through a repricing gap.  The gap is calculated by taking all assets that reprice or mature within a given timeframe and subtracting all liabilities that reprice or mature during that time frame.  A negative gap (more liabilitiesrepricing than assets) generally indicates that the Bank’s net interest income will decrease if interest rates rise and willincrease if interest rates fall.  A positive gap generally indicates that the Bank’s net interest income will decreaseif rates fall and will increase if rates rise. 

11
            The Bank also measures its short-term exposure to interestrate risk by simulating the impact to net interest income under several rate change levels.  Interest-earning assets andinterest-bearing liabilities are rate shocked to stress test the impact to the Bank’s net interest income and margin. The rate shock levels span three 100 basis point increments up and down from current interest rates.  This information is usedto monitor interest rate exposure risk relative to anticipated interest rate trends.  Asset/liability management strategiesare developed based on this analysis in an effort to limit the Bank’s exposure to interest rate risk.

                The Bank tracks its interest ratesensitivity on a monthly basis using a model, which applies betas to various types of interest-bearing deposit accounts.  Thebetas represent the Bank’s inclination to reprice deposit rates based on historical data provided from a call report drivendatabase.  The betas are used because it is not likely that deposit rates would change the full amount of a prime rateincrease or decrease.              

                At June 30, 2004, the differencebetween the Bank’s assets and liabilities repricing or maturing within one year, after applying the betas, was $19,545,000,indicating that the Bank was asset sensitive.  Rate shock data show that the Bank’s net interest income would increase$25,000 on an annual basis if rates increased 100 basis points, and would decrease $58,000 on an annual basis if rates fell 100basis points.

                Certain shortcomings are inherent inthe method of analysis presented in the foregoing paragraph.  For example, although certain assets and liabilities may havesimilar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in marketinterest rates.  Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes ininterest rates, both on a short-term basis and over the life of the asset.  Changes in interest rates, prepayment rates, earlywithdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from theassumptions made above.  In addition, significant rate decreases would not likely be reflected in the liability repricing andtherefore would make the Bank more sensitive in a falling rate environment.
Liquidity
                The Corporation must maintain, on adaily 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 agreementsto repurchase.  At June 30, the Corporation’s liquidity ratio was 16.1%.  This level of liquidity is within theBank’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 June 30, 2004.

                During the first six months of 2004,cash and cash equivalents decreased $4,415,000 to a total of $13,580,000 at June 30, 2004.  Cash inflows from operationstotaled $3,684,000 during the first six months of 2004, while outflows from financing activities totaled $5,423,000, most of whichwere net deposit decreases during the first six months of  $5,278,000 as well as cash dividends paid during the first sixmonths of 2004 of $899,885.

                Investing activities used $2,676,000of cash and cash equivalents, consisting of purchases of investment securities of $4,662,000 and purchases of premises andequipment of $1,904,000 as well as net advances of loans to customers of $3,154,000, offset by proceeds from the sales, calls,maturities and paydowns of investment securities totaling $5,406,000.  At June 30, 2004, the Bank had $50,616,000 ofinvestment securities available for sale.

12Contractual Obligations and Commitments
                The Corporation is party to financialinstruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  Thesefinancial instruments include commitments to extend credit, standby letters of credit and financial guarantees.  Theseinstruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet.  Thecontract amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financialinstruments.  At June 30, 2004, the contractual amounts of the Corporation’s commitments to extend credit and standbyletters of credit were $38,528,000 and $839,000, 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$38,528,000 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 third party.

**Capital**

                The following tables present OconeeState Bank’s regulatory capital position at June 30, 2004, based on the regulatory capital requirements of federal bankingagencies.  The capital ratios of the Corporation are essentially the same as those of the Bank at June 30, 2004 and thereforeonly the Bank’s ratios are presented.

Risk-Based Capital Ratios

 

Tier 1 Capital, Actual

 

11.7%

Tier 1 Capital minimum requirement

 

4.0%

 

 

 

Excess

 

7.7%

 

 

 

Total Capital, Actual

 

13.0%

Total Capital minimum requirement

 

8.0%

 

 

 

Excess

 

5.0%

 

 

 

Leverage Ratio

 

 

 

 

 

Tier 1 Capital to adjusted total assets

 

8.7%

Minimum leverage requirement

 

 3.0%

 

 

 

Excess

 

5.7%

13
Item 3.

**CONTROLS AND PROCEDURES**

                Our management, including ourprincipal executive officer and principal financial officer, supervised and participated in an evaluation of our disclosurecontrols and procedures (as defined in federal securities rules) and pursuant to such evaluation, concluded that our disclosurecontrols and procedures are effective as of June 30, 2004.  Disclosure controls and procedures are those controls andprocedures which ensure that information required to be disclosed in this filing is accumulated and communicated to management andis recorded, processed, summarized and reported in a timely manner and in accordance with Securities and Exchange Commission rulesand regulations.

                There were no significant changes inour internal controls or in other factors that could significantly affect these controls subsequent to the date of theirevaluation.
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**PART II.  OTHER INFORMATION**

**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

Item 1.    Legal Proceedings

                         None

Item 2.    Changes in Securities and Small Business Issuer Purchases of EquitySecurities

                         None

Item 3.    Defaults Upon Senior Securities

                         None

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

                         (a)   Oconee Financial Corporation’s annual meeting of stockholders was held on May 3, 2004.

                         (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 BishopHenry C. Maxey Jimmy L. ChristopherCarl R. Nichols Douglas D. DickensAnn B. Powers Walter T. Evans, Sr.Jerry K. Wages John A. HaleVirginia S. Wells B. Amrey Harden       A tabulation of votes concerning the above issue is as    follows:     Shares voted by proxy in favor 667,696  Shares voted in person in favor    35,553  Shares voted in person against            0  Shares abstained from voting             0     Total shares represented 703,249  Total shares outstanding  899,885    *  Directors were elected by slate, not individually.     Vote tabulation is therefore by slate.
Item 5.    Other Information

                         None

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Item 6.   Exhibits and Reports on Form 8-K

(a)  

Exhibits

 

 

31.1

Certification by B. Amrey Harden, CEO and President of the Corporation, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

31.2

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

 

32

Joint Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

 

(b)  

Reports on Form 8-K

 

There were no 8-K filings during the quarter for which this report is filed.

 

 

 

 

 

 

16
**OCONEE FINANCIAL CORPORATION AND SUBSIDIARY**

**SIGNATURES**

 

                In accordance with the requirementsof the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 

          OCONEE FINANCIALCORPORATION

  

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

  

Date:      August 16,2004                                                         

  

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

  

Date:      August 16 , 2004