U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C.  20549


FORM
10-K




x  Annual
Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
  For the
Fiscal Year Ended December 31, 2008
  o  Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934


Commission
File Number 000-25267




OconeeFinancial 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 offices)
              (Zip
      Code)





Registrant's
telephone number, including area code:  (706)
769-6611.





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





Securities
registered pursuant to Section 12(g) of the Act:


Title of each class
              Name of each exchange on which
      registeredCommon
      Stock, par value $2.00 per share
              None.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


o  Yes               x    No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


o  Yes              x     No





Indicate
by check mark 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 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  x  Yes    o  No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):




Large
      accelerated filer  o
              Accelerated
      filer  o
              Non-accelerated
      filer  o
              Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  o  Yes     x  No





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days:  As of April 10,
2009:  533,505 shares of common stock with an aggregate value of
$14,852,779 (based on approximate book value of the common stock).





As of
April 10, 2009, there were issued and outstanding 899,815 shares of common
stock.




Documents
Incorporated by Reference




Portions
of the registrant’s definitive Proxy Statement for the 2009 annual meeting of
shareholders are incorporated by reference into Part III.















PART I






ITEM
1.                      BUSINESS.




General




Oconee Financial Corporation
(“Oconee”), a registered bank holding company, was incorporated under the laws
of the State 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
owned subsidiary, the Bank, which was incorporated as a bank under the laws of
the State of Georgia in 1959.




At December 31, 2008, the Bank’s total
assets were $308,156,000, compared to $321,313,000 at year-end 2007.  Over
the past 5 years, total assets of the Bank have grown by $56,200,000,
representing an increase of 22.3%.




Services




The Bank is a community oriented,
full-service commercial bank, headquartered in Oconee County, Georgia with
six full-service banking offices and seven automated teller machines
(“ATMs”).  The Bank places an emphasis on retail and small business
banking, and offers customary banking services such as consumer and commercial
checking accounts, NOW accounts, money market accounts, savings accounts,
certificates of deposit, individual retirement accounts, safe deposit
facilities, and money transfers. The Bank finances commercial and consumer
transactions, makes secured and unsecured loans, offers lines of credit, VISA
and MasterCard accounts, and provides a variety of other banking
services.




Markets




The Bank operates primarily in Oconee
and Athens-Clarke Counties in Georgia.  The Bank’s secondary market is
defined as other counties contiguous to Oconee County, which include
Greene, Morgan, Walton, and Barrow Counties, and the rest of the Athens
Metropolitan Statistical Area.




Deposits




The Bank offers a full range of deposit
accounts and services to individuals and businesses.  At December 31, 2008,
the Bank’s deposit base totaled $275,038,000and consisted
of the following types of
accounts:




Amount
                        
                        
                        Percentage(In
      thousands)Non-interest
      bearing demand deposits
                        
                        $
                        27,413
                        
                        
                        
                        10.0%Interest-bearing
      NOW accounts
                        
                        
                        61,514
                        
                        
                        
                        22.4%Money
      market deposit accounts
                        
                        
                        9,820
                        
                        
                        
                        3.6%Savings
      deposits
                        
                        
                        38,012
                        
                        
                        
                        13.8%Time
      deposits of less than $100,000
                        
                        
                        57,088
                        
                        
                        
                        20.8%Time
      deposits of $100,000 or more
                        
                        
                        71,244
                        
                        
                        
                        25.9%Individual
      retirement accounts
                        
                        
                        9,947
                        
                        
                        
                        3.6%Total
      Deposits
                        
                        $
                        275,038
                        
                        
                        
                        100.0%




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




2




Loans




The Bank makes both
secured and unsecured loans to individuals and businesses.  At
December 31, 2008, the Bank’s loan portfolio totaled $195,772,000, consisting of
the following categories of
loans:




Amount
                    
                    
                    Percentage(In
      thousands)Commercial,
      financial and agricultural
                    
                    $
                    28,029
                    
                    
                    
                    14.3%Real
      estate – mortgage
                    
                    
                    105,460
                    
                    
                    
                    53.9%Real
      estate – commercial construction
                    
                    
                    51,568
                    
                    
                    
                    26.3%Real
      estate – consumer construction
                    
                    
                    2,897
                    
                    
                    
                    1.5%Consumer
                    
                    
                    7,818
                    
                    
                    
                    4.0%Total
      loans
                    
                    $
                    195,772
                    
                    
                    
                    100.0%




The following table shows the amounts
and growth for loans,
deposits, capital, and total assets at December 31, for the years ended
2003-2008 (dollar amounts are in millions):




2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004
                          
                          
                          2003
                          
                          
                          5-Year GrowthLoans
                          
                          $
                          195.8
                          
                          
                          $
                          199.8
                          
                          
                          $
                          217.9
                          
                          
                          $
                          206.5
                          
                          
                          $
                          186.1
                          
                          
                          $
                          171.2
                          
                          
                          $
                          24.6Deposits
                          
                          
                          275.0
                          
                          
                          
                          286.5
                          
                          
                          
                          304.0
                          
                          
                          
                          256.8
                          
                          
                          
                          231.8
                          
                          
                          
                          228.6
                          
                          
                          
                          46.4Capital
                          
                          
                          25.8
                          
                          
                          
                          29.3
                          
                          
                          
                          26.7
                          
                          
                          
                          23.7
                          
                          
                          
                          22.3
                          
                          
                          
                          20.8
                          
                          
                          
                          5.0Total
      Assets
                          
                          
                          308.2
                          
                          
                          
                          321.3
                          
                          
                          
                          336.5
                          
                          
                          
                          285.1
                          
                          
                          
                          256.9
                          
                          
                          
                          252.0
                          
                          
                          
                          56.2





The Bank
experienced declines in loans, deposits, total assets and capital during
2008.  The primary factor contributing to the decline in loans was a
slowdown in the housing and real estate market due to a downturn in the
economy.  During 2008, the Bank’s real estate construction loan
portfolio decreased $9,613,000, or 15.0%, primarily due to a lack of demand for
residential construction as a result of the economic downturn.  The
decrease in deposits during 2008 was primarily due to a management decision to
lower the balance of outstanding time deposits through lower interest rates in
order to better match the Bank’s funding with its loan demand, which slowed
during 2008.





As of
December 31, 2008, the Bank had concentrations of loans to the housing industry
and loans to the hotel and motel industry.  Outstanding construction and
development loans, all of which are secured by real estate, totaled $37,315,000,
which represented 19.1% of the Bank’s loan portfolio at December 31, 2008. 
At year-end 2008, total outstanding balances and commitments for development and
construction loans to the housing industry were $44,184,000, which represented
22.6% of the Bank’s total loans and 174.0% of the Bank’s Tier 1 equity
capital. As of
December 31, 2008, the Bank's established guideline for this concentration was
to be at a balance that represents less thank 425% of Tier 1 equity
capital.  Subsequent to December 31, 2008, the Bank lowered its
guideline for this concentration to be at a balance that represents less than
250% of Tier 1 equity capital. The
market for residential real estate and development continued to be slow during
2008, primarily in the area of new residential development and speculative
housing construction, resulting in a decrease in demand for loans funding this
industry.





As of
December 31, 2008, total outstanding balances for hotel and motel industry loans
were $21,403,000, which represented 10.9% of the Bank’s total loans. At year-end
2008, total outstanding balances and commitments for hotel and motel loans were
$21,915,000, which represented 11.2% of the Bank’s total loans and 83.1% of the
Bank’s Tier 1 equity capital. As of
December 31, 2008, the Bank's established guideline for this concentration was
to be at a balance that represents less thank 200% of Tier 1 equity
capital.  Subsequent to December 31, 2008, the Bank lowered its
guideline for this concentration to be at a balance that represents less than
100% of Tier 1 equity capital. Subsequent
to December 31, 2008, the Bank took ownership of a motel through foreclosure
proceedings.   This motel loan was included in impaired loans as
of December 31, 2008.  The Bank continues to own the motel and is
currently contracting with a hospitality management group to operate the motel
while the Bank is marketing the property for sale.





Lending
Policy




The current lending policy of the Bank
is to offer consumer, real estate, and commercial credit services to individuals
and entities that meet the Bank’s credit standards.  Lending authority is
delegated by the Board of Directors of the Bank to loan officers, each of whom
is limited in the amount of secured and unsecured loans which he can make to a
single borrower or a related group of borrowers.  The Bank provides
each lending officer with written guidelines for lending activities to ensure
that the Bank’s policies and procedures are followed
consistently.  Throughout the lending decision, the customer’s credit
worthiness is examined through credit bureau reports on the borrower’s credit
history as well as the borrower’s credit history at the Bank.  Various
financial information and other information are obtained from the borrower and
guarantor(s) and are analyzed to determine the borrower’s ability to repay the
loan.  In addition, collateral adequacy is examined to determine
whether or not the collateral would be sufficient to cover any of the Bank’s
risk exposure in the event that the Bank is required to rely on the liquidation
of the collateral as a secondary source of repayment.




3




The Board of Directors of the Bank is
responsible for approving and monitoring the loan policy, providing guidance and
counsel to all lending personnel and approving all extensions of credit to a
single borrower over $500,000, primarily through the Loan Committee of the Board
of Directors.  This committee convenes weekly to review and approve
any loans over $500,000 and also to review nonperforming loans and potential
problem loans.




Loan Review and
Non–Performing Assets




The Bank periodically reviews its loan
portfolio to determine deficiencies and corrective action to be taken. 
Senior lending officers conduct reviews of borrowers with total direct and
indirect indebtedness of $1,000,000 or more and closely monitor 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 Directors of the
Bank.  In addition, the Bank maintains internal classifications of
potential problem loans.  The Bank also utilizes an independent external
loan review specialist to review all customer relationships with outstanding
debt exceeding $1,000,000 as well as a sampling of loan relationships with
balances below $1,000,000.




The portion of loans that are not
supported by collateral are typically charged off when the loan reaches a past
due status of 120 days.  For those customers with fully-secured loans who
have begun bankruptcy proceedings, as well as loans on which the Bank has begun
foreclosure or other steps of collection, the loans are placed in nonaccrual
status. Exceptions involve loans which are technically past due but in the
process of renewal.




Investment
Policy




The Bank’s investment policy provides
guidelines for determining permissible investments in the investment portfolio,
credit criteria and quality ratings, the desired mix among those investments,
and preferred maturity distribution of the portfolio.  The Bank’s
objectives concerning its investment portfolio require balancing the Bank’s
goals with respect to asset/liability management, profitability, liquidity,
pledging, and local community support.  The Bank’s President and CEO,
Senior Executive Vice President, Vice President and CFO are authorized to buy
and sell securities according to criteria set forth in the investment
policy.  Individual transactions, portfolio composition, and performance
are reviewed by the Bank’s Investment and Asset/Liability Management Committee
and the full Board of Directors of the Bank on a monthly basis.  The
investment policy is reviewed annually by the Bank’s Board of
Directors.




Generally, all of the Bank’s securities
are classified as “Available for Sale”.  As of December 31, 2008,
investment securities totaled $79,762,000.




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




(1)
                      Credit risk, or the
      risk of default of the issuer.  Government-sponsored agency
      securities comprised 77.1% of the portfolio; the credit risk associated
      with these securities is primarily limited to the risk of default of the
      U.S. Government and its agencies.  State, County, and Municipal bonds
      represent 21.1% of the portfolio with the credit risk limited to the risk
      of default of the issuing authorities.  Other debt securities
      comprised 1.8% of the portfolio with the credit risk being the risk of
      default of the issuer of the debt security.(2)
                      Interest rate risk, or
      the risk of adverse movements in interest rates on the value of the
      portfolio.  In general, a rise in interest rates will cause
      the value of the Bank’s securities portfolio to decline.  The longer
      the maturity of an individual security, the greater the effect of change
      in interest rate on its value.  For a discussion of the Bank’s
      interest rate risk management policies and management, see “Management’s
      Discussion and Analysis of Financial Condition or Plan of Operation –
      Asset/Liability and Interest Rate Sensitivity
      Management.”




4




Competition




The Bank competes in Oconee County
with seven other commercial banks.  With four full-service banking offices
within Oconee County, the Bank is the market leader in Oconee County
in terms of assets, deposits, facility locations, and market
coverage.




The following table shows deposits by
financial institution along with market share in Oconee County for the
period ended June 30, 2008 (dollars in thousands):




Total
                  Deposits
                
                
                Deposit
                  Market
                  ShareOconee
      State Bank
                
                $
                249,717
                
                
                
                41.4
                %North
      Georgia Bank
                
                
                129,646
                
                
                
                21.5
                %Athens
      First Bank & Trust Company
                
                
                104,504
                
                
                
                17.3
                %Bank
      of America, N.A.
                
                
                52,892
                
                
                
                8.8
                %Community
      Bank & Trust
                
                
                31,287
                
                
                
                5.2
                %First
      American Bank & Trust Company
                
                
                14,798
                
                
                
                2.4
                %SunTrust
      Bank
                
                
                12,864
                
                
                
                2.1
                %First
      Georgia Banking Company
                
                
                7,982
                
                
                
                1.3
                %Total
      deposits
                
                $
                603,690
                
                
                
                100.0
                %




The Bank also competes in
Athens-Clark County.  There are sixteen other commercial banks in
Athens-Clarke County, fiveof which have
offices in Oconee County.  As of June 30, 2008, the other fourteen
banks located in Athens-Clarke County held deposits totaling
$2,115,430,000.  The Bank’s physical presence in Athens-Clarke County
is limited to one full-service branch and a full-service in-store branch in the
East Athens Wal-Mart Supercenter.




In addition, the Bank competes with
commercial banks, thrifts, and various other financial institutions and
brokerage firms and, to a lesser extent, with credit unions and for loans with
insurance companies, small loan or finance companies, and certain governmental
agencies.




The business of the Bank is not
materially seasonal.  The slowing of the construction and development
industry has lessened the effect of the Bank’s seasonal slowdown in the Fall and
Winter seasons relating to that industry. Historically, the seasonal slowdown in
construction and development has impacted the Bank, but not to the degree that
there is an appreciable impact upon the Bank’s Balance Sheet or Statement of
Earnings.




Forward Looking
Statements




Information provided by Oconee may
constitute “forward-looking” statements under the Private Securities Litigation
Reform Act of 1995 and are subject to numerous risks and uncertainties. 
Any statements made in this Annual Report on Form 10-K including any statements
incorporated by reference, which are not statements of historical fact, are
forward-looking statements.  These forward-looking statements and other
forward-looking statements made by us or our representatives are based on a
number of assumptions and involve a number of risks and uncertainties, and,
accordingly, actual results could differ materially.  Factors that could
cause actual results to differ from results discussed in forward-looking
statements include, but are not limited to:




·
            the
      conditions in the financial markets and economic conditions
      generally;


·
            our
      ability to raise capital;


·
            our
      liquidity;


·
            our
      construction and land development
loans;


·
            asset
      quality;


·
            the
      adequacy of the allowance for loan
losses;


·
            material
      unforeseen changes in the financial stability and liquidity of Oconee’s
      credit customers,


·
            technology
      changes, difficulties or failures;


·
            the
      Corporation’s ability to execute its business
  strategy;


·
            the
      loss of key personnel;


·
            economic
      conditions (both generally in the United States and in the markets where
      Oconee operates);


·
            competition
      from other providers of financial services;


·
            changes in
      regulation andmonetary and fiscal policies and laws, including
      Federal Reserve interest rate policies;


·
            inflation
      or fluctuation in market
conditions;


5





·
            losses
      due to fraudulent and negligent conduct of customers, service providers
      and employees;


·
            changes
      in or application of environmental and other laws and regulations to we
      are subject;


·
            political,
      legal and local economic conditions and
  developments;


·
            financial
      market conditions and the results of financing
  efforts;


·
            consumer
      income levels and spending and savings habits
  changes


·
            changes
      in interest rates;


·
            weather,
      natural disasters and other catastrophic events, and other factors
      discussed in our other filings with the Securities and Exchange
      Commission; and


·
            Oconee’s
      ability to manage the foregoing risks and factors; all of which are
      difficult to predict and which may be beyond the control of
      Oconee




Oconeeundertakes no obligation to revise
forward-looking statements to reflect events or changes after the date of this
discussion or to reflect the occurrence of unanticipated
events.




Supervision and
Regulation




The following is an explanation of the
supervision and regulation of Oconee and the Bank as financial
institutions.  This explanation does not purport to describe
supervision and regulation of general business companies.




General.  Oconee is a
registered bank holding company subject to regulation by the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding
Company Act of 1956, as amended (the “Act”).  Oconee is required to file
annual and quarterly financial information with the Federal Reserve and is
subject to periodic examination by the Federal Reserve.




The Act requires every bank holding
company to obtain the prior approval of the Federal Reserve before (1) it may
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank that it does not already control; (2) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of a bank; and (3) it may merge or consolidate with any other bank
holding company.  In addition, a bank holding company is generally
prohibited from engaging in, or acquiring, direct or indirect control of the
voting shares of any company engaged in non-banking activities.  This
prohibition does not apply to activities found by the Federal Reserve, by order
or regulation, to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.  Some of the activities that the
Federal Reserve has determined by regulation or order to be closely related to
banking are:




·
            making or servicing loans and
      certain types of leases;


·
            performing certain data
      processing services;


·
            acting as fiduciary or investment
      or financial advisor;


·
            providing brokerage
      services;


·
            underwriting bank eligible
      securities;


·
            underwriting debt and equity
      securities on a limited basis through separately capitalized subsidiaries;
      and


·
            making investments 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 closely related or incidental to banking (as discussed above), the
Gramm-Leach-Bliley Act (the “GLB Act”) relaxed the previous limitations and
permitted bank holding companies to engage in a broader range of financial
activities.  Specifically, bank holding companies may elect to become
financial holding companies which may affiliate with securities firms and
insurance companies and engage in other activities that are financial in
nature.  Among the activities that are deemed “financial in nature”
include:




·
            lending,
      exchanging, transferring, investing for others or safeguarding money or
      securities;


·
            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
      an investment company;


·
            issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold directly;
and


·
            underwriting,
      dealing in or making a market in
securities.  6
  A bank holding company may become a
financial holding company under this statute only if each of its subsidiary
banks is well capitalized, is well managed and has at least a satisfactory
rating under the Community Reinvestment Act.  A bank holding company that
falls out of compliance with such requirements may be required to cease engaging
in certain activities.  Any bank holding company that does not elect to
become a financial holding company remains subject to the current restrictions
of the bank holding company restrictions of the Act.




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




Oconee has no current plans to become a
financial holding company.




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




Oconee is an “affiliate” of the Bank
under the Federal Reserve Act, which imposes certain restrictions on (1) loans
by the Bank to Oconee, (2) investments in the stock or securities of Oconee by
the Bank, (3) the Bank’s taking the stock or securities of an “affiliate” as
collateral for loans by the Bank to a borrower, and (4) the purchase of assets
from Oconee by the Bank.  Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.




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




Payment
of Dividends.  Oconee is a legal entity separate and distinct from
the Bank.  Most of the revenues of Oconee result from dividends paid to it
by the Bank.  There are statutory and regulatory requirements applicable to
the payment of dividends by the Bank, as well as by Oconee to its
shareholders.




Under the regulations of the GDBF,
dividends may not be declared out of the retained earnings of a state bank
without first obtaining the written permission of the GDBF unless such bank
meets all the following requirements:




(a)
                total classified assets as of the
      most recent examination of the bank do not exceed 80% of equity capital
      (as defined by regulation);
 (b)
                the aggregate amount of dividends
      declared or anticipated to be declared in the 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 than
6%.




The payment of dividends by Oconee and
the Bank may also be affected or limited by other factors, such as the
requirement to maintain adequate capital above regulatory guidelines.  In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is 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, that such
bank cease and desist from such practice.  The FDIC has issued a policy
statement providing that insured banks should generally only pay dividends out
of current operating earnings.  In addition to the formal statutes and
regulations, regulatory authorities consider the adequacy of the Bank’s total
capital in relation to its assets, deposits and other such items.  Capital
adequacy considerations could further limit the availability of dividends to the
Bank. At December 31, 2008, no dividends could be declared without
regulatory approval due to the net loss incurred for the year ended December 31,
2008.




7




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 market operations in U.S.
government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits.  In view of changing
conditions in the national economy and in the money markets, as well as the
effect of actions by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels, loan demand or the business and earnings of the
Bank.




Capital
Adequacy.The
Federal Reserve and the FDIC have implemented substantially identical risk-based
rules for assessing bank and bank holding company capital adequacy.  These
regulations establish minimum capital standards in relation to assets and
off-balance sheet exposures as adjusted for credit risk.  Banks and bank
holding companies are required to have (1) a minimum level of total capital to
risk-weighted assets of 8%; (2) a minimum Tier 1 Capital to risk-weighted assets
of 4%; and (3) a minimum shareholders’ equity to risk-weighted assets of
4%.  In addition, the Federal Reserve and the FDIC have established a
minimum 4% leverage ratio of Tier 1 Capital to total assets for all but the most
highly rated banks and bank holding companies.  “Tier 1 Capital” generally
consists of common equity not including unrecognized gains and losses on
securities, minority interests in equity accounts of consolidated subsidiaries
and certain perpetual preferred stock less certain intangibles.  The
Federal Reserve and the FDIC will require a bank holding company and a bank,
respectively, to maintain a leverage ratio greater than 4% if either is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve.  The Federal
Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio
to assess the capital adequacy of banks and bank holding companies.  The
FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal
Reserve consider interest rate risk in the overall determination of a bank’s
capital ratio, requiring banks with greater interest rate risk to maintain
adequate capital for the risk.




In addition, Section 38 to the Federal
Deposit Insurance Act implemented the prompt corrective action provisions that
Congress enacted as a part of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the “1991 Act”).  The “prompt corrective action”
provisions set forth five regulatory zones in which all banks are placed largely
based on their capital positions.  Regulators are permitted to take
increasingly harsh action as a bank’s financial condition declines. 
Regulators are also empowered to place in receivership or require the sale of a
bank to another depository institution when a bank’s capital leverage ratio
reaches 2%.  Better-capitalized institutions are generally subject to less
onerous regulation and supervision than banks with lesser amounts of
capital.




The FDIC has adopted regulations
implementing the prompt corrective action provisions of the 1991 Act, which
place financial institutions in the following five categories based upon
capitalization ratios: (1) a “well capitalized” institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%; (2) an “adequately capitalized”
institution has a total risk-based capital ratio of at least 8%, a Tier 1
risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an
“undercapitalized” institution has a total risk-based capital ratio of under 8%,
a Tier 1 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 1 risk-based ratio of under 3% or a leverage ratio of
under 3%; and (5) a “critically undercapitalized” institution has a leverage
ratio of 2% or less.  Institutions in any of the three undercapitalized
categories would be prohibited from declaring dividends or making capital
distributions.  The FDIC regulations also establish procedures for
“downgrading” an institution to a lower capital category based on supervisory
factors other than capital.  Under the FDIC’s regulations, the Bank was a
“well capitalized” institution at December 31, 2008 and December 31,
2007.




Set forth below are pertinent capital
ratios for the Bank as of December 31, 2008 and 2007:




2008
              
              2007Total
      Risk-Based Capital
              
              13.0%
              
              14.2%Tier
      1 Risk-Based Capital
              
              11.7%
              
              13.0%Leverage Ratio (Tier
      1Capital to Average Total Assets)
              
              8.1%
              
              8.9%





Commercial Real
Estate.In December 2006, the federal banking agencies,
including the FDIC, issued a final guidance on concentrations in commercial real
estate lending, noting that recent increases in banks’ commercial real estate
concentrations could create safety and soundness concerns in the event of a
significant economic downturn.  The guidance mandates certain minimal
risk management practices and categorizes banks with defined levels of such
concentrations as banks requiring elevated examiner scrutiny.  The
Bank has a concentration in commercial real estate loans in excess of those
defined levels.  Management believes that the Bank’s credit processes
and procedures meet the risk management standards dictated by this guidance, but
it is not yet possible to determine the impact this guidance may have on
examiner attitudes with respect to the Bank’s real estate concentrations, which
attitudes could effectively limit increases in the Bank’s loan portfolios and
require additional credit administration and management costs associated with
those portfolios.


8




Loans.  Inter-agency
guidelines adopted by federal bank regulators mandate that financial
institutions establish real estate lending policies with maximum allowable real
estate loan-to-value limits, subject to an allowable amount of non-conforming
loans as a percentage of capital.  The Bank adopted the federal
guidelines in 2001.




Transactions with
Affiliates.Under federal law, all transactions between and
among a state nonmember bank and its affiliates, which include holding
companies, are subject to Sections 23A and 23B of the Federal Reserve Act
and Regulation W promulgated thereunder.  Generally, these
requirements limit these transactions to a percentage of the bank’s capital and
require all of them to be on terms at least as favorable to the bank as
transactions with non-affiliates.  In addition, a bank may not lend to
any affiliate engaged in non-banking activities not permissible for a bank
holding company or acquire shares of any affiliate that is not a
subsidiary.  The FDIC is authorized to impose additional restrictions
on transactions with affiliates if necessary to protect the safety and soundness
of a bank.  The regulations also set forth various reporting
requirements relating to transactions with affiliates.




Financial
Privacy.  In accordance with the GLB Act, federal banking
regulators adopted rules that limit the ability of banks and other financial
institutions to disclose non-public information about consumers to nonaffiliated
third parties.  These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to a nonaffiliated third
party.  The privacy provisions of the GLB Act affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors.




Anti-Money Laundering Initiatives and
the USA Patriot Act.  A major focus of governmental policy on
financial institutions in recent years has been aimed at combating terrorist
financing.  This has generally been accomplished by amending existing
anti-money laundering laws and regulations.  The USA Patriot Act of
2001 (the “USA Patriot Act”) has imposed significant new compliance and due
diligence obligations, creating new crimes and penalties.  The United
States Treasury Department has issued a number of implementing regulations which
apply to various requirements of the USA Patriot Act to Oconee and the
Bank.  These regulations impose obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent and
report money laundering and terrorist financing and to verify the identity of
their customers.  Failure of a financial institution to maintain and
implement adequate programs to combat terrorist financing, or to comply with all
of the relevant laws or regulations, could have serious legal and
reputation-related consequences for the institution.




Temporary Liquidity Guarantee
Program.On November 21, 2008, the Board of Directors of the
FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program
(“TLG
Program”).  The TLG Program was announced by the FDIC on
October 14, 2008, preceded by the determination of systemic risk by Treasury, as
an initiative to counter the system-wide crisis in the nation’s financial
sector.  Under the TLG Program the FDIC will (i) guarantee, through
the earlier of maturity or June 30, 2012, certain newly issued senior unsecured
debt issued by participating institutions and (ii) provide full FDIC deposit
insurance coverage for non-interest bearing transaction deposit accounts,
Negotiable Order of Withdrawal accounts paying less than 0.5% interest per annum
and Interest on Lawyers Trust Accounts held at participating FDIC-insured
institutions through December 31, 2009.  Coverage under the TLG
Program was available for the first 30 days without charge.  The fee
assessment for coverage of senior unsecured debt ranges from 50 basis points to
100 basis points per annum, depending on the initial maturity of the
debt.  The fee assessment for deposit insurance coverage is 10 basis
points per quarter on amounts in covered accounts exceeding
$250,000.  The Bank elected to participate in both guarantee
programs.





Future Legislation.Various
legislation affecting financial institutions and the financial industry is from
time to time introduced.  Such legislation may change banking statutes
and the operating environment of Oconee and its subsidiaries in substantial and
unpredictable ways, and could increase or decrease the cost of doing business,
limit or expand permissible activities or affect the competitive balance
depending upon whether any of this potential legislation will be enacted, and if
enacted, the effect that it or any implementing regulations, would have on the
financial condition or results of operations of Oconee or any of its
subsidiaries.  With the recent enactments of the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of
2009, the nature and extent of future legislative and regulatory changes
affecting financial institutions is very unpredictable at this time.  9


Available
Information




Oconee is subject to the information
requirements of the Securities Exchange Act of 1934, which means that it is
required to file certain reports, proxy statements, and other information, all
of which are available at the Public Reference Section of the Securities and
Exchange Commission at Room 1580, 100 F. Street, NE, Washington, D.C.
20549.  You may also obtain copies of the reports, proxy statements,
and other information from the Public Reference Section of the SEC, at
prescribed rates, by calling 1-800-SEC-0330.  The SEC maintains a
World Wide Web site on the Internet at www.sec.gov where you
can access reports, proxy, information and registration statements, and other
information regarding Oconee that we file electronically with the SEC through
the IDEA system.




Oconee’s Internet website address is
www.oconeestatebank.com.




Employees




At December 31, 2008, the Bank had 81
full-time employees and 28 part-time employees. The Bank is not a party to any
collective bargaining agreement, and the Bank believes that its employee
relations are good.




ITEM 1A.          RISK
FACTORS





An
investment in Oconee’s common stock and Oconee’s financial results are subject
to a number of risks.  Investors should carefully consider the risks
described below and all other information contained in this Annual Report on
Form 10-K and the documents incorporated by reference.  Additional
risks and uncertainties, including those generally affecting the industry in
which Oconee operates and risks that management currently deems immaterial may
arise or become material in the future and affect Oconee’s
business.




Our
business may be adversely affected by conditions in the financial markets and
economic conditions generally and there can be no assurance that recent efforts
to address difficult market and economic conditions will be
effective.




Since
mid-2007, and particularly during the second half of 2008, the financial markets
and economic conditions generally were materially and adversely affected by
significant declines in the values of nearly all asset classes and by a serious
lack of liquidity.  This was initially triggered by declines in home
prices and the values of subprime mortgages, but spread to all commercial and
residential mortgages as property prices declined rapidly and to nearly all
asset classes.  The effect of the market and economic downturn also
spread to other areas of the credit markets and in the availability of
liquidity.  The magnitude of these declines led to a crisis of
confidence in the financial sector as a result of concerns about the capital
base and viability of certain financial institutions.  During this
period, interbank lending and commercial paper borrowing fell sharply,
precipitating a credit freeze for both institutional and individual
borrowers.  Unemployment has also increased
significantly.





The
recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”) and
American Recovery and Reinvestment Act of 2009 (“ARRA”)
were signed into law in response to the financial crisis affecting the banking
system, financial markets and economic conditions generally.  Pursuant
to the EESA, Treasury has the authority under the Troubled Asset Relief Program
to purchase up to mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.   More
recently, the ARRA provided for a wide variety of programs intended to stimulate
the economy and provide for extensive infrastructure, energy, health, and
education needs.





The EESA
followed, and has been followed by, numerous actions by the U.S. Congress,
Federal Reserve Board, Treasury, the FDIC, the SEC and others to address the
current crisis, including most recently the ARRA.  These measures
include homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.  There can be no assurance, however, as to the actual impact
that EESA, the ARRA and the other initiatives describe above will have on the
banking system and financial markets or on us.  The failure of these
programs to help stabilize the banking system and financial markets and a
continuation or worsening of current economic conditions could materially and
adversely affect our business, financial condition, results of operations,
access to credit or the trading price of our common stock.


10





Oconee’s
ability to raise capital could be limited and could affect its liquidity and
could be dilutive to existing shareholders.




Current
conditions in the capital markets are such that traditional sources of capital
may not be available to Oconee on reasonable terms if it needed to raise
capital.  In such case, there is no guarantee that Oconee will be able
to borrow funds or successfully raise additional capital at all or on terms that
are favorable or otherwise not dilutive to existing shareholders.





Liquidity
is essential to our businesses and we rely on external sources to finance a
significant portion of our operations.





Liquidity is essential to our
businesses. Our liquidity could be substantially affected in a negative fashion
by an inability to raise funding in the long-term or short-term debt capital
markets or the equity capital markets or an inability to access the secured
lending markets.  Factors that we cannot control, such as disruption
of the financial markets or negative views about the financial services industry
generally, could impair our ability to raise funding. In addition, our ability
to raise funding could be impaired if lenders develop a negative perception of
our long-term or short-term financial prospects.  Such negative
perceptions could be developed if we are downgraded or put on (or remain on)
negative watch by the rating agencies, we suffer a decline in the level of our
business activity or regulatory authorities take significant action against us,
among other reasons.  If we are unable to raise funding using the
methods described above, we would likely need to finance or liquidate
unencumbered assets to meet maturing liabilities.  We may be unable to
sell some of our assets, or we may have to sell assets at a discount from market
value, either of which could adversely affect our results of operations and
financial condition.





Oconee’s
construction and land development loans are subject to unique risks that could
adversely affect earnings.





Oconee’s
construction and land development loan portfolio was $39,938,000 at December 31,
2008, comprising 20.4% of total loans.  Construction and land
development loans are often riskier than home equity loans or residential
mortgage loans to individuals.  In the event of a general economic
slowdown, they would represent higher risk due to slower sales and reduced cash
flow that could impact the borrowers’ ability to repay on a timely
basis.  In addition, although regulations and regulatory policies
affecting banks and financial services companies undergo continuous change and
we cannot predict when changes will occur or the ultimate effect of any changes,
there has been recent regulatory focus on construction, development and other
commercial real estate lending.  Recent changes in the federal
policies applicable to construction, development or other commercial real estate
loans make us subject us to substantial limitations with respect to making such
loans, increase the costs of making such loans, and require us to have a greater
amount of capital to support this kind of lending, all of which could have a
material adverse effect on our profitability or financial
condition.





A
deterioration in asset quality could have an adverse impact on
Oconee.





A
significant source of risk for Oconee arises from the possibility that losses
will be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans.  With respect to
secured loans, the collateral securing the repayment of these loans includes a
wide variety of diverse real and personal property that may be affected by
changes in prevailing economic, environmental and other conditions, including
declines in the value of real estate, changes in interest rates, changes in
monetary and fiscal policies of the federal government, environmental
contamination and other external events.  In addition, decreases in
real estate property values due to the nature of the Bank’s loan portfolio, over
81% of which is related to real estate, could affect the ability of customers to
repay their loans.  The Bank’s loan policies and procedures may not
prevent unexpected losses that could have a material adverse effect on Oconee’s
business, financial condition, results of operations, or liquidity.





Changes
in prevailing interest rates may negatively affect the results of operations of
Oconee and the value of its assets.





Oconee’s
earnings depend largely on the relationship between the yield on earning assets,
primarily loans and investments, and the cost of funds, primarily deposits and
borrowings.  This relationship, known as the interest rate spread, is
subject to fluctuation and is affected by economic and competitive factors which
influence interest rates, the volume and mix of interest earning assets and
interest bearing liabilities and the level of non-performing
assets.  Fluctuations in interest rates affect the demand of customers
for Oconee’s products and services.  In addition, interest-bearing
liabilities may re-price or mature more slowly or more rapidly or on a different
basis than interest-earning assets.  Significant fluctuations in
interest rates could have a material adverse effect on Oconee’s business,
financial condition, results of operations or liquidity.





Changes
in the level of interest rates may also negatively affect the value of Oconee’s
assets and its ability to realize book value from the sale of those assets, all
of which ultimately affect earnings.





11


If
Oconee’s allowance for loan losses is not sufficient to cover actual loan
losses, earnings would decrease.





The
Bank’s loan customers may not repay their loans according to their terms and the
collateral securing the payment of these loans may be insufficient to assure
repayment.  The Bank may experience significant loan losses which
would have a material adverse effect on Oconee’s operating results. Management
makes various assumptions and judgments about the collectibility of the loan
portfolio, including the creditworthiness of borrowers and the value of the real
estate and other assets serving as collateral for the repayment of
loans.  Oconee maintains an allowance for loan losses in an attempt to
cover any loan losses inherent in the portfolio.  In determining the
size of the allowance, management relies on an analysis of the loan portfolio
based on historical loss experience, volume and types of loans, trends in
classification, volume and trends in delinquencies and non-accruals, national
and local economic conditions and other pertinent information.  If
those assumptions are incorrect, the allowance may not be sufficient to cover
future loan losses and adjustments may be necessary to allow for different
economic conditions or adverse developments in the loan portfolio.





Oconee
may be subject to losses due to fraudulent and negligent conduct of the Bank’s
loan customers, third party service providers and employees.





When the
Bank makes loans to individuals or entities, they rely upon information supplied
by borrowers and other third parties, including information contained in the
applicant’s loan application, property appraisal reports, title information and
the borrower’s net worth, liquidity and cash flow information.  While
they attempt to verify information provided through available sources, they
cannot be certain all such information is correct or complete.  The
Bank’s reliance on incorrect or incomplete information could have a material
adverse effect on Oconee’s profitability or financial condition.





Oconee’s
business is subject to the success of the local economies and real estate
markets in which it operates.





Because
of the geographic concentration of Oconee operations, its success significantly
depends largely upon economic conditions in this area, which include volatility
in the agriculture market, influx and outflow of major employers in the area,
minimal population growth throughout the region.  Deterioration in
economic conditions in the communities in which Oconee operates could adversely
affect the quality of Oconee’s loan portfolio and the demand for its products
and services, and accordingly, could have a material adverse effect on Oconee’s
business, financial condition, results of operations or
liquidity.  Oconee is less able than a larger institution to spread
the risks of unfavorable local economic conditions across a large number of more
diverse economies.





Competition
from financial institutions and other financial service providers may adversely
affect Oconee.





The
banking business is highly competitive, and Oconee experiences competition in
its markets from many other financial institutions.  Oconee competes
with these other financial institutions both in attracting deposits and in
making loans.  Many of its competitors are well-established, larger
financial institutions that are able to operate profitably with a narrower net
interest margin and have a more diverse revenue base.  Oconee may face
a competitive disadvantage as a result of its smaller size, lack of geographic
diversification and inability to spread costs across broader
markets.  There can be no assurance that Oconee will be able to
compete effectively in its markets.  Furthermore, developments
increasing the nature or level of competition could have a material adverse
effect on Oconee’s business, financial condition, results of operations or
liquidity.





Changes
in government regulation or monetary policy could adversely affect
Oconee.





Oconee
and the banking industry are subject to extensive regulation and supervision
under federal and state laws and regulations.  The restrictions
imposed by such laws and regulations limit the manner in which Oconee conducts
its banking business, undertakes new investments and activities and obtains
financing.  These regulations are designed primarily for the
protection of the deposit insurance funds and consumers and not to benefit
holders of Oconee’s securities.  Financial institution regulation has
been the subject of significant legislation in recent years and may be the
subject of further significant legislation in the future, none of which is in
the control of Oconee.  Significant new laws or changes in, or repeals
of, existing laws could have a material adverse effect on Oconee’s business,
financial condition, results of operations or liquidity.  Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for Oconee, and any unfavorable
change in these conditions could have a material adverse effect on Oconee’s
business, financial condition, results of operations or
liquidity.  See Part I, Item 1, “Supervision and
Regulation.”


12


ITEM
2.          
PROPERTIES.




The Bank
operates six full-service banking offices and one support services space as
follows:




(1)
                                Main Office
                                  35
      North Main Street
                                  Watkinsville,
      Georgia 30677
                                
                                (5)
                                East Athens Wal-Mart
      Supercenter
                                  (In-Store
      Full Service Branch)
                                  4375
      Lexington Road
                                  Athens,
      Georgia 30605(2)
                                Bogart Branch
                                  U.S.
      Highway 78
                                  Bogart,
      Georgia 30622
                                
                                (6)
                                University Parkway Branch
                                  2500
      Daniell’s Bridge Road
                                  Building
      200, Suite 1A
                                  Athens,
      Georgia 30606(3)
                                Butler’s Crossing Branch
                                  2000
      Experiment Station Road
                                  Watkinsville,
      Georgia 30677
                                
                                (7)
                                Operations Center
                                  7920
      Macon Highway
                                  Watkinsville,
      Georgia30677(4)
                                Athens Branch
                                  500
      North Milledge Avenue
                                  Athens,
      Georgia 30605





Management believes that all of
Oconee’s properties are adequately covered by insurance.




ITEM 3.          LEGAL
PROCEEDINGS.




In
the ordinary course of operations, Oconee and the Bank are defendants in various
legal proceedings.  In the opinion of management, there is no pending
or threatened proceeding in which an adverse decision could result in a material
adverse change in the consolidated financial condition or results of operations
of Oconee.




ITEM
4.          SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS.






No matters were submitted to a vote of
the security holders of Oconee during the fourth quarter of the fiscal year
covered by this report.






PART
II




ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.




Markets For Capital Stock
and Dividends




Oconee’s common stock, its only class
of equity securities, is not traded on an established public trading
market.  The following table sets forth certain information regarding
trades of Oconee common stock known by management for the indicated
periods:





Number
                                  of
                                Aggregate
                                Size of Trades
                                
                                Price of TradesYear
                                Trades
                                Shares
                                Smallest
                                Largest
                                
                                Lowest
                                Highest2008
                                32
                                3,532
                                2
      shares
                                585
      shares
                                
                                $60.00
                                $90.002007
                                34
                                7,962
                                3
      shares
                                2,450
      shares
                                
                                $70.00
                                $90.00





At March 31, 2009, there were
approximately 714 recordholders of Oconee common stock and 899,815 shares issued
and outstanding.




Due to its net loss in 2008, Oconee did
not declare a cash dividend to shareholders.In 2007, Oconee declared
cash dividends of $1.15 per share, respectively, payable to shareholders of
record on December 31, 2007.  Cash dividends for 2007 represented a payment
of 31.7% of net income for the year.  While Oconee intends to continue
paying cash dividends contingent on its return to profitability, no assurance
can be given that dividends will be declared in the future.  The
amount and frequency of dividends is determined by Oconee’s Board of Directors
upon their consideration of various factors, which include Oconee’s financial
condition and results of operations, investment opportunities available to
Oconee, changes in regulatory capital requirements, tax consideration and
general economic conditions.  See “Supervision and Regulation – Payment of
Dividends.”  13


Oconee has not sold any unregistered
securities within the past three years.




Oconee does not have any equity
compensation plans.




Share
Repurchases




Oconee did not repurchase any shares of
stock during 2008 or 2007.







ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION.





This analysis of Oconee has been
prepared to provide insight into the financial condition of Oconee, and
addresses the factors which have affected our results of operations.  Our
financial statements and accompanying notes which follow are an integral part of
this review and should be read in conjunction with it.




SUMMARY
OF CRITICAL ACCOUNTING POLICIES




The
consolidated financial statements include the financial statements of Oconee and
the Bank (for purposes of this Item 6, collectively called, the
“Company”).  All significant intercompany balances and transactions
have been eliminated in consolidation.





The
Company’s accounting policies are fundamental to understanding management’s
discussion and analysis of results of operations and financial
condition.  Some of the Company’s accounting policies require
significant judgment regarding valuation of assets and liabilities and/or
significant interpretation of the specific accounting guidance.  A
description of the Company’s significant accounting policies can be found in
Note 1 of the Notes to Consolidated Financial Statements beginning on page
F-1.





Many of
the Company’s assets and liabilities are recorded using various valuation
techniques that require significant judgment as to recoverability.





The
collectibility of loans is reflected through the Company’s estimate of the
allowance for loan losses.  The Bank periodically analyzes the loan
portfolio in an effort to review asset quality and to establish an allowance for
loan losses that management believes will be adequate in light of anticipated
risks and loan losses.  In assessing the adequacy of the allowance,
size, quality and risk of loans in the portfolio are reviewed. Other factors
considered include:  the Bank’s loan loss experience, the amount of
past due and nonperforming loans, specific known risks, current and anticipated
economic conditions and other factors that management believes affect the
allowance for potential credit losses.





A
management loan review function is utilized by the Company which is supplemented
by the use of an outside loan review specialist.  In addition to
reviews by senior lending officers, all relationships of $1,000,000 or more are
reviewed annually by the outside loan review specialist, as well as a sampling
of relationships between $200,000 and $999,999. Loans are placed into various
loan grading categories which assist management in developing lists of potential
problem loans.  These loans are regularly monitored by the loan review
process to ensure early identification of repayment problems so that adequate
allowances can be made through the provision for loan losses.  The
formal allowance for loan loss adequacy test is performed at the end of each
calendar quarter.  Specific amounts of loss are estimated on impaired
loans and historical loss percentages, adjusted for various qualitative factors,
are applied to the balance of the portfolio using certain portfolio
stratifications.  The evaluation takes into consideration such factors
as changes in the nature and volume of the loan portfolio, current economic
conditions, regulatory examination results, and the existence of loan
concentrations.




On all
loans past due 120 days, it is the policy of the Company to charge off the
portion of those loans whose collectibility is sufficiently questionable that it
can no longer justify showing the loans as an asset on its balance
sheet.  To determine if a loan should be charged off, all possible
sources 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 reasonable probability that the loan can be collected, all or
a portion of the loan is charged off.  Loans are charged off by
crediting the appropriate loan category and debiting the reserve for loan losses
account.  Any accrued but unpaid interest is charged against current
years earnings.




14


In
addition, investment securities and mortgage loans held for sale are reflected
at their estimated fair value in the consolidated financial
statements.  Such amounts are based on either quoted market prices or
estimated values derived by the Company using dealer quotes or market
comparisons.





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




Selected
Financial Information





2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004(Amounts
      in thousands, except per share data)Net
      interest income
                    
                    $
                    7,893
                    
                    
                    $
                    11,443
                    
                    
                    $
                    12,198
                    
                    
                    $
                    11,111
                    
                    
                    $
                    10,003Other
      income
                    
                    
                    2,964
                    
                    
                    
                    2,708
                    
                    
                    
                    2,846
                    
                    
                    
                    2,508
                    
                    
                    
                    2,219Provision
      for loan losses
                    
                    
                    7,463
                    
                    
                    
                    330
                    
                    
                    
                    200
                    
                    
                    
                    612
                    
                    
                    
                    394Net
      earnings (loss)
                    
                    
                    (3,426
                    )
                    
                    
                    3,268
                    
                    
                    
                    3,960
                    
                    
                    
                    3,056
                    
                    
                    
                    2,531Net
      earnings (loss) per common share
                    
                    
                    (3.81
                    )
                    
                    
                    3.63
                    
                    
                    
                    4.40
                    
                    
                    
                    3.40
                    
                    
                    
                    2.81Total
      assets
                    
                    
                    308,156
                    
                    
                    
                    321,313
                    
                    
                    
                    336,508
                    
                    
                    
                    285,065
                    
                    
                    
                    256,865Cash
      dividends declared per common share
                    
                    
                    -
                    
                    
                    
                    1.15
                    
                    
                    
                    1.25
                    
                    
                    
                    1.10
                    
                    
                    
                    1.00







RESULTS
OF OPERATIONS




Net
Interest Income




The
Company’s earnings depend to a large degree on net interest income, 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
that is paid on its deposits and other borrowings.




Since
mid-2007, and particularly during the second half of 2008, the financial markets
and economic conditions generally were materially and adversely affected by
significant declines in the values of nearly all asset classes and by a serious
lack of liquidity.  This was initially triggered by declines in home
prices and the values of subprime mortgages, but spread to all commercial and
residential mortgages as property prices declined rapidly and to nearly all
asset classes.  The effect of the market and economic downturn also
spread to other areas of the credit markets and in the availability of
liquidity.  The magnitude of these declines led to a crisis of
confidence in the financial sector as a result of concerns about the capital
base and viability of certain financial institutions.  During this
period, interbank lending and commercial paper borrowing fell sharply,
precipitating a credit freeze for both institutional and individual
borrowers.  Unemployment has also increased
significantly.





Net interest income in 2008, which was
$7,983,000, decreased by $3,460,000, or 30.2%, over 2007.Net interest
income declined as a result of a decrease in interest income of $6,440,000,
offset by a decrease in interest expense of $2,980,000.  The decrease
in interest income during 2008 was due primarily to a lower average balance of
outstanding interest-earning assets, a lower interest rate environment in 2008
as compared to 2007, and the reversal of accrued interest income on loans that
were moved to nonaccrual status during 2008.  Average interest-earning
assets during 2008 were $297,996,000, a reduction of $18,798,000 as compared to
2007 average levels.  The primary reason for the reduction in
interest-earning assets was a decrease in average interest-earning loans of
$13,951,000.  During 2008, the Prime Rate was cut from 7.25% at the
beginning of 2008 to 3.25% effective December 16, 2008.  These rate
cuts had the effect of lowering the interest earned on the Bank’s floating rate
loans, which made up 36.7% of its loan portfolio at December 31,
2008.  In addition, the Bank moved $30,291,000 into nonaccrual status
during the year.  As a result of these reclassifications, the Bank
reversed approximately $887,000 of accrued interest on these
loans.  In addition, these loans became non-interest bearing,
resulting in an additional reduction in interest income for 2008.




The decrease in interest expense in
2008 as compared to 2007 was primarily due to the lower interest rate
environment in 2008 as compared to 2007 as well as a reduction of $14,015,000 in
average time deposits.  The reduction in time deposits was a result of
a management decision to lower the outstanding balances of these deposits
because the lack of demand for new loan growth due to the continued slow economy
decreased the need for funds.  Net interest margin decreased to 2.68%
in 2008 as compared to 3.61% in 2007 as a result of the decrease in interest
income impacting the Bank significantly more than the reduction in interest
expense.  Additionally, net interest margin was impacted negatively by
a decrease in interest-earning loans throughout 2008, including loan pay-offs
and shifts to nonaccrual loan status.  As loans paid off during 2008,
these funds were shifted to other interest-earning assets, primarily investment
securities and federal funds sold, which provide a lower yield than
loans.





15





Net
interest income in 2007, which was $11,443,000, decreased by $755,000, or 6.2%,
over 2006.Net interest
income declined as a result of an increase in interest expense of $2,748,000
offset by an increase in interest income of $1,992,000.  The increase
in interest income during 2007 was due primarily to an increase in interest
income on taxable securities of $2,058,000.  The increase in interest
income on taxable securities is due to income on investment securities that the
Bank purchased in the fourth quarter of 2006 because of a significant increase
in public funds deposits from the issuance of bonds by a local governmental
entity.  The decrease in interest and fee income on loans was
primarily due to the lower interest rate environment in late 2007 as compared to
2006 as well as only a slight increase in average loans outstanding in 2007 as
compared to 2006 of $573,000. The increase in interest expense was due primarily
to an increase in average time deposits of $23,520,000 in 2007 as compared to
2006 as well as an increase in average interest-bearing demand deposits of
$17,613,000 in 2007.  Net interest margin decreased to 3.61% in 2007
as compared to 4.34% in 2006 as a result of an increase in average rate paid on
interest-bearing liabilities combined with a decrease in the average yield on
interest-earning assets.  Additionally, net interest margin was
impacted negatively by a decrease in loans throughout 2007.  As loans
paid off during 2007, these funds shifted to other interest-earning assets,
primarily investment securities and federal funds sold, which provide a lower
yield than loans.  Another factor impacting net interest margin during
2007 was an increase in time deposits during the first half of 2007 which
resulted in additional interest expense.




Table 1
below sets forth the average balances for each category of interest-earning
assets and interest-bearing liabilities and the average rates of interest earned
or paid thereon for the years ended December 31, 2008 and
2007.  Nonaccrual loans and the interest income which was recorded on
these loans, if any, are included in the yield calculation for loans in all
periods reported.  Loan fees of $458,000 and $499,000 are included in
the yields for 2008 and 2007, respectively.  Yield information does
not give effect to changes in fair value that are reflected as a component of
shareholders’ equity, and yields are not calculated on a tax equivalent
basis.































16





Table
1




Average
Balance Sheets and Interest Rates




For
      the Years Ended December 31,2008
                                                                          
                                                                          
                                                                          2007Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Yield/
                                                                          
                                                                          Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Yield/Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Rate
                                                                          
                                                                          Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          RateAssets:Interest
      earning assets:Investment
      securities:Taxable
                                                                          
                                                                          $
                                                                          64,690,151
                                                                          
                                                                          
                                                                          $
                                                                          3,489,145
                                                                          
                                                                          
                                                                          
                                                                          5.39
                                                                          %
                                                                          
                                                                          $
                                                                          71,694,930
                                                                          
                                                                          
                                                                          $
                                                                          3,767,024
                                                                          
                                                                          
                                                                          
                                                                          5.25
                                                                          %Non-taxable
                                                                          
                                                                          
                                                                          18,836,267
                                                                          
                                                                          
                                                                          
                                                                          845,679
                                                                          
                                                                          
                                                                          
                                                                          4.49
                                                                          %
                                                                          
                                                                          
                                                                          21,008,857
                                                                          
                                                                          
                                                                          
                                                                          954,220
                                                                          
                                                                          
                                                                          
                                                                          4.54
                                                                          %Restricted
      equity Securities
                                                                          
                                                                          
                                                                          2,307,210
                                                                          
                                                                          
                                                                          
                                                                          143,492
                                                                          
                                                                          
                                                                          
                                                                          6.22
                                                                          %
                                                                          
                                                                          
                                                                          1,713,171
                                                                          
                                                                          
                                                                          
                                                                          103,331
                                                                          
                                                                          
                                                                          
                                                                          6.03
                                                                          %Federal
      funds sold
                                                                          
                                                                          
                                                                          14,315,141
                                                                          
                                                                          
                                                                          
                                                                          288,246
                                                                          
                                                                          
                                                                          
                                                                          2.01
                                                                          %
                                                                          
                                                                          
                                                                          10,579,167
                                                                          
                                                                          
                                                                          
                                                                          525,030
                                                                          
                                                                          
                                                                          
                                                                          4.96
                                                                          %Loans
      (including loan fees)(1)
                                                                          
                                                                          
                                                                          197,847,237
                                                                          
                                                                          
                                                                          
                                                                          11,317,393
                                                                          
                                                                          
                                                                          
                                                                          5.72
                                                                          %
                                                                          
                                                                          
                                                                          211,798,207
                                                                          
                                                                          
                                                                          
                                                                          17,174,191
                                                                          
                                                                          
                                                                          
                                                                          8.11
                                                                          %Total
      interest-earning assets
                                                                          
                                                                          
                                                                          297,996,006
                                                                          
                                                                          
                                                                          
                                                                          16,083,955
                                                                          
                                                                          
                                                                          
                                                                          5.40
                                                                          %
                                                                          
                                                                          
                                                                          316,794,332
                                                                          
                                                                          
                                                                          
                                                                          22,523,796
                                                                          
                                                                          
                                                                          
                                                                          7.11
                                                                          %Allowance
      for loan losses
                                                                          
                                                                          
                                                                          (3,623,631
                                                                          )
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (3,106,599
                                                                          )Cash
      and due from banks
                                                                          
                                                                          
                                                                          5,155,005
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          5,435,235Other
      assets
                                                                          
                                                                          
                                                                          10,829,979
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          10,941,461Total
      assets
                                                                          
                                                                          $
                                                                          310,357,359
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          330,064,429Liabilities
      and shareholders’ equity:Interest-bearing
      liabilities:Deposits:Interest-bearing
      demand
                                                                          
                                                                          $
                                                                          72,036,759
                                                                          
                                                                          
                                                                          $
                                                                          1,272,076
                                                                          
                                                                          
                                                                          
                                                                          1.77
                                                                          %
                                                                          
                                                                          $
                                                                          75,944,711
                                                                          
                                                                          
                                                                          $
                                                                          2,344,299
                                                                          
                                                                          
                                                                          
                                                                          3.09
                                                                          %Savings
                                                                          
                                                                          
                                                                          38,026,256
                                                                          
                                                                          
                                                                          
                                                                          748,969
                                                                          
                                                                          
                                                                          
                                                                          1.97
                                                                          %
                                                                          
                                                                          
                                                                          41,074,218
                                                                          
                                                                          
                                                                          
                                                                          1,244,400
                                                                          
                                                                          
                                                                          
                                                                          3.03
                                                                          %Time
                                                                          
                                                                          
                                                                          133,126,985
                                                                          
                                                                          
                                                                          
                                                                          5,900,965
                                                                          
                                                                          
                                                                          
                                                                          4.43
                                                                          %
                                                                          
                                                                          
                                                                          147,142,263
                                                                          
                                                                          
                                                                          
                                                                          7,418,685
                                                                          
                                                                          
                                                                          
                                                                          5.04
                                                                          %Federal
      Funds purchased
                                                                          
                                                                          
                                                                          245,123
                                                                          
                                                                          
                                                                          
                                                                          5,932
                                                                          
                                                                          
                                                                          
                                                                          2.42
                                                                          %
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Securities
      sold under repurchase agreements
                                                                          
                                                                          
                                                                          7,000,747
                                                                          
                                                                          
                                                                          
                                                                          173,067
                                                                          
                                                                          
                                                                          
                                                                          2.47
                                                                          %
                                                                          
                                                                          
                                                                          3,662,413
                                                                          
                                                                          
                                                                          
                                                                          73,569
                                                                          
                                                                          
                                                                          
                                                                          2.01
                                                                          %Total
      interest bearing liabilities
                                                                          
                                                                          
                                                                          250,435,870
                                                                          
                                                                          
                                                                          
                                                                          8,101,009
                                                                          
                                                                          
                                                                          
                                                                          3.23
                                                                          %
                                                                          
                                                                          
                                                                          267,823,605
                                                                          
                                                                          
                                                                          
                                                                          11,080,953
                                                                          
                                                                          
                                                                          
                                                                          4.14
                                                                          %Non-interest
      bearing deposits
                                                                          
                                                                          
                                                                          29,596,193
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          32,771,278Other
      liabilities
                                                                          
                                                                          
                                                                          958,705
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          1,416,935Total
      liabilities
                                                                          
                                                                          
                                                                          280,990,768
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          302,011,818Shareholders’
      equity
                                                                          
                                                                          
                                                                          29,366,591
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          28,052,611Total
      liabilities and shareholders’ equity
                                                                          
                                                                          $
                                                                          310,357,359
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          330,064,429Excess
      of interest-bearing assets over interest-bearing
    liabilities
                                                                          
                                                                          $
                                                                          47,560,136
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          48,970,727Ratio
      of interest-earning assets to interest-bearing liabilities
                                                                          
                                                                          
                                                                          118.99%
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          118.28%Net
      interest income
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          7,982,946
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          11,442,843Net
      interest spread
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.17
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.97
                                                                          %Net
      interest margin (2)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.68
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3.61
                                                                          %







(1)
            Average
      nonaccrual loans of $16,478,440 and $1,664,000 are included in total loans
      as of December 31, 2008 and 2007,
respectively.


(2)
            Net
      interest margin is the net return on interest-earning
      assets.  It is computed by dividing net interest income by
      average total interest-earning
assets.




17




The
changes in interest income and interest expense can result from variances in
both volume and rates.  Table 2 presents the impact of the Company’s
net interest income resulting from changes in average balances and average rates
for the period indicated.  The changes in interest due to both volume
and rate have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the changes in each.




Table
2


Volume-Rate
Analysis







2008 over 2007Increase (decrease) due to changes
      in:Volume
                                            
                                            
                                            Rate
                                            
                                            
                                            TotalInterest
      income on:
                                              Investment
      securitiesTaxable
                                            
                                            $
                                            (376,000
                                            )
                                            
                                            $
                                            98,121
                                            
                                            
                                            $
                                            (277,879
                                            )Non-taxable
                                            
                                            
                                            (98,095
                                            )
                                            
                                            
                                            (10,446
                                            )
                                            
                                            
                                            (108,541
                                            )Restricted
      equity securities
                                            
                                            
                                            36,815
                                            
                                            
                                            
                                            3,345
                                            
                                            
                                            
                                            40,160Federal
      funds sold
                                            
                                            
                                            144,322
                                            
                                            
                                            
                                            (381,106
                                            )
                                            
                                            
                                            (236,784
                                            )Loans
      (including loan fees)
                                            
                                            
                                            (1,069,932
                                            )
                                            
                                            
                                            (4,786,865
                                            )
                                            
                                            
                                            (5,856,797
                                            )Total
      interest earning assets
                                            
                                            
                                            (1,362,890
                                            )
                                            
                                            
                                            (5,076,951
                                            )
                                            
                                            
                                            (6,439,841
                                            )Interest
      expense on:Deposits:Interest
      bearing demand
                                            
                                            
                                            (115,273
                                            )
                                            
                                            
                                            (956,950
                                            )
                                            
                                            
                                            (1,072,223
                                            )Savings
                                            
                                            
                                            (86,699
                                            )
                                            
                                            
                                            (408,732
                                            )
                                            
                                            
                                            (495,431
                                            )Time
                                            
                                            
                                            (668,400
                                            )
                                            
                                            
                                            (849,320
                                            )
                                            
                                            
                                            (1,517,720
                                            )Federal
      funds purchased
                                            
                                            
                                            5,932
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,932Securities
      sold under repurchase agreements
                                            
                                            
                                            79,530
                                            
                                            
                                            
                                            19,968
                                            
                                            
                                            
                                            99,498Total
      interest bearing liabilities
                                            
                                            
                                            (784,910
                                            )
                                            
                                            
                                            (2,195,034
                                            )
                                            
                                            
                                            (2,979,944
                                            )Net
      interest income
                                            
                                            $
                                            (577,980
                                            )
                                            
                                            $
                                            (2,881,917
                                            )
                                            
                                            $
                                            (3,459,897
                                            )




Provision
for Loan Losses




Provisions
for loan losses are charged to operations in order to bring the total allowance
for loan losses to a level deemed appropriate by management based on
management’s judgment as to potential losses within the Company’s loan portfolio
based on the valuation of impaired loans, loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies and the overall quality
of the loan portfolio and general economic conditions.




The provision for loan losses in 2008
was $7,463,000 compared to $330,000 in 2007.  The substantial increase
in the provision for loan losses is primarily due to an increase in nonaccrual
loans during 2008 and net charge-offs of $6,584,000 during
2008.  Nonaccrual loans increased $19,715,000, or 217.7%, at December
31, 2008 as compared to December 31, 2007.




The allowance for loan losses
represented approximately 2.15% of total loans outstanding at December 31, 2008
compared to 1.67% at December 31, 2007.  Net charge-offs for 2008
increased to $6,584,000, compared to $75,000 during 2007.  Net
charge-offs as a percentage of the provision for loan losses were 88.2% and
22.7% for the years ended December 31, 2008 and 2007,
respectively.  Management believes that the level of the allowance is
appropriate based on our evaluation of the loan portfolio and current economic
conditions.




The provision for loan losses in 2007
was $330,000 compared to $200,000 in 2006, an increase of 65.0%.  The
increase in the provision for loan losses is primarily due to an increase in
classified loans during 2007, particularly an increase in nonaccrual loans of
$8,379,000, or 1,235.8%.  18


The allowance for loan losses
represented approximately 1.67% of total loans outstanding at December 31, 2007
compared to 1.41% at December 31, 2006.  Net charge-offs for 2007
increased to $75,000, compared to $64,000 during 2006.  Net
charge-offs as a percentage of the provision for loan losses were 22.7% and
32.0% for the years ended December 31, 2007 and 2006,
respectively.




Other
Income




Other income of $2,965,000 in 2008
increased from 2007 by $257,000 or 9.5% due primarily to gains on the sale of
investment securities of $215,000 in 2008.




Other income of $2,708,000 in 2007
decreased from 2006 by $138,000 or 4.9% due primarily to decreases in gains on
the sale of other real estate owned of $392,000 and gains on the sales of fixed
assets of $68,000 in 2007 as compared to 2006.  These decreases were
offset by increases in commissions on investment sales of $130,000, insufficient
funds service charges on deposit accounts of $111,000 and ATM fees of $81,000
and in 2007.




Other
Expense




Other expenses increased by $401,000 or
4.3% in 2008 as compared to 2007.  The increase in other expenses is
attributable to an increase in marketing and public relations expense of
$216,000, primarily due to a marketing campaign to attract new non-interest
bearing checking accounts.  The program was adopted in anticipation of
lowering long-term interest expense on deposits.  As a result of the
reduction in the Bank’s earnings and the cost associated with the program, the
program was discontinued in September 2008.





Other expenses increased by $213,000 or
2.4% in 2007 as compared to 2006.  The increase in other expenses is
attributable to an increase in occupancy expense of $257,000, primarily due to
the opening of a new branch in February 2007.




Income
Tax Expense (Benefit)




The
Company had an effective tax benefit rate of 44% in 2008 as compared to an
effective tax rate of 28% for the year ended December 31, 2007.  The
difference in the effective tax rates reflects tax benefits that the Company
realized in 2008 as a result of the high level of loan charge-offs as a
percentage of provision expense as compared to previous years.




ANALYSIS OF FINANCIAL
CONDITION




Summary




During
2008, average total assets decreased $19,706,000 (6.0%) from
2007.  Average total deposits decreased $24,146,000 (8.1%) in 2008
from 2007.  Average loans decreased $13,951,000 (6.6%) in 2008 over
2007.




Year-end
balances at December 31, 2008 and 2007 reflect a decrease in total assets of
$13,157,000 (4.1%) from 2007 to 2008.  Total deposits decreased
$11,486,000 (4.0%) from 2007 to 2008.  Total loans decreased
$4,059,000 (2.0%) from 2007 to 2008.




Total
loans declined during 2007 primarily as a result of a continued slowdown in the
housing industry, both nationally, and more prominently, in the Bank’s market
area.  An overall economic slowdown lessened the demand for new
housing construction and development.  Total deposits declined due to
loan payoffs supplying the needed liquidity to fund new loans and also a
decision by management to lower interest rates paid on time deposits in an
effort to minimize interest expense.




Investment
Securities




All of
the Company’s investment securities are classified as available-for-sale
(“AFS”).  At December 31, 2008, the market value of AFS securities
totaled $79,762,000, compared to $91,434,000 at December 31,
2007.  Table 3 presents the market value of AFS securities at December
31, 2008 and 2007.


19


Table
3


Investment
Portfolio





2008
                
                
                2007Available
      for saleState,
      county and municipal
                
                $
                16,804,489
                
                
                $
                21,361,919Government-sponsored
      agencies
                
                
                38,131,423
                
                
                
                49,862,513Mortgage-backed
                
                
                23,364,052
                
                
                
                18,575,862Other
      debt securities
                
                
                1,461,606
                
                
                
                1,633,900Totals
                
                $
                79,761,570
                
                
                $
                91,434,194





The
composition of the investment securities portfolio reflects the Company’s
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income.  The investment
portfolio also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits. Table 4 presents the AFS securities
held by the Company by maturity category at December 31, 2008.  Yield
information does not give effect to changes in fair value that are reflected as
a component of shareholders’ equity and yields are not calculated on a tax
equivalent basis.




Table
4


Maturity
Distribution and Weighted Average Yield on Investments (1)





Government-Sponsored
                  Agencies
              
              
              Mortgage-
                  Backed
      Securities
              
              
              State,
      County
                  and
                  Municipal
              
              
              Other
      Debt
                  Securities
              
              
              Weighted
                  Average
      YieldsWithin
      1 year
              
              $
              7,027,040
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              
              3.54
              %After
      1 through 5 years
              
              
              -
              
              
              
              1,324,900
              
              
              
              2,935,924
              
              
              
              -
              
              
              
              4.14
              %After
      5 through 10 years
              
              
              7,516,378
              
              
              
              2,742,254
              
              
              
              2,022,051
              
              
              
              981,780
              
              
              
              4.18
              %After
      10 years
              
              
              23,588,005
              
              
              
              19,296,898
              
              
              
              11,846,514
              
              
              
              479,826
              
              
              
              5.30
              %Totals
              
              $
              38,131,423
              
              
              $
              23,364,052
              
              
              $
              16,804,489
              
              
              $
              1,461,606
              
              
              
              5.08
              %





(1)
            Expected
      maturities may differ from contractual maturities because borrowers may
      have the right to call or prepay obligations with or without call or
      prepayment penalties.




The
Company’s mortgage-backed securities primarily consist of U.S. Government agency
sponsored securities.  A mortgage-backed security relies on the
underlying pools of mortgage loans to provide a cash flow of principal and
interest.  The actual maturities of these securities will differ from
the contractual maturities because the loans underlying the security may prepay
without prepayment penalties.  Decreases in long-term interest rates
will generally cause an acceleration of prepayment levels.  In a
declining interest rate environment, proceeds may not be able to be reinvested
in assets that have comparable yields.




Loans




The loan portfolio is the largest
category of the Company’s earning assets and is comprised of commercial loans,
residential mortgage loans, real estate construction and development loans and
consumer loans.  The Company conducts primary lending through its
branches in Oconee and Athens-Clarke County, Georgia, while its secondary
lending market consists of those counties contiguous with Oconee County,
including Greene, Morgan, Walton, and Barrow Counties, part of the Athens
Standard Metropolitan Statistical Area.




The composition of the Company’s loan
portfolio at December 31 for each of the past 5 years is presented in Table
5.


20





Table
5


Loan
Portfolio




2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Commercial,
      financial and agricultural
              
              $
              28,028,762
              
              
              
              22,229,689
              
              
              
              20,468,788
              
              
              
              21,012,994
              
              
              
              21,625,371Real
      estate – construction
              
              
              54,465,394
              
              
              
              64,077,793
              
              
              
              87,264,251
              
              
              
              72,533,344
              
              
              
              55,157,066Real
      estate - mortgage
              
              
              105,459,965
              
              
              
              104,703,465
              
              
              
              100,620,440
              
              
              
              103,029,748
              
              
              
              98,929,804Consumer
              
              
              7,818,286
              
              
              
              8,820,318
              
              
              
              9,533,930
              
              
              
              9,897,511
              
              
              
              10,353,250195,772,407
              
              
              
              199,831,265
              
              
              
              217,887,409
              
              
              
              206,473,597
              
              
              
              186,065,491Less:
      Allowance for loan losses
              
              
              (4,215,262
              )
              
              
              (3,335,825
              )
              
              
              (3,080,661
              )
              
              
              (2,945,256
              )
              
              
              (2,531,330
              )Loans,
      net
              
              $
              191,557,145
              
              
              
              196,495,440
              
              
              
              214,806,748
              
              
              
              203,528,341
              
              
              
              183,534,161







As of December 31, 2008, loans
outstanding were $195,772,000, a decrease of $4,059,000 or 2.0% over the
December 31, 2007 balance of $199,831,000.  This decrease was
primarily attributable to a decline in the Bank’s construction lending portfolio
of $9,613,000 at December 31, 2008 as compared to December 31,
2007.  The construction loan segment of the portfolio declined due to
a continued slowdown in the housing industry resulting in a lower demand for new
housing construction and development activity.  The decrease in the
Bank’s construction lending portfolio was partially offset by an increase in
commercial, financial and agricultural loans of $5,799,000.




Table 6
identifies the maturities of commercial and real estate construction (including
acquisition and development) loans as of December 31, 2008 and addresses the
sensitivity of these loans to changes in interest rates.




Table
6


Maturity
and Repricing Data for Loans




Maturity
                    
                    
                    Commercial,
                        Financial
      and Agricultural
                    
                    
                    Real
                        Estate
                        Construction
                    
                    
                    TotalWithin
      1 year
                    
                    $
                    10,980,427
                    
                    
                    $
                    42,955,566
                    
                    
                    $
                    53,935,9931
      to 5 years
                    
                    
                    13,289,048
                    
                    
                    
                    11,509,828
                    
                    
                    
                    24,798,876Over
      5 years
                    
                    
                    3,759,287
                    
                    
                    
                    -
                    
                    
                    
                    3,759,287Totals
                    
                    $
                    28,028,762
                    
                    
                    $
                    54,465,394
                    
                    
                    $
                    82,494,156





As of December 31, 2008, the interest
terms of loans in the indicated classifications for the indicated maturity
ranges in excess of one year are as follows:





Fixed
                    Interest
                    Rates
                
                
                Variable
                    Interest
                    Rates
                
                
                TotalCommercial,
      financial and agricultural1
      to 5 years
                
                $
                7,502,499
                
                
                $
                5,786,549
                
                
                $
                13,289,048Over
      5 years
                
                $
                -
                
                
                $
                3,759,287
                
                
                $
                3,759,287Real
      estate construction1
      to 5 years
                
                $
                8,043,558
                
                
                $
                3,466,270
                
                
                $
                11,509,828Over
      5 years
                
                $
                -
                
                
                $
                -
                
                
                $
                -




Allowance
for Loan Losses




The allowance for loan losses reflects
management’s assessment and estimate of the risks associated with extending
credit and its evaluation of the quality of the loan portfolio.




22







Table 7 presents an analysis of the
allowance for loan losses including charge-off activity




Table
7


Allowance
for Loan Losses





The
following table summarizes information concerning the allowance for loan
losses:





2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(Amounts
      are presented in thousands)Balance
      at beginning of year
              
              $
              3,336
              
              
              $
              3,081
              
              
              $
              2,945
              
              
              $
              2,531
              
              
              $
              2,669Charges-offs:Commercial,
      financial and agricultural
              
              
              54
              
              
              
              55
              
              
              
              -
              
              
              
              160
              
              
              
              453Installment
              
              
              116
              
              
              
              53
              
              
              
              60
              
              
              
              80
              
              
              
              273Real
      Estate
              
              
              6,456
              
              
              
              10
              
              
              
              50
              
              
              
              13
              
              
              
              -Total
      charge-offs
              
              
              6,626
              
              
              
              118
              
              
              
              110
              
              
              
              253
              
              
              
              726Recoveries:Commercial,
      financial and agricultural
              
              
              22
              
              
              
              10
              
              
              
              20
              
              
              
              40
              
              
              
              178Installment
              
              
              17
              
              
              
              31
              
              
              
              26
              
              
              
              15
              
              
              
              16Real
      Estate
              
              
              3
              
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      recoveries
              
              
              42
              
              
              
              43
              
              
              
              46
              
              
              
              55
              
              
              
              194Net
      charge-offs
              
              
              6,584
              
              
              
              75
              
              
              
              64
              
              
              
              198
              
              
              
              532Provisions
      charged to operations
              
              
              7,463
              
              
              
              330
              
              
              
              200
              
              
              
              612
              
              
              
              394Balance
      at end of year
              
              $
              4,215
              
              
              $
              3,336
              
              
              $
              3,081
              
              
              $
              2,945
              
              
              $
              2,531Ratio
      of net charge-offs during the period to average loans outstanding during
      the period
              
              
              3.36%
              
              
              
              .04%
              
              
              
              .03%
              
              
              
              .10%
              
              
              
              .30%





At
December 31, 2008, the Company had loan concentrations in the housing industry
and in the hotel and motel industries.  The Company monitors these
concentrations on a monthly basis to ensure that they do not exceed established
internal guidelines.  The primary risks relating to the concentration
in the housing industry is a downturn in the economy adversely affecting
construction of new homes and developments of new housing communities and the
impact of rising interest rates on variable rate mortgages.  The
market for residential real estate and development continued to be slow during
2008 due to a downturn in the economy, primarily in the area of new residential
development and speculative housing construction, resulting in a decrease in
demand for loans funding this industry.  The Company’s primary risk
relating to the hotel and motel industry loans is a slowdown in the travel
industry.  The Company has established a maximum dollar amount of
hotel and motel loans that it is willing to fund as a result of this
slowdown.





The
Company’s allowance for loan losses is also subject to regulatory examinations
and determinations as to adequacy, which may take into account such factors as
the methodology used to calculate the allowance for loan losses and the size of
the allowance for loan losses compared to 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 information available to them at the time of their
examination.





During
the year ended December 31, 2008, the Bank had net charge-offs of $6,584,000, as
compared to $75,000 in net charge-offs during the year ended December 31,
2007.  Of the total charge-offs, $6,399,000 were write-downs of loans
that were classified as impaired at December 31, 2008.  Write-downs of
loans purchased as participations from another financial institution totaled
$4,198,000.  These participation loans were for residential and
commercial development projects which were adversely affected by the slow
economy and downturn in the construction and development industry.





23


For year-end 2008 and 2007 the
allowance for loan losses was allocated as follows (in
thousands):





As of December 31, 2008:
                  
                  Allocation
      of Allowance for
                    Loan Losses
                  
                  
                  %
      of
                    Allowance
      for
                    Loan Losses
                  
                  
                  %
      of Loans by Category to
                    Total LoansCommercial,
      financial and agricultural
                  
                  $
                  99
                  
                  
                  
                  2.3%
                  
                  
                  
                  14.3%Real
      Estate - Commercial Construction
                  
                  
                  1,915
                  
                  
                  
                  45.4%
                  
                  
                  
                  26.3%Consumer
                  
                  
                  137
                  
                  
                  
                  3.3%
                  
                  
                  
                  4.0%Real
      Estate - Mortgage
                  
                  
                  1,807
                  
                  
                  
                  42.9%
                  
                  
                  
                  53.9%Unallocated
                  
                  
                  257
                  
                  
                  
                  6.1%
                  
                  
                  
                  1.5%Total
                  
                  $
                  4,215
                  
                  
                  
                  100.0%
                  
                  
                  
                  100.0%





As of December 31, 2007:
                    
                    Allocation
      of Allowance for
                      Loan Losses
                    
                    
                    %
      of
                      Allowance
      for
                      Loan Losses
                    
                    
                    %
      of Loans by Category to
                      Total LoansCommercial,
      financial and agricultural
                    
                    $
                    48
                    
                    
                    
                    1.4%
                    
                    
                    
                    5.1%Real
      Estate - Commercial Construction
                    
                    
                    2,107
                    
                    
                    
                    63.2%
                    
                    
                    
                    36.4%Consumer
                    
                    
                    46
                    
                    
                    
                    1.4%
                    
                    
                    
                    4.2%Real
      Estate - Mortgage
                    
                    
                    918
                    
                    
                    
                    27.5%
                    
                    
                    
                    53.0%Unallocated
                    
                    
                    217
                    
                    
                    
                    6.5%
                    
                    
                    
                    1.3%Total
                    
                    $
                    3,336
                    
                    
                    
                    100.0%
                    
                    
                    
                    100.0%





Nonperforming
Assets




Non-performing
assets, comprised of non-accrual loans, other real estate owned, other
repossessed assets and loans for which payments are more than 90 days past due,
totaled $30,578,000 at December 31, 2008 compared to $9,057,000 at December 31,
2007.   This increase is attributable to increases in non-accrual
loans of $19,715,000, in other real estate and repossessions of $1,782,000, and
loans more than 90 days past due of $24,000.  The increase in
nonaccrual loans was primarily due to construction and development loans which
were placed on nonaccrual status due to the slow housing and development
market.  Several of the development loans have stopped development due
to dramatically slower lot sales due to the slowing of the residential real
estate market.  Loans related to the construction and development
industry represented $24,334,000 of the Bank’s total nonaccrual loans at
December 31, 2008.  The majority of the construction loans that were
on nonaccrual status at December 31, 2008 were houses that were being marketed
for sale by the builders.  If these houses continue to fail to sale
through the builders’ efforts, it is possible that the Bank will take ownership
of the houses through foreclosure proceedings.  Subsequent to December
31, 2008, the Bank took ownership of a motel that was securing a loan that was
on nonaccrual status at December 31, 2008.  As of December 31, 2008,
the balance on the related motel loan was $2,224,000 and was included in
impaired loans.  The Bank is marketing the property for sale while the
motel continues to operate through a contractual agreement between the Bank and
a hospitality management company.




A summary
of non-performing assets at December 31 during the last past 5 fiscal years is
presented in Table 8.




24


Table
8


Non-performing
Assets


December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Other
      real estate and repossessions
                
                $
                1,782,000
                
                
                
                -
                
                
                $
                744,000
                
                
                $
                327,000
                
                
                $
                839,000Accruing
      loans 90 days or more past due
                
                
                24,000
                
                
                
                -
                
                
                
                623,000
                
                
                
                632,000
                
                
                
                5,064,000Non-accrual
      loans
                
                
                28,772,000
                
                
                
                9,057,000
                
                
                
                678,000
                
                
                
                2,151,000
                
                
                
                1,080,000Interest
      on non-accrual loans which would have been reported
                
                
                1,045,000
                
                
                
                408,000
                
                
                
                91,000
                
                
                
                95,000
                
                
                
                44,000Interest
      recognized on non-accrual loans prior to reclassification of
      loans
                
                
                188,000
                
                
                
                285,000
                
                
                
                14,000
                
                
                
                86,000
                
                
                
                18,000Restructured
      debt
                
                
                4,351,000
                (1)
                
                
                3,240,000
                (1)
                
                
                -
                
                
                
                -
                
                
                
                -




(1)  Included
in non-accrual loans above





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





Management
regularly monitors the loan portfolio to ensure that all loans are in
appropriate classifications.  Should economic conditions continue to
deteriorate, the inability of distressed customers to service their existing
debt could cause even higher levels of non-performing loans.




Deposits




The
Company uses deposits primarily to fund its loan and investment portfolios. The
Company offers a variety of deposit accounts to individuals and
businesses.  Deposit accounts include checking, savings, money market
and time deposits.  As of December 31, 2008, total deposits were
$275,038,000, a decrease of $11,487,000 or 4.0% over the December 31, 2007
balance of $286,525,000.  The decrease in deposits is primarily
attributable to a decision by management to lower time deposit rates in order to
better match the Bank’s deposit base with loan demand and to minimize interest
expense on time deposits.





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





Table
9


Deposits




December
      31,2008
                      
                      
                      2007Average
      Balance
                      
                      
                      Rate
                      
                      
                      Average
      Balance
                      
                      
                      RateDeposits:Non-interest
      bearing demand
                      
                      $
                      29,596,193
                      
                      
                      
                      -
                      
                      
                      $
                      32,771,278
                      
                      
                      
                      -Interest
      bearing demand
                      
                      
                      72,036,759
                      
                      
                      
                      1.77
                      %
                      
                      
                      75,944,711
                      
                      
                      
                      3.09
                      %Savings
                      
                      
                      38,026,256
                      
                      
                      
                      1.97
                      %
                      
                      
                      41,074,218
                      
                      
                      
                      3.03
                      %Time
                      
                      
                      133,126,985
                      
                      
                      
                      4.43
                      %
                      
                      
                      147,142,263
                      
                      
                      
                      5.04
                      %$
                      272,786,193
                      
                      
                      
                      
                      
                      
                      $
                      296,932,470





Time
deposits in amounts of $100,000 or more totaled $71,244,000and $65,100,000
at December 31, 2008 and 2007, respectively.  Table 10 is a summary of
the maturity distribution of time deposits in amounts of $100,000 or more as of
December 31, 2008.


25








Table
10


Maturity
of Time Deposits over $100,000





Within
      3 months
                  
                  $
                  19,559,806After
      3 through 6 months
                  
                  
                  8,173,406After
      6 through 12 months
                  
                  
                  26,798,777After
      12 months
                  
                  
                  16,711,842$
                  71,243,831




Transactions
with Related Parties




The
Company conducts transactions with directors and executive officers, including
companies in which they have beneficial interest, in the normal course of
business.  It is the policy of the Company that loan transactions with
directors and officers are made on substantially the same terms as those
prevailing at the time made for comparable loans to other persons.  At
December 31, 2008, the Company had loans outstanding to related parties of
$6,958,000.  Deposits of related parties were $6,833,000.




Liquidity




The
Company must maintain, on a daily basis, sufficient funds to cover the
withdrawals from depositors’ accounts and to supply new borrowers with
funds.  To meet these obligations, the 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 an attempt to match these to meet liquidity
needs.  It is the policy of the Company to monitor its liquidity to
meet local funding and regulatory requirements.




The
Company maintains relationships with correspondent banks that can provide funds
to it on short notice, if needed.  Presently, the Company has
arrangements with correspondent banks for short term unsecured advances of up to
$6,000,000.  Additional liquidity is provided to the Company through
Federal Home Loan Bank (FHLB) advances.




Cash and
cash equivalents decreased $827,000to a total of
$20,062,000at
year-end 2008 as cash used by financing activities and operating activities
outpaced amounts provided by investing activities.  Cash outflows from
operations totaled $810,000in 2008, while outflows
from financing activities totaled $9,224,000, most of which were net deposit
decreases during 2008 of $11,486,000.




Investing activities provided
$9,207,000of cash
and cash equivalents, principally composed of proceeds from sales, calls and
maturities of investment securities of $40,679,000, partially offset by
purchases of investment securities of $28,916,000.




Contractual
Obligations and Off-Balance Sheet Arrangements




For maturity and repricing information
regarding the Company’s contractual obligations, please see the table under the
heading “Asset/Liability and Interest Rate Sensitivity Management.”




The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and standby letters of credit.  Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized on
the balance sheet.  The contract amounts of those instruments reflect
the extent of exposure the Company has in particular classes of financial
instruments.  At December 31, 2008, the contractual amounts of the
Company’s commitments to extend credit and standby letters of credit were
$26,153,000and
$661,000, respectively.




Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract.  Commitments generally have
fixed expiration dates and because they may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements.  Standby letters of credit written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party.




See note 8 to the consolidated
financial statements for further discussion of these risks and contractual
commitments.





26








Capital
Resources




Table 11
presents the Bank’s regulatory capital position at December 31,
2008.




Table
11


Capital
Ratios


Risk-Based Capital Ratios
                  Actual as of December 31,
    2008Tier
      1 Capital
                11.7%Tier
      1 Capital minimum requirement
                4.0%Excess
                7.7%Total
      Capital
                13.0%Total
      Capital minimum requirement
                8.0%Excess
                5.0%Leverage Ratio At December 31,
      2008Leverage
      ratio
                8.1%Leverage
      ratio requirement
                4.0%Excess
                4.1%





Table
12


Selected
Ratios





The
following table sets out certain ratios of the Company for the years
indicated:





2008
                
                2007Net
      income (loss) to:Average
      shareholders’ equity
                
                
                (11.67
                )%
                
                
                11.65
                %Average
      assets
                
                
                (1.10
                )%
                
                
                0.99
                %Dividends
      to net income
                
                
                -
                
                
                
                31.66
                %Average
      equity to average assets
                
                
                9.46
                %
                
                
                8.50
                %





For
further discussion of the actual and required capital ratios of the Company, see
note 10 to the consolidated financial statements and “Supervision and Regulation
– Capital Adequacy.”




Asset/Liability
and Interest Rate Sensitivity Management




It is the
Company’s objective to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established cash,
loan, investment, borrowing and capital policies.  Certain officers
are charged with the responsibility for monitoring policies and procedures that
are designed to ensure acceptable composition of the asset/liability
mix.  It is the overall philosophy of management to support asset
growth primarily through growth of core deposits, which include deposits of all
categories made by local individuals, partnerships and
corporations.  The objective of this policy is to control interest
sensitive assets and liabilities so as to minimize the impact of substantial
movements in interest rates on earnings.




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




The
absolute level and volatility of interest rates can have a significant impact on
Oconee’s profitability.  The objective of interest rate risk
management is to identify and manage the sensitivity of net interest income to
changing interest rates, in order to achieve Oconee’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.




Oconee
uses income simulation modeling as a tool in measuring interest rate risk and
managing interest rate sensitivity.  Simulation modeling considers not
only the impact of changing market rates of interest on future net interest
income, but also other potential causes of variability.




27


Interest rate sensitivity is a function
of the repricing characteristics of Oconee’s portfolio of assets and
liabilities.  These repricing characteristics are the time frames
within which the interest earning assets and liabilities are subject to change
in interest rates either at replacement, repricing or maturity during the life
of the instruments.  Interest rate sensitivity management focuses on
the maturity structures of assets and liabilities and their repricing
characteristics during periods of change in market interest
rates.  Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities in Oconee’s current portfolio that
are subject to repricing at various time horizons:  immediate; one to
three months; four to twelve months; one to five years; over five years, and on
a cumulative basis.  The differences are known as interest rate
sensitivity gap.




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




A
negative gap (more liabilities repricing than assets) generally indicates that
the bank’s net interest income will decrease if interest rates rise and will
increase if interest rates fall.  A positive gap generally indicates
that the bank’s net interest income will decrease if rates fall and will
increase if rates rise.




The
following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2008 that are
contractually maturing, prepaying or repricing in each of the future time
periods shown.  Except as stated below, the amount of assets or
liabilities that mature or reprice during a particular period was determined in
accordance with the contractual terms of the asset or
liability.  Investment securities are reported based on the adjusted
cost basis.  Adjustable rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in the period in which
they are due, and fixed rate loans and mortgage-backed securities are included
in the periods in which they are required to be repaid based on scheduled
maturities.  The Company’s savings accounts and interest-bearing
demand accounts (NOW and money market deposit accounts), 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.




28







At
      December 31, 2008
                                                                                                        Maturing or Repricing in
                                                                                                        (dollars
      in thousands)Three
      Months
                                                                                                          or
      Less
                                                                                                      
                                                                                                      
                                                                                                      Four
      Months
                                                                                                        to
                                                                                                        12
      Months
                                                                                                      
                                                                                                      
                                                                                                      1
      to 5
                                                                                                          Years
                                                                                                      
                                                                                                      
                                                                                                      Over
      5
                                                                                                          Years
                                                                                                      
                                                                                                      
                                                                                                      TotalInterest-earning
      assets:Investment
      securities
                                                                                                      
                                                                                                      $
                                                                                                      3,499
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      3,472
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      4,241
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      68,141
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      79,353Federal
      funds sold
                                                                                                      
                                                                                                      
                                                                                                      15,709
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      15,709Loans
                                                                                                      
                                                                                                      
                                                                                                      80,525
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      20,930
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      65,377
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      56
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      166,888Total
      interest-bearing assets
                                                                                                      
                                                                                                      $
                                                                                                      99,733
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      24,402
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      69,618
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      68,197
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      261,950Interest-bearing
      liabilities:Deposits:Savings
      and demand
                                                                                                      
                                                                                                      $
                                                                                                      109,346
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      109,346Time
      deposits
                                                                                                      
                                                                                                      
                                                                                                      37,926
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      70,462
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      29,892
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      138,280Repurchase
      agreements
                                                                                                      
                                                                                                      
                                                                                                      6,453
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      6,453Total
      interest-bearing liabilities
                                                                                                      
                                                                                                      $
                                                                                                      153,725
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      70,462
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      29,892
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      254,079Interest
      sensitive difference per period
                                                                                                      
                                                                                                      $
                                                                                                      (53,992
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (46,060
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      39,726
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      68,197
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      7,871Cumulative
      interest sensitivity difference
                                                                                                      
                                                                                                      $
                                                                                                      (53,992
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (100,052
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      (60,326
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      7,871Cumulative
      difference to total earning assets
                                                                                                      
                                                                                                      
                                                                                                      (20.61%)
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (38.20%)
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (23.03%)
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3.00%





At
December 31, 2008 the difference between the Company’s liabilities and assets
repricing or maturing within one year was $99,996,000.  Based on this
analysis, due to an excess of liabilities repricing or maturing within one year,
a rise in interest rates would generally cause the Company’s net interest income
to decrease, and a decrease in interest rates would generally cause the
Company’s net interest income to increase.




Certain
shortcomings are inherent in the method of analysis presented in the foregoing
table.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
or at different points in time to changes in market interest
rates.  Additionally, certain assets, such as adjustable-rate
mortgages, have features, such as interest rate floors and ceilings that
restrict changes in interest rates, both on a short-term basis and over the life
of the asset.  Changes in interest rates, prepayment rates, early
withdrawal levels and the ability of borrowers to service their debt, among
other factors, may change significantly from the assumptions made in the
table.  In addition, the optionality for callable securities is not
factored in the foregoing table.




The Bank
also measures its short-term exposure to interest rate risk by simulating the
impact to net interest income under several rate change
levels.  Interest-earning assets and interest-bearing liabilities are
rate shocked to stress test the impact to the Bank’s net interest income and
margin.  The rate shock levels span four 50 basis point increments up
and down from current interest rates.  This information is used to
monitor interest rate exposure risk relative to anticipated interest rate
trends.  Asset/liability management strategies are developed based on
this analysis in an effort to limit the Bank’s exposure to interest rate
risk.




The Bank
tracks its interest rate sensitivity on a quarterly basis using a model, which
applies various hypothetical interest rate changes to various types of
interest-bearing deposit accounts.  The rate changes represent the
Bank’s inclination to reprice deposit rates based on historical data provided
from a call report driven database.  In addition, the model calculates
the likelihood of issuers of investment securities exercising  call
options on certain investment securities as a result of potential interest rate
changes as opposed to showing the investment securities being repriced at their
maturities.





At
December 31, 2008, the difference between the Bank’s assets and liabilities
repricing or maturing within one year, after applying the hypothetical rate
changes to deposit accounts and taking into account the likely calls within the
investment portfolio, was $295,000, indicating that the Bank was asset
sensitive.  The most recent simulation model shows that the Bank’s net
interest income would increase $256,000 on an annual basis if rates increased
100 basis points, and would decrease $263,000 on an annual basis if rates fell
100 basis points.




29


Inflation




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




ITEM 8.          
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




The financial statements and the
reports of independent registered public accounting firms are included in this
report beginning at page F-1 of this Form 10-K.




ITEM 9.          CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.







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






ITEM
9A(T)    CONTROLS AND PROCEDURES.




Disclosure Controls and
Procedures





Oconee’s management, including the
principal executive officer and principal financial officer, supervised and
participated in an evaluation of the company’s disclosure controls and
procedures as of December 31, 2008.  Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
the disclosure controls and procedures were effective in accumulating and
communicating information to management, including the principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding disclosures of that information under the Securities and
Exchange Commission’s rules and forms and that the disclosure controls and
procedures are designed to ensure that the information required to be disclosed
in reports that are filed or submitted under the Securities Act of 1933 is
recorded, processed, summarized and reported within the time periods
specified.





Management’s Annual Report
on Internal Control over Financial Reporting.





Oconee’s management is responsible for
establishing and maintaining adequate internal control over financial
reporting.  Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements.  Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





Management assessed the effectiveness
of Oconee’s internal control over financial reporting as of December 31, 2008
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in “Internal Control – Integrated
Framework.”  Based on that assessment, management believes that, as of
December 31, 2008, Oconee’s internal control over financial reporting was
effective based on those criteria.





This Annual Report on Form 10-K does
not include an attestation report of Oconee’s independent registered public
accountant regarding internal control over financial
reporting.  Management’s report was not subject to attestation by
Oconee’s independent accountant pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this Form 10-K.


30
  Changes in Internal Control
Over Financial Reporting





No changes were made to Oconee’s
internal control over financial reporting during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect, Oconee’s
internal control over financial reporting.





ITEM
9B.       OTHER INFORMATION.




All information, if any, required to be
reported on Form 8-K during the fourth quarter of the fiscal year covered by
this Form 10-K has been reported.






PART
III




ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.







The information contained under the
headings “Information About Nominees For Directors and  Executive
Officers,” “Compliance with Section 16(a),” “Audit Committee and Audit Committee
Financial Expert,” and “Code of Ethics” in the definitive Proxy Statement to be
used in connection with the solicitation of proxies for Oconee’s annual meeting
of shareholders to be held on May 4, 2009 to be filed with the SEC, is
incorporated herein by reference.




ITEM 11.        EXECUTIVE
COMPENSATION.




The information contained under the heading “Executive Compensation” in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for Oconee’s annual meeting of shareholders to be held on May 4, 2009,
to be filed with the SEC, is incorporated herein by reference.




ITEM 12.        SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The information contained under the
heading “Voting Securities and Principal Holders” in the definitive Proxy
Statement to be used in connection with the solicitation of proxies for Oconee’s
annual meeting of shareholders to be held on May 4, 2009, to be filed with the
SEC, is incorporated herein by reference.




ITEM
13.        CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.




The information contained under the
heading “Certain Relationships and Related Party Transactions” in the definitive
Proxy Statement to be used in connection with the solicitation of proxies for
all the Company‘s annual meeting of shareholders to be held on May 4, 2009, to
be filed with the SEC, is incorporated herein by reference.




ITEM
14.        PRINCIPAL ACCOUNTANT FEES AND
SERVICES.




The information contained under the
heading “Principal Accountant and Audit Fees” in the definitive Proxy Statement
to be used in connection with the solicitation of proxies for Oconee’s annual
meeting of shareholders to be held on May 4, 2009, to be filed with the SEC, is
incorporated herein by reference.




31




PART IV






ITEM 15.        EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.




The following financial statements and
notes thereto of the Registrant are located beginning at page F-1 of this Form
10-K pursuant to Item 7 of this Report:




1.
            Report
      of Independent Registered Public Accounting
Firm




2.
            Balance
      Sheets  - December 31, 2008 and
2007




3.
            Statements
      of Operations
              For
      the Years Ended December 31, 2008 and
2007




4.
            Statements
      of Changes in Shareholders Equity
              For
      the Years Ended December 31, 2008 and
2007




5.
            Statements
      of Cash Flows


For
      the Years Ended December 31, 2008 and
2007





6.
            Notes
      to Consolidated Financial
Statements




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




3.1
            Articles
      of Incorporation of Oconee Financial Corporation, dated August 27, 1998
      (included as Exhibit 3.1 to Oconee’s 10-KSB filed with the SEC on March
      30, 2004 and incorporated herein by reference).3.2
            Amended
      and Restated Bylaws of Oconee Financial Corporation, dated May 7, 2001
      (included as Exhibit 3.2 to Oconee’s 10-KSB filed with the SEC on April 1,
      2002 and incorporated herein by reference).4
            See
      Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and
      Amended and Restated Bylaws which define the rights of the holders of
      Common Stock of Oconee.4.1
            Form
      of Common Stock Certificate (included as Exhibit 4.1 to Oconee’s 10-KSB
      filed with the SEC on March 31, 2005 and incorporated herein by
      reference).10.1
            Oconee
      State Bank Officers’ Cash Incentive Plan (included as Exhibit 10.1 to the
      Bank’s 10-KSB filed with the SEC on April 1, 2002 and incorporated herein
      by reference).14
            Code
      of Ethical Conduct (included as Exhibit 14 to Oconee’s 10-KSB filed with
      the SEC on March 31, 2006 and incorporated herein by
      reference).21
            Subsidiaries
      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
      Act of 2002.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
            Section
      1350 Certification of Chief Executive Officer.32.2
            Section
      1350 Certification of Chief Financial
Officer.





32




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors
 Oconee
Financial Corporation and Subsidiary
 Watkinsville,
Georgia
 
 We have
audited the consolidated balance sheets of Oconee Financial Corporation and
Subsidiary as of December 31, 2008 and 2007, and the related consolidated
statements of earnings, comprehensive income, stockholders’ equity and cash
flows for the years then ended. These financial statements are the
responsibility of the 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 the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial 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 our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Oconee Financial Corporation
and Subsidiary as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
 
 We were
not engaged to examine management’s assertion about the effectiveness of Oconee
Financial Corporation and Subsidiary’s internal control over financial reporting
as of December 31, 2008 included under Item 8A(T) “Controls and Procedures” in
Oconee Financial Corporation and subsidiary’s Annual Report on Form 10-K and,
accordingly, we do not express an opinion thereon.
  
 
  Atlanta,
Georgia
 April 13,
2009





F-1




OCONEE
FINANCIAL CORPORATION





Consolidated
Balance Sheets





December
31, 2008 and 2007





2008
                        
                        
                        2007AssetsCash
      and due from banks, including reserverequirements of $25,000 and
      $25,000
                        
                        $
                        4,353,492
                        
                        
                        
                        5,365,937Federal
      funds sold
                        
                        
                        15,709,000
                        
                        
                        
                        15,524,000Cash and cash
      equivalents
                        
                        
                        20,062,492
                        
                        
                        
                        20,889,937Investment
      securities available for sale
                        
                        
                        79,761,570
                        
                        
                        
                        91,434,194Restricted
      equity securities
                        
                        
                        679,229
                        
                        
                        
                        706,729Mortgage
      loans held for sale
                        
                        
                        1,638,561
                        
                        
                        
                        1,063,183Loans,
      net
                        
                        
                        191,557,145
                        
                        
                        
                        196,495,440Premises
      and equipment, net
                        
                        
                        6,903,890
                        
                        
                        
                        7,394,096Other
      real estate owned
                        
                        
                        1,781,905
                        
                        
                        
                        1Accrued
      interest receivable and other assets
                        
                        
                        5,770,757
                        
                        
                        
                        3,329,402$
                        308,155,549
                        
                        
                        
                        321,312,982Liabilities and Stockholders’
      EquityDeposits:Demand
                        
                        $
                        27,413,165
                        
                        
                        
                        31,544,102Interest-bearing
      demand
                        
                        
                        71,333,508
                        
                        
                        
                        76,761,239Savings
                        
                        
                        38,011,673
                        
                        
                        
                        38,754,825Time
                        
                        
                        138,279,806
                        
                        
                        
                        139,464,402Total deposits
                        
                        
                        275,038,152
                        
                        
                        
                        286,524,568Securities
      sold under repurchase agreements
                        
                        
                        6,453,272
                        
                        
                        
                        3,156,300Accrued
      interest payable and other liabilities
                        
                        
                        866,937
                        
                        
                        
                        2,297,382Total liabilities
                        
                        
                        282,358,361
                        
                        
                        
                        291,978,250Stockholders’
      equity:Common stock, par value $2,
      authorized 1,500,000 shares,issued and outstanding 899,815
      shares
                        
                        
                        1,799,630
                        
                        
                        
                        1,799,630Additional paid-in
      capital
                        
                        
                        4,243,332
                        
                        
                        
                        4,243,332Retained earnings
                        
                        
                        19,500,772
                        
                        
                        
                        22,927,131Accumulated other comprehensive
      income
                        
                        
                        253,454
                        
                        
                        
                        364,639Total stockholders’
      equity
                        
                        
                        25,797,188
                        
                        
                        
                        29,334,732$
                        308,155,549
                        
                        
                        
                        321,312,982











See
accompanying notes to consolidated financial statements.





F-2





OCONEE
FINANCIAL CORPORATION





Consolidated
Statements of Operations





For
the Years Ended December 31, 2008 and 2007





2008
                
                
                2007Interest
      income:Interest and fees on
      loans
                
                $
                11,317,394
                
                
                
                17,174,191Interest on federal funds
      sold
                
                
                288,246
                
                
                
                525,030Interest and dividends on
      securities:U. S. government
      agencies
                
                
                3,489,145
                
                
                
                3,767,024State, county and
      municipal
                
                
                845,679
                
                
                
                954,220Other
                
                
                143,491
                
                
                
                103,331Total interest
    income
                
                
                16,083,955
                
                
                
                22,523,796Interest
      expense:Interest-bearing demand
      deposits
                
                
                1,272,076
                
                
                
                2,344,299Savings deposits
                
                
                748,969
                
                
                
                1,244,400Time deposits
                
                
                5,900,965
                
                
                
                7,418,685Other
                
                
                178,999
                
                
                
                73,569Total interest
      expense
                
                
                8,101,009
                
                
                
                11,080,953Net interest
    income
                
                
                7,982,946
                
                
                
                11,442,843Provision
      for loan losses
                
                
                7,463,000
                
                
                
                330,000Net interest income after
      provision for loan losses
                
                
                519,946
                
                
                
                11,112,843Other
      income:Service charges
                
                
                1,523,231
                
                
                
                1,539,808Gain (loss) on sale of
      securities
                
                
                215,129
                
                
                
                (2,308
                )Gain
      (loss) on sale of other real estate owned
                
                
                -
                
                
                
                (25,758
                )Gain
      (loss) on sale and disposal of premises and equipment
                
                
                -
                
                
                
                (4,741
                )Mortgage
      origination fee income
                
                
                350,955
                
                
                
                395,004Miscellaneous
                
                
                875,422
                
                
                
                805,883Total other
income
                
                
                2,964,737
                
                
                
                2,707,888Other
      expenses:Salaries and employee
      benefits
                
                
                5,311,899
                
                
                
                5,567,192Occupancy
                
                
                1,434,168
                
                
                
                1,515,034Other operating
                
                
                2,912,205
                
                
                
                2,174,789Total other
    expenses
                
                
                9,658,272
                
                
                
                9,257,015Earnings (loss) before income
      taxes
                
                
                (6,173,588
                )
                
                
                4,563,716Income
      tax expense (benefit)
                
                
                (2,747,229
                )
                
                
                1,295,246Net earnings
    (loss)
                
                $
                (3,426,359
                )
                
                
                3,268,470Net earnings (loss) per
      share
                
                $
                (3.81
                )
                
                
                3.63





See
accompanying notes to consolidated financial statements.





F-3





OCONEE
FINANCIAL CORPORATION





Consolidated
Statements of Comprehensive Income (Loss)





For
the Years Ended December 31, 2008 and 2007








2008
                      
                      
                      2007Net
      earnings (loss)
                      
                      $
                      (3,426,359
                      )
                      
                      
                      3,268,470Other
      comprehensive income (loss), net of income taxes
(benefit):Unrealized gains on securities
      available for sale:Holding gains arising during
      period, net of taxexpense of
      $13,633 and $236,449
                      
                      
                      22,281
                      
                      
                      
                      386,441Reclassification adjustment for
      (gains) losses included in netEarnings
      (loss), net of (tax) benefit of ($81,663) and $876
                      
                      
                      (133,466
                      )
                      
                      
                      1,432Total other comprehensive income
      (loss)
                      
                      
                      (111,185
                      )
                      
                      
                      387,873Comprehensive
      income (loss)
                      
                      $
                      (3,537,544
                      )
                      
                      
                      3,656,343





















































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, 2008 and 2007








Additional
              
              
              
              
              
              Accumulated
                OtherCommon
              
              
              Paid-In
              
              
              Retained
              
              
              ComprehensiveStock
              
              
              Capital
              
              
              Earnings
              
              
              Income (Loss)
              
              
              TotalBalance,
      December 31, 2006
              
              $
              1,799,630
              
              
              
              4,243,332
              
              
              
              20,693,448
              
              
              
              (23,234
              )
              
              
              26,713,176Cash
      dividends declared($1.15
      per share)
              
              
              -
              
              
              
              -
              
              
              
              (1,034,787
              )
              
              
              -
              
              
              
              (1,034,787
              )Change
      in net unrealized gain (loss)on
      investment securities availablefor
      sale, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              387,873
              
              
              
              387,873Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              3,268,470
              
              
              
              -
              
              
              
              3,268,470Balance,
      December 31, 2007
              
              
              1,799,630
              
              
              
              4,243,332
              
              
              
              22,927,131
              
              
              
              364,639
              
              
              
              29,334,732Change
      in net unrealized gain (loss)on
      investment securities availablefor
      sale, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (111,185
              )
              
              
              (111,185
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              (3,426,359
              )
              
              
              -
              
              
              
              (3,426,359
              )Balance,
      December 31, 2008
              
              $
              1,799,630
              
              
              
              4,243,332
              
              
              
              19,500,772
              
              
              
              253,454
              
              
              
              25,797,188



































See
accompanying notes to consolidated financial statements.





F-5





OCONEE
FINANCIAL CORPORATION





Consolidated
Statements of Cash Flows





For
the Years Ended December 31, 2008 and 2007





2008
                
                
                2007Cash
      flows from operating activities:Net
      earnings (loss)
                
                $
                (3,426,359
                )
                
                
                3,268,470Adjustments
      to reconcile net earnings (loss) to netcash provided (used) by operating
      activities:Depreciation, amortization and
      accretion
                
                
                651,941
                
                
                
                657,610Provision for loan
      losses
                
                
                7,463,000
                
                
                
                330,000Provision for deferred
      taxes
                
                
                (13,119
                )
                
                
                (122,414
                )(Gain) loss on sale of investment
      securities
                
                
                (215,129
                )
                
                
                2,308(Gain)
      loss on sale and disposal of fixed assets
                
                
                -
                
                
                
                4,741(Gain) loss on sale of other real
      estate
                
                
                -
                
                
                
                25,758Change in:Accrued interest receivable and
      other assets
                
                
                (4,299,415
                )
                
                
                962,149Accrued interest payable and
      other liabilities
                
                
                (395,658
                )
                
                
                (253,012
                )Mortgage loans originated and
      held for sale
                
                
                (575,378
                )
                
                
                912,817Net cash (used) provided by
      operating activities
                
                
                (810,117
                )
                
                
                5,788,427Cash
      flows from investing activities:Purchase of investment securities
      available for sale
                
                
                (28,916,088
                )
                
                
                (24,579,037
                )Proceeds from calls and maturities
      of investment securitiesavailable for
sale
                
                
                31,936,266
                
                
                
                20,168,478Proceeds from sales of investment
      securities availablefor sale
                
                
                8,742,800
                
                
                
                6,032,693Purchase
      of restricted equity securities
                
                
                -
                
                
                
                (36,400
                )Sales
      of restricted equity securities
                
                
                27,500
                
                
                
                -Net change in
loans
                
                
                (2,524,705
                )
                
                
                17,981,308Purchases of premises and
      equipment
                
                
                (216,176
                )
                
                
                (1,659,111
                )Proceeds from sales of other real
      estate
                
                
                157,306
                
                
                
                714,018Net cash provided by investing
      activities
                
                
                9,206,903
                
                
                
                18,621,949Cash
      flows from financing activities:Net change in
    deposits
                
                
                (11,486,416
                )
                
                
                (17,470,383
                )Net change in securities sold
      under repurchase agreements
                
                
                3,296,972
                
                
                
                (3,275
                )Dividends paid
                
                
                (1,034,787
                )
                
                
                (1,124,769
                )Net cash used by financing
      activities
                
                
                (9,224,231
                )
                
                
                (18,598,427
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                (827,445
                )
                
                
                5,811,949Cash
      and cash equivalents at beginning of year
                
                
                20,889,937
                
                
                
                15,077,988Cash
      and cash equivalents at end of year
                
                $
                20,062,492
                
                
                
                20,889,937





F-6





OCONEE
FINANCIAL CORPORATION





Consolidated
Statements of Cash Flows, continued





For
the Years Ended December 31, 2008 and 2007





2008
              
              
              2007Supplemental
      disclosures of cash flow information:Cash paid during the year
      for:Interest
              
              $
              8,464,094
              
              
              
              11,081,348Income taxes
              
              $
              281,500
              
              
              
              1,310,500Noncash investing and financing
      activities:Change in net unrealized gain on
      investmentsecurities available for sale,
      net of tax
              
              $
              (111,185
              )
              
              
              387,873Transfer of loans to other real
      estateT
              
              $
              1,935,325
              
              
              
              -Change in dividends
      payableT
              
              $
              1,034,787
              
              
              
              1,124,769




































































See
accompanying notes to consolidated financial statements.





F-7





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements





(1)
            Summary
      of Significant Accounting Policies




Organization


Oconee
Financial Corporation (“OFC”) received regulatory approval to operate as a bank
holding company on October 13, 1998, and began operations effective January 1,
1999. OFC is primarily regulated 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 1960 upon receipt of its banking
charter from the Georgia Department of Banking and Finance (the “DBF”). The Bank
is primarily regulated by the DBF and the Federal Deposit Insurance Corporation
and undergoes periodic examinations by these regulatory agencies. The Bank
provides a full range of commercial and consumer banking services primarily in
Oconee and Clarke counties in Georgia.





On
September 17, 2008, Putters, Inc. was incorporated as a subsidiary of the
Bank.  Putters, Inc. was formed as a real estate holding company for a
residential subdivision that was foreclosed on by the bank subsequent to the
incorporation of Putters, Inc.





Principles of
Consolidation


The
consolidated financial statements include the financial statements of Oconee
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
Presentation


The
accounting principles followed by the Company, and the methods of applying 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 with GAAP, management is
required to make estimates and assumptions that affect the reported amounts in
the financial statements. Actual results could differ significantly from these
estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include, but are
not limited to, the determination of the allowance for loan losses, deferred
taxes, fair value of financial instruments, and valuation of real estate
acquired in connection with or in lieu of foreclosure on
loans.





Cash and Cash
Equivalents


For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks and federal funds sold.  Included in cash and due from
banks is interest-bearing deposits at other banks of $9,720 and $5,528 at
December 31, 2008 and 2007, respectively.





Investment
Securities


The
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
until maturity. All other securities not included in trading or held to maturity
are classified as available for sale.





Available
for sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on securities available for sale are
excluded from operations and are reported as a separate component of
stockholders’ equity until realized. A decline in the market value of any
available for sale or held to maturity security below cost that is deemed other
than temporary is charged to operations and establishes a new cost basis for the
security. Declines in the fair value of securities below their cost that are
deemed to be other than temporary are reflected in operations as realized
losses. In estimating other-than-temporary impairment losses, management
considers: 1) the length of time and the extent to which the fair value has been
less than cost, 2) the financial condition and near-term prospects of the
issuer, and 3) the intent and ability of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated recovery
in fair value.





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





F-8





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(1)
              Summary
      of Significant Accounting Policies,
continued


Other
Investments


Other
investments include other equity securities.  No ready market exists
for these securities and there is no quoted fair value.  These
investment securities are carried at cost.





Mortgage Loans Held for
Sale


Mortgage
loans held for sale are carried at the lower of aggregate cost or market value.
At December 31, 2008 and 2007, the cost of mortgage loans held for sale
approximates the market value.  Mortgage loans held for sale consist of
loans which have commitments to be sold to third party investors upon
closing.





Loans and Allowance for Loan
Losses


Loans are
stated at the principal amount outstanding, less net deferred origination fees
or costs and the allowance for loan losses. Interest on loans is calculated by
using the simple interest method on daily balances of the principal amount
outstanding.  The Bank analyzes its direct costs associated with the
origination of different types of loans.  Any fees collected that are
greater than the costs calculated by the bank are recognized as income over the
life of the loan as opposed to at the time of origination.





Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan’s effective interest rate, or at the loan’s observable
market price, or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when, based on current information and events, it
is 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 collection of interest is doubtful. Interest
previously accrued but not collected is reversed against current period earnings
and interest is recognized on a cash basis when such loans are placed on
non-accrual status.





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





Management’s
judgment in determining the adequacy of the allowance is based on evaluations of
the collectibility of loans. These evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, current
economic conditions that may affect the borrower’s ability to pay, overall
portfolio quality and review of specific problem loans. The allowance consists
of specific, general and unallocated components.  The specific
component relates to loans that are classified as impaired.  The
general component covers non-impaired loans and is based on historical loss
experience adjusted for qualitative factors.  An unallocated component
is maintained to cover uncertainties that could affect management’s estimate of
probable losses.  The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.  Management uses an external loan review program to
challenge and corroborate the internal grading system and provide additional
analysis in determining the adequacy of the allowance and 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 regulatory agencies, as an integral part of
their examination process, periodically review the Company’s allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on judgments different than those of
management.





Premises and
Equipment


Premises
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. Leasehold improvements are amortized over the shorter
period of the useful life of the asset or the lease term.  When assets
are retired or otherwise disposed, the cost and related accumulated depreciation
are removed from the accounts, and any gain or loss is reflected in operations
for the period. The cost of maintenance and repairs which do not improve or
extend the useful life of the respective asset is charged to earnings as
incurred, whereas significant improvements are capitalized. The range of
estimated useful lives for premises and equipment are generally as
follows:





Buildings
      and improvements
            5 -
      40 years


Furniture
      and equipment
            3 -
      10 years








F-9





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(1)
            Summary
      of Significant Accounting Policies,
continued


Other Real
Estate


Properties
acquired through foreclosure are carried at the lower of cost (defined as fair
value less selling costs at foreclosure) or fair value less estimated costs to
dispose.  Accounting guidance defines fair value as the amount that is
expected to be received in a current sale between a willing buyer and seller
other than in a forced or liquidation sale. Fair values at foreclosure are based
on appraisals.  Losses arising from the acquisition of foreclosed
properties are charged against the allowance for loan
losses.  Subsequent write-downs are provided by a charge to operations
through the allowance for losses on other real estate in the period in which the
need arises.  The carrying amount of foreclosed assets at December 31,
2008 and 2007 was $1,776,930 and $1, respectively.





Securities Sold Under
Repurchase Agreements


Securities
sold under repurchase agreements are treated as financing activities, and are
carried at the amounts at which the securities will be repurchased as specified
in the respective agreements.





Income
Taxes


Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Additionally,
the recognition of future tax benefits, such as net operating loss
carryforwards, is required to the extent that realization of such benefits is
more likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the
assets and liabilities are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income tax expense in the period that includes the enactment
date.





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





Mortgage Banking
Income


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





Earnings (Loss) Per
Share


Earnings
(loss) per common share are based on the weighted average number of common
shares outstanding during the period while the effects of potential common
shares outstanding during the period are included in diluted earnings per share.
The Company had no potential common share equivalents outstanding during 2008
and 2007.  For each of those years, earnings (loss) per share is
calculated using the weighted average shares outstanding during the period of
899,815.





Stock Repurchase
Plan


In 1999,
the Company approved a stock buy-back program which authorized the repurchase of
up to 75 shares of its common stock per shareholder per year, and an aggregate
limit of 1,000 shares annually.  The program is approved annually by
the Board of Directors.  During the years ended December 31, 2008 and
2007 the Company did not buy-back any shares of common stock under the program.
The shares would be retired and placed into authorized and unissued shares of
common stock upon buy-back.










F-10








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(1)
            Summary
      of Significant Accounting Policies,
continued




Recent Accounting
Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued,
Statement of Financial Accounting Standard, (“SFAS”) 157,Fair Value Measurements ,
which defines fair value, establishes a framework for measuring fair value under
Generally Accepted Accounting Principles, and expands disclosures about fair
value measurements. SFAS 157 applies to other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within
those fiscal years. The adoption of SFAS 157 did not have a material effect on
the Company’s consolidated financial position, results of operations and cash
flows.




In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, that permits a one-year deferral in applying the measurement
provisions of SFAS 157 to non-financial assets and non-financial liabilities
(non-financial items) that are not recognized or disclosed at fair value in an
entity’s financial statements on a recurring basis (at least annually).
Therefore, if the change in fair value of a non-financial item is not required
to be recognized or disclosed in the financial statements on an annual basis or
more frequently, the effective date of application of Statement 157 to that item
is deferred until fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. This deferral does not apply, however, to an
entity that applied SFAS 157 in interim or annual financial statements prior to
the issuance of FSP 157-2. The adoption of FSP 157-2 did not have a material
effect on the Company’s operating income or net earnings.




SFAS
141(R), Business
Combinations, was issued in December 2007. SFAS 141(R) establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. SFAS
141(R) also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) will become effective as of the
beginning of a company’s fiscal year beginning after December 15, 2008. This
pronouncement would impact the Company’s accounting for business combinations
completed after the effective date, if any.




SFAS 160,
Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51, was issued
in December 2007. SFAS 160 establishes accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 will become effective as of the beginning of a company’s
fiscal year beginning after December 15, 2008. The Company believes that SFAS
160 will not have an impact on the Company’s financial statements in future
periods.





In
February 2008, the FASB issued a FSP FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions. FSP 140-3
addresses the issue of whether or not these transactions should be viewed as two
separate transactions or as one “linked” transaction. FSP 140-3 includes a
“rebuttable presumption” that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. FSP 140-3 will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
The Company is currently evaluating the potential impact FSP 140-3 will have on
its consolidated financial statements.




In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. SFAS 161 requires entities that utilize derivative instruments to
provide qualitative disclosures about their objectives and strategies for using
such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives. SFAS 161 also requires entities to
disclose additional information about the amounts and location of derivatives
located within the financial statements, how the provisions of SFAS 133 has been
applied, and the impact that hedges have on an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged. The Company believes that SFAS 161 will not have an impact on the
Company’s financial statements in future periods.







F-11








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(1)
            Summary
      of Significant Accounting Policies,
continued




In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. The intent of FSP 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
141(R), and other GAAP. FSP 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The Company believes
that FSP 142-3 will not have an impact on the Company’s financial statements in
future periods.




In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company is currently evaluating the potential impact, if
any, SFAS 162 will have on its consolidated financial statements.




In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.
FSP EITF 03-6-1 clarifies that all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic
and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the potential impact, if any, FSP EITF 03-6-1 will have on its
consolidated financial statements.




In June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-5).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. EITF 07-5 also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the potential
impact, if any, EITF 07-5 will have on its consolidated financial
statements.




In June
2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for
Maintenance Deposits Under Lease Arrangements (EITF 08-3). EITF 08-3
provides guidance for accounting for nonrefundable maintenance deposits. EITF
08-3 also provides revenue recognition accounting guidance for the lessor. EITF
08-3 is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the potential impact, if any, EITF 08-3 will
have on its consolidated financial statements.




In
October 2008, the FASB issued FSP SFAS No. 157-3,Determining the Fair Value of a
Financial Asset When The Market for That Asset Is Not Active (FSP 157-3),
to clarify the application of the provisions of SFAS 157 in an inactive market
and how an entity would determine fair value in an inactive market. FSP 157-3 is
effective immediately upon adoption of SFAS No. 157 on October 1, 2008. The
application of the provisions of FSP 157-3 will not materially affect our
results of operations or financial condition.




In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161 (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and
enhances disclosure requirements for sellers of credit derivatives and financial
guarantees. FSP 133-1 and FIN 45-4 also clarifies that the disclosure
requirements of SFAS 161 are effective for quarterly periods beginning after
November 15, 2008, and fiscal years that include those periods. FSP 133-1 and
FIN 45-4 is effective for reporting periods (annual or interim) ending after
November 15, 2008. The implementation of FSP 133-1 and FIN 45-4 will not have a
material impact on our consolidated financial position and results of
operations.







F-12








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(1)
            Summary
      of Significant Accounting Policies,
continued




In
September 2008, the FASB ratified EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement (EITF 08-5).
EITF 08-5 provides guidance for measuring liabilities issued with an attached
third-party credit enhancement (such as a guarantee). It clarifies that the
issuer of a liability with a third-party credit enhancement should not include
the effect of the credit enhancement in the fair value measurement of the
liability. EITF 08-5 is effective for the first reporting period beginning after
December 15, 2008. The Company is currently assessing the impact of EITF 08-5 on
its consolidated financial position and results of operations.





In
October 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a
Financial Asset When the Market for That Asset is not active. FSP 157-3
clarifies the application of FAS Statement 157,Fair Value Measurements, in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 shall be effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate (SFAS 154,
Accounting Changes and Error
Corrections). The disclosure provisions of SFAS 154 for a change in
accounting estimate are not required for revisions resulting from a change in
valuation technique or its application. The Company’s adoption of FSP 157-3 is
not expected to have a material impact on its financial position, results of
operations and cash flows.




On
February 27, 2009, The Board of Directors of the Federal Deposit Insurance
Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance
Fund (DIF). The Board also took action to ensure the continued strength of the
insurance fund by imposing a special assessment on insured institutions of 20
basis points, implementing changes to the risk-based assessment system, and
setting rates beginning the second quarter of 2009. Under the restoration plan
approved last October, the Board set a rate schedule to raise the DIF reserve
ratio to 1.15 percent within five years. The February 27, 2009 action
extends the restoration plan horizon to seven years in recognition of the
current significant strains on banks and the financial system and the likelihood
of a severe recession. The amended restoration plan was accompanied by a final
rule that sets assessment rates and makes adjustments that improve how the
assessment system differentiates for risk. Currently, most banks are in the best
risk category and pay anywhere from 12 cents per $100 of deposits to 14 cents
per $100 for insurance. Under the final rule, banks in this category will pay
initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an
annual basis, beginning on April 1, 2009. The Board adopted an interim rule
imposing a 20 basis point emergency special assessment on the industry on
June 30, 2009. The assessment is to be collected on September 30,
2009. The interim rule would also permit the Board to impose an emergency
special assessment after June 30, 2009, of up to 10 basis points if
necessary to maintain public confidence in federal deposit insurance. Comments
on the interim rule on special assessments are due no later than 30 days after
publication in the Federal Register. Changes to the assessment system include
higher rates for institutions that rely significantly on secured liabilities,
which may increase the FDIC’s loss in the event of failure without providing
additional assessment revenue. Under the final rule, assessments will be higher
for institutions that rely significantly on brokered deposits but, for
well-managed and well-capitalized institutions, only when accompanied by rapid
asset growth. Brokered deposits combined with rapid asset growth have played a
role in a number of costly failures, including some recent ones. The final rule
also would provide incentives in the form of a reduction in assessment rates for
institutions to hold long-term unsecured debt and, for smaller institutions,
high levels of Tier 1 capital. The Company is currently evaluating the effects
of these insurance increases to its financial position and results of
operation.





F-13








OCONEE
      FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(2)
            Investment
      Securities




Investment
securities available for sale at December 31, 2008 and 2007 are as
follows:





December 31, 2008Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Estimated
                      Fair
                      ValueGovernment
      sponsored agencies
                    
                    $
                    37,171,757
                    
                    
                    
                    959,666
                    
                    
                    
                    -
                    
                    
                    
                    38,131,423State,
      county and municipal
                    
                    
                    17,714,238
                    
                    
                    
                    84,212
                    
                    
                    
                    993,961
                    
                    
                    
                    16,804,489Mortgage-backed
      securities
                    
                    
                    22,846,975
                    
                    
                    
                    517,867
                    
                    
                    
                    790
                    
                    
                    
                    23,364,052Other
      debt securities
                    
                    
                    1,620,067
                    
                    
                    
                    -
                    
                    
                    
                    158,461
                    
                    
                    
                    1,461,606Total
                    
                    $
                    79,353,037
                    
                    
                    
                    1,561,745
                    
                    
                    
                    1,153,212
                    
                    
                    
                    79,761,570





December 31, 2007Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Estimated
                      Fair
                      ValueGovernment
      sponsored agencies
                    
                    $
                    49,204,411
                    
                    
                    
                    675,410
                    
                    
                    
                    17,308
                    
                    
                    
                    49,862,513State,
      county and municipal
                    
                    
                    21,318,254
                    
                    
                    
                    207,101
                    
                    
                    
                    163,436
                    
                    
                    
                    21,361,919Mortgage-backed
      securities
                    
                    
                    18,700,736
                    
                    
                    
                    52,747
                    
                    
                    
                    177,621
                    
                    
                    
                    18,575,862Other
      debt securities
                    
                    
                    1,623,045
                    
                    
                    
                    10,855
                    
                    
                    
                    -
                    
                    
                    
                    1,633,900Total
                    
                    $
                    90,846,446
                    
                    
                    
                    946,113
                    
                    
                    
                    358,365
                    
                    
                    
                    91,434,194





Unrealized
losses and fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, as of
December 31, 2008 and 2007 are summarized as follows:





December
      31, 2008Less
      than 12 Months
                
                
                12
      Months or MoreEstimated
                    Fair
                    Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
                  Fair
                  Value
                
                
                Unrealized
                  LossesState, county and
      municipal
                
                $
                10,833,908
                
                
                
                907,749
                
                
                
                692,675
                
                
                
                86,212Mortgage-backed
      securities
                
                
                208,311
                
                
                
                790
                
                
                
                -
                
                
                
                -Other debt
      securities
                
                
                1,620,067
                
                
                
                158,461
                
                
                
                -
                
                
                
                -$
                12,662,286
                
                
                
                1,067,000
                
                
                
                692,675
                
                
                
                86,212





December
      31, 2007Less
      than 12 Months
                
                
                12
      Months or MoreEstimated
                    Fair
                    Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
                  Fair
                  Value
                
                
                Unrealized
                  LossesGovernment
      sponsored agencies
                
                $
                998,440
                
                
                
                6,179
                
                
                
                5,480,010
                
                
                
                11,129State, county and
      municipal
                
                
                4,898,455
                
                
                
                97,728
                
                
                
                3,780,628
                
                
                
                65,708Mortgage-backed
      securities
                
                
                3,701,205
                
                
                
                11,074
                
                
                
                7,048,299
                
                
                
                166,547Other debt
      securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -$
                9,598,100
                
                
                
                114,981
                
                
                
                16,308,937
                
                
                
                243,384








F-14





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(2)
            Investment
      Securities, continued




The
unrealized losses on these debt securities in a continuous loss position for
twelve months or more as of December 31, 2008 and 2007 are considered to be
temporary because they arose due to changing interest rates and the repayment
sources of principal and interest are government backed or are securities of
investment grade issuers.  Included in the table above as of December
31, 2008 were 30 out of 44 securities issued by state and political subdivisions
that contained unrealized losses, 1 of 22 mortgage-backed securities, and 2 of 2
other debt securities that contained unrealized losses.  Included in
the table above as of December 31, 2007 were 22 out of 55 securities issued by
state and political subdivisions that contained unrealized losses, 4 out of 32
securities issued by government sponsored agencies, and 12 of 18 mortgage-backed
securities that contained unrealized losses.





The
amortized cost and fair value of investment securities available for sale at
December 31, 2008, by contractual maturity, are shown below.  Expected
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.





Amortized
                      Cost
                    
                    
                    Estimated
                      Fair ValueDue
      within one year
                    
                    $
                    6,971,135
                    
                    
                    
                    7,027,040Due
      from one to five years
                    
                    
                    2,926,032
                    
                    
                    
                    2,935,922Due
      from five to ten years
                    
                    
                    10,204,676
                    
                    
                    
                    10,520,208Due
      after ten years
                    
                    
                    36,404,219
                    
                    
                    
                    35,914,348Mortgage-backed
      securities
                    
                    
                    22,846,975
                    
                    
                    
                    23,364,052$
                    79,353,037
                    
                    
                    
                    79,761,570




Proceeds
from sales of securities available for sale during 2008 were
$8,742,800.  Gross gains of $215,129 were realized on those
sales.  Proceeds from sales of securities available for sale during
2007 were $6,032,693.  Gross gains of $2,342 and gross losses of
$4,650 were realized on those sales.





Securities
with a carrying value of approximately $63,014,000 and $62,990,000 at December
31, 2008 and 2007, respectively, were pledged to secure public deposits and for
other purposes as required by law.





Restricted
equity securities consist of the following:





December
      31,2008
                          
                          2007Federal
      Home Loan Bank Stock
                          
                          $
                          578,800
                          
                          
                          
                          606,300Silverton
      Financial Services, Inc. Stock
                          
                          
                          100,429
                          
                          
                          
                          100,429$
                          679,229
                          
                          
                          
                          706,729







(3)
            Loans




Major
classifications of loans at December 31, 2008 and 2007 are summarized as
follows:




2008
                  
                  
                  2007Commercial,
      financial and agricultural
                  
                  $
                  28,028,762
                  
                  
                  
                  22,229,689Real
      estate – mortgage
                  
                  
                  105,459,965
                  
                  
                  
                  104,703,465Real
      estate – commercial construction
                  
                  
                  51,567,771
                  
                  
                  
                  62,969,984Real
      estate – consumer construction
                  
                  
                  2,897,623
                  
                  
                  
                  1,107,809Consumer
                  
                  
                  7,836,864
                  
                  
                  
                  8,820,086Total loans
                  
                  
                  195,790,985
                  
                  
                  
                  199,831,033Deferred
      (fees), costs
                  
                  
                  18,578
                  
                  
                  
                  (232
                  )Less
      allowance for loan losses
                  
                  
                  4,215,262
                  
                  
                  
                  3,335,825Total net loans
                  
                  $
                  191,557,145
                  
                  
                  
                  196,495,440










F-15







OCONEE
FINANCIAL CORPORATION




Notes
to Consolidated Financial Statements, continued




(3)
              Loans,
      continued




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




At
December 31, 2008 and 2007, the recorded investment in loans that were
considered to be impaired and on nonaccrual was approximately $28,772,000 and
$9,057,000, respectively.  Included in this amount is $9,803,000 of
impaired loans at December 31, 2008 for which there is no related allowance for
loan losses.  Impaired loans at December 31, 2008 and 2007 also
include $18,969,000 and $9,057,000 of impaired loans for which the related
allowance for loan losses is $1,438,000 and $1,359,000,
respectively.   In addition, the Company had approximately
$24,000 and $0 in loans past due more than ninety days and still accruing
interest at December 31, 2008 and 2007, respectively.  These accounts
are deemed to be well collateralized and in the process of
collection.  The average recorded investment in impaired loans for the
twelve months ended December 31, 2008 and 2007 was approximately $16,478,000 and
$1,664,000, respectively.  For the years ended December 31, 2008 and
2007, the interest recognized on impaired loans was
immaterial.




Changes
in the allowance for loan losses were as follows:





Years
      Ended December 31,2008
                  
                  
                  2007Balance
      at beginning of year
                  
                  $
                  3,335,825
                  
                  
                  
                  3,080,661Provision
      for loan losses
                  
                  
                  7,463,000
                  
                  
                  
                  330,000Amounts
      charged off
                  
                  
                  (6,625,721
                  )
                  
                  
                  (117,876
                  )Recoveries
      on amounts previously charged off
                  
                  
                  42,158
                  
                  
                  
                  43,040Balance
      at end of year
                  
                  $
                  4,215,262
                  
                  
                  
                  3,335,825





(4)
            Premises
      and Equipment




Major
classifications of premises and equipment are summarized as
follows:





December
      31,2008
                  
                  
                  2007Land
                  
                  $
                  1,354,181
                  
                  
                  
                  1,354,181Buildings
      and improvements
                  
                  
                  5,936,622
                  
                  
                  
                  5,887,088Furniture
      and equipment
                  
                  
                  5,881,342
                  
                  
                  
                  5,732,113Leasehold
      improvements
                  
                  
                  115,673
                  
                  
                  
                  115,67313,287,818
                  
                  
                  
                  13,089,055Less
      accumulated depreciation
                  
                  
                  6,383,928
                  
                  
                  
                  5,694,959$
                  6,903,890
                  
                  
                  
                  7,394,096





Depreciation
expense was $706,382 and $718,801 for the years ended December 31, 2008 and
2007, respectively.







F-16











OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(4)
            Premises
      and Equipment, continued




Future
minimum lease payments under current operating leases pertaining to banking
premises and equipment at December 31, 2008, are as follows:





Years
      Ending December 31,2009
                  
                  $
                  158,1362010
                  
                  
                  107,2182011
                  
                  
                  89,4602012
                  
                  
                  91,2492013
                  
                  
                  93,074Thereafter
                  
                  
                  298,784Total
      minimum lease payments
                  
                  $
                  837,921





(5)
            Deposits




The
aggregate amounts of certificates of deposit, each with a minimum denomination
of $100,000, were approximately $71,244,000 and $65,100,000 at December 31, 2008
and 2007, respectively.  The Company had brokered time deposits at
December 31, 2008 and 2007 of $17,979,000 and $0, respectively.





At
December 31, 2008, the scheduled maturities of certificates of deposits are as
follows:





2009
                  
                  $
                  108,388,3492010
                  
                  
                  28,485,8842011
                  
                  
                  812,2102012
                  
                  
                  324,4802013
                  
                  
                  268,883$
                  138,279,806





At
December 31, 2008, the Bank had concentrations of deposits of approximately
$28,699,000 and $12,425,000 with two customers.  These deposits are
with customers that have been customers of the Bank for several years and are
expected to remain with the Bank for the foreseeable future.





(6)
            Income
      Taxes




The
components of income tax expense (benefit) in the statements of earnings are as
follows:





2008
                  
                  
                  2007Current
      tax (benefit)
                  
                  $
                  (2,699,668
                  )
                  
                  
                  1,417,660Deferred
                  
                  
                  (13,119
                  )
                  
                  
                  (122,414
                  )Total
      income tax expense (benefit)
                  
                  $
                  (2,712,787
                  )
                  
                  
                  1,295,246





The
differences between income tax expense (benefit) and the amount computed by
applying the statutory federal income tax rate to earnings before income taxes
are as follows:





2008
                  
                  
                  2007Pretax
      income (loss) at statutory rates
                  
                  $
                  (2,099,020
                  )
                  
                  
                  1,551,663Add
      (deduct):Tax
      exempt interest income
                  
                  
                  (288,919
                  )
                  
                  
                  (326,056
                  )Non-deductible
      interest expense
                  
                  
                  33,751
                  
                  
                  
                  48,613State
      taxes, net of federal effect
                  
                  
                  (442,801
                  )
                  
                  
                  122,901Other
                  
                  
                  84,202
                  
                  
                  
                  (101,875
                  )$
                  (2,712,787
                  )
                  
                  
                  1,295,246








F-17








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(6)
            Income
      Taxes, continued




The
following summarizes the sources and expected tax consequences of future taxable
deductions (income) which comprise the net deferred tax asset. The net deferred
tax asset is a component of other assets at December 31, 2008 and
2007.


2008
                  
                  
                  2007Deferred
      income tax assets:Allowance
      for loan losses
                  
                  $
                  1,164,777
                  
                  
                  
                  1,158,747Other
      real estate
                  
                  
                  14,062
                  
                  
                  
                  14,062Total
      gross deferred income tax assets
                  
                  
                  1,178,839
                  
                  
                  
                  1,172,809Deferred
      income tax liabilities:Unrealized
      gains on investment securities available for sale
                  
                  
                  (155,079
                  )
                  
                  
                  (223,109
                  )Premises and
      equipment
                  
                  
                  (449,192
                  )
                  
                  
                  (456,281
                  )Total
      gross deferred income tax liabilities
                  
                  
                  (604,271
                  )
                  
                  
                  (679,390
                  )Net
      deferred income tax asset
                  
                  $
                  574,568
                  
                  
                  
                  493,419





(7)
            Related
      Party Transactions




The
Company conducts transactions with directors and executive officers, including
companies in which they have beneficial interests, in the normal course of
business. It is the policy of the Company that loan transactions with directors
and officers are made on substantially the same terms as those prevailing at the
time made for comparable loans to other persons. The following is a summary of
activity for related party loans:





December
      31,2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  7,550,279
                  
                  
                  
                  6,326,109New
      loans
                  
                  
                  1,970,123
                  
                  
                  
                  2,754,108Repayments
                  
                  
                  (2,562,301
                  )
                  
                  
                  (1,529,938
                  )Ending
      balance
                  
                  $
                  6,958,101
                  
                  
                  
                  7,550,279





Deposits
from related parties totaled approximately $6,833,000 and $12,119,000 as of
December 31, 2008 and 2007, respectively.





(8)
              Commitments




The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.





The
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.  In most
cases, the Company does require collateral or other security to support
financial instruments with credit risk.





Contractual Amount2008
                  
                  
                  2007Financial
      instruments whose contract
                  
                  (in
      thousands)amounts represent credit
      risk:Commitments to extend
      credit
                  
                  $
                  26,153
                  
                  
                  
                  36,398Standby letters of
      credit
                  
                  $
                  661
                  
                  
                  
                  785











F-18








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(8)
              Commitments,
      continued




Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates 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. The Company
evaluates each customer’s creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management’s credit evaluation. Collateral held varies but
may include unimproved and improved real estate, certificates of deposit, or
personal property.





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





The
Company has $7,000,000 available for the purchase of overnight federal funds
from two correspondent financial institutions as of December 31, 2008 and
2007.





(9)
            Profit
      Sharing Plan




The
Company has a contributory profit sharing plan which is available to
substantially all employees subject to certain age and service requirements.
Contributions to the plan are determined annually by the Board of Directors. The
total contributions by the Company for 2008 and 2007 were $227,367 and $319,445,
respectively.





(10)
            Regulatory
      Matters




The
Company is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (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, 2008 and 2007, the Company and the Bank met all capital adequacy
requirements to which they are subject.





As of
December 31, 2008, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table and also must not be subject to any written agreement, order, capital
directive or prompt corrective action directive issued by federal banking
regulators. There are no conditions or events since that notification that
management believes have changed the Bank’s category.








F-19








OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(10)
            Regulatory
      Matters, continued




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





To
      Be WellCapitalized
      UnderFor
      Capital
            Prompt
      CorrectiveActual
            Adequacy Purposes
            Action ProvisionsAmount
            Ratio
            Amount
            Ratio
            Amount
            RatioAs
      of December 31, 2008:Total Capital(to Risk-Weighted
      Assets)
            $
            28,095
            13.0%
            $
            17,334
            8.0%
            $
            21,667
            10.0%Tier 1 Capital(to Risk-Weighted
      Assets)
            $
            25,368
            11.7%
            $
            8,667
            4.0%
            $
            13,000
            6.0%Tier 1 Capital(to Average
    Assets)
            $
            25,368
            8.1%
            $
            12,529
            4.0%
            $
            15,662
            5.0%





As
      of December 31, 2007:Total Capital(to Risk-Weighted
      Assets)
            $
            31,701
            14.2%
            $
            17,809
            8.0%
            $
            22,261
            10.0%Tier 1 Capital(to Risk-Weighted
      Assets)
            $
            28,912
            13.0%
            $
            8,905
            4.0%
            $
            13,357
            6.0%Tier 1 Capital(to Average
    Assets)
            $
            28,912
            8.9%
            $
            13,038
            4.0%
            $
            16,298
            5.0%








(11)
            Stockholders’
      Equity




Dividends
paid by the Bank are the primary source of funds available to the Company for
payment of dividends to its stockholders and for other working capital needs.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the regulatory authorities. These restrictions are based on the
level of regulatory classified assets, the prior year’s net earnings, and the
ratio of equity capital to total assets.  At December 31, 2008, no
dividends could be declared without regulatory approval due to the net loss
incurred for the year ended December 31, 2008.





(12)
            Fair
      Value Disclosures




Fair Value
Measurements


In
September 2006 the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair
Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements,
but applies under other accounting pronouncements. FASB previously concluded in
such accounting pronouncements that fair value is the relevant measurement
attribute.




The
Company adopted the provisions of SFAS 157 on January 1, 2008. In February
2008 the FASB issued Staff Position No. FAS 157-2 which permits delayed
application of the provisions of SFAS 157 to nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis to fiscal years beginning after
November 15, 2008. Since the Company has elected to delay application of
the provisions of SFAS 157 to nonfinancial assets and liabilities in scope of
this staff position, the information disclosed below does not consider the
impact that SFAS 157 would have on such nonfinancial assets and liabilities. The
major categories of assets and liabilities that are recognized or disclosed at
fair value, for which the provisions of SFAS 157 have not been applied, include
reporting units measured at fair value in the first step of a goodwill
impairment test under SFAS 142 and nonfinancial long-lived assets measured at
fair value for an impairment assessment under SFAS 144.









F-20







OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(12)
            Fair
      Value Disclosures, continued




SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:




Level 1 –
Quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.




Level 2 –
Significant other observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in markets that are not
active, and other inputs that are observable or can be corroborated by
observable market data.




Level 3 –
Generated from model-based techniques that use at least one significant
assumption based on unobservable inputs for the asset or liability, which are
typically based on an entity’s own assumptions, as there is little, if any,
related market activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair value
hierarchy, the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.




The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:




Securities
Available-for-Sale: Securities available-for-sale are recorded at fair
value on a recurring basis. Fair value measurement is based upon quoted prices,
if available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security’s credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.




Loans Held for Sale:
Loans held for sale are carried at the lower of cost or fair value. The fair
value of loans held for sale is based on what secondary markets are currently
offering for portfolios with similar characteristics. As such, management
classifies loans subjected to recurring fair value adjustments as Level
2.




Impaired Loans: Loans
for which it is probable that payment of interest and principal will not be made
in accordance with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired, management
measures impairment in accordance with SFAS 114, “Accounting by Creditors for
Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At December 31, 2008, substantially all of the
impaired loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
impaired loan as nonrecurring Level 3.




Foreclosed Assets:
Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management’s estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair
value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the foreclosed asset as
nonrecurring Level 3.





F-21





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(12)
            Fair
      Value Disclosures, continued




The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008, aggregated by the level in the
fair value hierarchy within which those measurements fall.




Balance
      at
                    December
      31,
                    2008(In
      thousands)
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)AssetsSecurities
                
                $
                79,762
                
                
                $
                -
                
                
                $
                79,762
                
                
                $
                -Loans
      held for sale
                
                
                1,639
                
                
                
                -
                
                
                
                1,639
                
                
                
                -







The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. Generally Accepted
Accounting Principles. These include assets that are measured at the lower of
cost or fair value. The table below presents the Company’s assets and
liabilities measured at fair value on a nonrecurring basis as of
December 31, 2008, aggregated by the level in the fair value hierarchy
within which those measurements fall.




Balance
      at
                    December
      31,
                    2008(In
      thousands)
                
                
                (Level
      1)
                
                
                (Level
      2)
                
                
                (Level
      3)AssetsImpaired
      loans
                
                $
                17,531
                
                
                $
                -
                
                
                $
                -
                
                
                $
                17,531Foreclosed
      asssets
                
                
                1,782
                
                
                
                -
                
                
                
                -
                
                
                
                1,782




For the
year ended December 31, 2008, the Company recognized adjustments related to
impaired loans and foreclosed assets that are measured at fair value on a
nonrecurring basis. Approximately $7,374,000 of losses related to impaired loans
and foreclosed assets were recognized as either charge-offs or specific
allocations within the allowance for loan losses for the year ended
December 31, 2008.




Fair Value of Financial
Instruments


The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:




Cash and Cash
Equivalents


For cash,
due from banks, and federal funds sold, the carrying amount is a reasonable
estimate of fair value.





Investment Securities
Available for Sale


Fair
values for investment securities are based on quoted market
prices.





Restricted Equity
Securities


The
carrying amount of restricted equity securities approximates fair
value.





Loans and Mortgage Loans
Held for Sale


The fair
value of fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. The fair value of impaired loans is estimated
based on discounted contractual cash flows or underlying collateral value, where
applicable.  Mortgage loans held for sale are valued based on the
current price at which these loans could be sold into the secondary
market.








F-22




OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued





(12)
            Fair
      Value Disclosures, continued




Deposits and Securities Sold
Under Repurchase Agreements


The fair
value of demand deposits, interest-bearing demand deposits, savings, and
securities sold under repurchase agreements is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.





Commitments to Extend Credit
and Standby Letters of Credit


Commitments
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.




The
estimated fair values of the Company’s financial instruments as of
December 31, 2008 and 2007 are as follows:




2008
                  
                  
                  2007Carrying
                  
                  
                  Estimated
                  
                  
                  Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value
                  
                  
                  Amount
                  
                  
                  Fair ValueAssets:
                  
                  (In
      thousands)Cash and cash
      equivalents
                  
                  $
                  20,062
                  
                  
                  
                  20,062
                  
                  
                  
                  20,890
                  
                  
                  
                  20,890Investment
      securities
                  
                  $
                  79,762
                  
                  
                  
                  79,762
                  
                  
                  
                  91,434
                  
                  
                  
                  91,434Restricted equity
      securities
                  
                  $
                  679
                  
                  
                  
                  679
                  
                  
                  
                  706
                  
                  
                  
                  706Mortgage loans held for
      sale
                  
                  $
                  1,639
                  
                  
                  
                  1,639
                  
                  
                  
                  1,063
                  
                  
                  
                  1,063Loans, net
                  
                  $
                  191,557
                  
                  
                  
                  191,214
                  
                  
                  
                  196,495
                  
                  
                  
                  197,211Liabilities:Deposits
      and securities sold underrepurchase
      agreement
                  
                  $
                  281,491
                  
                  
                  
                  281,682
                  
                  
                  
                  289,681
                  
                  
                  
                  290,752







(13)
            Other
      Operating Income and Expenses




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




2008
                  
                  
                  2007Other
      IncomeIncome
      and fees from ATM’s
                  
                  $
                  484,438
                  
                  
                  
                  438,425Other
      ExpensesProfessional
      fees
                  
                  $
                  380,755
                  
                  
                  
                  338,026ATM
      process and settlement charges
                  
                  $
                  297,177
                  
                  
                  
                  269,790Deposit
      program marketing expense
                  
                  $
                  246,234
                  
                  
                  
                  -





(14)
            Oconee
      Financial Corporation (Parent Company Only) Financial
      Information





Balance
Sheets




December
31, 2008 and 2007




2008
                          
                          
                          2007AssetsCash
                          
                          $
                          167,865
                          
                          
                          
                          1,093,678Investment
      in subsidiary
                          
                          
                          25,621,141
                          
                          
                          
                          29,276,533Other
      assets
                          
                          
                          8,182
                          
                          
                          
                          -$
                          25,797,188
                          
                          
                          
                          30,370,211Liabilities and Stockholders’
      EquityOther
      liabilities
                          
                          $
                          -
                          
                          
                          
                          1,035,479Stockholders’
      equity
                          
                          
                          25,797,188
                          
                          
                          
                          29,334,732$
                          25,797,188
                          
                          
                          
                          30,370,211




F-23





OCONEE
FINANCIAL CORPORATION





Notes
to Consolidated Financial Statements, continued







(14)
            Oconee
      Financial Corporation (Parent Company Only) Financial Information,
      continued





Statements
      of OperationsFor
      the Years Ended December 31, 2008 and
2007





2008
                
                
                2007Dividends
      from subsidiary
                
                $
                150,000
                
                
                
                1,034,787Other
      expenses
                
                
                51,825
                
                
                
                48,694Earnings before income tax
      benefit and equity inundistributed earnings (loss)
      of subsidiary
                
                
                98,175
                
                
                
                986,093Income
      tax benefit
                
                
                19,673
                
                
                
                18,484Earnings before equity in
      undistributed earnings (loss)of subsidiary
                
                
                117,848
                
                
                
                1,004,577Equity
      in undistributed earnings (loss) of subsidiary
                
                
                (3,544,207
                )
                
                
                2,263,893Net earnings
    (loss)
                
                $
                (3,426,359
                )
                
                
                3,268,470








Statements
of Cash Flows





For the
Years Ended December 31, 2008 and 2007





2008
                
                
                2007Cash
      flows from operating activities:Net earnings
    (loss)
                
                $
                (3,426,359
                )
                
                
                3,268,470Adjustments to reconcile net
      earnings (loss)to net cash provided by
      operating activities:Equity in undistributed loss
      (earnings) of subsidiary
                
                
                3,544,207
                
                
                
                (2,263,893
                )Change in:Other assets
                
                
                (8,182
                )
                
                
                323Other
    liabilities
                
                
                (692
                )
                
                
                693Net cash provided by operating
      activities
                
                
                108,974
                
                
                
                1,005,593Cash
      flows from financing activities:Dividends
      paid
                
                
                (1,034,787
                )
                
                
                (1,124,769
                )Net
      cash used by financing activities
                
                
                (1,034,787
                )
                
                
                (1,124,769
                )Change
      in cash
                
                
                (925,813
                )
                
                
                (119,176
                )Cash
      at beginning of year
                
                
                1,093,678
                
                
                
                1,212,854Cash
      at end of year
                
                $
                167,865
                
                
                
                1,093,678











F-24







SIGNATURES






Pursuant to the requirements of Section
13 or 15(d) of the Exchange Act, the issuer has duly caused this Report on Form
10–K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Watkinsville, State of Georgia, on the15thday ofApril2009.




OCONEE
      FINANCIAL CORPORATION
              (Registrant)
              
              By:B.
      Amrey
      Harden
              B.
      Amrey Harden
              President
      and Chief Executive Officer




POWER
OF ATTORNEY AND SIGNATURES






KNOW ALL MEN BY THESE PRESENTS that
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 him and in his name, place and stead, in any and all capacities, to sign any
amendments to this Report on Form 10–K and to file the same, with all exhibits
thereto and other documents in connection therewith, with the SEC, hereby
ratifying and confirming all that said attorney–in–fact, or their substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.




Pursuant to the requirements of the
Exchange Act, this Report on Form 10–K has been signed by the following persons
in the capacities indicated on the 15th day
of April2009.






Signature
                                                        Title/s/
      G. Robert Bishop
                                                        DirectorG.
      Robert Bishop/s/
      Jimmy L. Christopher
                                                        DirectorJimmy
      L. Christopher/s/
      Douglas D. Dickens
                                                        Chairman
      of the Board of DirectorsDouglas
      D. Dickens/s/
      J. Albert Hale, Sr.
                                                        DirectorJ.
      Albert Hale, Sr./s/
      B. Amrey Harden
                                                        President
      and Chief Executive Officer, DirectorB.
      Amrey Harden/s/
      Henry C. Maxey
                                                        DirectorHenry
      C. Maxey
  32






/s/
      Ann Breedlove Powers
            DirectorAnn
      Breedlove Powers/s/
      Steven A. Rogers
            Vice
      President and Chief Financial OfficerSteven
      A. Rogers/s/
      Jerry K. Wages
            Senior
      Executive Vice President, Corporate Secretary, andJerry
      K. Wages
            Director/s/
      Virginia S. Wells
            Vice
      Chairperson of the Board of DirectorsVirginia
      S. Wells/s/
      Tom F. Wilson
            Executive
      Vice President and Chief Loan Officer,Tom
      F. Wilson
            Director






























33