**U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549FORM 10-KSB**

| x      | Annual Report Pursuant to Section 13 or 15(d) ofThe Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2003 |
|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                            |
|  ̈  | Transition Report Pursuant to Section 13 or 15(d) ofThe Securities Exchange Act of 1934                                         |

Commission File Number 000-25267

              **Oconee Financial Corporation**              (Name of Small Business Issuer in its charter)

| Georgia                                                              |   | 58-2442250                                 |
|----------------------------------------------------------------------|--------|--------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

    35 North Main Street,Watkinsville, Georgia 30677-0205    (Address of principal executive office)   (Zip Code)

Issuer’s telephone number, including area code:  (706) 769-6611

Securities registered pursuant to Section 12(b) of the Act: None

Name of exchange on which registered:  None

Securities registered pursuant to Section 12(g) of the Act:  CommonStock, $2.00 par value per share.

                Check whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

                Yes x       No  ̈

                Check if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-B is not contained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendmentto this Form 10-KSB.  x

                State issuer’ s revenuesfor its most recent fiscal year.  $17,473,261

                State the aggregate market valueof the voting and non-voting Common Stock held by non-affiliates computed by relevance to the price at which the common equity wassold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: As of March 30,2004: 578,628 shares of common stock $2.00 par value (the “Common Stock”), with an aggregate value of $43,397,100(based on approximate market value of $75.00/share) (the last sale price known to the Registrant for the Common Stock for whichthere is no established trading market).

                State the number of sharesoutstanding of each of the issuer’s classes of Common Stock as of the latest practicable date. As of March 30, 2004, therewere issued and outstanding 899,885 shares of Common Stock, par value $2.00 per share.

Documents Incorporated by Reference

                Portions of theregistrant’s definitive Proxy Statement for the 2004 annual meeting of shareholders are incorporated by reference into PartIII.

                Transitional Small BusinessDisclosure format.   Yes  ̈      No x

-1- **PART I**
**ITEM 1.****                DESCRIPTION OFBUSINESS.**

**General**

                Oconee Financial Corporation(“Oconee” or the “Company”), a registered bank holding company, was incorporated under the laws of theState of Georgia in 1998 and commenced operations by acquiring 100% of the outstanding shares of Oconee State Bank (the“Bank”) effective January 1, 1999.  All of Oconee’s activities are currently conducted by its wholly ownedsubsidiary, the Bank, which was incorporated as a bank under the laws of the State of Georgia in 1959.  At December 31, 2003,Oconee had approximately 655 holders of record of Common Stock, its only class of equity securities.

                At December 31, 2003, theBank’s total assets were $251,956,000, compared to $246,286,000 at year-end 2002.  Over the past 5 years, total assetsof the Bank have grown by $121,304,000, representing an increase of 92.8%.

**Services**

                The Bank is a community oriented,full-service commercial bank, headquartered in Oconee County, Georgia with four full-service banking offices, one limited-serviceloan production office and six automated teller machines (ATMs).  The Bank places an emphasis on retail banking, and offerssuch customary banking services as consumer and commercial checking accounts, NOW accounts, money market accounts, savingsaccounts, certificates of deposit, individual retirement accounts, safe deposit facilities, and money transfers. The Bank financescommercial and consumer transactions, makes secured and unsecured loans, offers lines of credit, VISA and MasterCard accounts, andprovides a variety of other banking services. 

**Markets**

                The primary market for the Bankis Oconee County, Georgia.  The Bank’s secondary market is defined as those counties contiguous to Oconee County, whichinclude Clarke, Greene, Morgan, Walton, Barrow, and Oglethorpe, as well as Madison County, which is not contiguous to OconeeCounty, but is a part of the Athens Standard Metropolitan Statistical Area. 

**Deposits**

                The Bank offers a full range ofdepository accounts and services to both consumers and businesses.  At December 31, 2003, the Bank’s deposit basetotaled $228,621,000 and consisted of thefollowing types of accounts:

                                                                               

Amount

        

Percentage

 

 

 

 

Non-interest bearing demand deposits

 $

27,575,000

 

12.1%

Interest-bearing NOW accounts

40,744,000

 

17.8%

Money market deposit accounts

20,471,000

 

9.0%

Savings deposits

50,698,000

 

22.2%

Time deposits less than $100,000

60,899,000

 

26.6%

Time deposits of $100,000 or more

19,104,000

 

8.3%

Individual Retirement Accounts

9,130,000

 

4.0%

               Total Deposits

$ 

228,621,000

 

100.0%

                Management of the Bank is of theopinion that its time deposits of $100,000 or more are customer relationship-oriented and representa reasonably stable source of funds.

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**Loans**

                The Bank makes both secured andunsecured loans to individuals and businesses.  At December 31, 2003, the Bank’s loan portfolio totaled $171,151,000, consisting of thefollowing categories of loans:

                                                                               

Amount

        

Percentage

 

 

 

 

Loans secured by real estate

$

138,097,000

 

80.7%

Agricultural production & loans to farmers

669,000

 

0.4%

Commercial and industrial loans

20,539,000

 

12.0%

Credit cards and related plans

899,000

 

 0.5%

Consumer loans (excluding credit cards)

10,987,000

 

6.4%

LESS:  Unearned income

(40,000)

 

0.0%

Total Loans Net of Unearned Income

$ 

171,151,000

 

100.0%

                The following table shows theamounts and growthfor loans, deposits, capital, and total assets at December 31, for the years ended1998-2003 (dollar amounts are in millions):

                             

2003

2002

2001

2000

1999

1998

5-Year Growth

Loans

$171.2  

$179.6   

$151.3   

$ 123.3   

$ 93.3   

$  76.8   

$

94.4     

Deposits

228.6  

211.4   

179.7   

150.5   

136.5   

116.1   

112.5     

Capital

20.8  

19.0   

16.8   

15.1   

13.0   

12.5   

8.3     

Total Assets

252.0  

246.3   

212.5   

181.9   

152.1   

130.7   

121.3     

               As of December 31, 2003, the Bank had concentrations of loans to the housing industry and to the hotel and motel industry. Loans secured by real estate totaled $138,097,000, which represented 80.7% of the Bank’s loan portfolio at December 31,2003.  At year-end 2003, total outstanding balances and commitments for development and construction loans were $68,892,000,which represented 40.3% of the Bank’s total loans and 342.4% of the Bank’s Tier 1 equity capital.  TheBank’s established guideline for this concentration is to be in a range of 375% - 425% of Tier 1 equity capital.  At December 31, 2003, the Bank’s aforementioned concentration was slightly below its established guidelines due to a slowingin single-family speculative construction lending.  Although speculative lending demand has declined, demand for single familyconstruction, as well as acquisition and development lending, remains solid due to low interest rates and the desirability ofliving in Oconee County, which have fueled demand for new housing and new subdivisions in the area.  The traffic and expansionassociated with Georgia Highway 316, the Watkinsville by-pass, and Highway 441 may continue to encourage further housing growth,resulting in the Bank’s continued concentration of loans to this industry.  At year-end 2003, total outstanding balancesand commitments for hotel and motel loans were $28,373,000, which represented 16.6% of the Bank’s total loans and 141.0% ofthe Bank’s Tier 1 equity capital.  The Bank’s established guideline for this concentration is to be in a range of100%-200% of Tier 1 equity capital.  Due to the current economic environment and its effects on the tourism and travelindustry, the Bank does not anticipate any additional loan growth in this area. 

**Lending Policy**

                The current lending policy of theBank is to offer consumer, real estate, and commercial credit services to individuals and entities that meet the Bank’scredit standards. ** ** The Bank provides each lending officer with written guidelines for lending activities toensure that the Bank’s policies and procedures are followed consistently.  Lending authority is delegated by the Boardof Directors of the Bank to loan officers, each of whom is limited in the amount of secured and unsecured loans which he can maketo a single borrower or a related group of borrowers. 

                The Board of Directors of theBank is responsible for approving and monitoring the loan policy, providing guidance and counsel to all lending personnel andapproving all extensions of credit over $250,000, primarily through the Loan Committee of the Board of Directors.  Thiscommittee convenes weekly to review and approve any loans over $250,000 and also to review nonperforming loans and potentialproblem loans.

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**Loan Review and Non –Performing Assets**

                The Bank reviews its loanportfolio to determine deficiencies and corrective action to be taken.  Senior lending officers conduct periodic reviews ofborrowers with total direct and indirect indebtedness of $250,000 or more and conduct ongoing reviews of all past due loans. Past due loans are reviewed at least weekly by lending officers, and a summary report is reviewed monthly by the Board of Directorsof the Bank.  The Board of Directors of the Bank reviews all loans over $250,000, whether current or past due, at least onceannually.  In addition, the Bank maintains internal classifications of potential problem loans.  The Bank also utilizesan independent external loan review specialist to review all outstanding debt from customers exceeding $250,000.

                Past due loans are typicallycharged off when they reach a past due status of 120 days or more.  Exceptions to this involve customers with loans who havebegun bankruptcy proceedings, as well as loans on which the Bank has begun foreclosure or other steps of collection, such asforeclosure and repossession, under which circumstances the loans are placed in nonaccrual status.

**Investment Policy**

                The Bank’s investmentpolicy provides guidelines for determining permissible investments in the investment portfolio, credit criteria and qualityratings, the desired mix among those investments, and preferred maturity distribution of the portfolio.  The Bank has fiveobjectives concerning its investment portfolio which address asset/liability management, profitability, liquidity, pledging, andlocal community support.  The Bank’s President/CEO and Executive Vice President/CFO are authorized to buy and sellsecurities according to the criteria set forth in the investment policy.  Individual transactions, portfolio composition, andperformance are reviewed by the Bank’s Investment and Asset/Liability Management Committee and the full Board of Directors ofthe Bank on a monthly basis.  The investment policy is reviewed annually by the Bank’s Board ofDirectors. 

                In general, the Bank’sinvestment policy is to place securities in the Available for Sale portfolio.  As of December 31, 2003, investment securitiestotaled $53,475,000.

                The primary risks in theBank’s securities portfolio consist of two types:

(1)     

Credit risk, or the risk of default of the issuer.  Treasury and government agency securities comprised 63.2% of the portfolio; therefore the credit risk isprimarily limited to the risk of default of the U.S. Government and its agencies.  State, County, and Municipal bondsrepresent 34.0% of the portfolio with the credit risk limited to the risk of default of the issuing municipality. Trust-preferred securities comprised 2.8% of the portfolio with the credit risk being the risk of default of the issuer of thetrust-preferred security.

(2)     

Interest rate risk, or the risk of adverse movements in interest rates onthe value of the portfolio.  In general, a rise in interest rates will cause the valueof the Bank’s securities portfolio to decline.  The longer the maturity of an individual security, the greater theeffect of change in interest rate on its value.  For a discussion of the Bank’s interest rate risk management policiesand management, see “Management’s Discussion and Analysis of Financial Condition and Plan of Operation for the YearsEnded December 31, 2003 and 2002 – Asset/Liability and Interest Rate Sensitivity Management.” 

**Competition**

                The Bank competes in OconeeCounty with six other commercial banks.  With three full-service and one limited banking office within Oconee County, the Bankis the market leader in Oconee County in terms of assets, deposit size, facility locations, and market coverage. 

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                The Bank also competes inAthens-Clarke County.  There are eleven other commercial banks in Athens-Clarke County, six of which have offices in OconeeCounty.  As of June 30, 2003, the other eleven banks located in Athens-Clarke County held deposits totaling$1,557,986,000.  The Bank’s physical presence in Athens-Clarke County is limited to the loan production office, anin-store branch in the East Athens Wal-Mart Supercenter, and two ATM’s, located in Jimbo’s Convenience Store and QuickStop Convenience Store.

                The following table showsdeposits by financial institution along with market share in Oconee County for the period ended June 30, 2003 (Dollar amounts arein thousands): 

                                                                              

Total Deposits

          

Market Share

Athens First Bank & Trust Company

$  79,185

 

20.1%

Bank of America, N.A.

12,327

 

3.1%

Community Bank & Trust

2,336

 

0.6%

First American Bank & Trust Company

9,547

 

2.4%

North Georgia Bank

67,329

 

17.1%

Oconee State Bank

218,453

 

55.4%

SunTrust Bank, N.A.

5,322

 

1.3%

Total Deposits

$  394,499

 

100.0%

               In addition to the Bank’s competition in Oconee County and Athens-Clarke County, the Bank competes with commercial banks,thrifts, and various other financial institutions and brokerage firms located in Northeastern Georgia counties located outside itsprimary and secondary market areas.  To a lesser extent, the Bank also competes for deposits and loans with credit unions andfor loans with insurance companies, small loan or finance companies, and certain governmental agencies**.  ** To theextent that banks must maintain non-interest earning reserves against deposits, they may be at a competitive disadvantage whencompared with other financial service organizations that are not required to maintain reserves against substantially equivalentsources of funds. 

               The business of the Bank is not materially seasonal.  Construction and development lending are strongest in Spring andSummer.  Building slows somewhat in Fall and Winter, but not to the degree that there is an appreciable impact upon theBank’s Balance Sheet or Statement of Earnings. 

**Forward Looking Statements**

                Information provided by Oconee orstatements made by our directors, officers or employees may constitute “forward-looking” statements under the PrivateSecurities Litigation Reform Act of 1995 and are subject to numerous risks and uncertainties.  Any statements made in thisAnnual Report on Form 10-KSB including any statements incorporated by reference, which are not statements of historical fact, areforward-looking statements.  These forward-looking statements and other forward-looking statements made by us or ourrepresentatives are based on a number of assumptions and involve a number of risks and uncertainties, and, accordingly, actualresults could differ materially.  Factors that could cause actual results to differ from results discussed in forward-lookingstatements include, but are not limited to: economic conditions (both generally and in the primary and secondary markets whereOconee operates); competition from other providers of financial services offered by Oconee; government regulations and legislation;changes in interest rates; material unforeseen changes in the financial stability and liquidity of Oconee’s credit customers,all of which are difficult to predict and which may be beyond the control of Oconee.  Oconee undertakes no obligation torevise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence ofunanticipated events.

**Supervision and Regulation**

**               ****General.**  Oconee is a registered bank holding company subject toregulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank HoldingCompany Act of 1956, as amended (the “Act”).  Oconee is required to file financial information with the FederalReserve periodically and is subject to periodic examination by the Federal Reserve.

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                The Act requires every bankholding company to obtain the prior approval of the Federal Reserve before (i) it acquires direct or indirect ownership or controlof more than 5% of the voting shares of any bank that it does not already control; (ii) it or any of its subsidiaries, other than abank, acquires all or substantially all of the assets of a bank; and (iii) it merges or consolidates with any other bank holdingcompany.  In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirectcontrol of the voting shares of any company engaged in non-banking activities.  This prohibition does not apply to activitiesfound by the Federal Reserve, by order or regulation, to be so closely related to banking or managing or controlling banks as to bea proper incident thereto.  Some of the activities that the Federal Reserve has determined by regulation or order to beclosely related to banking are:  making or servicing loans and certain types of leases; performing certain data processingservices; acting as fiduciary or investment or financial advisor; providing discount brokerage services; underwriting bank eligiblesecurities; underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and makinginvestments in corporations or projects designed primarily to promote community welfare.

               Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closelyrelated or incidental to banking, the Gramm-Leach-Bliley Act became effective in 2000 and relaxed the previous limitations,permitting bank holding companies to engage in a broader range of financial activities.  Specifically, bank holding companiesmay elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage inother activities that are financial in nature.  Among the activities that are deemed “financial in nature”are:
- lending, exchanging, transferring, investing for others or safeguarding money orsecurities;
- insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability,or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
- providing financial, investment, or economic advisory services, including advising aninvestment company;
- issuing or selling instruments representing interests in pools of assets permissible fora bank to hold directly; and
- underwriting, dealing in or making a market in securities.

               A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is wellcapitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  A bank holdingcompany that falls out of compliance with such requirements may be required to cease engaging in certain activities.  Any bankholding company that does not elect to become a financial holding company remains subject to the current restrictions of the BankHolding Company Act.

               Under the Gramm-Leach-Bliley Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financialholding companies with supervisory authority over each parent company and limited authority over its subsidiaries.  Theprimary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by thesubsidiary.  For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurancesubsidiaries will be regulated largely by insurance authorities.

               Oconee cannot predict the full impact of this legislation and has no immediate plans to become a financial holdingcompany.

                Oconee must also register withthe Georgia Department of Banking and Finance (the “GDBF”) and file periodic information with the GDBF.  As partof such registration, the GDBF requires information with respect to the financial condition, operations, management, andintercompany relationships of Oconee and the Bank and related matters.  The GDBF may also require such other information as isnecessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder bythe GDBF have been complied with, and the GDBF may examine Oconee and the Bank.

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                Oconee is an “affiliate” of the Bank under the Federal Reserve Act, which imposes certain restrictions on (i)loans by the Bank to Oconee, (ii) investments in the stock or securities of Oconee by the Bank, (iii) the Bank’s taking thestock or securities of an “affiliate” as collateral for loans by the Bank to a borrower, and (iv) the purchase ofassets from Oconee by the Bank.  Further, a bank holding company and its subsidiaries are prohibited from engaging in certaintie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.

                The Bank is regularly examined bythe Federal Deposit Insurance Corporation (the “FDIC”).  The Bank, a state banking association organized underGeorgia law, is subject to the supervision of, and is regularly examined by, the GDBF.  Both the FDIC and the GDBF must grantprior approval of any merger, consolidation or other corporation reorganization involving the Bank.  A bank can be held liablefor any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonlycontrolled institution.

**                Payment ofDividends.**  Oconee is a legal entity separate and distinct from the Bank.  Mostof the revenues of Oconee result from dividends paid to it by the Bank.  There are statutory and regulatory requirementsapplicable to the payment of dividends by the Bank, as well as by Oconee to its shareholders.

                The Bank is a state charteredbank regulated by the GDBF and the FDIC.  Under the regulations of the GDBF, dividends may not be declared out of the retainedearnings of a state bank without first obtaining the written permission of the GDBF unless such bank meets all the followingrequirements:

(a)

total classified assets as of the most recent examination of the bank do notexceed 80% of equity capital (as defined by regulation);

(b)

the aggregate amount of dividends declared or anticipated to be declared inthe calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year;and

(c)

the ratio of equity capital to adjusted assets is not less than6%.

                The payment of dividends byOconee and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital aboveregulatory guidelines.  In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdictionis engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank,could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist fromsuch practice.  The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out ofcurrent operating earnings.  In addition to the formal statutes and regulations, regulatory authorities consider the adequacyof the Bank’s total capital in relation to its assets, deposits and other such items.  Capital adequacy considerationscould further limit the availability of dividends to the Bank.  At December 31, 2003, net assets available from the Bank topay dividends without prior approval from regulatory authorities totaled $1,354,000.  For 2003, Oconee’s cash dividendpayout of $899,885 to stockholders was 33.6% of net income.

**                Monetary Policy.**  The results of operations of the Bank are affected by credit policies of monetary authorities,particularly the Federal Reserve.  The instruments of monetary policy employed by the Federal Reserve include open marketoperations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirementsagainst bank deposits.  In view of changing conditions in the national economy and in the money markets, as well as the effectof actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible futurechanges in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

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            **Capital Adequacy.**  The Federal Reserve and the FDIC have implementedsubstantially identical risk-based rules for assessing bank and bank holding company capital adequacy.  These regulationsestablish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk.  Banksand bank holding companies are required to have (1) a minimum level of total capital to risk-weighted assets of eight percent (8%);(2) a minimum Tier One Capital to risk-weighted assets of four percent (4%); and (3) a minimum stockholders’ equity torisk-weighted assets of four percent (4%).  In addition, the Federal Reserve and the FDIC have established a minimum fourpercent (4%) leverage ratio of Tier One Capital to total assets for all but the most highly rated banks and bank holdingcompanies.  “Tier One Capital” generally consists of common equity not including unrecognized gains and losses onsecurities, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certainintangibles.  The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain aleverage ratio greater than three percent (3%) if either is experiencing or anticipating significant growth or is operating withless than well-diversified risks in the opinion of the Federal Reserve.  The Federal Reserve and the FDIC use the leverageratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies.  The FDIC, theOffice of the Comptroller of the Currency (the “OCC”) and the Federal Reserve have amended, effective January 1, 1997,the capital adequacy standards to provide for the consideration of interest rate risk in the overall determination of abank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.  Therevised standards have not had a significant effect on Oconee’s capital requirements.

                In addition, effective December19, 1992, a new Section 38 to the Federal Deposit Insurance Act implemented the prompt corrective action provisions, designed toefficiently resolve failing financial situations, that Congress enacted as a part of the Federal Deposit Insurance CorporationImprovement Act of 1991 (the “1991 Act”).  The “prompt corrective action” provisions set forth fiveregulatory zones in which all banks are placed largely based on their capital positions.  Regulators are permitted to takeincreasingly harsh action as a bank’s financial condition declines.  Regulators are also empowered to place inreceivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches2%.  Better-capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesseramounts of capital.

                The FDIC regulations implementingthe “prompt corrective action” provisions of the 1991 Act, which place financial institutions in the following fivecategories based upon capitalization ratios: (1) a “well capitalized” institution has a total risk-based capital ratioof at least 10%, a Tier One risk-based ratio of at least 6% and a leverage ratio of at least5%; (2) an “adequatelycapitalized” institution has a total risk-based capital ratio of at least 8%, a Tier One risk-based ratio of at least 4% anda leverage ratio of at least 4%; (3) an “undercapitalized” institution has a total risk-based capital ratio of under8%, a Tier One risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a “significantly undercapitalized”institution has a total risk-based capital ratio of under 6%, a Tier One risk-based ratio of under 3% or a leverage ratio of under3%; and (5) a “critically undercapitalized” institution has a leverage ratio of 2% or less.  Institutions in anyof the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions.  TheFDIC regulations also establish procedures for “downgrading” an institution to a lower capital category based onsupervisory factors other than capital.  Under the FDIC’s regulations, the Bank was a “well capitalized”institution at December 31, 2002 and December 31, 2003.

 

 

 

 

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               Set forth below are pertinent capital ratios for the Bank as of December 31, 2003 and 2002:

Minimum Capital Requirement

 

                   
**The Bank**
                   

 

 

2003

                   

2002

Total Capital to               Risk Weighted                Assets:  8%(1)

 

12.6%

 

11.4%

Tier One Capital to               Risk Weighted                Assets:  4%(2)

 

11.3%

 

10.2%

Leverage Ratio (Tier One               Capital to Average Total               Assets):  3% (3)

 

8.0%

 

 7.5%

 
__________________________(1)   Minimum required ratio for “well capitalized” banks is10%(2)   Minimum required ratio for “well capitalized” banks is 6%(3)   Minimum required ratio for “well capitalized” banks is 5%

**Economic Conditions**

                Economic growth in theBank’s primary service area is expected to remain stable.  The counties in the Bank’s market area are expected tocontinue to receive revenues from their traditional sources of trade, finance, insurance, real estate development and sales,manufacturing and the service industry.  Both employment and population growth are projected to remain stable in Oconee andAthens-Clarke Counties.  The area has seen a slight decline in speculative housing construction. This decline had a negativeimpact on the Bank’s loan growth during 2003.  It is anticipated that this market will recover as the overall economyemerges from its current uncertain situation.

**Employees**

                At December 31, 2003, the Bankhad 75 full-time employees and 30 part-time employees. The Bank is not a party to any collective bargaining agreement, and the Bankbelieves that its employee relations are generally good.

**ITEM 2.****                DESCRIPTION OFPROPERTIES.**

                The Bank operates fourfull-service banking offices, one limited service banking office and two support services spaces as follows:

          

(1)

Main Office

          
 
35 North Main Street Watkinsville, Georgia 30677

          

 

 
 
(2)

Bogart BranchU.S. Highway 78 Bogart, Georgia 30622

          

 

 

 

(3)

Friendship Branch8811 Macon Highway Athens, Georgia 30606

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(4)

Mortgage Department/Operations Annex(Limited Service/Support Offices for Main Office) Condominium Units 10, 12, 14, 16, 18 and 20 Durham Street Watkinsville, Georgia 30677

 

 

 

 

(5)

Athens Loan Center(Limited Service Loan Production Office) 500 North Milledge Avenue Athens, Georgia 30605

 

 

 

 

(6)

East Athens Wal-Mart Supercenter(In-Store Full Service Branch) 4375 Lexington Road Athens, Georgia 30605

                The executive offices and themain office of Oconee and the Bank are located in a 6,500 square-foot facility at 35 North Main Street in Watkinsville, Georgiawith three drive-thru windows and a walk-up ATM.

                The Bogart Branch is located atthe intersection of U.S. Highway 78 and Mars Hill Road in Bogart, Georgia.  This 5,250 square-foot facility has 2 drive-thruwindows and a drive-thru ATM.

                The Friendship Branch is an 800square-foot facility at 8811 Macon Highway, Athens, Georgia.  This branch has three drive-thru windows and serves theFriendship community.  Although it has an Athens address, this branch is located within Oconee County.

                The Bank owns five officecondominium units adjacent to and behind its main office in Watkinsville.  The units are numbered 10, 12, 14, 16, & 18 onDurham Street in Watkinsville, Georgia.  Each unit contains 1,180 square feet on the ground floor and 450 square feet on thesecond floor, for a total of 1,630 square feet per unit or 8,150 square feet for all units owned.  Unit 10 houses theBank’s mortgage loan department.  Units 12, 14, and 16 are connected by interior hallways and house informationtechnology administration, bank operations, call center, proof, bookkeeping, supplies, human resources, and trainingfunctions.  Unit 18 is occupied by the Bank’s loan operations department.

                Except as described below, all ofthe properties referenced previously are owned by Oconee. 

                In September 2003, the Bankrenewed a lease agreement with Hardigree Properties, LLLP to lease office condominium unit #20 on Durham Street in Watkinsville,Georgia for $900.00 per month.  This unit is next to other office condominiums owned by the Bank.  Unit #20 housesaccounting, audit, and compliance personnel.  In addition, two parking lots adjacent to the main office are leased whichprovide additional parking for employees. 

                The Athens Loan Center is locatedat 500 North Milledge Avenue in Athens, Georgia.  The Loan Center is a 2,000 square foot building that houses one commercialloan officer and one mortgage loan originator, along with their support staff.  The Loan Center is leased by the Bank. The lease was renewed in July of 2003 and has a term of two years at a monthly rate of $2,205.00. 

                The Bank leases space in theWal-Mart Supercenter Store No. 2811 located at 4375 Lexington Road in Athens, Georgia from Wal-Mart Stores East, Inc.  Thisbranch is located in a 695 square foot leased space inside the store.  The lease was entered into in January of 2000 and isfor five years.

                In May of 2002, the Bankpurchased a building located at 7920 Macon Highway in Watkinsville, Georgia.  The building is approximately 60,000 square feetand is divided into three equally sized bays, and is located on approximately 10 acres of land.  The Bank is in the process ofrenovating one of the bays to house the operations personnel currently housed in the above-mentioned officecondominiums.  The other two bays will be available for the Bank to lease to othercompanies.  Currently, one of the bays is leased to Fibervisions, Inc.  The Bank had anticipated occupying the buildingin the fall of 2003, however, due to unforeseen architectural design and construction delays, the move is anticipated to occur inmid-May of 2004. 

               Management of Oconee and the Bank believe that all of its properties are adequately covered by insurance.

-10-
**ITEM 3.****  LEGALPROCEEDINGS.**

                Neither Oconee nor the Bank is aparty to, nor are any of their properties the subject of, any material legal proceeding other than ordinary routine litigationincidental to Oconee’s and the Bank’s business.  

**ITEM 4.****  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

**               **No matters were submitted to a vote of the security holders of Oconee during the fourth quarter of the fiscal year coveredby the report.

**PART II**

**ITEM 5****.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**

**Markets For Capital Stock**

                Oconee Common Stock is not tradedon any established public trading market.  Management is aware of 49 trades of Oconee Common Stock in 2003, aggregating 3,841shares in blocks ranging from 2 to 1,000 shares at prices ranging from $50 to $75 per share.  Management is aware of 61 tradesof Oconee Common Stock in 2002, aggregating 2,943 shares in blocks ranging from 1 to 532 shares at prices ranging from $45.00 to$60.00 per share.

**Holders**

                As of December 31, 2003, therewere 655 holders of record of Common Stock.

**Dividends**

**               **In 2003 and 2002, Oconee declared cash dividends of $1.00 per share payable to shareholders of record on December 31 ofeach year.  Oconee intends to continue paying cash dividends on an annual basis.  Cash dividends for 2003 represented apayment of 33.6% of net income for the year compared to 34.5% for 2002.  The amount and frequency of dividends is determinedby Oconee’s Board of Directors in light of earnings, capital requirements and the financial condition of the Bank.  See“Supervision and Regulation -- Payment of Dividends” for further discussion regarding dividends.

**ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF                OPERATION FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002.**

  **               **This analysis of Oconee has beenprepared to provide insight into the financial condition of the Company, and addresses the factors which have affected theCompany’s results of operations.  The Company’s financial statements and accompanying notes which follow are anintegral part of this review and should be read in conjunction with it.
**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
**               **The consolidated financial statements include the financial statements of Oconee and theBank (for purposes of this Item 6, collectively called, the “Company”).  All significant intercompany balances andtransactions have been eliminated in consolidation.

**               **The Company’s accounting policies are fundamental to understandingmanagement’s discussion and analysis of results of operations and financial condition.  Some of the Company’saccounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation ofthe specific accounting guidance.  A description of the Company’s significant accounting policies can be found in Note 1of the Notes to Consolidated Financial Statements in the Company’s 2003 Annual Report to Shareholders. 

-11-
**               **Many of the Company’s assets and liabilities are recorded using various valuationtechniques that require significant judgment as to recoverability.  The collectibility of loans is reflected through theCompany’s estimate of the allowance for loan losses.  The Company performs periodic detailed reviews of its loanportfolio in order to assess the adequacy of the allowance for loan losses in light of anticipated risks and loan losses.  Inaddition, investment securities and mortgage loans held for sale are reflected at their estimated fair value in the consolidatedfinancial statements.  Such amounts are based on either quoted market prices or estimated values derived by the Company usingdealer quotes or market comparisons.

                Management of the Company hasmade a number of estimates and assumptions to prepare these consolidated financial statements in conformity with generally acceptedaccounting principles.  Actual results could differ from those estimates.

**Selected Financial Information**
  
**2003**

**2002**

**2001**

**2000**

**1999**
 
**(Amounts  in thousands)(except for per share data)**

Net interest income

$

9,033

8,665

8,022

7,887

6,371

Other operating income

$

3,003

2,504

1,922

1,377

1,288

Provision for loan losses

$

645

555

300

387

116

Net income

$

2,678

2,612

2,393

2,467

2,203

Net income per common share

$

2.98

2.90

2.66

2.74

2.45

Total assets

$

251,956

246,286

212,524

181,925

152,139

Cash dividends declared per common share

$

1.00

1.00

1.00

1.10

1.00

**RESULTS OF OPERATIONS**
**Net Interest Income**
                The Company’s earnings depend to a large degree on net interestincome, which is the difference between the interest income received from its earning assets (such as loans, investment securities,federal funds sold, etc.) and the interest expense which is paid on deposit and other liabilities.

                Net interest income in 2003, which was $9,033,000, increased by $368,000, or4.2%, over 2002*. * Net interest income improved as a result of a decrease in interest income of $454,000 offset by adecrease in interest expense of $822,000.  The decrease in interest income is due primarily to a decrease in interest incomeon loans as a result of a lower rate environment.  The decrease in interest expense is a result of lower interest rates beingpaid on interest-bearing deposits as well as a reduction in interest expense on a Federal Home Loan Bank advance which was paid infull in August, 2003. Although net interest income increased, the Bank’s net interest margin decreased from 4.04% in 2002 to3.67% in 2003.  This decline is a result of an increase in average interest-bearing assets during 2003 of $31,988,000. Of this growth, $23,537,000 was growth in investment securities and federal funds sold, which yield lower interest rates thanloans, which are the Bank’s traditional source of growth.

                Net interest income in 2002, which was $8,665,000, increased by $643,000, or8.0%, over 2001.  Net interest income improved as a result of increases in interest earning assets outpacing the growth ininterest bearing liabilities and the slight improvement in the net interest spread from 3.48% to 3.51% for the years ended December31, 2001 and 2002, respectively. 

                Table 1 sets forth the average balance for each category of interest-earningassets and interest-bearing liabilities and the average rate of interest earned or paid thereon for the years ended December 31,2003, 2002 and 2001.  The table also sets forth the average rate earned on total interest-earning assets, the average ratepaid on total interest-bearing liabilities, and the net yield on average total interest-earning assets for the same periods.Nonaccrual loans and the interest income which was recorded on these loans, if any, are included in the yield calculation for loansin all periods reported.  Tax-exempt income is not calculated on a tax-equivalent basis.  Loan fees of $647,000, $605,000and $743,000 are included in the yields for 2003, 2002 and 2001, respectively.  Yield information does not give effect tochanges in fair value that are reflected as a component of stockholders’ equity. 

-12-**Table1Average Balance Sheets and Interest Rates**
 
 
 

For the Years Ended December 31,

 
   
 

2003

2002

2001
 
 
                                                                                     
 

Average Balance

 Interest

Yield/ Rate

Average Balance

 Interest

Yield/ Rate

Average Balance

 Interest

Yield/ Rate
           
Assets:
         
Interest earning assets:
         
 Interest earning deposits

$         -           

$       -      

-

$      -       

$    -         

-

  $      24,110  

 $      1,876    

7.78%  

 Investment securities:
         
Taxable

29,174,332    

972,110  

3.33% 

17,651,461  

991,561  

5.62% 

19,641,673  

1,314,972  

6.69%  

Non-taxable

16,534,171    

786,847  

4.76% 

14,411,069  

713,056  

4.95% 

14,492,273  

713,717  

4.92%  

Other Investment Securities

1,536,662    

68,662  

4.47% 

1,265,429  

64,218  

5.07% 

1,061,320  

72,383  

6.82%  

Federal funds sold

16,185,123    

169,988  

1.05% 

6,564,956  

      104,368  

1.59% 

10,042,855  

452,596  

4.51%  

Loans (including loan fees)

182,933,219    

12,472,490  

6.82% 

174,482,281  

13,050,387  

7.48% 

142,468,808  

13,271,683  

9.32%  
 
Total interest-earning assets

246,363,507    

14,470,097  

5.87% 

214,375,196  

14,923,590  

6.96% 

187,731,039  

15,827,227  

8.43%  
          
Allowance for loan losses

(2,376,496)   
  
 (1,974,230) 
  
(1,719,390)   
Cash and due from banks

7,000,382    
  
 6,132,989  
  
 4,900,305  
  
Other assets

8,740,202    
  
 6,630,985  
  
 5,657,522  
      
Total assets

$ 259,727,595    
  
$ 225,164,940  
  
$ 96,569,476  
      
Liabilities and stockholders’ equity:
         
Interest-bearing liabilities:
         
Deposits:
         
Interest-bearing demand

$  56,018,253    

$  768,243  

1.37% 

$  50,959,946  

$    887,176  

1.74% 

$ 41,854,844  

$   1,142,991  

2.73%  

Savings

47,182,345    

831,956  

1.76% 

27,015,213  

609,431  

2.26% 

11,542,884  

284,883  

2.47%  

Time

96,482,324    

3,267,922  

3.39% 

89,334,650  

3,885,384  

4.35% 

89,971,607  

5,485,151  

6.10%  

Federal Funds Purchased

-       

  -       

    -    

4,595  

78  

1.70% 

-       

  -       

    -     

Federal Home Loan Bank Advances

8,599,452    

552,778  

6.43% 

13,300,000  

854,931  

6.43% 

13,300,000  

854,931  

6.43%  

Securities sold under repurchase agreements

897,839    

15,920  

1.77% 

983,599  

21,820  

2.22% 

1,109,622  

37,078  

3.34%  
 
Total interest bearing liabilities

209,180,213    

5,436,819  

2.60% 

181,598,003  

6,258,820  

3.45% 

157,778,957  

7,805,034  

4.95%  
          
Non-interest bearing deposits

28,432,352    
  
23,713,917  
  
20,749,925  
  
Other liabilities

1,838,430    
  
1,544,138  
  
1,540,769  
      
Total liabilities

239,450,995    
  
206,856,058  
  
180,069,651  
            
 Stockholders’ equity

20,276,600    
  
18,308,882  
  
16,499,825  
      
Total liabilities and    stockholders’ equity

$ 259,727,595    
  
$225,164,940  
  
$196,569,476  
      
Excess of interest-bearing    assets over  interest-bearing     lsiabilities

$  37,183,294    
  
$ 32,777,193  
  
$  29,952,082  
      
Ratio of interest-earning assets to interest     -bearing liabilities

117.78%   
  
118.05%
  
118.98%
  
Net interest income
 
$ 9,033,278 
  
$  8,664,770  
  
$   8,022,193  
        
Net interest spread
  
3.27% 
  
3.51% 
  
3.48%  

Net interest yield on interest earning assets
  
3.67% 
  
4.04% 
  
4.27%   
 
-13-
                The changes in interest income and interest expense can result fromvariances in both volume and rates.  Table 2 describes the impact of the Company’s net interest income resulting fromchanges in average balances and average rates for the period indicated.  The changes in interest due to both volume and ratehave been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes ineach.

**Table 2Volume-Rate Analysis**

**2003 over 2002Increase (decrease) due to changes in:**  
** **
**Volume**

** **
**Rate**

** **
**Total**

Interest income on:
         
Investment securities
        
Taxable
$ 361,419 $(380,870)$(19,451)
Non-taxable
 
87,253  (13,462) 73,791 
Other investment securities
 
24,407  (19,963) 4,444 
Federal funds sold
 
152,939  (87,319) 65,620 
Loans (including loan fees)
 
611,418  
(1,189,315) 
(577,897)
Total interest earning assets

 
1,237,436 
 
(1,690,929)
 
(453,493)
Interest expense on:
      
Deposits:
      
Interest bearing demand
 
80,141  (199,074) (118,933)
Savings
 
454.947  (232,422) 222,525 
Time
 
319,408  (936,870) 
(617,462)

Securities sold under     repurchase agreements
 
8,175  (14,075 
(5,900

Federal Funds purchased
 
(78) 
---    
 (78)
Federal Home LoanBank     Advances
 (302,153) 
---    
 (302,153)
Total interest bearing liabilities

 
560,440 
 
(1,382,441
 
(822,001)

Net interest income

$  676,996 
 $
 (308,488)
$
368,508  
**Table 2Volume-Rate Analysis (continued)**

**2002 over 2001Increase (decrease) due to changes in:**  
** **
**Volume**

** **
**Rate**

** **
**Total**

Interest income on:
         
Investment securities
        
Interest-earning deposits

 $ (1,876)  
 
---    

  (1,876)
Taxable
 
(125,427)  
 
(197,984)
 
(323,411)

Non-taxable
 
(4,481)  
 
3,820 
 
(661)

Other investment securities
 
12,416    
 
(20,581)
 
(8,165)

Federal funds sold
 
(121,351)  
 
(226,877)
 
(348,228)

Loans (including loan fees)
 
2,673,038   
 
(2,894,334)
 
(221,296)

Total interest earning assets

 
2,432,319   

 
(3,335,956)

 
(903,637)

Interest expense on:
      
Deposits:
      
Interest bearing demand
 
214,815   
 
(470,631)
 
(255,816)

Savings
 
350,779   
 
(26,231)
 
324,548 

Time
 
(38,527)  
 
(1,561,239)
 
(1,599,766)

Securities sold under     repurchase agreements
 
(3,860)  
 
(11,398)
 
(15,258)

Federal Funds purchased
 
78   
 
---    
 
78 

Federal Home LoanBank     Advances
 
     ---   
 
---    
 
---  

Total interest bearing liabilities

 
523,285  

 
(2,069,499)

 
(1,546,214)

Net interest income

$  1,909,034  
 $
 (1,266,457)

$
 642,577 
**Provision for Loan Losses**
                Provisions for loan losses are charged to income in order to bring the totalallowance for loan losses to a level deemed appropriate by management of the Company based on factors such as management’sjudgment as to losses within the Company’s loan portfolio including the valuation of impaired loans, loan growth, netcharge-offs, changes in the composition of the loan portfolio, delinquencies and management’s assessment of the quality ofthe loan portfolio and general economic climate.

                The provision for loan losses in 2003 was $645,000 compared to $555,000 in2002.  The increase in the provision for loan losses was primarily attributable to the need for a higher provision as a resultof an increase in loans that were classified as substandard or doubtful by examiners during 2003.  The allowance for loanlosses represented approximately 1.56% of total loans outstanding at December 31, 2003 compared to 1.17% at December 31,2002.  Net charge-offs for 2003 were $75,000 compared to $268,000 during 2002.  Net charge-offs as a percentage of theprovision for loan losses were 11.6% and 48.3% for the years ended December 31, 2003 and 2002, respectively.  The decrease innet charge-offs for 2003 was a result of charge-offs of four customer relationships in 2002 totaling $239,000.

                A management loan review function is utilized by the Company which issupplemented by the use of an outside loan review specialist.  All loans $250,000 or more are reviewed annually and placedinto various loan grading categories which assist management in developing lists of potential problem loans.  These loans areregularly monitored by the loan review process to ensure early identification of repayment problems so that adequate allowances canbe made through the provision for loan losses.   Management believes that these levels of allowance are appropriate based uponthe Company’s loan portfolio and current economic conditions. 

-14-
                The provision for loan losses in 2002 was $555,000 compared to $300,000 in2001.  The increase in the provision for loan losses was primarily attributable to the need for a higher provision due to anincrease in the Bank’s non-performing loans and to accommodate the growth in loans.  The allowance for loan lossesrepresented approximately 1.17% of total loans outstanding at December 31, 2002 compared to 1.20% at December 31, 2001. Although non-performing loans increased in 2002 compared to 2001, the allowance as a percentage of loans decreased as compared tothe prior year as the Bank’s portfolio mix moved from higher risk commercial credit to mortgage loans.  Net charge-offsfor 2002 were $268,000 compared to $296,000 during 2001.
**Non-Interest Income**
                Other income in 2003 of $3,003,000 increased from 2002 by $499,000****or19.9% due primarily to an increase in mortgage banking income of $369,000 or 33.0% along with an increase of $55,000 or 5.5% inservice charges on deposit accounts.  Mortgage banking income increased primarily due to continued strong demand forrefinancing of existing mortgage loans due to low interest rates.  Mortgage loan volume increased from $59,359,000 to$72,965,000 for the years ended December 31, 2002 and 2003, respectively.  Demand for mortgage loans slowed during the finalthree months of 2003 and the Company anticipates mortgage loan volume to return to historical levels during 2004.  Theincrease in service charges on deposit accounts is due primarily to growth in the number of the Bank’s depositaccounts. 

                Other income in 2002 of $2,504,000 increased from 2001 by $512,000****or25.7% due primarily to an increase in mortgage banking income of $339,000 or 43.5% along with an increase of $115,000 or 12.8% inservice charges on deposit accounts.  Mortgage banking income increased primarily due to continued strong demand forrefinancing of existing mortgage loans due to low interest rates. Mortgage loan volume was $59,359,000 and $53,924,000 for theyears ended December 31, 2002 and 2001, respectively.  Service charges on deposit accounts increased because of growth in thenumber of the Bank’s deposit accounts. 
**Non-Interest Expense**
                Other expenses in 2003 of $7,647,000 increased by $798,000****or 11.7%over 2002.  The increase in other expenses is primarily attributable to an increase in salaries and employee benefits expenseof $442,000****or 10.3%.  This increase is primarily attributable to an increase in compensation earned by the Bank’scommission-based mortgage loan originator and merit increases for existing employees.  Also, other operating expensesincreased by $235,000 or 14.3% primarily due to a $93,000 increase in outside service fees and an increase of $79,000 in loancollection expenses. 

                Other expenses in 2002 of $6,849,000 increased by $534,000****or 11.7%over 2001.  The increase in other expenses was primarily attributable to an increase in salaries and employee benefits expenseof $436,000****or 11.3%.  This increase was primarily attributable to an increase in compensation earned by theBank’s commission-based mortgage loan originator, merit increases for existing employees, and increased employee benefitsexpense due to higher premiums for employee health insurance.  Also, other operating expenses increased by $50,000 or3.1%.
**Income Tax Expense**
                The Company’s effective tax rates were 28%, 31% and 30% for the yearsended December 31, 2003, 2002, and 2001, respectively.  The decrease in 2003 was due to a State of Georgia retraining taxcredit of $71,000 that the Bank received as a result of training staff members on various technology initiatives. 

**ANALYSIS OF FINANCIAL CONDITION**
**Summary**
                During 2003, average total assets increased $34,563,000 (15.4%) over2002.  Average deposits increased $37,092,000 (19.4%) in 2003 over 2002.  Average loans increased $8,451,000 (4.8%) in2003 over 2002.

                Year-end balances at December 31, 2003 and 2002 reflect an increase in totalassets of $5,670,000 (2.3%) from 2002 to 2003.  Total deposits increased $17,258,000 (8.2%) from 2002 to 2003 .  Althoughaverage loans increased during 2003, year-end balances for loans outstanding decreased $8,401,000 (4.7%) compared to December 31,2002.  This is a result of decline in loan demand during the third and fourth quarters of 2003.  Time deposits decreased$7,303,000 (7.6%)****from 2002 to 2003 while all other deposit accounts increased $24,560,000 (21.4%) from 2002 to2003.

-15-**Investment Securities**
                All of the Company’s investment securities are held in theavailable-for-sale (“AFS”) category.  At December 31, 2003, the market value of AFS securities totaled$53,475,000, compared to $38,899,000 and $36,194,000 at December 31, 2002 and 2001, respectively.  Table 3 presents the marketvalue of the presently held AFS securities for the years ended December 31, 2003, 2002 and 2001. The increase in investmentsecurities is due to the bank investing proceeds from deposit growth as opposed to lending the funds to customers as a result of adecline in loan demand during 2003.

**Table 3**

**Investment Portfolio**
  
2003
 
2002
 
2001

**Available for sale**
      
     State, county and municipal

  $
18,165,794

  $
 14,786,132

  $
14,789,848

     United States Treasuries and          Government agencies
 
19,300,929 
15,099,712
 
    8,322,957

     Mortgage-backed
 
14,508,176 
8,513,393
 
   12,581,426

     Other debtsecurities
 
1,500,000 
500,000
 
        500,000

          Totals

  $
 53,474,899

  $
38,899,237

  $
36,194,231

                The composition of the investment securities portfolio reflects theCompany’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source ofincome.  The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of thebalance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities topledge as required collateral for certain deposits. Table 4 presents the AFS securities held by the Company by maturity category atDecember 31, 2003.  Yield information does not give effect to changes in fair value that are reflected as a component ofshareholders’ equity and yields are not calculated on a tax equivalent basis.  Mortgage backed securities are includedin the maturities categories in which they are anticipated to be repaid based on scheduled maturities.

**Table 4Maturity Distribution and Weighted Average Yield onInvestments**
 
U.S. Treasuries&GovernmentAgencies

MortgageBackedSecurities

State, County and Municipal

OtherDebtSecurities

WeightedAverageYields
      
Within 1 year

$ 5,164,063    

  $         ---        

$    248,558     

$         ---      

1.31%

After 1 through 5 years

 4,001,563    

1,475,963    

1,949,503     

---      

2.89%

After 5 through 10 years

4,652,347    

5,677,248    

4,379,182     

---      

4.01%

After 10 years

  5,482,956    

7,354,965    

11,588,551     

1,500,000     

5.11%

Totals

$19,300,929    

$ 14,508,176    

$18,165,794     

$1,500,000     
**Loans**
               The loan portfolio is the largest category of the Company’s earning assets andis comprised of commercial loans, real estate mortgage loans, real estateconstruction loans and consumer loans.  The Company restricts its primarylending market to Oconee County, Georgia and its secondary market to thosecounties contiguous to Oconee County, including Clarke, Greene, Morgan, Walton,Barrow and Oglethorpe, and to Madison County, which is not contiguous to OconeeCounty, but is part of the Athens Standard Metropolitan Statistical Area.

-16-
               The composition of the Company’s loan portfolio is presented in Table 5.

**Table 5Loan Portfolio**
 
2003
 
2002
 
2001
 
2000
 
1999

Commercial, industrial      andagricultural

$  21,208,190 

 
$  21,466,048 

 
 $   18,154,481 

 
 $ 16,487,028 

 
 $ 12,714,342 

Real estate – construction

43,831,025 
 
51,268,113 
 
45,386,203 
 
29,663,443 
 
28,310,935 

Real estate - mortgage

94,266,400 
 
93,464,207 
 
74,130,798 
 
64,214,266 
 
40,222,371 

Consumer

11,845,183 
 
13,354,030 
 
13,615,861 
 
12,976,318 
 
12,082,629 
  
171 150,798 
 
179,552,398 
 
151,287,343 
 
123,341,055 
 
93,330,277 

Less: Allowance for loan           Losses

(2,669,204)
 
(2,098,691)
 
(1,812,041)
 
 (1,807,671)
 
 (1,469,126)

Loans, net

$  168,451,594 
 
$  177,453,707
 
$149,475,302 
 
$121,533,384 
 
$91,861,151 

               As of December 31, 2003, loans outstanding were $171,151,000, a decrease of $8,401,000 or 4.7% below the December 31, 2002 balanceof $179,552,000.  Most of this decline was attributable to a decrease in real estate construction loans of $7,437,000 during2003.  This decline is due primarily to a slowdown in the residential development activity in the Bank’s market area,particularly in the speculative housing construction industry.  

                Table 6 identifies the maturities of commercial and real estate constructionloans as of December 31, 2003 and addresses the sensitivity of these loans to changes in interest rates.  The longer-termconstruction loans are typically development loans and loans to tax-exempt organizations for construction purposes.

**Table 6Maturity and Repricing Data for Loans**

Maturity

Commercial,Industrial andAgricultural
 
Real EstateConstruction
 
Total

Within 1 year

$     8,262,995

  
$  35,778,020
 
$ 44,041,015

1 to 5 years

12,831,030
 
8,053,005
 
20,884,035

Over 5 years

114,165
 
---   
 
114,165

        Totals

$   21,208,190

 
$   43,831,025

 
$  65,039,215

 
      -17-
               As of December 31, 2003, the interest terms of loans in the indicatedclassifications for the indicated maturity ranges in excess of one year are as follows:
 
Fixed Interest Rates
 
VariableInterest Rates
 
Total

Commercial, industrial      and agricultural
     
          1 to 5 years

$  3,928,446
 
$  8,902,584
 
$  12,831,030

          Over 5 years

$     114,165
 
       ---
 
$      114,165
        
Real estate construction
       
          1 to 5 years

$  1,146,295
 
$  6,906,710
 
$  8,053,005

          Over 5 years

       ---
 
       ---
 
       ---
**Allowance for Loan Losses**
      The allowance for loan losses reflectsmanagement's assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loanportfolio.  The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish anallowance for loan losses that management believes will be adequate in light of anticipated risks and loan losses.  Inassessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. Other factors consideredinclude:  the Bank’s loan loss experience, the amount of past due and nonperforming loans, specific known risks, currentand anticipated economic conditions and other factors which management believes affect the allowance for potential creditlosses.

                The Company has a dedicated loanreview function.  All loans $250,000 or more are reviewed annually and placed into various loan grading categories which areused to develop lists of potential problem loans.  These loans are regularly monitored by the loan review function to ensureearly identification of deterioration.  The formal allowance for loan loss adequacy test is performed at the end of each calendar quarter.  Specific amounts of loss are estimated on problem loans and historicalloss percentages are applied to the balance of the portfolio using certain portfoliostratifications.  Additionally, the evaluation takes into consideration such factors as changes in the nature and volume ofthe loan portfolio, current economic conditions, regulatory examination results, and the existence of loanconcentrations.

                On all loans past due 120 days,it is the policy of the Company to charge off those loans whose collectibility is sufficiently questionable that it can no longerjustify showing the loans as an asset on its balance sheet.  To determine if a loan should be charged off, all possiblesources of repayment are analyzed, including: (1) the potential future cash flow, (2) the value of the Company’s collateral,and (3) the strength of co-makers or guarantors of the loan in question.  When these sources do not add up to a reasonableprobability that the loan can be collected, the loan is charged off.  Loans are charged off by crediting the appropriate loancategory and debiting the reserve for loan losses account.  Any accrued but unpaid interest is charged against current yearsearnings.  All future payments received on the loan are credited to the reserve for loan losses account.

-18-
                Table 7 presents an analysis of the allowance for loan losses including charge-offactivity.

**Table 7Allowance for Loan Losses**

The following table summarizes information concerning the allowance for loanlosses:
 
2003
 
2002
 
2001
 
2000
 
1999
  
 (Amounts arepresented in thousands)
Balance at beginning of year

$2,099
 
$1,812 

 
$1,808

 
$1,469

 
$1,427

Charges-offs:

           
Commercial, financial and agricultural
35 
138 
 
275
 
69
 
29

Installment(1)
76 
162 
 
107
 
29
 
74

Real Estate10 
 -  
 -  
 -  
 - 
Total charge-offs

121 

 
300 

 
382

 
98

 
103

Recoveries:
          
Commercial, financial and agricultural
28 
9 
 
70
 
31
 
17

Installment(1)
18 
23 
 
16
 
19
 
12

Total recoveries

46 

 
32 

 
86

 
50

 
29

Net charge-offs (recoveries)

75 

 
268 

 
296

 
48

 
74

Provisions charged to operations

645 

 
555 

 
300

 
387

 
116

Balance at end of year

$2,669 

 
$2,099 

 
$1,812

 
$1,808

 
$1,469

Ratios of net charge-offs (recoveries)    during the period to average loans    outstanding during the period

.04% 
 
.15% 
 
      .21%
 
.04%
 
.09%

(1)   There were no real estate recoveries.

                At December 31, 2003, the Companyhad loan concentrations in the housing industry and in the hotel and motel industry.  The Company monitors theseconcentrations on a monthly basis to ensure that they do not exceed established internal guidelines.  The primary riskrelating to the concentration in the housing industry is a downturn in the economy adversely effecting construction of new homesand developments of new housing communities.  The Company saw a decrease in loan demand in 2003 as a result of continuedeconomic uncertainties.  The market for residential real estate and development slowed during the year, primarily in the areaof new residential development and speculative housing construction.  The Company’s primary risk relating to the hoteland motel industry is a slowdown in the travel and tourism industry.  The Company has established a maximum dollar amount ofhotel and motel loans that it is willing to fund as a result of this slowdown.  Management of the Company is confident thatall of the Company’s hotel and motel loans are adequately collateralized in the unforeseen event that cash flows fromoperations of the hotels and motels are not sufficient to meet the terms of repayment outlined in the loanagreements. 

               The Company’s allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, whichmay take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowancefor loan losses compared to a group of peer banks identified by the regulators.  During their routine examinations of banks,the FDIC and GDBF may require the Company to recognize additions to the allowance based on their judgments about informationavailable to them at the time of their examination.

 

 

-19-
               For year-end 2003 the allowance for loan losses was allocated as follows*(in thousands)*:
                                                                                                    
Allocation ofAllowance forLoan Losses
 
% ofAllowance forLoan Losses
      
% of Loans byCategory toTotal Loans

Commercial

$

374     
 
14.0%   
 
11.0%     

Commercial Construction
 
239     
 
9.0%   
 
15.5%     

Commercial Accounts Receivable
 
30     
 
1.1%   
 
0.1%     

Consumer
 
57     
 
2.1%   
 
6.4%     

Mortgages
 
392     
 
14.7%   
 
22.7%     

Cross-allocated
 
1,577     
 
  59.1%   
 
44.3%     

Total

$

2,669     
 
100.0%   
 
100.0%     

**Nonperforming Assets**

               Non-performing assets, comprised of non-accrual loans, other real estate owned, other repossessed assets and loans for whichpayments are more than 90 days past due, totaled $3,163,000 at December 31, 2003 compared to $2,899,000 at December 31,2002.   This increase is attributable to an increase in other real estate owned and loans more than90 days past due offset by a decrease in nonaccrual loans.  The decrease in nonaccrual loans was primarily due to a loan thatwas in nonaccrual status at December 31, 2002 totaling $817,000 being paid off during 2003.  The increase in loans 90 dayspast due is due to two loans totaling $563,000 that were past due 99 and 102 days.  Payments have been made on these loanssince December 31, 2003 and the loans were current as of February 29, 2004. The increase in other real estate owned is a result ofthe Bank having possession of ten parcels of foreclosed property at December 31, 2003 as compared to four parcels at December 31,2002.  There were no related party loans which were considered non-performing at December 31, 2002.

                In addition, the Bank had oneloan outstanding at December 31, 2003 that was considered an restructured due to the customer’s inability to comply to theterms of the original loan agreement.  This loan is secured by a motel and had an outstanding balance of $3,189,000 atDecember 31, 2003.

                A summary of non-performingassets at December 31, 2003, 2002, 2001, 2000 and 1999 is presented in Table 8.

**Table 8Non-performing Assets**
 
December 31,
 
2003

2002

2001

2000

1999
      
Other real estate and repossessions

$ 1,077,235    

$   291,931  

$  43,690 

$  37,265 

$ 53,398  

Accruing loans 90 days or more past due

583,316    

9,562  

33,675  

586 

-     

Non-accrual loans

1,502,640    

2,597,069  

910,822  

217,919 

25,010  

Interest on non-accrual loans whichwould have been reported

63,000    

188,000  

30,800  

7,200 

200  

Interest recognized on non-accrualloans prior to reclassification ofloans

37,000    

98,000  

57,000 

10,000 

2,000  

Restructured debt

3,189,000    

-      

-     

-     

-    

                A loan is placed on non-accrualstatus when, in management’s judgment, the collection of interest appears questionable.  As a result ofmanagement’s ongoing review of the loan portfolio, loans are classified as non-accrual generally when they are past due inprincipal and interest for more than 90 days or it is otherwise not reasonable to expect collection of principal and interest underthe original terms.   Exceptions are allowed for 90 day past due loans when such loans are well secured and in process ofcollection.  Generally, payments received on non-accrual loans are applied directly to principal.

-20-
               Management regularly monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on futureoperating results, liquidity or capital resources have been classified as non-performing.  Should economic conditionsdeteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performingloans.
**Deposits**
                The Company uses depositsprimarily to fund its loan and investment portfolios. The Company offers a variety of deposit accounts to individuals andbusinesses.  Deposit accounts include checking, savings, money market and time deposits.  As of December 31, 2003, totaldeposits were $228,621,000, an increase of $17,258,000 or 8.2% over the December 31, 2002 balance of $211,363,000.  Theincrease in deposits is primarily attributable to growth in savings, which resulted from deposit marketing campaigns conductedthroughout 2003.

                The average balance of thedeposits and the average rates paid on such deposits are summarized in Table 9.

**Table 9Deposits**
  
December31,
 
2003

2002
 
2001

Deposits:
      
 
Non-interest bearing demand

$

28,432,352
   

-
$

 23,713,917 
-
$

 20,749,925  
-

Interest bearing demand

56,018,253

  
1.37%
50,959,946
 1.74%
    41,854,844
  
2.73%

Savings

47,182,345

  
1.76%
27,015,213
 2.26%
    11,542,884
  
2.47%

Time

96,482,324

  

3.39%
89,334,650
 
4.35%
    89,971,607
  
6.10%
              
$ 

228,115,274   
$

 191,023,726  
$

164,119,260   
   
    
   
                Time deposits in amounts of$100,000 or more totaled $19,104,000, $27,709,000 and $18,621,000 at December 31, 2003, 2002 and 2001, respectively.  Table 10is a summary of the maturity distribution of time deposits in amounts of $100,000 or more as of December 31, 2003.

**Table 10Maturity of Time Deposits over $100,000**

Within 3 months

 $

6,085,000

After 3 through 6 months

6,442,000

After 6 through 12 months

3,700,000

After 12 months

2,877,000
 
$

19,104,000
**Transactions with Related Parties**
               The Company conducts transactions with directors and executive officers,including companies in which they have beneficial interest, in the normal courseof business.  It is the policy of the Company that loan transactions withdirectors and officers are made on substantially the same terms as thoseprevailing at the time made for comparable loans to other persons.

-21-
At December 31, 2003, the Company had loans outstanding to relatedparties of $4,488,000 and deposits of related parties were $13,693,000.  
**Liquidity**
                The Company 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 Company 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 anattempt to match these to meet liquidity needs.  It is the policy of the Company to monitor its liquidity to meet regulatoryrequirements and local funding requirements.

                The Company maintainsrelationships with correspondent banks that can provide funds to it on short notice, if needed.  Presently, the Company hasarrangements with correspondent banks for short term unsecured advances of up to $7,000,000.  Additional liquidity is providedto the Company through FHLB advances. 

                Cash and cash equivalentsincreased $2,129,000****to a total of $17,995,000****at year-end 2003 as cash provided by operating activities and financingactivities outpaced amounts used by investing activities.  Cash inflows from operations totaled $7,291,000 in 2003, whileinflows from financing activities totaled $3,213,000, most of which were net deposit increases during 2003 of $17,257,000, offsetby cash dividends paid during 2003 of $900,000 and the repayment of an advance from the FHLB of $13,300,000. 

                Investing activities used$8,376,000 of cash and cash equivalents, principally composed of purchases of investment securities of $54,834,000, offset by thenet repayments of loans to customers of $7,142,000 during 2003 and by the proceeds from the sales, calls and maturities ofinvestment securities totaling $40,177,000.
**Contractual Obligations and Off-Balance Sheet Arrangements**
                For maturity and repricinginformation regarding the Company’s contractual obligation, please reference the table under the heading “Asset/Liability and Interest Rate Sensitivity Management.”

                The Company is party to financial instruments with off-balance sheet risk inthe normal course of business to meet the financing needs of its customers.  These financial instruments include commitmentsto extend credit, standby letters of credit and financial guarantees.  Those instruments involve, to varying degrees, elementsof credit risk in excess of the amount recognized on the balance sheet.  The contract amounts of those instruments reflect theextent of exposure the Company has in particular classes of financial instruments.  At December 31, 2003, the contractualamounts of the Company’s commitments to extend credit and standby letters of credit were $35,732,000 and $861,000,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$35,732,000 does not necessarily represent future cash requirements.  Standby letters of credit and financial guaranteeswritten are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

               In the normal course of business the Bank is a party to financial instruments with off balance sheet risk.  See note 9 to theconsolidated financial statements for a discussion of these risks and contractual commitments.
****
-22- **Capital Resources**
                Table 11 presents theCompany’s regulatory capital position at December 31, 2003.

**Table 11Capital Ratios**

Risk-Based Capital RatiosActual as of December 31, 2003
  
Tier 1 Capital

11.3%

Tier 1 Capital minimum requirement

   4.0%

Excess

   7.3%====
  
Total Capital

12.6%

Total Capital minimum requirement

  8.0%

Excess

 4.6%====
  
Leverage Ratio As of December 31, 2003
 
Tier 1 Capital to average total assets

  8.0%

Minimum leverage requirement

  4.0%

Excess

  4.0%====

**Table 12Selected Ratios**

The following table sets out certain ratios of the Company for the yearsindicated.
 
2003

2002

2001

Net income to:
   
          Average stockholders’ equity

13.21%

14.27%

         14.50%

          Average assets

 1.03%

 1.16%

            1.22%

Dividends to net income

33.60%

34.45%

         37.61%

Average equity to average assets

 7.81%

 8.13%

             8.39%

                For further discussion of the actual and required ratios of the Company, seenote 11 to the consolidated financial statements and “Supervision and Regulation – Capital Adequacy.”
**Asset/Liability and Interest Rate Sensitivity Management**
                It is the Company’sobjective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework ofestablished cash, loan, investment, borrowing and capital policies.  Certain officers are charged with the responsibility formonitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix.  It is theoverall philosophy of management to support asset growth primarily through growth of core deposits, which include deposits of allcategories made by local individuals, partnerships and corporations.  The objective of this policy is to control interestsensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings.

                The asset/liability mix ismonitored on a regular basis.  A report reflecting the interest sensitive assets and interest sensitive liabilities isprepared and presented to the Board of Directors of the Bank on a monthly basis.

                The absolute level and volatilityof interest rates can have a significant impact on Oconee’s profitability.  The objective of interest rate riskmanagement is to identify and manage the sensitivity of net interest income to changing interest rates, in order to achieveOconee’s overall financial goals.  Based on economic conditions, asset quality and various other considerations,management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.

-23-
                Oconee uses income simulationmodeling as a tool in measuring interest rate risk and managing interest rate sensitivity.  Simulation modeling considers notonly the impact of changing market rates of interest on future net interest income, but also other potential causes ofvariability.

                Interest rate sensitivity is afunction of the repricing characteristics of Oconee’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.  Interest rate sensitivity managementfocuses on the maturity structures of assets and liabilities and their repricing characteristics during periods of change in marketinterest rates.  Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities inOconee’s current portfolio that are subject to repricing at various time horizons:  immediate; one to three months; fourto twelve months; one to five years; over five years, and on a cumulative basis.  The differences are known as interest ratesensitivity gap.

                One method to measure abank’s interest rate exposure is through its repricing gap.  The gap is calculated by citing all liabilities thatreprice or taking all assets that reprice or mature within a given time frame and subtracting all liabilities that reprice ormature within that time frame.  The difference between these two amounts is called the “gap”, the amount of eitherliabilities or assets that will reprice without a corresponding asset or liability repricing.

                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.

                Oconee also measures itsshort-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 netinterest income and margin.  The rate shock levels span three 100 basis point increments up and down from current interestrates.  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 tointerest rate risk.

                The following table summarizesthe amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003 that are contractuallymaturing, prepaying or repricing in each of the future time periods shown.  Except as stated below, the amount of assets orliabilities that mature or reprice during a particular period was determined in accordance with the contractual terms of the assetor liability.  Investment securities are reported based on the adjusted cost basis.  Adjustable rate loans are includedin the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rateloans and mortgage-backed securities are included in the periods in which they are anticipated to be repaid based on scheduledmaturities.  The Company’s savings accounts and interest-bearing demand accounts (NOW and money market depositaccounts), which are generally subject to immediate withdrawal, are included in the “Three Months or Less” category,although historical experience has proven the rates of these deposits to be more stable over the course of a year.

-24-
 
 
At December 31, 2003Maturing or Repricing in(dollars in thousands) 
ThreeMonths or Less
 
Four Months to12 Months
    
 1 to 5 Years
 
 Over 5 Years
 
 Total

Interest-earning assets:
         
Investment securities

$         30 
 
5,401  
7,331  
39,833 
52,595
Federal funds sold

8,788 
 
--- 
 
--- 
 
---
 
8,788
Loans

90,285 
 
34,248  
44,480 
 
88 
169,101
Total interest-bearing assets

$   99,103 

 
39,649 
 
51,811 

 
39,921
 
230,484
Interest-bearing liabilities:
         
Deposits:
         
Savings and demand

$  111,913 
 
--- 
 
--- 
 
---
 
111,913
Time deposits

25,746 
 
44,297  
19,066 
 
23 
89,132
Repurchase agreements

---  
 
898  
--- 
 
---
 
898          
Total interest-bearing liabilities

$  137,659 
 
45,195  
19,066 
 
23 
201,943
Interest sensitive difference per period

$   (38,556)
 
(5,546)
 
32,745 
 
39,898 
28,541
Cumulative interest sensitivity     difference

$   (38,556)
 
(44,102) 
(11,357)
 
28,541 
 
Cumulative difference to total earning     assets

(16.8%)
 
(19.3%) 
(5.0%)
 
12.4% 
 
 

Note:  For purposes of this analysis, nonaccrual loans, overdrafts andunearned interest are not included in Loans.

                At December 31, 2003 thedifference between the Company’s liabilities and assets repricing or maturing within one year was $44,102,000.  Due toan excess of liabilities repricing or maturing within one year, a rise in interest rates would generally cause the Company’snet interest income to decrease.

               The Bank also measures its short-term exposure to interest rate risk by simulating the impact to net interest income under severalrate change levels.  Interest-earning assets and interest-bearing liabilities are rate shocked to stress test the impact tothe Bank’s net interest income and margin.  The rate shock levels span three 100 basis point increments up and down fromcurrent interest rates.  This information is used to monitor interest rate exposure risk relative to anticipated interest ratetrends.  Asset/liability management strategies are developed based on this analysis in an effort to limit the Bank’sexposure to interest rate risk.****

               The Bank tracks its interest rate sensitivity on a quarterly basis using a model, which applies betas to various types ofinterest-bearing deposit accounts.  The betas represent the Bank’s inclination to reprice deposit rates based onhistorical data provided from a call report driven database.  The betas are used because it is not likely that deposit rateswould change the full amount of an interest rate increase or decrease.

               At December 31, 2003, the difference between the Bank’s assets and liabilities repricing or maturing within one year, afterapplying the betas, was $26,088,000, indicating that the Bank was asset sensitive.  Rate shock data show that the Bank’snet interest income would increase $60,000 on an annual basis if rates increased 100 basis points, and would decrease $83,000 on anannual basis if rates fell 100 basis points.****

                Certain shortcomings are inherentin the method of analysis presented in the foregoing table.  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, such as interest rate floorsand ceilings, that restrict changes in interest rates, both on a short-term basis and over the life of the asset.  Changes ininterest 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 in the table.  In addition, the optionality for callable securities is notfactored in the foregoing table.  Including optionality would reflect greater asset sensitivity than indicated.

-25-**Inflation**
                Inflation impacts the growth intotal assets in the banking industry and causes a need to increase equity capital at higher than normal rates to meet capitaladequacy requirements. The Company copes with the effects of inflation through the management of its interest rate sensitivity gapposition, by periodically reviewing and adjusting its pricing of services to consider current costs, and through managing its levelof net earnings relative to its dividend payout policy.

**ITEM 7.****        FINANCIAL STATEMENTS.**

                The financial statements and thereport of independent accountants are included in this report beginning at page F-1 of this Form 10-KSB.

**ITEM 8.      **

**CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

**               **During the Company’s two most recent fiscal years, the Company did not change accountants and had no disagreementwith its accountants on any matters of accounting principles or practices or financial statement disclosure.

**ITEM 8A.****   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 December 31, 2003.  Disclosure controls andprocedures are those controls and procedures which ensure that information required to be disclosed in this filing is accumulatedand communicated to management and is recorded, processed, summarized and reported in a timely manner and in accordance withSecurities and 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.

**PART III**

**ITEM 9.      **

**DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**

                The information contained underthe headings “Information About Nominees For Directors and Executive Officers,” “Compliance with Section16(a),” “Audit Committee and Audit Committee Financial Expert,” and “Code of Ethics” in thedefinitive Proxy Statement to be used in connection with the solicitation of proxies for the Company’s annual meeting ofshareholders to be held on May 3, 2004 to be filed with the Securities and Exchange Commission (“SEC”), is incorporatedherein by reference

**ITEM 10.****    EXECUTIVE COMPENSATION.**

**               **The information contained under the heading “Executive Compensation” in the definitive Proxy Statement tobe used in connection with the solicitation of proxies for the Bank’s annual meeting of shareholders to be held on May 3,2004, to be filed with the SEC, is incorporated herein by reference.

**ITEM 11.****    SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.**

**               **The information contained under the heading “Beneficial Ownership of Securities and Voting Rights” in thedefinitive Proxy Statement to be used in connection with the solicitation of proxies for the Company ‘s annual meeting ofshareholders to be held on May 3, 2004, to be filed with the SEC, is incorporated herein by reference.

-26-
**ITEM 12.****    CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

**               **The information contained under the heading “Certain Relationships and Related Transaction” in the definitiveProxy Statement to be used in connection with the solicitation of proxies for all the Company ‘s annual meeting ofshareholders to be held on May 3, 2004, to be filed with the SEC, is incorporated herein by reference.
 
 

 

 

 

 

 

 

 

 

 

-27-
**ITEM 13.****               EXHIBITS, LIST AND REPORTS ON FORM8–K.**

**               **(a)**           Financial Statements.**

                The following financialstatements and notes thereto of the Registrant are located beginning at page F-1 of this Form 10-KSB pursuant to Item 7 of thisReport:
-  Report of Independent Certified Public Accountants 
-  BalanceSheets  - December 31, 2003 and 2002 
-  Statements of Earnings  For the Years Ended December 31, 2003, 2002, and 2001 
-  Statements of Changes in Stockholders EquityFor the Years Ended December 31, 2003, 2002, and 2001 
-  Statements of Cash FlowsFor the Years Ended December 31, 2003, 2002, and 2001 

Notes to Financial Statements

                The following exhibits arerequired to be filed with this Report on 10-KSB by Item 601 of Regulation S-B.

3.1

Articles of Incorporation of Oconee Financial Corporation, dated August 27,1998, as amended.

3.2

Amended and Restated Bylaws of Oconee Financial Corporation, dated May 7,2001 (included as Exhibit 3.2 to the Bank’s 10-KSB filed with the SEC on April 1, 2002 and incorporated herein byreference).

4

See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation andAmended and Restated Bylaws which define the rights of the holders of Common Stock of the Bank.

10.1

Oconee State Bank Officers’ Cash Incentive Plan (included as Exhibit10.1 to the Bank’s 10-KSB filed with the SEC on April 1, 2002 and incorporated herein by reference).

14

Code of Ethics.

21

Subsidiary of Oconee Financial Corporation.

24 

Power of Attorney (included herein on the signature page).

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

32.2

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

               (b)           **Reports on Form 8-K.**

                                 Oconee did not file any reports on Form 8-K during the fourth quarter of2003.

 

-28-
**ITEM14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**.

**               **The information contained under the heading “Audit Fees” in the definitive Proxy Statement to be used inconnection with the solicitation of proxies for the Bank’s annual meeting of shareholders to be held on May 3, 2004, to befiled with the SEC, is incorporated herein by reference.
 
 

 

 

 

 

 

 

 

-29-
**REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

** **

To the Board of Directors and StockholdersOconee Financial Corporation:

We have audited the accompanying consolidated balance sheets of Oconee Financial Corporation and subsidiary as of December 31,2003 and 2002, and the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity andcash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Oconee Financial Corporation and subsidiary as of December 31, 2003 and 2002, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

Atlanta, GeorgiaFebruary 6, 2004

F-1
**OCONEE FINANCIAL CORPORATION**

**Consolidated Balance Sheets**

**December 31, 2003 and 2002**

2003
 
2002

Assets
        
Cash and due from banks, including reserve
 
    requirements of $3,766,000 and $2,964,000

$

9,206,802
 
7,399,399

Federal funds sold

8,788,000
 
8,466,000
 
                    Cash and cashequivalents

17,994,802
 
15,865,399
 
Investment securities available for sale

53,474,899
 
38,899,237

Other investments

765,429
 
1,090,429

Mortgage loans held for sale

3,162,971
 
6,842,457

Loans, net

168,481,594
 
177,453,707

Premises and equipment, net

4,521,644
 
3,454,182

Accrued interest receivable and other assets

3,555,051
 
2,680,933
 
$

251,956,390
 
246,286,344
 
Liabilities and Stockholders’ Equity
  
Deposits:
 
    Demand 

$

27,575,073
 
23,991,371

    Interest-bearing demand

61,214,763
 
56,637,322

    Savings

50,697,737
 
34,298,949

    Time

  89,132,999
 
96,435,702
 
                    Totaldeposits

228,620,572
 
211,363,344
 
Securities sold under repurchase agreements

898,468
 
742,396

Federal Home Loan Bank advances

-     
 
13,300,000

Accrued interest payable and other liabilities

1,683,688
 
1,867,600
 
                    Totalliabilities

231,202,728
 
227,273,340
 
Stockholders’ equity:
 
    Common stock, par value $2, 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

14,161,577
 
12,383,367

    Accumulated other comprehensive income

545,483
 
583,035
 
                    Totalstockholders’ equity

20,753,662
 
19,013,004
 
$

251,956,390
 
246,286,344
 
See accompanying notes to consolidated financial statements.

F-2
**OCONEE FINANCIAL CORPORATION**

**Consolidated Statements of Earnings**

**For the Years Ended December 31, 2003, 2002 and 2001**

2003
 
2002
 
2001

Interest income:
          
    Interest and fees on loans 

$

12,472,490
 
13,050,387
 
13,271,683

    Interest on federal funds sold

169,988
 
104,368
 
452,596

    Interest and dividends on securities:
  
        U. S. Treasuries and government agencies

972,110
 
991,561
 
1,314,972

        State, county and municipal

786,847
 
713,056
 
713,717

        Other

68,662
 
64,218
 
72,383

    Interest on interest-bearing deposits with banks

-    
 
-    
 
1,876
  
                       Total interest income

14,470,097
 
14,923,590
 
15,827,227
  
Interest expense:
  
    Interest-bearing demand deposits

768,243
 
887,176
 
1,142,992

    Savings deposits

831,956
 
609,431
 
284,883

    Time deposits

3,267,922
 
3,885,384
 
5,485,150

    Federal Home Loan Bank advances

552,778
 
854,931
 
854,931

    Other

15,920
 
21,898
 
37,078
  
                       Total interest expense

  5,436,819
 
6,258,820
 
7,805,034
  
                       Net interest income

9,033,278
 
8,664,770
 
8,022,193
  
Provision for loan losses

645,000
 
555,000
 
300,000
  
                       Net interest income after provision for loan                       losses

8,388,278
 
8,109,770
 
7,722,193
  
Other income:
  
    Service charges

1,069,199
 
1,013,876
 
899,088

    Gain on sale of securities

-    
 
4,357
 
-    

    Mortgage banking income

1,487,720
 
1,118,722
 
779,960

    Miscellaneous

446,245
 
367,224
 
312,456
  
                       Total other income

  3,003,164
 
2,504,179
 
1,991,504
  
Other expenses:
  
    Salaries and employee benefits

4,741,913
 
4,300,182
 
3,863,829

    Occupancy 

1,022,610
 
901,460
 
853,498

    Other operating

1,882,481
 
1,647,546
 
1,598,127
  
                       Total other expenses

7,647,004
 
6,849,188
 
6,315,454
  
                       Earnings before income taxes

3,744,438
 
3,764,761
 
3,398,243
  
Income tax expense

1,066,343
 
1,152,830
 
1,005,714
  
                       Net earnings 

$

2,678,095
 
2,611,931
 
2,392,529
  
                       Net earnings per share

$

2.98
 
2.90
 
2.66
  
See accompanying notes to consolidated financial statements.

F-3
**OCONEE FINANCIAL CORPORATION**

**Consolidated Statements of Comprehensive Income**

**For the Years Ended December 31, 2003, 2002 and 2001**

2003
 
2002
 
2001
          
Net earnings

$

2,678,095 
 
2,611,931 
 
2,392,529
  
Other comprehensive (loss) income, net of income taxes: 
  
   Unrealized gains on securities available for sale:
  
     Holding gains (losses) arising during period, net of tax
  
        benefit (expense) of $22,975, ($312,197) and ($150,176)

  (37,552)
 
510,240 
 
245,442

     Reclassification adjustment for gains included in net
  
        earnings, net of tax of $0, ($1,654) and $0

-    
 
  (2,703)
 
-    
  
                    Total othercomprehensive (loss) income

  (37,552)
 
507,537 
 
245,442
  
Comprehensive income

$

2,640,543 
 
3,119,468 
 
2,637,971
    
See accompanying notes to consolidated financial statements.

F-4
**OCONEE FINANCIAL CORPORATION**

**Consolidated Statements of Changes in Stockholders’ Equity**

**For the Years Ended December 31, 2003, 2002 and 2001**
                      
Accumulated
       
Additional  
Other
  
Common
 
Paid-in 
Retained
 
Comprehensive
  
Stock
 
Capital 
Earnings
 
Income (Loss)
 
Total
     
Balance, December 31, 2000

$
1,799,770
 
4,246,832  
9,178,677 
 
(169,944)
 
15,055,335 
     
Cash dividends declared
     
   ($1.00 per share)
 
-     
 
-     
 
(899,885)
 
-    
 
(899,885)
     
Change in net unrealized gain (loss)
     
   on investment securities available
     
   for sale, net of tax
 
-     
 
-      
 
-      
 
245,442 
 
245,442 
     
Net earnings
 
-     
 
-     
 
2,392,529 
 
-    
 
2,392,529 
     
Balance, December 31, 2001
 
  1,799,770
 
4,246,832  
10,671,321 
 
  75,498 
 
16,793,421 
     
Cash dividends declared
     
   ($1.00 per share)
 
-     
 
-     
 
(899,885)
 
-    
 
(899,885)
     
Change in net unrealized gain (loss)
     
   on investment securities available
     
   for sale, net of tax
 
-     
 
-       
 
-       
 
507,537 
 
507,537 
     
Net earnings
 
-     
 
-     
 
2,611,931 
 
-    
 
  2,611,931 
     
Balance, December 31, 2002
 
  1,799,770
 
4,246,832  
12,383,367 
 
583,035 
 
19,013,004 
     
Cash dividends declared
     
   ($1.00 per share)
 
-     
 
-     
 
(899,885)
 
-    
 
(899,885)
     
Change in net unrealized gain (loss)
     
   on investment securities available
     
   for sale, net of tax
 
-     
 
-     
 
-     
 
(37,552)
 
(37,552)
     
Net earnings
 
-     
 
-     
 
  2,678,095 
 
-    
 
  2,678,095 
     
Balance, December 31, 2003

$
1,799,770
 
4,246,832 
 
14,161,577 
 
545,483 
 
20,753,662
     
See accompanying notes to consolidated financial statements.

F-5
**OCONEE FINANCIAL CORPORATION**

**Consolidated Statements of Cash Flows**

**For the Years Ended December 31, 2003, 2002 and 2001**

2003
 
2002
 
2001

Cash flows from operating activities:
          
    Net earnings 

$  2,678,095 
 
2,611,931 
 
2,392,529 

    Adjustments to reconcile net earnings to net
  
        cash provided (used) by operating activities:
  
            Depreciation, amortization and accretion

519,707 
 
459,745 
 
307,402 

            Provision for loan losses

645,000 
 
555,000 
 
300,000 

            Provision for deferred taxes

(209,652)
 
(31,832)
 
(340)

            Gain on sale of investment securities

-     
 
(4,357)
 
-    

            Loss on sale of other real estate

85,855 
 
-    
 
-    

            Change in:
  
                Accrued interest receivable and otherassets

76,806 
 
(91,709)
 
(109,877)

                Accrued interest payable and otherliabilities

(183,912)
 
167,023 
 
(95,011)

                Mortgage loans held for sale

  3,679,486 
 
60,309 
 
(4,624,153)
  
                           Net cash provided (used) by operating activities

  7,291,385 
 
  3,726,110 
 
(1,829,450)
  
Cash flows from investing activities:
  
    Purchase of investment securities available for sale

(54,834,174)
 
(13,340,887)
 
(19,943,661)

    Proceeds from calls and maturities of investment securities
  
        available for sale

40,176,520 
 
10,416,083 
 
14,274,230  

    Proceeds from sales of investment securities available
  
        for sale      

-     
 
995,331 
 
-    

    Investment in unconsolidated subsidiary

-     
 
(325,000)
 
-    

    Proceeds from liquidation of investment in unconsolidated
  
        subsidiary

325,000 
 
-    
 
-    

    Net change in loans

7,141,514 
 
(28,763,015)
 
(28,241,918)

    Purchases of premises and equipment

(643,265)
 
(1,613,887)
 
(413,792)

    Construction in process

(922,364)
 
-    
 
-    

    Proceeds from sales of other real estate

381,372 
 
-    
 
-    
  
                           Net cash used by investing activities

  (8,375,397)
 
(32,631,375)
 
(34,325,141)
  
Cash flows from financing activities:
  
    Net change in deposits

17,257,228
 
31,635,092 
 
29,190,635 

    Net change in securities sold under repurchase agreements

156,072
 
97,380 
 
(191,071)

    Repayment of Federal Home Loan Bank advances

(13,300,000)
 
-    
 
-    

    Dividends paid

  (899,885)
 
  (899,885)
 
   (989,874)
  
                           Net cash provided by financing activities

  3,213,415
 
30,832,587 
 
28,009,690 
  
Net increase (decrease) in cash and cash equivalents

2,129,403
 
1,927,322 
 
(8,144,901)
  
Cash and cash equivalents at beginning of year

15,865,399
 
13,938,077 
 
22,082,978 
  
Cash and cash equivalents at end ofyear                                                

$ 17,994,802
 
  15,865,399 
 
13,938,077 
  
 

F-6
**OCONEE FINANCIAL CORPORATION**

**Consolidated Statements of Cash Flows, continued**

**For the Years Ended December 31, 2003, 2002 and 2001**
 
2003
 
2002
 
2001

 
               
Supplemental disclosures of cash flow information:
      
    Cash paid during the year for:
        
        Interest

$
  5,609,479 
 
6,371,957
 
7,908,814 

        Income taxes 

$
  1,213,446 
 
  901,000
 
1,044,000 
   
    Noncash investing and financing activities:
   
        Change in net unrealized gain on investment

$  
            securities available for sale, net oftax  

$
  (37,552)
 
  507,537
 
245,442 

        Change in dividendspayable  

$
-    
 
  -
 
  (89,989)

        Transfer of loansto other real estate

$
  1,232,564 
 
  229,610
 
73,164 

        Financed portion of other real estate sold

$
46,965 
 
   -
 
73,164 

See accompanying notes to consolidated financial statements.

F-7
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements**

**(1)     Summary of Significant Accounting Policies**

OrganizationOconee Financial Corporation (“OFC”) received regulatoryapproval to operate as a bank holding company on October 13, 1998, and began operations effective January 1, 1999. OFC is primarilyregulated by the Federal Reserve Bank, and serves as the one-bank holding company for Oconee State Bank.

Oconee State Bank (the “Bank”) commenced business in 1960upon receipt of its banking charter from the Georgia Department of Banking and Finance (the “DBF”). The Bank isprimarily regulated by the DBF and the Federal Deposit Insurance Corporation and undergoes periodic examinations by theseregulatory agencies. The Bank provides a full range of commercial and consumer banking services primarily in Oconee and Clarkecounties in Georgia.

In September 2002, OSB Services, Inc., a wholly owned subsidiary ofthe Bank, acquired an 8% ownership interest in Community Insurance Group, LLC through an initial capital contribution of$325,000.  Community Insurance Group, LLC was formed for the purpose of offering insurance products and services.  Priorto beginning operations, the LLC was dissolved in 2003 and capital contributions were refunded.

Principles of ConsolidationThe consolidated financial statements include the financial statements ofOconee Financial Corporation and its wholly owned subsidiary, Oconee State Bank (collectively called the “Company”).All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of PresentationThe accounting principles followed by the Company, and the methods ofapplying these principles, conform with accounting principles generally accepted in the United States of America(“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity withGAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actualresults could differ significantly from these estimates. Material estimates common to the banking industry that are particularlysusceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loanlosses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.

Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents includecash and due from banks and federal funds sold. 

Investment SecuritiesThe Company classifies its securities in one of three categories:trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term.Held to maturity securities are those securities for which the Company has the ability and intent to hold the security untilmaturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31,2003 and 2002, the Company had classified all of its investment securities as available for sale.

Available for sale securities are recorded at fair value. Unrealizedholding gains and losses, net of the related tax effect, on securities available for sale are excluded from earnings and arereported as a separate component of stockholders’ equity until realized.

A decline in the market value of any available for sale or held tomaturity security below cost that is deemed other than temporary is charged to earnings and establishes a new cost basis for thesecurity.

Premiums and discounts are amortized or accreted over the life of therelated security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale and heldto maturity are included in earnings and are derived using the specific identification method for determining the cost ofsecurities sold.

F-8
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(1)     Summary of Significant Accounting Policies, continued**

OtherInvestmentsOther investments include Federal Home Loan Bank stock and other equitysecurities.   No ready market exists for these securities and there is no quoted fair value.  These investment securitiesare carried at cost.

Mortgage Loans Held for SaleMortgage loans held for sale are carried at the lower of aggregate costor market value. At December 31, 2003 and 2002, the cost of mortgage loans held for sale approximates the market value.

Loans and Allowance for Loan LossesLoans are stated at the principal amount outstanding, net of theallowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principalamount outstanding.  Loan fees, net of certain origination costs, have been deferred and are being amortized over the lives ofthe respective loans.

Impaired loans are measured based on the present value of expected futurecash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fairvalue of the collateral if the loan is collateral dependent. A loan is impaired when, based on current information and events, itis probable that all amounts due according to the contractual terms of the loan will not be collected.

Accrual of interest is discontinued on a loan when management believes,after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collectionof interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings and interest isrecognized on a cash basis when such loans are placed on non-accrual status.

The allowance for loan losses is established through a provision for loanlosses charged to earnings. Loans are charged against the allowance for loan losses when management believes the collectibility ofthe principal is unlikely. The allowance represents an amount which, in management’s judgment, will be adequate to absorbprobable losses on existing loans that may become uncollectible.

Management’s judgment in determining the adequacy of the allowanceis based on evaluations of the collectibility of loans. These evaluations take into consideration such factors as changes in thenature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overallportfolio quality and review of specific problem loans. In determining the adequacy of the allowance for loan losses, managementuses a loan grading system that rates loans in seven different categories. Grades four through seven are assigned allocations ofloss based on standard regulatory loss percentages. All other loans are assigned loss allocations based on historical credit losspercentages. The combination of these results are compared quarterly to the recorded allowance for loan losses. Management uses anexternal loan review program to challenge and corroborate the internal grading system and provide additional analysis indetermining the adequacy of the allowance and the future provisions for estimated loan losses.

While management uses available information to recognize losses on loans,future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatoryagencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Suchagencies may require the Company to recognize additions to the allowance based on judgments different than those of management.

Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation.Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets areretired or otherwise disposed,  the cost and related accumulated depreciation are removed from the accounts, and any gain orloss is reflected in earnings for the period. The cost of maintenance and repairs which do not improve or extend the useful life ofthe respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The rangeof estimated useful lives for premises and equipment are generally as follows:
      Buildings and improvements5 - 40 years      Furniture and equipment3 - 10 years
F-9
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(1)    Summary of Significant Accounting Policies, continued**

Other Real EstateProperties acquired through foreclosure are carried at the lower of cost(defined as fair value at foreclosure) or fair value less estimated costs to dispose.  Accounting literature defines fairvalue as the amount that is expected to be received in a current sale between a willing buyer and seller other than in a forced orliquidation sale. Fair values at foreclosure are based on appraisals.  Losses arising from the acquisition of foreclosedproperties are charged against the allowance for loan losses.  Subsequent write-downs are provided by a charge to incomethrough the allowance for losses on other real estate in the period in which the need arises.

Securities Sold Under Repurchase AgreementsSecurities sold under repurchase agreements are treated as financingactivities, and are carried at the amounts at which the securities will be repurchased as specified in the respectiveagreements.

Income TaxesDeferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, isrequired to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to berecovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income taxexpense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financialreporting bases and the tax bases of the Company’s assets and liabilities result in deferred tax assets, an evaluation of theprobability of being able to realize the future benefits indicated by such assets is required. A valuation allowance is providedfor the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset willnot be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals ofdeferred tax liabilities, projected future taxable income, and tax planning strategies.

Mortgage Banking IncomeMortgage banking income represents net gains from the sale of mortgage loansand fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgageloans.

Net Earnings Per ShareEarnings per common share are based on the weighted average number of commonshares outstanding during the period while the effects of potential common shares outstanding during the period are included indiluted earnings per share. The Company had no potential common share equivalents outstanding during 2003, 2002 and 2001.  Foreach of those years, net earnings per share is calculated using the weighted average shares outstanding during the period of899,885.

ReclassificationReclassifications of certain amounts in the 2002 and 2001 financial statementshave been made to conform with the financial statement presentation for 2003.

F-10
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(2)    Investment Securities**

         Investment securities available for sale at December 31, 2003 and 2002 are asfollows:
  
December31, 2003     
Amortized        Cost     
    
GrossUnrealized    Gains     
    
GrossUnrealized    Losses   
     
EstimatedFair       Value    
          
U.S. Treasuries Government agencies
 
$ 

19,206,658 
190,864 
96,593  
19,300,929
State, county and municipal
 
17,461,717
 
759,079 
55,002  
18,165,794
Mortgage-backed securities
 
14,427,279
 
156,611 
75,714  
14,508,176
Other debt securities
  
1,500,000
  
          -      
  
         -      
   
1,500,000
           
               Total

  
$

52,595,654 
 

1,106,554
 227,309 
 
53,474,899
 
  
December 31, 2002     
Amortized        Cost     
    
GrossUnrealized    Gains     
    
GrossUnrealized    Losses   
     
EstimatedFair       Value    
          
U.S. Treasuries and government agencies
 
$ 

 14,950,595 
154,628
 
5,511
  
15,099,712

State, county and municipal
 
14,305,211
 
513,832
 
32,911
  
14,786,132

Mortgage-backed securities
 
8,203,659
 
310,170
 
436
  
8,513,393

Other debt securities
  
    500,000
  
          -      
  
         -      
   
    500,000
           
               Total

  
$

37,959,465 
 

978,630
 38,858 
 
38,899,237
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in acontinuous unrealized loss position, as of December 31, 2003 are summarized as follows:
          
Less than s12 Months  
Fair
 
Unrealized
Value

Losses

            U.S. Government agencies

$
4,896,094

96,593

            State, county and municipal

3,685,125

55,002

            Mortgage-backed securities

11,114,236

  75,714
    
$
19,695,455

227,309

There were no securities in the portfolio as of December 31, 2003 that were in a continuous unrealized loss position greaterthan twelve months.  The unrealized losses on these debt securities as of December 31, 2003 arose due to changing interestrates and are considered to be temporary.  Included in the table above were 10 out of 51 securities issued by state andpolitical subdivisions that contained unrealized losses and 11 out of 31 securities issued by U.S. government agencies andgovernment sponsored corporations, including mortgage-backed securities, that contained unrealized losses.  These unrealizedlosses are considered temporary because the repayment sources of principal and interest are government backed.

F-11
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**  (2)      Investment Securities, continued**

The amortized cost and fair value of investment securities available for sale at December 31, 2003, by contractual maturity, areshown below.  Expected maturities will differ from contractual maturities because borrowers have the right to call or prepayobligations with or without call or prepayment penalties.
     
Amortized Cost
     
EstimatedFair Value

Due within one year

$
 5,400,763
 
5,412,620

Due from one to five years
 
5,846,909
 
5,951,064

Due from five to ten years
 
8,863,167
 
9,031,527

Due after ten years
 
18,057,536
 
18,571,512

Mortgage-backed securities
 
14,427,279
 
14,508,176
  
$
52,595,654
 
53,474,899

There were no sales of securities during 2003 and 2001.  Proceeds from sales of securities available for sale during 2002were $995,331.  Gross gains of $4,357 and were realized on 2002 sales.

Securities with a carrying value of approximately $39,939,000 and $24,877,000 at December 31, 2003 and 2002, respectively, werepledged to secure public deposits and for other purposes as required by law.

**(3)       Loans**

            Major classifications of loans at December 31, 2003 and 2002are summarized as follows:
     
2003
     
2002

Commercial, financial and agricultural   

$

21,208,190

 

21,466,048

Real estate - mortgage

94,266,400

93,464,207

Real estate - construction

43,831,025

51,268,113

Consumer

11,845,183

13,354,030
       
          Total loans

171,150,798

179,552,398

Less allowance for loan losses

2,669,204

2,098,691

          Total net loans

$

168,481,594

 

177,453,707

The Bank grants loans and extensions of credit primarily toindividuals and a variety of firms and corporations located in certain Georgia counties including Oconee and Clarke. Although theBank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimprovedreal estate and is dependent upon the real estate market.

At December 31, 2003 and 2002, the recorded investment inloans that were considered to be impaired was approximately $4,692,000 and $2,597,000, respectively, of which approximately$1,503,000 at December 31, 2003 and $2,597,000 at December 31, 2002 were on nonaccrual.  In addition, the Company hadapproximately $583,000 and $9,600 in loans past due more than ninety days and still accruing interest at December 31, 2003 and2002, respectively.  These accounts are deemed to be well collateralized and in the process of collection.  The relatedallowance for loan losses on impaired loans was approximately $703,000 and $390,000 at December 31, 2003 and 2002,respectively.  The average recorded investment in impaired loans for the twelve months ended December 31, 2003 and 2002 wasapproximately $4,709,000 and $1,140,000, respectively.  For the years ended December 31, 2003, 2002 and 2001, the Companyrecognized approximately $255,000, $98,000 and $57,000, respectively, of interest income on impaired loans.

F-12
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(3)       Loans, continued**

            Changes in the allowance for loan losses were as follows:
 
2003
 
2002
 
2001
                     
Balance at beginning ofyear  

$
 2,098,691
 
1,812,041
 
1,807,671

Provision for loan losses
 
645,000
 
555,000
 
300,000

Amounts charged off
 
(120,901)
 
(300,048)
 
(381,521)

Recoveries on amounts previously charged off
 
46,414
 
31,698
 
85,891
   
Balance at end of year  

$
 2,669,204
 
2,098,691
 
1,812,041

**(4)       Premises and Equipment**

            Major classifications of premises and equipment aresummarized as follows:
 
2003
 
2002
          
Land

$
1,209,929
 
1,209,929

Buildings and improvements
 
2,468,101
 
2,474,501

Furniture and equipment
 
3,458,997
 
2,921,606

Construction in process
 
922,364
 
       -     
 
8,059,391
 
6,606,036
  
Less accumulated depreciation
 
3,537,747
 
3,151,854
  
$
4,521,644
 
3,454,182

Depreciation expense was $498,167, $412,841 and $379,385 for the years ended December 31, 2003, 2002 and 2001, respectively.

**  (5)       Deposits**

The aggregate amounts of certificates of deposit, each with a minimum denomination of $100,000, were approximately $19,104,000and $27,709,000 at December 31, 2003 and 2002, respectively.

At December 31, 2003, the scheduled maturities of certificates of deposits are as follows:

2004

$
70,065,193

2005

15,621,996

2006

769,954

2007

1,880,381

2008

772,253

Thereafter

23,222

$
89,132,999

At December 31, 2003, the Bank had one customer with deposits of approximately $15,704,000 and another customer with deposits ofapproximately $13,909,000 included in interest-bearing demand deposits.

**(6)        Income Taxes**

The components of income tax expense in the statements of earnings are as follows:
     
2003
         
2002
         
2001

      Current

$
 1,275,995 

 
1,184,662 

 
1,006,054 

      Deferred
 
  (209,652)
 
  (31,832)
 
  (340)

      Total income tax expense

$
  1,066,343 

 
1,152,830 

 
1,005,714 

F-13
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(6)        Income Taxes, continued**

The differences between income tax expense and the amount computed by applying the statutory federal income tax rate to earningsbefore income taxes are as follows:
     
2003
     
2002
     
2001

Pretax income at statutory rates 

$
1,273,109 

 
1,280,019 

 
1,155,403 

Add (deduct):
   
     Tax exempt interest income
 
(247,883)
 
(232,608)
 
(231,880)

     Non-deductible interest expense
 
23,685 
 
28,093 
 
40,424 

     State taxes, net of federal effect
 
34,485 
 
84,791 
 
42,590 

     Other
 
  (17,053)
 
  (7,465)
 
  (823)

$
1,066,343 

 
1,152,830 

 
1,005,714 

The following summarizes the sourcesand expected tax consequences of future taxable deductions (income) whichcomprise the net deferred tax asset. The net deferred tax asset is a componentof other assets at December 31, 2003 and 2002.
       
2003
       
2002

Deferred income tax assets:
  
       Allowance for loan losses

$
927,029
 
710,462

       Other real estate
 
51,904
 
28,947

       Other
 
             -     
 
4,589

                    Total gross deferred income tax assets

 
978,933

 
743,998

Deferred income tax liabilities:
  
       Premises and equipment
 
151,059
 
125,776

       Unrealized gains on investment securities available for sale
 
333,761
 
356,737
  
                    Total gross deferred income tax liabilities
 
484,820
 
482,513

Net deferred income taxasset                                                                      

$
 494,113

 
261,485

**(7)       Federal Home Loan Bank Advances**

The Bank has an agreement with the Federal Home Loan Bank(“FHLB”) whereby the FHLB agreed to provide the Bank credit facilities. Any amounts advanced by the FHLB are securedunder a blanket floating lien on all of the Bank’s 1-4 family first mortgage loans.  The Bank may draw advances up to75% of the outstanding balance of these loans based on the agreement with the FHLB.  At December 31, 2002, the Bank had oneadvance outstanding in the amount of $13,300,000, which matured and was repaid in August 2003.  There were no advancesoutstanding at December 31, 2003.

**  (8)       Related Party Transactions**

The Company conducts transactions withdirectors and executive officers, including companies in which they havebeneficial interests, in the normal course of business. It is the policy of theCompany that loan transactions with directors and officers are made onsubstantially the same terms as those prevailing at the time made for comparableloans to other persons. The following is a summary of activity for related partyloans for 2003:

Beginning balance

$

4,073,000 

New loans

1,714,000 

Repayments

(1,299,000)
   
Ending balance

$

4,488,000 

Deposits from related parties totaled approximately $13,693,000 and $7,963,000 as of December 31, 2003 and 2002,respectively.

F-14
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**  (9)       Commitments**

The Company is a party to financialinstruments with off-balance-sheet risk in the normal course of business to meetthe financing needs of its customers. These financial instruments includecommitments to extend credit, standby letters of credit and financialguarantees. Those instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized in the balance sheet. The contractamounts of those instruments reflect the extent of involvement the Bank has inparticular classes of financial instruments.

The exposure to credit loss in theevent of nonperformance by the other party to the financial instrument forcommitments to extend credit and standby letters of credit and financialguarantees written is represented by the contractual amount of thoseinstruments. The Company uses the same credit policies in making commitments andconditional obligations as it does for on-balance-sheet instruments.  Inmost cases, the Company does require collateral or other security to supportfinancial instruments with credit risk.

Contractual Amount

2003

2002

Financial instruments whose contract

    amounts represent credit risk:

        Commitments toextend credit 

$ 35,732,000     

25,331,000   

        Standby letters of credit and

           financial guarantees written 

$      861,000     

1,421,000   

 Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments generally have fixedexpiration dates or other termination clauses and may require payment of a fee.Since many of the commitments may expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements. TheCompany evaluates each customer’s creditworthiness on a case-by-case basis. Theamount of collateral obtained, if deemed necessary by the Bank, upon extensionof credit is based on management’s credit evaluation. Collateral held varies butmay include unimproved and improved real estate, certificates of deposit, orpersonal property.

Standby letters of credit andfinancial guarantees written are conditional commitments issued by the Companyto guarantee the performance of a customer to a third party. Those guaranteesare primarily issued to businesses in the Company’s delineated trade area. Thecredit risk involved in issuing letters of credit is essentially the same asthat involved in extending loan facilities to customers. The Company holds realestate, equipment, automobiles and customer deposits as collateral supportingthose commitments for which collateral is deemed necessary.

The Company sells participations incertain types of loans in order to comply with legal lending limits. At December31, 2003, the Company had participations sold outstanding of approximately$3,306,000.  Of the total participations sold, approximately $1,427,000 hasbeen sold under agreements that provide for the participating institutions toreceive 100% of their investment prior to the Company receiving any principlepayments, regardless of repayment, default, foreclosure or liquidation.

The Company has $7,000,000 available for the purchase of overnight federal funds from two correspondent financial institutionsas of December 31, 2003 and 2002.

**(10)      Profit Sharing Plan**

The Company has a contributory profitsharing plan which is available to substantially all employees subject tocertain age and service requirements. Contributions to the plan are determinedannually by the Board of Directors. The total contributions by the Company for2003, 2002 and 2001 were approximately $299,000, $264,000 and $242,000,respectively.

F-15
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**  (11)      Regulatory Matters**

The Company is subject to variousregulatory capital requirements administered by the federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Company’s financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involve quantitativemeasures of the assets, liabilities and certain off-balance-sheet items ascalculated under regulatory accounting practices. The capital amounts andclassification are also subject to qualitative judgments by the regulators aboutcomponents, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts andratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets(all as defined). Management believes, as of December 31, 2003, the Bank met all capital adequacy requirements to which it issubject.

As of December 31, 2003, the most recent notification from the FDIC categorized the Bank as well capitalized under theregulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum totalrisk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since thatnotification that management believes have changed the Bank’s category.

The capital ratios for the Company areessentially the same as those of the Bank. Therefore, only the Bank’s capitalratios are presented in the following table (dollars in thousands):

To Be Well

Capitalized Under

For Capital

Prompt Corrective

Actual

Adequacy Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

**As of December 31, 2003:**

    Total Capital

        (to Risk-Weighted Assets)

$ 22,347

12.6%

$ 14,232

8.0%

$ 17,790

10.0%

    Tier 1 Capital

        (to Risk-Weighted Assets)

$ 20,119

11.3%

$   7,116

4.0%

$ 10,674

6.0%

    Tier 1 Capital

        (to Average Assets)

$ 20,119

8.0%

$ 10,085

4.0%

$ 12,607

5.0%
 
 
 
 
 
 
 
**As of December 31, 2002:**

    Total Capital

        (to Risk-Weighted Assets)

$ 20,410

11.4%

$ 14,328

8.0%

$ 17,909

10.0%

    Tier 1 Capital

        (to Risk-Weighted Assets)

$ 18,311

10.2%

$   7,164

4.0%

$ 10,746

6.0%

    Tier 1 Capital

        (to Average Assets)

$ 18,311

7.5%

$   9,786

4.0%

$ 12,233

5.0%

**  (12)      Stockholders’ Equity**

Dividends paid by the Bank are theprimary source of funds available to the Company for payment of dividends to itsstockholders and for other working capital needs. Banking regulations limit theamount of dividends that may be paid without prior approval of the regulatoryauthorities. These restrictions are based on the level of regulatory classifiedassets, the prior year’s net earnings, and the ratio of equity capital to totalassets.  Approximately $1,354,000 is available for payment of dividendsfrom the Bank to the Company in 2004.

F-16
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**  (13)      Fair Value of Financial Instruments**

The Company is required to disclosefair value information about financial instruments, whether or not recognized onthe face of the balance sheet, for which it is practicable to estimate thatvalue. The assumptions used in the estimation of the fair value of the Company’sfinancial instruments are detailed below. Where quoted prices are not available,fair values are based on estimates using discounted cash flows and othervaluation techniques. The use of discounted cash flows can be significantlyaffected by the assumptions used, including the discount rate and estimates offuture cash flows. The following disclosures should not be considered asurrogate of the liquidation value of the Company, but rather a good faithestimate of the increase or decrease in value of financial instruments held bythe Company since purchase, origination or issuance.

Cash and Cash EquivalentsFor cash, due from banks, and federal funds sold, thecarrying amount is a reasonable estimate of fair value.

InvestmentSecurities Available for SaleFair values for investment securities are based onquoted market prices.

Other InvestmentsThe carrying amount of other investments approximatesfair value.

Loans and Mortgage Loans Held forSaleThe fair value of fixed rate loans is estimated bydiscounting the future cash flows using the current rates at which similar loanswould be made to borrowers with similar credit ratings. For variable rate loans,the carrying amount is a reasonable estimate of fair value. Mortgage loans heldfor sale are valued based on the current price at which these loans could besold into the secondary market.

Deposits and Securities Sold UnderRepurchase AgreementsThe fair value of demand deposits, interest-bearingdemand deposits, savings, and securities sold under repurchase agreements is theamount payable on demand at the reporting date. The fair value of fixed maturitycertificates of deposit is estimated by discounting the future cash flows usingthe rates currently offered for deposits of similar remaining maturities.

FHLB AdvancesThe fair value of FHLB advances isestimated based upon discounted future cash flows using a discount rate comparable to the current market rate for suchborrowings.

Commitments to Extend Credit and Standby Letters of CreditCommitments to extend credit and standby letters of credit are generally short-term and carry variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

LimitationsFair value estimates are made at a specific point in time, based on relevant market information and information about thefinancial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one timethe Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of theCompany’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in natureand involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes inassumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate thevalue of anticipated future business and the value of assets and liabilities that are not considered financial instruments.Significant assets and liabilities that are not considered financial instruments include the deferred income taxes and premises andequipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significanteffect on fair value estimates and have not been considered in the estimates.

F-17
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(13)      Fair Value of Financial Instruments, continued**

The carrying amount and estimated fair values of the Company’s financial instruments at December 31, 2003 and 2002 are asfollows (in thousands):
  
2003 
2002
Carrying
       
Estimated
       
Carrying
       
Estimated

Amount
 
Fair Value
 
Amount
 
Fair Value

Assets:
   
    Cash and cash equivalents

$

17,995

 
17,995

 
  15,865

 
15,865

    Investment securities

$

53,475

 
53,475

 
38,899

 
38,899

    Other investments

$

765

 
765

 
1,090

 
1,090

    Mortgage loans held for sale

$

3,163

 
3,163

 
  6,842

 
6,842

    Loans, net

$

168,482

 
168,841

 
177,453

 
178,008

 

 

 

Liabilities:

 

 

 

    Deposits and securities sold under

 

 

 

       repurchase agreement

$

229,519

 
230,504

 
212,106

 
212,558

    FHLB advances

$

-

 
-

 
13,300

 
13,481

**  (14)     Other Operating Expenses**

Components of other operating expenses which are greater than 1% of interest income and other income are as follows:
 
2003

2002

2001

Professional fees

$ 337,226

293,435

241,092

Marketing expenses

$ 182,116

187,622

206,590

**(15)   Oconee Financial Corporation (Parent Company Only) Financial Information**

Balance Sheets

December 31, 2003 and 2002
         
2003
       
2002

Assets
  
Cash

$
990,363
 
1,015,056

Investment in subsidiary
 
20,664,227
 
18,893,984

Other assets
 
-
 
2,513

$
21,654,590

 
19,911,553

Liabilities and Stockholders’ Equity
  
Other liabilities

$
900,928
 
898,549

Stockholders’ equity
 
20,753,662
 
19,013,004

$
21,654,590

 
19,911,553

F-18
**OCONEE FINANCIAL CORPORATION**

**Notes to Consolidated Financial Statements, continued**

**(15)   Oconee Financial Corporation (Parent Company Only) Financial Information, continued**

Statements of Earnings
For the Years Ended December 31, 2003,2002 and 2001              
2003
       
2002
       
2001
   
Dividends from subsidiary

$
899,885
 
  899,885
 
899,885
   
Other expenses
 
47,689
 
49,606
 
63,472
   
        Earnings before income taxes and equity in
   
            undistributed earnings of subsidiary
 
852,196
 
850,279
 
836,413
   
Income tax benefit
 
18,104
 
18,830
 
24,094
   
        Earnings before equity in undistributed earnings
   
            of subsidiary
 
870,300
 
869,109
 
860,507
   
Equity in undistributed earnings of subsidiary
 
1,807,795
 
1,742,822
 
1,532,022
   
        Net earnings

$
2,678,095
 
2,611,931
 
2,392,529
       
Statements of Cash Flows
For the Years Ended December 31, 2003,2002 and 2001        
2003
 
2002
 
2001

Cash flows from operating activities:
   
    Net earnings

$
2,678,095 
 
2,611,931 
 
2,392,529 

    Adjustments to reconcile net earnings
   
        to net cash provided by operating activities:
   
            Equity in undistributed earnings of subsidiary
 
(1,807,795)
 
(1,742,822)
 
(1,532,022)

            Change in:
   
                Other assets
 
2,513 
 
2,516 
 
2,515 

                Other liabilities
 
2,379 
 
  (6,845)
 
2,638 

                               Net cash provided by operating activities
 
875,192 
 
864,780 
 
865,660 

Cash flows from financing activities, consisting of

 

 

 

   dividends paid

 
  (899,885)

 
  (899,885)

 
  (989,874)

Change in cash

 
(24,693)

 
(35,105)

 
(124,214)

Cash at beginning of year

 
  1,015,056 

 
  1,050,161 

 
  1,174,375 

Cash at end of year

$
  990,363 

 
  1,015,056 

 
  1,050,161 

F-19
**SIGNATURES**

                Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused this Report on Form 10–KSB to besigned on its behalf by the undersigned, thereunto duly authorized, in the City of Watkinsville, State of Georgia, on the30th day of March, 2004.

                                                                      

**OCONEE FINANCIAL CORPORATION (Registrant)**

By:   /s/ B.Amrey Harden         B. Amrey Harden          Title: President and Chief Executive Officer

**POWER OF ATTORNEY AND SIGNATURES**

                KNOW ALL MEN BY THESE PRESENTSthat each person whose signature appears below constitutes and appoints B. Amrey Harden or Douglas D. Dickens and either of them(with full power in each to act alone), as true and lawful attorneys–in–fact, with full power of substitution, for himand in his name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10–KSB and to filethe same, with all exhibits thereto and other documents in connection therewith, with the SEC, hereby ratifying and confirming allthat said attorney–in–fact, or their substitute or substitutes, may lawfully do or cause to be done by virtuethereof.

                Pursuant to the requirements ofthe Securities Act of 1934, this Report on Form 10–KSB has been signed by the following persons in the capacities indicatedon the 30th day of March 2004.

**Signature**

**Title**
              
   */s/ G. Robert        Bishop*

 

Director

G. Robert Bishop

 

 

 

   */s/ Jimmy L.        Christopher*

 

Director

Jimmy L.        Christopher

 

 

 

   */s/ Douglas D.        Dickens*

 

Chairman of the        Board of Directors

Douglas D.        Dickens

 

 

 

   */s/ Walter T.        Evans, Sr.*

 

 Director

Walter T. Evans,        Sr.

 

 

 

 *  /s/ John A.        Hale*

 

Vice Chairman of the        Board of Directors

John A. Hale

 

 

 

 *  /s/ B. Amrey        Harden*

 

President and        Chief Executive Officer, Director

B. Amrey Harden

 

 

 

 *  /s/ Henry C.        Maxey*

 

Director

Henry C. Maxey

 

 

 

 *  /s/ Carl R.        Nichols*

 

Director

Carl R. Nichols

 

 

 

 *  /s/ Ann        Breedlove Powers*

 

Director

Ann Breedlove        Powers

 

 

 

   */s/ Jerry K.        Wages*

 
Senior Executive Vice        President and Chief Financial
Jerry K. Wages

Officer, Chief        Accounting Officer,  Corporate Secretary, and Director

 

 

   */s/ Virginia S.        Wells*

 

Director

Virginia S. Wells

 

 

 

   */s/**Tom F. Wilson*

 

Director

Tom F. Wilson

 
****
-20-
**INDEX TO EXHIBITS**

**Exhibit**

**Description**

3.1

Articles of Incorporation of Oconee Financial Corporation, dated August 27,1998, as amended.

14

Code of Ethics.

21

Subsidiary of Oconee Financial Corporation. 

24 

Power of Attorney (included herein on the signature page).

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

31.2

Certification of Chief Financing Officer pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

32.2

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.