**UNITED
STATES**
 **SECURITIES
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 ,
2005
 ****
 **[   ]  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 be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.   Yes x   No o
 
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 899,885 shares of Common Stock, par value
$2.00, outstanding as of May 13,
2005.
 
  Table of Contents
  
 
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 
 **INDEX**
 
 Page
      No.PART
      I
    FINANCIAL INFORMATIONItem
      1.
    Financial StatementsConsolidated Balance Sheet (unaudited) at March 31,
      2005
    3Consolidated Statements of Earnings (unaudited) for the
      Three Months Ended
      March 31, 2005 and
      2004
    4Consolidated Statements of Comprehensive Income (unaudited)
      for the Three Months
      Ended March 31, 2005 and 2004
    5Consolidated Statements of Cash Flows (unaudited) for
      the Three Months
      Ended March 31, 2005 and
      2004
    6-7Notes to Financial Statements
(unaudited)
    8-9Item
      2.
    Management's Discussion and Analysis of Financial
      Condition and Results of
      Operations
    10-13Item
      3.
    Controls and Procedures
    14PART
      II
    OTHER INFORMATIONItem
      1.
    Legal Proceedings
    15Item
      2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    15Item
      3.
    Defaults Upon Senior Securities
    15Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    15Item
      5.
    Other Information
    15Item
      6.
    Exhibits and Reports on Form 8-K
    15
 
  2
 Table of Contents
 **PART
I. FINANCIALINFORMATION**
 Item 1.
FinancialStatements
 
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 Consolidated
BalanceSheet
 March 31,
2005
 (Unaudited)
 
 AssetsCash
      and due from banks, including reserve requirements of
      $3,430,000
    
    $
    4,492,644Federal
      funds sold
    
    
    12,302,000Cash and cash equivalents
    
    
    16,794,644Investment
      securities available for sale
    
    
    41,246,649Other
      investments
    
    
    614,429Mortgage
      loans held for sale
    
    
    2,835,339Loans
    
    
    187,278,282Less:
      Allowance for loan losses
    
    
    (2,730,332
    )Loans,
      net
    
    
    184,547,950Premises
      and equipment, net
    
    
    5,919,939Accrued
      interest receivable and other assets
    
    
    3,038,272Total
      assets
    
    $
    254,997,222Liabilities
      and Stockholders’ EquityLiabilities:Deposit*s*Noninterest-bearing
    
    $
    31,192,979Interest-bearing
    
    
    198,486,400Total
      deposits
    
    
    229,679,379Securities
      sold under repurchase agreements
    
    
    1,890,648Accrued
      interest payable and other liabilities
    
    
    822,030Total
      liabilities
    
    
    232,392,057Stockholders’
      equity:Common
      stock, $2 par value;authorized
      1,500,000 shares;issued
      and outstanding 899,885 shares
    
    
    1,799,770Additional
      paid-in capital
    
    
    4,246,832Retained
      earnings
    
    
    16,378,391Accumulated
      other comprehensive income
    
    
    180,172Total
      stockholders’ equity
    
    
    22,605,165Total
      liabilities and stockholders’ equity
    
    $
    254,997,222
 
 See
accompanying notes to financial statements.
  3
 Table of Contents
  
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 
 Consolidated
Statements of Earnings
 For the
Three Months Ended March 31, 2005 and 2004
 (Unaudited)
 **2005**
    
    **2004**Interest
      Income:Loans
    
    $
    3,224,929
    
    
    2,859,321Investment securities:Tax exempt
    
    
    193,788
    
    
    211,070Taxable
    
    
    284,138
    
    
    331,726Federal funds sold and other
    
    
    48,140
    
    
    28,103Total interest income
    
    
    3,750,995
    
    
    3,430,220Interest
      Expense:Deposits
    
    
    1,065,639
    
    
    1,013,639Other
    
    
    7,715
    
    
    3,768Total interest expense
    
    
    1,073,354
    
    
    1,017,407Net interest income
    
    
    2,677,641
    
    
    2,412,813Provision
      for loan losses
    
    
    204,000
    
    
    90,000Net
      interest income after provision for loan losses
    
    
    2,473,641
    
    
    2,322,813Other
      Income:Service charges on deposit accounts
    
    
    281,664
    
    
    238,967Mortgage
      banking income
    
    
    73,749
    
    
    149,936Securities gains, net
    
    
    -
    
    
    24,137Other operating income
    
    
    153,863
    
    
    149,091Total other income
    
    
    509,276
    
    
    562,131Other
      Expense:Salaries and other personnel expense
    
    
    1,311,416
    
    
    1,278,825Net occupancy and equipment expense
    
    
    314,011
    
    
    265,978Other operating expense
    
    
    533,326
    
    
    517,398Total other expense
    
    
    2,158,753
    
    
    2,062,201Earnings before income taxes
    
    
    824,164
    
    
    822,743Income
      taxes
    
    
    238,001
    
    
    227,508Net earnings
    
    $
    586,163
    
    
    595,235Earnings
      per common share based on averageoutstanding shares of 899,885 in each of 2005 and 2004:
    
    $
    0.65
    
    
    0.66
 
 
 
 See
accompanying notes to financial statements.
  4
 Table of Contents
  
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 Consolidated
Statements of Comprehensive Income
 For the
Three Months Ended March 31, 2005 and 2004
 (Unaudited)
 
 **2005**
    
    **2004**Net
      earnings
    
    $
    586,163
    
    
    595,235Other
      comprehensive income, net of tax:Unrealized gains on securities available for sale:Holding gains arising during period, net of (benefit) taxof ($193,397) and $263,342
    
    
    (316,079
    )
    
    429,663Reclassification adjustments for gains included in
    netearnings, net of tax of $0 and $9,162
    
    
    -
    
    
    (14,975
    )Total other comprehensive (loss) income
    
    
    (316,079
    )
    
    414,688Comprehensive income
    
    $
    270,084
    
    
    1,009,923
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See
accompanying notes to financial statements.
  5
 Table of Contents
  
 
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 Consolidated
Statements of Cash Flows
 For the
Three Months Ended March 31, 2005 and 2004
 (Unaudited)
 
 **2005**
    
    **2004**Cash
      flows from operating activities:Net
      earnings
    
    $
    586,163
    
    
    595,235Adjustments
      to reconcile net earnings to netcash
      provided (used) by operating activities:Provision
      for loan losses
    
    
    204,000
    
    
    90,000Depreciation,
      amortization and accretion
    
    
    169,056
    
    
    207,645Gain
      on sale of investment securities
    
    
    -
    
    
    (24,137
    )Loss
      on disposal of fixed assets
    
    
    5,666
    
    
    -Gain
      on sale of other real estate owned
    
    
    (19,485
    )
    
    (27,906
    )Change
      in assets and liabilities:Interest
      receivable and other assets
    
    
    (263,921
    )
    
    (104,280
    )Interest
      payable and other liabilities
    
    
    134,381
    
    
    21,317Mortgage
      loans held for sale
    
    
    (1,707,639
    )
    
    2,078,421Net
      cash provided (used) by operating activities
    
    
    (891,779
    )
    
    2,836,295Cash
      flows from investing activities:Proceeds
      from sale of investment securities
    
    
    -
    
    
    1,181,779Proceeds
      from calls, maturities, and paydowns ofinvestment
      securities available for sale
    
    
    4,978,891
    
    
    779,407Purchases
      of investment securities available for sale
    
    
    -
    
    
    (1,235,476
    )Purchases of other securities
    
    
    (10,100
    )
    
    -Net
      change in loans
    
    
    (1,217,789
    )
    
    (984,978
    )Purchases
      of premises and equipment
    
    
    (85,311
    )
    
    (914,229
    )Proceeds from sale of other real estate owned
    
    
    539,123
    
    
    522,331Net cash provided (used) by investing activities
    
    
    4,204,814
    
    
    (651,166
    )Cash
      flows from financing activities:Net
      change in deposits
    
    
    (2,073,724
    )
    
    (1,556,360
    )Net
      change in securities sold under repurchase agreements
    
    
    701,852
    
    
    173,369Dividends
      paid
    
    
    (899,885
    )
    
    (899,885
    )Net
      cash used by financing activities
    
    
    (2,271,757
    )
    
    (2,282,876
    )Net
      increase (decrease) in cash and cash equivalents
    
    
    1,041,278
    
    
    (97,747
    )Cash
      and cash equivalents at beginning of period
    
    
    15,753,366
    
    
    17,994,802Cash
      and cash equivalents at end of period
    
    $
    16,794,644
    
    
    17,897,055
 
  6
 Table of Contents
  
 
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 
 Consolidated
Statements of Cash Flows, continued
 
 For the
Three Months Ended March 31, 2005 and 2004
 (Unaudited)
 
 **2005**
    
    
    **2004**Supplemental
      cash flow information:Cash
      paid for interest
    
    $
    1,029,254
    
    $
    1,066,774Cash
      paid for taxes
    
    $
    20,000
    
    $
    99,500Noncash
      investing and financing activities:Transfer
      from loans to other real estate owned
    
    $
    -
    
    $
    356,249Change
      in dividends payable
    
    $
    899,885
    
    $
    899,885Change
      in net unrealized gain on investment securitiesavailable
      for sale, net of tax
    
    $
    (316,079
    )
    $
    414,688
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See
accompanying notes to financial statements.
  7
 Table of Contents
  **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 Notesto Consolidated Financial Statements
 (Unaudited)
 (1) Basis
of Presentation
 
 The
financial statements include the accounts of Oconee Financial Corporation (the
“Corporation”) and its wholly-owned subsidiary, Oconee State Bank (the “Bank”).
All significant intercompany accounts and transactions have 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. All such adjustments are of a normal recurring nature.
 
 Operating
results for the three-month period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the financial statements and footnotes
included in the Corporation’s annual report included on Form 10-KSB for the year
ended December 31, 2004.
 
 Critical
Accounting Policies
 
 The
Corporation’s accounting policies are fundamental to understanding management’s
discussion and analysis of results of operations and financial condition. Some
of the Corporation’s accounting policies require significant judgment 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 Consolidated
Financial Statements in the Company’s 10-KSB for the year ended December 31,
2004.
 
 Many of
the Corporation’s assets and liabilities are recorded using various valuation
techniques that require significant judgment as to recoverability. The
collectibility of loans is reflected through the Corporation’s estimate of the
allowance for loan losses. The Corporation performs periodic detailed reviews of
its loan portfolio in order to assess the adequacy of the allowance for loan
losses in light of anticipated risks and loan losses. In addition, investment
securities and mortgage loans available or held for sale are reflected at their
estimated fair value in the consolidated financial statements. Such amounts are
based on either quoted market prices or estimated values derived by the
Corporation using dealer quotes 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.
 
 
 
 
  8
 Table of Contents
  
 **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 Notes to
Consolidated Financial Statements, continued
 (Unaudited)
 
 
 (3) Allowance
for Loan Losses
 
 Changes
in the allowance for loan losses were as follows:
 
 
 **2005**
    
    **2004**Balance
      at beginning of year
    
    $
    2,531,330
    
    
    2,669,204Amounts
      charged off
    
    
    (16,436
    )
    
    (118,299
    )Recoveries
      on amounts previously charged off
    
    
    11,438
    
    
    163,628Provision
      for loan losses
    
    
    204,000
    
    
    90,000Balance
      at March 31
    
    $
    2,730,332
    
    
    2,804,533
 
 
 
 
  9
 Table of Contents
  
 Item
2.
 **MANAGEMENT’SDISCUSSION AND ANALYSIS OF
FINANCIAL**
 **CONDITION
AND RESULTS OF OPERATIONS**
 
 **Forward-Looking
Statements**
 
 This
discussion contains forward-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 are reasonable, any of the assumptions
could be inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions
(both generally and in the 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 and liquidity of the Corporation’s
credit customers, all of which are difficult to predict and which may be beyond
the control of the Corporation. The Corporation undertakes no obligation to
revise forward-looking statements to reflect events or changes after the date of
this discussion or to reflect the occurrence of unanticipated
events.
 
 **Financial
Condition**
 
 Total
assets at March 31, 2005 were $254,997,000, representing a $1,868,000 (0.73%)
decrease from December 31, 2004. Deposits decreased $2,074,000 (0.89%) from
December 31, 2004. The decline in deposits is primarily attributable to
decreases in interest-bearing checking accounts of $7,129,000 and money market
accounts of $1,450,000, offset by increases in time deposits of $4,927,000 and
non interest-bearing checking accounts of $1,978,000. Loans increased $1,213,000
(0.65%) from December 31, 2004. Investment securities decreased $5,485,000
(11.74%) from December 31, 2004 primarily due to maturities of securities. The
allowance for loan losses at March 31, 2005 was $2,730,000, compared to the
December 31, 2004 balance of $2,531,000, representing 1.46% of total loans at
March 31, 2005, compared to 1.36% of total loans at December 31, 2004. Cash and
cash equivalents increased $1,042,000 from December 31, 2004.
 
 The total
amount of nonperforming assets, which includes nonaccruing loans, other real
estate owned, repossessed collateral and loans for which payments are more than
90 days past due was $3,086,000 at March 31,
2005 ,
representing a decrease of $3,897,000 (55.8%) from December 31, 2004. This
decrease is attributable to decreases of $3,259,000 in loans more than 90 days
past due, $522,000 in other real estate owned, $99,000 in nonaccrual loans, and
$17,000 in repossessed collateral. At March 31, 2005, loans more than 90 days
past due totaled $1,805,000. Of the $1,805,000 total, $1,642,000 was due to a
loan for which the collateral was under contract to be sold. After the sale of
the property, the bank will receive the funds to pay off the loan. As a result
of the decrease, total nonperforming assets were 1.65% of total loans at March 31,
2005 compared
to 3.75% of total loans at December 31, 2004. Nonperforming loans represented
1.21% of total assets at March 31,
2005 ,
compared to 2.72% of total assets at December 31, 2004. Nonaccrual loans
represented 0.52% of total loans outstanding at March 31,
2005 ,
compared to 0.58% of total loans outstanding at December 31, 2004. There were no
related party loans which were considered to be nonperforming at March 31, 2005 .
 
 At March
31, 2005, the Corporation had loan
concentrations in the housing industry and in the hotel and motel industry. As
of March 31, 2005, the Corporation had total commitments for construction and
development loans of $81,338,000, of which $52,005,000 was funded and
outstanding. Total funded and unfunded commitment amounts for hotel and motel
loans were $22,176,000 at March 31, 2005. Of the total commitments for hotel and
motel loans, $22,176,000 was funded and outstanding at March 31, 2005. The Corporation monitors
these concentrations on a monthly basis. The primary risk relating to the
concentration in the housing industry is a downturn in the economy which would
adversely affect construction of new homes and developments of new housing
communities. The Corporation ’s
primary risk relating to the hotel and motel industry is a slowdown in the
travel and tourism industry. The Corporation has
established a maximum dollar amount of hotel and motel loans that it is willing
to fund. Management of the Corporation is
confident that all of the Corporation ’s hotel
and motel loans are adequately collateralized in the unforeseen event that cash
flows from operations of the hotels and motels are not sufficient to meet the
terms of repayment outlined in the loan agreements.
 
  10
 Table of Contents
  
 
 **Results
of Operations**
 
 Net
interest income increased $265,000 (10.98%) in the first three months of 2005
compared to the same period for 2004, primarily as a result of improved interest
rate spread. Interest income for the first three months of 2005 was $3,751,000,
representing an increase of $321,000 (9.36%) as compared to the same period in
2004. Interest expense for the first three months of 2005 increased $56,000
(5.51%) compared
to the same period in 2004. The
increase in interest income during the first three months of 2005 compared to
the same period in 2004 is primarily attributable to a higher interest rate
market due to prime rate increases during the first quarter of 2005 and an
increase in outstanding loans. The increase in interest expense is primarily
attributable to a higher level of deposits as well as the rising interest rate
environment.
 
 The
Bank’s net interest margin for the first three months of 2005 was 4.69%,
compared to 4.23% for the same time period during 2004. Yield on interest
earning assets for the three-month period ending March 31, 2005 was 6.50%,
compared to 5.95% for the three-month period ending March 31, 2004. Average rate
paid on interest bearing liabilities was 2.17% for the three months ending March
31, 2005, compared to 2.03% for the same period during 2004. The primary reason
for the changes in the yields and cost of funds is due to increases in the prime
rate during the first three months of 2005.
 
 The Bank
analyzes its allowance for loan losses on a monthly basis. Additions to the
allowance for loan losses are made by charges to the provision for loan
losses. Loans deemed to be uncollectible are charged against the allowance for
loan losses. Recoveries of previously charged off amounts are credited to the
allowance for loan losses. For the three months ended March 31, 2005, the
provision for loan losses was $ 204,000,
compared to $90,000 for the same period in 2004. **** The
increase in the provision for loan losses is primarily due to an increase in
nonperforming loans as compared to the first quarter of 2004. The nature of the
process by which the Corporation determines the appropriate allowance for loan
losses requires the exercise of considerable judgment. It is management’s belief that the allowance for loan losses is adequate to absorb
possible losses in the portfolio.
 
 Other
income for the first three months of 2005
decreased $53,000 (9.40%) compared
to the first three months of 2004. This
decrease is primarily attributable to a $76,000 decrease in fee income on
mortgage loans originated offset by an increase in NSF check income of $47,000.
The decrease in fee income on mortgage loans is due to a decrease in the volume
of mortgage loans that the Bank originated during the first three months of 2005
as a result of a continued slowdown in the demand for refinancing. The demand
for both original mortgage financing as well as refinancing has slowed to more
traditional levels. The increase in NSF check income is due to the Bank
implementing an overdraft protection program during March 2005.
 
 Other
expenses for the first three months of 2005 increased $96,000 (4.68%) compared
to the first three months in 2004.  The
increase is primarily attributable to a $48,000 (18.06%) increase in occupancy
and furniture and equipment expense as a result of additional expenses
associated with the Bank’s operations center, which was completed in May 2004
and an increase of $33,000 in salaries and benefits expense primarily due to
merit increases for employees based on performance.
 
 The
Bank’s effective tax rate was 29% and 28% for the three months ended March 31,
2005 and 2004, respectively.
 
 **Interest
rate sensitivity**
 
 Interest
rate sensitivity is a function of the repricing characteristics of the Bank’s
portfolio of assets and liabilities. These repricing characteristics are the
time frames within which the interest earning assets and liabilities are subject
to change in interest rates either at replacement, repricing or maturity during
the life of the instruments. One method to measure interest rate sensitivity is
through a repricing gap. The gap is calculated by taking all assets that reprice
or mature within a given time frame and subtracting all liabilities that reprice
or mature during that time frame. A negative gap (more liabilities repricing
than assets) generally indicates that the Bank’s net interest income will
decrease if interest rates rise and will increase if interest rates fall. A
positive gap generally indicates that the Bank’s net interest income will
decrease if rates fall and will increase if rates rise.
 
  11
 Table of Contents
  The Bank
also measures its short-term exposure to interest rate risk by simulating the
impact to net interest income under several rate change levels. Interest-earning
assets and interest-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 used to monitor interest rate exposure risk relative to
anticipated interest rate trends. Asset/liability management strategies are
developed based on this analysis in an effort to limit the Bank’s exposure to
interest rate risk.
 
 The Bank
tracks its interest rate sensitivity on a monthly basis using a model, which
applies betas to various types of interest-bearing deposit accounts. The betas
represent the Bank’s inclination to reprice deposit rates based on historical
data provided from a call report driven database. The betas are used because it
is not likely that deposit rates would change the full amount of a prime rate
increase or decrease.
 
 At March
31, 2005, the difference between the Bank’s assets and liabilities repricing or
maturing within one year, after applying the betas, was $79,896,000, indicating
that the Bank was asset sensitive. Rate shock data show that the Bank’s net
interest income would increase $335,000 on an annual basis if rates increased
100 basis points, and would decrease $346,000 on an annual basis if rates fell
100 basis points.
 
 Certain
shortcomings are inherent in the method of analysis presented in the foregoing
paragraph. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees or at
different points in time to changes in market interest rates. Additionally,
certain assets, such as adjustable-rate mortgages, 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, among other factors, may change
significantly from the assumptions made above. In addition, significant rate
decreases would not likely be reflected in the liability repricing and therefore
would make the Bank more sensitive in a falling rate environment.
 
 **Liquidity**
 
 The
Corporation must maintain, on a daily basis, sufficient funds to cover the
withdrawals from depositors’ accounts and to supply new borrowers with funds. To
meet these obligations, the Corporation keeps cash on hand, maintains account
balances with its correspondent banks, and purchases and sells federal funds and
other short-term investments. Asset and liability maturities are monitored in an
attempt to match these to meet liquidity needs. It is the policy of the
Corporation to monitor its liquidity to meet regulatory requirements and its
local funding requirements.
 
 The
Corporation monitors its liquidity 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 agreement
to repurchase. At March 31, 2005, the Corporation’s liquidity ratio was 15.2%.
This level of liquidity is within the Bank’s stated guidelines of
15-35%.
 
 The
Corporation maintains relationships with correspondent banks that can provide it
with funds on short notice, if needed. Presently, the Corporation has
arrangements with a commercial bank for short term unsecured advances up to
$7,000,000. Additional liquidity is provided to the Corporation through
available Federal Home Loan Bank advances, none of which were outstanding at
March 31, 2005.
 
 During
the first three
months of 2005, cash and cash equivalents increased $1,041,000 to a total of
$16,795,000 at March 31, 2005. Cash outflows from operations totaled $892,000
during the first three months of 2005, while outflows from financing activities
totaled $2,272,000, most of which were net deposit decreases during the first
three months of $2,074,000 as well as cash dividends paid during the first three
months of 2005 of $900,000.
 
 Investing
activities provided $4,205,000 of cash and cash equivalents, consisting
primarily of maturities of investment securities of $4,979,000, offset by net
increases in loans totaling $1,218,000. At March 31, 2005, the Bank had
$41,247,000 of investment securities available for sale.
 
  12
 Table of Contents
  **Contractual
Obligations and Commitments**
 
 The
Corporation is party to financial instruments with
off-balance sheet risk in the normal course of business 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 in excess of
the amount recognized on the balance sheet. The contract amounts of these
instruments reflect the extent of the involvement of the Corporation in
particular classes of financial instruments. At March 31,
2005 , the
contractual amounts of the Corporation’s commitments to extend credit and
standby letters of credit were $ 34,200,000  and
$1,373,000, respectively.
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and because they may expire without being drawn
upon, the total commitment amount of $34,200,000 does not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party.
 
 **Capital**
 
 The
following tables present Oconee State Bank’s regulatory capital position at March 31,
2005 , based
on the regulatory capital requirements of federal banking agencies. The capital
ratios of the Corporation are essentially the same as those of the Bank at March 31,
2005 and
therefore only the Bank’s ratios are presented.
 
 
 Risk-Based
      Capital RatiosTier
      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
      RatioTier
      1 Capital to adjusted total assets
    
    
    8.8
    %Minimum
      leverage requirement
    
    
    3.0
    %Excess
    
    
    5.8
    %
 
  13
 Table of Contents
  Item
3.
 **CONTROLSAND PROCEDURES**
 
 Our
management, including our principal executive officer and principal financial
officer, supervised and participated in an evaluation of our disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934) and pursuant
to such evaluation, concluded that our disclosure controls and procedures were
effective as of March 31, 2005. Disclosure controls and procedures are those
controls and procedures which ensure that information required to be disclosed
in this filing is accumulated and communicated to management and is recorded,
processed, summarized and reported in a timely manner and in accordance with
Securities and Exchange Commission rules and regulations.
 
 There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
 
  14
 Table of Contents
  **OCONEE
FINANCIAL CORPORATION AND SUBSIDIARY**
 ****
 **PART
II. OTHERINFORMATION**
 
  Item
1.  LegalProceedings
 
 None
  Item
2.  UnregisteredSales of Equity Securities and Use of
Proceeds
 
 None
  
 Item
3 . DefaultsUpon Senior Securities
 
 None
  
 Item
4 . Submissionof Matters to a Vote of Security
Holders
 
 None
  
 Item
5.  OtherInformation
 
 None
  
 Item
6.  Exhibits
 
 (a)
    Exhibits31.1
    Certification
      by B. Amrey Harden, CEO and President of the Corporation, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
    Certification
      by Jerry K. Wages, Senior Executive Vice President and Chief Financial
      Officer of the Corporation, as adopted pursuant 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-Oxley Act of
      2002.
 
  15
 Table of Contents
  
 
 **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 the undersigned, thereunto duly
authorized.
 
 
 OCONEE
      FINANCIAL CORPORATION
      
      
      By:/s/
      B. Amrey Harden
      B.
      Amrey Harden, President and CEO
      (Principal
      Executive Officer)
      
      
      Date:May
      13, 2005
      
      
      By:/s/
      Steven A. Rgers
      Steven
      A. Rogers
      Vice
      President and Controller
      (Principal
      Accounting Officer)
      
      
      Date:May
      13, 2005