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, 2009o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934




Commission
File Number 000-25267




Oconee
Financial Corporation


(Name of
Small Business Issuer in its Charter)




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





35 North Main Street,
      Watkinsville, Georgia
            30677-0205(Address
      of principal executive 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).     o 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 Yesx 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 March 31,
2010:  548,505 shares of common stock with an aggregate value of
$15,215,464 (based on approximate book value of the common stock).





As of
March 31, 2010, 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 2010 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, 2009, the Bank’s total
assets were $285,299,000, compared to $308,156,000 at year-end 2008.  Over
the past 5 years, total assets of the Bank have grown by $28,434,000,
representing an increase of 11.1%.
  Services
  The Bank is a community oriented,
full-service commercial bank, headquartered in Oconee County, Georgia with five
full-service banking offices and six 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, 2009,
the Bank’s deposit base totaled $250,442,000and consisted
of the following types of
accounts:
  Amount
              
              
              Percentage(In
      thousands)Non-interest
      bearing demand deposits
              
              $
              28,957
              
              
              
              11.6
              %Interest-bearing
      NOW accounts
              
              
              46,933
              
              
              
              18.7
              %Money
      market deposit accounts
              
              
              8,316
              
              
              
              3.3
              %Savings
      deposits
              
              
              37,747
              
              
              
              15.1
              %Time
      deposits of less than $100,000
              
              
              65,946
              
              
              
              26.3
              %Time
      deposits of $100,000 or more
              
              
              52,535
              
              
              
              21.0
              %Individual
      retirement accounts
              
              
              10,008
              
              
              
              4.0
              %Total
      Deposits
              
              $
              250,442
              
              
              
              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, 2009, the Bank’s loan portfolio totaled $179,783,000, consisting of
the following categories of
loans:
  Amount
              
              
              Percentage(In
      thousands)Commercial,
      financial and agricultural
              
              $
              28,393
              
              
              
              15.8
              %Real
      estate – mortgage
              
              
              114,253
              
              
              
              63.6
              %Real
      estate – commercial construction
              
              
              29,568
              
              
              
              16.4
              %Real
      estate – consumer construction
              
              
              801
              
              
              
              0.4
              %Consumer
              
              
              6,768
              
              
              
              3.8
              %Total
      loans
              
              $
              179,783
              
              
              
              100.0
              %
  The following table shows the amounts
and growth for loans,
deposits, capital, and total assets at December 31, for the years ended
2004-2009 (dollar amounts are in millions):
  2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              5-Year
      Growth(Decline)Loans
              
              $
              179.8
              
              
              $
              195.8
              
              
              $
              199.8
              
              
              $
              217.9
              
              
              $
              206.5
              
              
              $
              186.1
              
              
              $
              (6.3
              )Deposits
              
              
              250.4
              
              
              
              275.0
              
              
              
              286.5
              
              
              
              304.0
              
              
              
              256.8
              
              
              
              231.8
              
              
              
              18.6Capital
              
              
              24.7
              
              
              
              25.8
              
              
              
              29.3
              
              
              
              26.7
              
              
              
              23.7
              
              
              
              22.3
              
              
              
              2.4Total
      Assets
              
              
              285.3
              
              
              
              308.2
              
              
              
              321.3
              
              
              
              336.5
              
              
              
              285.1
              
              
              
              256.9
              
              
              
              28.4
 
 The Bank
experienced declines in loans, deposits, total assets and capital during
2009.  The primary factor contributing to the decline in loans was a
slowdown in the housing and real estate markets due to a downturn in the
economy.  During 2009, the Bank’s real estate construction loan
portfolio decreased $24,096,000, or 44.2%, primarily due to a lack of demand for
residential construction as a result of the economic downturn.  The
decrease in deposits during 2009 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 2009.  The reductions in loans and deposits, and the
corresponding reduction in total assets during 2009 were the result of a
strategic decision by management to shrink the Bank’s balance sheet in order to
protect capital ratios in light of a declining level of capital as a result of
net operating losses for 2009 and 2008.
 
 As of
December 31, 2009, 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 $18,743,000,
which represented 10.4% of the Bank’s loan portfolio at December 31, 2009. 
At year-end 2009, total outstanding balances and commitments for development and
construction loans to the housing industry were $21,779,000, which represented
12.1% of the Bank’s total loans and 89.9% of the Bank’s Tier 1 equity
capital.  As of December 31, 2009, the Bank’s established guideline for
this concentration is 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 2009, 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, 2009, the outstanding balances for hotel and motel industry loans
totaled $19,710,000, which represented 11.0% of the Bank’s total loans. At
year-end 2009, outstanding balances and commitments for hotel and motel loans
totaled $19,821,000, which represented 11.0% of the Bank’s total loans and 81.8%
of the Bank’s Tier 1 equity capital.  As of December 31, 2009, the Bank’s
established guideline for this concentration is to be at a balance that
represents less than 100% of Tier 1 equity capital.  In January 2009, the
Bank took ownership of a motel through foreclosure
proceedings.   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, 2009,
investment securities totaled $66,903,000.
  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 81.1% 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 16.7% of the portfolio with the credit risk limited to the risk
      of default of the issuing authorities.  Other debt securities
      comprised 2.2% 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, 2009 (dollars in
thousands):
  Total
                Deposits
              
              
              Deposit
                Market
                ShareOconee
      State Bank
              
              $
              245,518
              
              
              
              36.6
              %North
      Georgia Bank
              
              
              152,073
              
              
              
              22.6
              %Athens
      First Bank & Trust Company
              
              
              96,350
              
              
              
              14.4
              %Bank
      of America, N.A.
              
              
              61,835
              
              
              
              9.2
              %Community
      Bank & Trust
              
              
              55,731
              
              
              
              8.3
              %First
      Georgia Banking Company
              
              
              26,170
              
              
              
              3.9
              %SunTrust
      Bank
              
              
              18,630
              
              
              
              2.8
              %First
      American Bank & Trust Company
              
              
              14,838
              
              
              
              2.2
              %Total
      deposits
              
              $
              671,145
              
              
              
              100.0
              %
  The Bank also competes in Athens-Clark
County.  There are fifteen other commercial banks in Athens-Clarke
County, fiveof which have offices in Oconee County.  As of June 30, 2009, the
other fourteen banks located in Athens-Clarke County held deposits totaling
$2,256,798,000.  The Bank’s physical presence in Athens-Clarke County is
limited to a full-service in-store branch in the East Athens Wal-Mart
Supercenter. On July 31, 2009, the Bank closed its other branch in Athens due to
continued decline in transaction activity.  The branch building is
leased until June 2010, and the Bank will continue to pay monthly lease payments
for the remainder of the lease term unless a new tenant for the building can be
found prior to the expiration of the Bank’s current lease.
  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
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.
  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:
   5
   ·
              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.
  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.
   6
   On August 18, 2009, the Bank entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist
(the “Consent Agreement”) with the FDIC and the GDBF, whereby the Bank consented
to the issuance of an Order to Cease and Desist (the “Order”).
 
 Among
other things, the Order provides that, unless otherwise agreed by the FDIC and
GDBF:
 
 ·
              the
      Board of Directors of the Bank must increase its participation in the
      affairs of the Bank and establish a Board committee responsible for
      ensuring compliance with the Order;
  ·
              the
      Bank must have and retain qualified management and notify the FDIC and the
      GDBF in writing when it proposes to add any individual to the Bank’s Board
      of Directors or employ any individual as a senior executive
      officer;
  ·
              the
      Bank must have and maintain a Tier 1 (Leverage) Capital ratio of not less
      than 8% and a Total Risk-based Capital ratio of at least
    10%;
  ·
              the
      Bank must collect or charge-off problem
loans;
  ·
              the
      Bank must formulate a written plan to reduce the Bank’s adversely
      classified assets in accordance with a defined asset reduction
      schedule;
  ·
              the
      Bank may not extend any additional credit to, or for the benefit of, any
      borrower who has a loan or other extension of credit from the Bank that
      has been charged-off or adversely classified and is
      uncollected;
  ·
              the
      Bank must strengthen its lending and collection policy to provide
      effective guidance and control over the Bank’s lending
      functions;
  ·
              the
      Bank must perform a risk segmentation analysis with respect to
      concentrations of credit and reduce such
  concentrations;
  ·
              the
      Board of Directors of the Bank must review the adequacy of the allowance
      for loan and lease losses (the “ALLL”) and establish a comprehensive
      policy for determining the adequacy of the
ALLL;
  ·
              the
      Bank must revise its budget and include formal goals and strategies to
      improve the Bank’s net interest margin, increase interest income, reduce
      discretionary expenses and improve and sustain earnings of the
      Bank;
  ·
              the
      Bank may not pay a cash dividend to Oconee Financial
      Corporation;
  ·
              the
      Board of Directors of the Bank must strengthen its asset/liability
      management and interest rate risk policies and liquidity contingency
      funding plan;
  ·
              the
      Bank may not accept, renew or rollover brokered deposits without obtaining
      a brokered deposit waiver from the
FDIC;
  ·
              the
      Bank must eliminate or correct all violations of law and contraventions of
      policy; and
  ·
              the
      Bank must submit quarterly reports to the FDIC and GDBF regarding
      compliance with the Order.
  The
provisions of the Order will remain effective until modified, terminated
suspended or set aside by the FDIC.  Management of the Bank has
developed a plan for compliance with the Order and has been given authority by
the Board of Directors to institute that plan.  The primary focuses of
the plan going forward will be reducing classified and non-performing assets,
maintaining adequate levels of capital and returning the Bank to profitable
operating levels.  As of the date of this filing,  the Bank
was in full compliance all provisions within the Order.
  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.
   7
  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, 2009, no dividends could be declared without
regulatory approval as a result of one of the stipulations within the Order
issued to the Bank by the FDIC on August 18, 2009.
  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.
   8
  Set forth below are pertinent capital
ratios for the Bank as of December 31, 2009 and 2008:
  2009
              
              
              2008Total
      Risk-Based Capital
              
              
              13.5
              %
              
              
              13.0
              %Tier
      1 Risk-Based Capital
              
              
              12.2
              %
              
              
              11.7
              %Leverage Ratio (Tier
      1Capital to Average Total Assets)
              
              
              8.3
              %
              
              
              8.1
              %
  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.
  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 June 30, 2010.  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.
 
  9
  Future
Legislation.Various legislation affecting financial
institutions and the financial industry is from time to time introduced in
Congress.  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.
  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, 2009, the Bank had 76
full-time employees and 22 part-time employees. The Bank is not a party to any
collective bargaining agreement, and the Bank believes that its employee
relations are good.
  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;
 ·
              losses
      due to fraudulent and negligent conduct of customers, service providers
      and employees;
  10
  ·
              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
  Oconee
undertakes no obligation to revise forward-looking statements to reflect events
or changes after the date of this discussion or to reflect the occurrence of
unanticipated events.
  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.
  We
have consented to the issuance of a cease and desist order with the FDIC that
significantly restricts our subsidiary bank’s operations, and our failure to
comply with this order could have a material adverse effect on our business,
financial condition or results of operations.
  Following
an examination of the operations of the bank, the FDIC noted weaknesses relating
primary to our lending practices and asset quality, and their impact on our
capital and earnings. We have taken action and implemented procedures that
management believes will address the weaknesses identified by the FDIC.
Effective August 18, 2009, we consented to the issuance by the FDIC of a cease
and desist order to the bank, which provides, among other things, that the bank
must have and maintain a 8% Leverage Capital ratio and 10% Total Risk-based
Capital ratio. In the event the bank fails to fully comply with the terms of the
Order, including its obligations to maintain sufficient capital to comply with
the minimum Leverage Capital ratio and Total Risk-based Capital ratio specified
in the Order, the FDIC will have the authority to subject the bank to the terms
of a more restrictive enforcement order, to impose civil money penalties on the
bank and its directors and officers, as applicable, and to remove directors and
officers from their positions with the bank. As a result, our failure to comply
with the Order could have a material adverse impact on our business, financial
condition or results of operations.
  As
a financial services company, adverse conditions in the general business or
economic environment could have a material adverse effect on our financial
condition and results of operations.
 
 Continued
weakness or adverse changes in business and economic conditions generally or
specifically in the markets in which we operate could adversely impact our
business, including causing one or more of the following negative
developments:
 
 ·
              a
      decrease in the demand for loans and other products and services offered
      by us;
 ·
              a
      decrease in the value of our loans secured by consumer or commercial real
      estate;
 ·
              an
      impairment of our assets, such as its goodwill or deferred tax assets;
      or
 ·
              an
      increase in the number of customers or other counterparties who default on
      their loans or other obligations to us, which could result in a higher
      level of nonperforming assets, net charge-offs and provision for loan
      losses.
 
 For
example, if we are unable to continue to generate, or demonstrate that we can
continue to generate, sufficient taxable income in the near future, then we may
not be able to fully realize the benefits of our deferred tax assets and may be
required to recognize a valuation allowance, similar to an impairment of those
assets, if it is more-likely-than-not that some portion of our deferred tax
assets will not be realized.  Such a development, or one or more other
negative developments resulting from adverse conditions in the general business
or economic environment, some of which are described above, could have a
material adverse effect on our financial condition and results of
operations.
  11
  
 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 capital resources and liquidity could be negatively
impacted by disruptions in our ability to access these sources of
funding.  With increased concerns about bank failures, traditional
deposit customers are increasingly concerned about the extent to which their
deposits are insured by the FDIC.  Customers may withdraw deposits
from the our subsidiary bank in an effort to ensure that the amount that they
have on deposit is fully insured.  In addition, the cost of brokered
and other out-of-market deposits and potential future regulatory limits on the
interest rate we pay for brokered deposits could make them unattractive sources
of funding.  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.  Other financial
institutions may be unwilling to extend credit to banks because of concerns
about the banking industry and the economy generally and, given recent downturns
in the economy, there may not be a viable market for raising short or long-term
debt or equity capital.  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.
  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, 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.
  12
  
 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 $30,369,000 at December 31,
2009, comprising 16.9% 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
80% of which is secured by 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.
 
 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.
 
  13
  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 agricultural 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.”
  ITEM
2.  PROPERTIES.
  The Bank operates five full-service
banking offices and one support services space as follows:
  (1)
              Main
      Office
                35
      North Main Street
                Watkinsville,
      Georgia 30677
              (4)
              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
              (5)
              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
              (6)
              Operations
      Center
                7920
      Macon Highway
                Watkinsville,
      Georgia 30677
 
 Management believes that all of
Oconee’s properties are adequately covered by insurance.
 
  14
  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.
  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
              
              
              Highest2009
              
              
              4
              
              
              
              835
              
              50
      shares
              500
      shares
              
              $
              60.00
              
              
              $
              60.002008
              
              
              32
              
              
              
              3,532
              
              2
      shares
              585
      shares
              
              $
              60.00
              
              
              $
              90.00
 
 At March 31, 2010, there were
approximately 713 recordholders of Oconee common stock and 899,815 shares issued
and outstanding.
  Due to a
stipulation within the Consent Agreement that the Bank entered into with the
FDIC on August 18, 2009, Oconee did not declare a cash dividend to shareholders
in 2009.  In addition, due to a net loss in 2008, Oconee did not
declare a cash dividend to shareholders in 2008.As long as the Consent
Agreement with the FDIC is in place, the Bank is prohibited from paying
dividends to Oconee Financial Corporation without prior approval from regulatory
authorities.  Therefore, through the duration of the Consent Order,
Oconee will not be able to declare a dividend to shareholders since the Company
is dependent upon the Bank to provide funding for shareholder
dividends.  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.”
  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 2009 or 2008.
   15
  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 the analysis.
  SUMMARY
OF CRITICAL ACCOUNTING POLICIES
  The
consolidated financial statements include the financial statements of Oconee and
the Bank (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 analyzes the loan portfolio on a
monthly basis 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, impaired 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 below $1,000,000. 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
month.  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, as well as other industry factors.
  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 doubtful and the amount of loss
is confirmed.  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.
  In
addition, investment securities, loans held for sale and other real estate owned
are reflected at their estimated fair value in the consolidated financial
statements.  Such amounts for investment securities and loans held for
sale are based on either quoted market prices or estimated values derived by the
Company using dealer quotes or market comparisons.  The market value
for other real estate owned is arrived at through a professional appraisal of
the property and recorded at the lesser of the loan balance of the property
foreclosed upon or the appraised value less costs associated with selling the
property.
 
 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.
  16
  
 Selected
Financial Information
  2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(Amounts
      in thousands, except per share data)Net
      interest income
              
              $
              7,241
              
              
              $
              7,893
              
              
              $
              11,443
              
              
              $
              12,198
              
              
              $
              11,111Other
      income
              
              
              3,262
              
              
              
              2,964
              
              
              
              2,708
              
              
              
              2,846
              
              
              
              2,508Provision
      for loan losses
              
              
              2,140
              
              
              
              7,463
              
              
              
              330
              
              
              
              200
              
              
              
              612Net
      earnings (loss)
              
              
              (1,200
              )
              
              
              (3,426
              )
              
              
              3,268
              
              
              
              3,960
              
              
              
              3,056Net
      earnings (loss) per common share
              
              
              (1.33
              )
              
              
              (3.81
              )
              
              
              3.63
              
              
              
              4.40
              
              
              
              3.40Total
      assets
              
              
              285,299
              
              
              
              308,156
              
              
              
              321,313
              
              
              
              336,508
              
              
              
              285,065Cash
      dividends declared per common share
              
              
              -
              
              
              
              -
              
              
              
              1.15
              
              
              
              1.25
              
              
              
              1.10
  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.
  Like many
financial institutions across the United States, the Company’s operations have
been negatively affected by the current economic crisis.  The
recession has reduced liquidity and credit quality within the banking system and
the labor, capital and real estate markets.  Dramatic declines in the
housing market have negatively affected the credit performance of our
residential construction and development loans.  The economic
recession has also lowered commercial real estate values and substantially
reduced general business activity and investment.  Combined, the
deterioration in the residential and the commercial real estate markets has
materially increased our level of nonperforming assets and charge-offs of
problem loans.  These market conditions and the tightening of credit
have led to increased delinquencies in our loan portfolio, increased market
volatility, added pressure on our capital, a lower net  interest
margin and net losses.
 
 Net interest income in 2009, which was
$7,241,000, decreased by $652,000, or 8.3%, as compared to 2008.Net interest
income declined as a result of a decrease in interest income of $2,963,000,
offset by a decrease in interest expense of $2,221,000.  The decrease
in interest income during 2009 was due primarily to a lower average balance of
outstanding interest-earning assets during 2009 as compared to
2008.  Average interest-earning assets during 2009 were $279,862,000,
a reduction of $18,134,000 as compared to 2008 average levels.  The
primary reason for the lower average balance of outstanding interest-earning
assets was a decrease in average interest-earning loans of $7,675,000 and
investment securities of $8,603,000.
  The decrease in interest expense in
2009 as compared to 2008 was primarily due to the lower interest rate
environment in 2009 as compared to 2008.  The lower interest rate
environment allowed management to reprice time deposits at lower interest rates
as they came due in 2009.  Net interest margin decreased to 2.59% in
2009 as compared to 2.68% in 2008 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 assets throughout 2009, including loan pay-offs
and shifts of performing loans to nonaccrual loan status.
  The reductions in loans and deposits,
and the corresponding reduction in total assets during 2009 were the result of a
strategic decision by management to shrink the Bank’s balance sheet in order to
protect capital ratios in light of a declining level of capital as a result of
net operating losses for 2009 and 2008.  Management of the Bank is
anticipating further shrinking of the balance sheet in 2010 in a continued
effort to improve the Bank’s capital ratios.
  Net interest income in 2008, which was
$7,893,000, decreased by $3,550,000, or 31.0%, 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.
   17
  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.
  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, 2009 and
2008.  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 $444,000 and $458,000 are included in
the yields for 2009 and 2008, 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.
   18
  Table
1
 Average
Balance Sheets and Interest Rates
 For
      the Years Ended December 31,2009
                
                
                2008Average
                
                
                
                
                
                Yield/
                
                Average
                
                
                
                
                
                Yield/Balance
                
                
                Interest
                
                
                Rate
                
                Balance
                
                
                Interest
                
                
                RateAssets:Interest
      earning assets:Investment
      securities:Taxable
                
                $
                59,657,263
                
                
                
                2,708,371
                
                
                
                4.54
                %
                
                $
                64,690,151
                
                
                $
                3,489,145
                
                
                
                5.39
                %Non-taxable
                
                
                15,353,032
                
                
                
                685,629
                
                
                
                4.47
                %
                
                
                18,836,267
                
                
                
                845,679
                
                
                
                4.49
                %Restricted
      equity Securities
                
                
                2,220,585
                
                
                
                109,574
                
                
                
                4.93
                %
                
                
                2,307,210
                
                
                
                143,283
                
                
                
                6.21
                %Federal
      funds sold
                
                
                923,786
                
                
                
                931
                
                
                
                0.21
                %
                
                
                14,315,141
                
                
                
                288,246
                
                
                
                2.01
                %Interest-bearing
      due from banks
                
                
                11,534,501
                
                
                
                24,765
                
                
                
                0.10
                %
                
                
                9,720
                
                
                
                209
                
                
                
                2.15
                %Loans
      (including loan fees)(1)
                
                
                190,172,698
                
                
                
                9,591,830
                
                
                
                5.04
                %
                
                
                197,847,237
                
                
                
                11,317,393
                
                
                
                5.72
                %Total
      interest-earning assets
                
                
                279,861,865
                
                
                
                13,121,100
                
                
                
                4.69
                %
                
                
                298,005,726
                
                
                
                16,083,955
                
                
                
                5.40
                %Allowance
      for loan losses
                
                
                (4,643,303
                )
                
                
                
                
                
                
                
                
                
                
                (3,623,631
                )Cash
      and non-interest earning due from banks
                
                
                11,071,263
                
                
                
                
                
                
                
                
                
                
                
                5,145,285Other
      assets
                
                
                18,661,402
                
                
                
                
                
                
                
                
                
                
                
                10,829,979Total
      assets
                
                
                304,951,227
                
                
                
                
                
                
                
                
                
                
                $
                310,357,359Liabilities
      and shareholders’ equity:Interest-bearing
      liabilities:Deposits:Interest-bearing
      demand
                
                
                61,158,514
                
                
                
                462,688
                
                
                
                0.76
                %
                
                $
                72,036,759
                
                
                $
                1,272,076
                
                
                
                1.77
                %Savings
                
                
                37,329,919
                
                
                
                456,869
                
                
                
                1.22
                %
                
                
                38,026,256
                
                
                
                748,969
                
                
                
                1.97
                %Time
                
                
                137,928,330
                
                
                
                4,591,829
                
                
                
                3.33
                %
                
                
                133,126,985
                
                
                
                5,900,965
                
                
                
                4.43
                %Federal
      Funds purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                %
                
                
                245,123
                
                
                
                5,932
                
                
                
                2.42
                %Securities
      sold under repurchase agreements
                
                
                13,210,868
                
                
                
                368,341
                
                
                
                2.79
                %
                
                
                7,000,747
                
                
                
                173,067
                
                
                
                2.47
                %Total
      interest bearing liabilities
                
                
                249,627,631
                
                
                
                5,879,727
                
                
                
                2.36
                %
                
                
                250,435,870
                
                
                
                8,101,009
                
                
                
                3.23
                %Non-interest
      bearing deposits
                
                
                28,593,947
                
                
                
                
                
                
                
                
                
                
                
                29,596,193Other
      liabilities
                
                
                1,328,050
                
                
                
                
                
                
                
                
                
                
                
                958,705Total
      liabilities
                
                
                279,549,628
                
                
                
                
                
                
                
                
                
                
                
                280,990,768Shareholders’
      equity
                
                
                25,401,599
                
                
                
                
                
                
                
                
                
                
                
                29,366,591Total
      liabilities and shareholders’ equity
                
                $
                304,951,227
                
                
                
                
                
                
                
                
                
                
                $
                310,357,359Excess
      of interest-bearing assets over interest-bearing
      liabilities
                
                $
                30,234,234
                
                
                
                
                
                
                
                
                
                
                $
                47,569,856Ratio
      of interest-earning assets to interest-bearing
      liabilities
                
                
                112.11%
                
                
                
                
                
                
                
                
                
                
                
                118.99%Net
      interest income
                
                
                
                
                
                $
                7,241,373
                
                
                
                
                
                
                
                
                
                
                $
                7,982,946Net
      interest spread
                
                
                
                
                
                
                
                
                
                
                2.33
                %
                
                
                
                
                
                
                
                
                
                
                2.17
                %Net
      interest margin (2)
                
                
                
                
                
                
                
                
                
                
                2.59
                %
                
                
                
                
                
                
                
                
                
                
                2.68
                %
  (1)
                  Average
      nonaccrual loans of $25,557,812 and $16,478,440 are included in total
      loans as of December 31, 2009 and 2008,
  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.


19


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





2009 over
      2008
              Increase (decrease)
      due to changes in:Volume
            
            
            Rate
            
            
            TotalInterest
      income on:Investment
      securitiesTaxable
            
            $
            (257,938
            )
            
            $
            (522,836
            )
            
            $
            (780,774
            )Non-taxable
            
            
            (156,286
            )
            
            
            (3,764
            )
            
            
            (160,050
            )Restricted
      equity securities
            
            
            (5,194
            )
            
            
            (28,515
            )
            
            
            (33,709
            )Federal
      funds sold
            
            
            (142,531
            )
            
            
            (144,784
            )
            
            
            (287,315
            )Interest-bearing
      due from banks
            
            
            24,915
            
            
            
            (359
            )
            
            
            24,556Loans
      (including loan fees)
            
            
            (424,522
            )
            
            
            (1,301,041
            )
            
            
            (1,725,563
            )Total
      interest earning assets
            
            
            (961,556
            )
            
            
            (2,001,299
            )
            
            
            (2,962,855
            )Interest
      expense on:Deposits:Interest
      bearing demand
            
            
            (169,374
            )
            
            
            (640,014
            )
            
            
            (809,388
            )Savings
            
            
            (13,405
            )
            
            
            (278,695
            )
            
            
            (292,100
            )Time
            
            
            205,415
            
            
            
            (1,514,551
            )
            
            
            (1,309,136
            )Federal
      funds purchased
            
            
            (5,932
            )
            
            
            -
            
            
            
            (5,932
            )Securities
      sold under repurchase agreements
            
            
            170,389
            
            
            
            24,885
            
            
            
            195,274Total
      interest bearing liabilities
            
            
            187,093
            
            
            
            (2,408,375
            )
            
            
            (2,221,282
            )Net
      interest income
            
            $
            (1,148,649
            )
            
            $
            407,076
            
            
            $
            (741,573
            )




Provision
for Loan Losses




Provisions
for loan losses are charged to operations in order to adjust 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, 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 2009
was $2,140,000 compared to $7,463,000 in 2008.  The substantial
decrease in the provision for loan losses is primarily due to reductions in
nonaccrual loans during 2009 as compared to 2008 and a decrease in net
charge-offs in 2009 as compared to 2008.  Nonaccrual loans at December
31, 2009 totaled $17,706,000, a reduction of $11,066,000 compared to the
December 31, 2008 balance of $28,772,000.




The allowance for loan losses
represented approximately 1.95% of total loans outstanding at December 31, 2009
compared to 2.15% at December 31, 2008.  Net charge-offs for 2009
decreased to $2,858,000, compared to $6,584,000 during 2008.  Net
charge-offs as a percentage of the provision for loan losses were 133.6% and
88.2% for the years ended December 31, 2009 and 2008,
respectively.  Management evaluates the sufficiency of the loan loss
reserve on a monthly basis through a detailed analysis process whereby the
various types of performing loans are analyzed based on historical
charge-offs.  Impaired loan relationships are evaluated individually
for potential losses.  As a result of its analysis at December 31,
2009, management believes that the level of the allowance is appropriate based
on our evaluation of the loan portfolio and current economic
conditions.




20


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 was 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.




Other
Income




Other income of $3,262,000 in 2009
increased from 2008 by $297,000 or 10.0% due primarily to income on other real
estate owned during 2009 of $584,000, offset by decreases in overdraft charges
of $207,000, and a decrease in gains on investment sales of
$65,000.  The increase in income from other real estate owned is due
to income generated by the operations of a motel upon which the Bank foreclosed
in early 2009.  The Bank operated the motel during 2009 under a
contract with a hospitality management company while the Bank marketed the motel
property for sale.




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
Expense




Other expenses increased by $974,000 or
10.1% in 2009 as compared to 2008.  The increase in other expenses is
primarily attributable to an increase in regulatory fees of $733,000 in 2009 as
compared to 2008 and an increase in expenses on other real estate owned of
$652,000.  The increase in regulatory fees is due to a one-time
special assessment by the Federal Deposit Insurance Corporation (FDIC) on all
financial institutions during 2009 and an increase in ordinary FDIC assessment
expense during 2009 as a result of the Bank entering into a formal regulatory
enforcement action during 2009.  The increase in expenses on other
real estate owned during 2009 is attributable to operating expenses on the motel
upon which the Bank foreclosed on 2009, as well as maintenance and other
expenses on residential subdivision properties upon which the Bank foreclosed in
2009.  These expense increases were offset by a reduction in salaries
and benefits expense of $389,000 in 2009 as compared to 2008 and a reduction in
advertising and public relations expense of $367,000 during 2009 compared to
2008.





Other expenses increased by $401,000 or
4.3% in 2008 as compared to 2007.  The increase in other expenses was
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.




Income
Tax Expense (Benefit)




The
Company had an effective tax benefit rate of 47% in 2009 as compared to 44% for
the year ended December 31, 2008.  The difference in the effective tax
rates reflects tax benefits that the Company realized in 2009 as a result of tax
exempt interest income as a percentage of the total net loss before tax
benefits.




ANALYSIS OF FINANCIAL
CONDITION




Summary




During
2009, average total assets decreased $5,406,000 (1.7%) from
2008.  Average total deposits decreased $7,775,000 (2.9%) in 2009 from
2008.  Average loans decreased $9,723,000 (5.4%) in 2009 over
2008.




Year-end
balances at December 31, 2009 and 2008 reflect a decrease in total assets of
$22,857,000 (7.4%) from 2008 to 2009.  Total deposits decreased
$24,596,000 (8.9%) from 2008 to 2009.  Total loans decreased
$16,008,000 (8.2%) from 2008 to 2009.




21


Total
loans declined during 2009 primarily as a result of a continued slowdown in the
housing industry, both nationally, and more prominently, in the Bank’s market
area.  A continued 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.  In addition, management of the
Bank implemented a plan to shrink the balance sheet in an effort to protect
the Bank’s capital ratios due to the Bank’s capital base shrinking during 2009
and 2008 as a result of net operating losses.




Investment
Securities




All of
the Company’s investment securities are classified as available-for-sale
(“AFS”).  At December 31, 2009, the market value of AFS securities
totaled $66,903,000, compared to $79,762,000 at December 31,
2008.  Table 3 presents the market value of AFS securities at December
31, 2009 and 2008.




Table
3


Investment
Portfolio





2009
            
            
            2008Available
      for saleState,
      county and municipal
            
            $
            11,154,419
            
            
            $
            16,804,489Government-sponsored
      agencies
            
            
            28,954,155
            
            
            
            38,131,423Mortgage-backed
            
            
            25,310,398
            
            
            
            23,364,052Other
      debt securities
            
            
            1,484,311
            
            
            
            1,461,606Totals
            
            $
            66,903,283
            
            
            $
            79,761,570





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, 2009.  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
            
            $
            -
            
            
            $
            442,993
            
            
            $
            436,037
            
            
            $
            -
            
            
            
            4.02
            %After
      1 through 5 years
            
            
            -
            
            
            
            409,414
            
            
            
            414,309
            
            
            
            -
            
            
            
            5.43
            %After
      5 through 10 years
            
            
            10,311,745
            
            
            
            3,611,045
            
            
            
            1,533,584
            
            
            
            913,650
            
            
            
            4.45
            %After
      10 years
            
            
            18,642,410
            
            
            
            20,846,946
            
            
            
            8,770,489
            
            
            
            570,661
            
            
            
            4.63
            %Totals
            
            $
            28,954,155
            
            
            $
            25,310,398
            
            
            $
            11,154,419
            
            
            $
            1,484,311
            
            
            
            4.61
            %





(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.


22





Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.





The
unrealized losses on the fourteen investments in government sponsored agency
securities were caused by interest rate increases.  The contractual
terms of those investments do not permit the issuer to settle the securities at
a price less than the amortized cost bases of the
investments.  Because the Company does not intend to sell the
investments and it is not more likely than not that the Company will be required
to sell the investments before recovery of their amortized cost bases, which may
be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.





The
Company’s unrealized losses on investments in two corporate bonds relates to
investments in companies within the financial services sector.  The
unrealized losses are primarily caused by recent decreases in profitability and
profit forecasts by industry analysts.  The Company currently does not
believe it is probable that it will be unable to collect all amounts due
according to the contractual terms of the investments.  Because the
Company does not intend to sell the investment and it is not more likely than
not that the Company will be required to sell the investments before recovery of
its par value, which may be maturity, it does not consider these investments to
be other-than-temporarily impaired at December 31, 2009.





The
unrealized losses on the Company’s investment in mortgage-backed securities were
caused by interest rate increases.  The contractual cash flows of
those investments are guaranteed by an agency of the U.S.
Government.  Accordingly, it is expected that the securities would not
be settled at a price less than the amortized cost bases of the Company’s
investments.  Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company does
not intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider those
investments to be other-than-temporarily impaired at December 31,
2009.




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.




Table
5


Loan
Portfolio


2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Commercial,
      financial and agricultural
            
            $
            28,392,933
            
            
            
            28,028,762
            
            
            
            22,229,689
            
            
            
            20,468,788
            
            
            
            21,012,994Real
      estate – construction
            
            
            30,368,950
            
            
            
            54,465,394
            
            
            
            64,077,793
            
            
            
            87,264,251
            
            
            
            72,533,344Real
      estate - mortgage
            
            
            114,252,957
            
            
            
            105,459,965
            
            
            
            104,703,465
            
            
            
            100,620,440
            
            
            
            103,029,748Consumer
            
            
            6,822,942
            
            
            
            7,818,286
            
            
            
            8,820,318
            
            
            
            9,533,930
            
            
            
            9,897,511179,837,782
            
            
            
            195,772,407
            
            
            
            199,831,265
            
            
            
            217,887,409
            
            
            
            206,473,597Less:
      Allowance for loan losses
            
            
            (3,497,292
            )
            
            
            (4,215,262
            )
            
            
            (3,335,825
            )
            
            
            (3,080,661
            )
            
            
            (2,945,256
            )Loans,
      net
            
            $
            176,340,490
            
            
            
            191,557,145
            
            
            
            196,495,440
            
            
            
            214,806,748
            
            
            
            203,528,341




As of December 31, 2009, loans
outstanding were $179,838,000, a decrease of $15,934,000 or 8.1% over the
December 31, 2008 balance of $195,772,000.  This decrease was
primarily attributable to a decline in the Bank’s construction lending portfolio
of $24,096,000 at December 31, 2009 as compared to December 31,
2008.  The construction loan segment of the portfolio declined due to
the increased risk in this section of the economy caused by 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 real estate mortgage
loans of $8,793,000.




23


Table 6
identifies the maturities of commercial and real estate construction (including
acquisition and development) loans as of December 31, 2009 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
            
            $
            15,558,669
            
            
            $
            28,189,351
            
            
            $
            43,748,0201
      to 5 years
            
            
            9,057,850
            
            
            
            2,179,599
            
            
            
            11,237,449Over
      5 years
            
            
            3,776,414
            
            
            
            -
            
            
            
            3,776,414Totals
            
            $
            28,392,933
            
            
            $
            30,368,950
            
            
            $
            58,761,883





As of December 31, 2009, 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
            
            $
            5,043,023
            
            
            $
            4,014,826
            
            
            $
            9,057,850Over
      5 years
            
            $
            -
            
            
            $
            3,776,414
            
            
            $
            3,776,414Real
      estate construction1
      to 5 years
            
            $
            -
            
            
            $
            2,179,599
            
            
            $
            2,179,599Over
      5 years
            
            $
            -
            
            
            $
            -
            
            
            $
            -




24




Allowance
for Loan Losses




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




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:





2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Amounts
      are presented in thousands)Balance
      at beginning of year
            
            $
            4,215
            
            
            $
            3,336
            
            
            $
            3,081
            
            
            $
            2,945
            
            
            $
            2,531Charges-offs:Commercial,
      financial and agricultural
            
            
            84
            
            
            
            54
            
            
            
            55
            
            
            
            -
            
            
            
            160Installment
            
            
            255
            
            
            
            116
            
            
            
            53
            
            
            
            60
            
            
            
            80Real
      Estate
            
            
            2,605
            
            
            
            6,456
            
            
            
            10
            
            
            
            50
            
            
            
            13Total
      charge-offs
            
            
            2,944
            
            
            
            6,626
            
            
            
            118
            
            
            
            110
            
            
            
            253Recoveries:Commercial,
      financial and agricultural
            
            
            14
            
            
            
            22
            
            
            
            10
            
            
            
            20
            
            
            
            40Installment
            
            
            26
            
            
            
            17
            
            
            
            31
            
            
            
            26
            
            
            
            15Real
      Estate
            
            
            46
            
            
            
            3
            
            
            
            2
            
            
            
            -
            
            
            
            -Total
      recoveries
            
            
            86
            
            
            
            42
            
            
            
            43
            
            
            
            46
            
            
            
            55Net
      charge-offs
            
            
            2,858
            
            
            
            6,584
            
            
            
            75
            
            
            
            64
            
            
            
            198Provisions
      charged to operations
            
            
            2,140
            
            
            
            7,463
            
            
            
            330
            
            
            
            200
            
            
            
            612Balance
      at end of year
            
            $
            3,497
            
            
            $
            4,215
            
            
            $
            3,336
            
            
            $
            3,081
            
            
            $
            2,945Ratio
      of net charge-offs during the period to average loans outstanding during
      the period
            
            
            1.50
            %
            
            
            3.36
            %
            
            
            .04
            %
            
            
            .03
            %
            
            
            .10
            %





At
December 31, 2009, 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
2009 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, 2009, the Bank had net charge-offs of $2,858,000, as
compared to $6,584,000 in net charge-offs during the year ended December 31,
2008.  Of the total charge-offs in 2009, $1,960,000 were write-downs
of loans that were classified as impaired at December 31, 2009, while $714,000
were write-downs of loans that were shifted to other real estate owned during
2009 and were held for sale by the Bank at December 31, 2009.  Of the
total charge-offs in 2008, $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
$3,198,000 in 2009 and $4,198,000 in 2008.  The financial institution
from whom the Bank purchased these loans failed during 2008 and the Bank
negotiated with the FDIC a swap transaction whereby the Bank took over total
control of some loans by swapping its position in other loans with the
FDIC.  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.  As of December
31, 2009, the Bank had no outstanding participation loans with other financial
institutions.


25





For year-end 2009 and 2008 the
allowance for loan losses was allocated as follows (in
thousands):





As of December 31,
2009:





Allocation
      of Allowance for Loan
      Losses
            
            
            %
      of Allowance for Loan
      Losses
            
            
            %
      of Loans by Category to
              Total LoansCommercial,
      financial and agricultural
            
            $
            963
            
            
            
            27.5
            %
            
            
            15.8
            %Real
      Estate - Construction
            
            
            1,273
            
            
            
            36.4
            %
            
            
            16.4
            %Consumer
            
            
            139
            
            
            
            4.0
            %
            
            
            3.8
            %Real
      Estate - Mortgage
            
            
            1,064
            
            
            
            30.4
            %
            
            
            63.5
            %Unallocated
            
            
            58
            
            
            
            1.7
            %
            
            
            0.5
            %Total
            
            $
            3,497
            
            
            
            100.0
            %
            
            
            100.0
            %




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 - 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
            %





Non-performing
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 $24,671,000 at December 31, 2009 compared to $30,578,000 at December 31,
2008.   This decrease is attributable to decreases in non-accrual
loans of $11,066,000 and loans more than 90 days past due of $24,000, offset by
an increase in other real estate and repossessions of $5,184,000.  The
decrease in nonaccrual loans was primarily due to foreclosing on several pieces
of real estate securing loans that were on nonaccrual status at December 31,
2008.  During 2009, the Bank foreclosed on three subdivisions and one
motel whose loans were in nonaccrual status at December 31, 2008, resulting in a
decrease in nonaccrual loans and an increase in other real estate owned of
$6,272,000 during 2009.  The Bank is actively marketing the
subdivisions for sale, either as individual lots or the subdivision developments
as a whole.  The Bank is marketing the motel property for sale while
the motel continues to operate through a contractual agreement between the Bank
and a hospitality management company.  The Bank has periodically
evaluated the market value of the foreclosed properties through professional
appraisals and market evaluations.  As a result of these evaluations,
the Company recognized write-downs on foreclosed properties during 2009 totaling
$972,000 in 2009 and $14,000 in 2008.  In addition, the Company
recognized $35,000 in net losses on the sale of other real estate during
2009.




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




26





Table
8


Non-performing
Assets


December
      31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Other
      real estate and repossessions
            
            $
            6,966,000
            
            
            
            1,782,000
            
            
            
            -
            
            
            $
            744,000
            
            
            $
            327,000Accruing
      loans 90 days or more past due
            
            
            -
            
            
            
            24,000
            
            
            
            -
            
            
            
            623,000
            
            
            
            632,000Non-accrual
      loans
            
            
            17,706,000
            
            
            
            28,772,000
            
            
            
            9,057,000
            
            
            
            678,000
            
            
            
            2,151,000Interest
      on non-accrual loans which would have been reported
            
            
            1,546,000
            
            
            
            1,045,000
            
            
            
            408,000
            
            
            
            91,000
            
            
            
            95,000Interest
      recognized on non-accrual loans
            
            
            24,000
            
            
            
            188,000
            
            
            
            285,000
            
            
            
            14,000
            
            
            
            86,000Restructured
      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 likelihood of
collecting 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 appropriately
classified.  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, 2009, total deposits were
$250,442,000, a decrease of $24,596,000 or 8.9% as compared to the December 31,
2008 balance of $275,038,000.  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.





27




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





Table
9


Deposits


December
      31,2009
            
            
            2008Average
      Balance
            
            
            Rate
            
            
            Average
      Balance
            
            
            RateDeposits:Non-interest
      bearing demand
            
            $
            28,593,947
            
            
            
            -
            
            
            $
            29,596,193
            
            
            
            -Interest
      bearing demand
            
            
            61,158,514
            
            
            
            0.76
            %
            
            
            72,036,759
            
            
            
            1.77
            %Savings
            
            
            37,329,919
            
            
            
            1.22
            %
            
            
            38,026,256
            
            
            
            1.97
            %Time
            
            
            137,928,330
            
            
            
            3.33
            %
            
            
            133,126,985
            
            
            
            4.43
            %$
            265,010,710
            
            
            
            
            
            
            $
            272,786,193





Time
deposits in amounts of $100,000 or more totaled $52,535,000 and $71,244,000 at
December 31, 2009 and 2008, respectively.  Table 10 is a summary of
the maturity distribution of time deposits in amounts of $100,000 or more as of
December 31, 2009.





Table
10


Maturity
of Time Deposits over $100,000





Within
      3 months
            
            $
            14,638,000After
      3 through 6 months
            
            
            17,908,000After
      6 through 12 months
            
            
            12,953,000After
      12 months
            
            
            7,036,000$
            52,535,000




Transactions
with Related Parties




The
Company conducts transactions with directors and executive officers, including
companies in which they have beneficial interest, in the normal 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, 2009, the Company had loans outstanding to related parties of
$4,068,000.  Deposits of related parties were $6,883,000.




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
$5,000,000.  Additional liquidity is provided to the Company through
Federal Home Loan Bank (FHLB) advances.




Cash and
cash equivalents increased $4,674,000to a total of
$24,736,000at
year-end 2009 as cash used by financing activities outpaced amounts provided by
operating and investing activities.  Cash inflows from operations
totaled $5,635,000in 2009, while outflows
from financing activities totaled $21,235,000, consisting of net deposit
decreases during 2009 of $24,596,000, offset by net increases in securities sold
under repurchase agreements of $3,361,000.




Investing activities provided
$20,274,000of cash
and cash equivalents, principally composed of proceeds from sales, calls and
maturities of investment securities of $144,251,000, and proceeds from sales of
investment securities of $12,937,000, partially offset by purchases of
investment securities of $143,937,000.




28


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, 2009, the contractual amounts of the
Company’s commitments to extend credit and standby letters of credit were
$27,410,000and
$570,000, 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 11 to the consolidated
financial statements for further discussion of these risks and contractual
commitments.




Capital
Resources




Table 11
presents the Bank’s regulatory capital position at December 31,
2009.




Table
11


Capital
Ratios


Risk-Based Capital
      Ratios
              Actual as of December
      31, 2009Tier
      1 Capital
            
            
            12.2
            %Tier
      1 Capital minimum requirement
            
            
            4.0
            %Excess
            
            
            8.2
            %Total
      Capital
            
            
            13.5
            %Total
      Capital minimum requirement
            
            
            8.0
            %Excess
            
            
            5.5
            %Leverage Ratio At
              December 31,
      2009Leverage
      ratio
            
            
            8.3
            %Leverage
      ratio requirement
            
            
            4.0
            %Excess
            
            
            4.3
            %





Table
12


Selected
Ratios





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





2009
            
            
            2008Net
      income (loss) to:Average
      shareholders’ equity
            
            
            (4.72
            )%
            
            
            (11.67
            )%Average
      assets
            
            
            (0.39
            )%
            
            
            (1.10
            )%Dividends
      to net income
            
            
            -
            
            
            
            -Average
      equity to average assets
            
            
            8.33
            %
            
            
            9.46
            %





For
further discussion of the actual and required capital ratios of the Company, see
note 13 to the consolidated financial statements and “Supervision and Regulation
– Capital Adequacy.”




29


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.




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, 2009 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.




30





At
      December 31, 2009
                                                                                                          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
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        879
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        823
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        65,201
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        66,903Interest-earning
      due from banks
                                                                                                        
                                                                                                        
                                                                                                        20,675
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        20,675Loans
                                                                                                        
                                                                                                        
                                                                                                        60,220
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        29,096
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        71,057
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,579
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        161,942Total
      interest-bearing assets
                                                                                                        
                                                                                                        $
                                                                                                        80,895
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        29,975
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        71,880
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        66,770
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        249,520Interest-bearing
      liabilities:Deposits:Savings
      and demand
                                                                                                        
                                                                                                        $
                                                                                                        92,987
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        92,987Time
      deposits
                                                                                                        
                                                                                                        
                                                                                                        40,181
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        68,297
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        20,011
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        128,489Repurchase
      agreements
                                                                                                        
                                                                                                        
                                                                                                        9,814
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        9,814Total
      interest-bearing liabilities
                                                                                                        
                                                                                                        $
                                                                                                        142,982
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        68,297
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        20,011
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        231,290Interest
      sensitive difference per period
                                                                                                        
                                                                                                        $
                                                                                                        (62,087
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (38,322
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        51,869
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        66,770
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        18,230Cumulative
      interest sensitivity difference
                                                                                                        
                                                                                                        $
                                                                                                        (62,087
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (100,409
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (48,540
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        18,230Cumulative
      ratio of total earning assets to total interest-bearing
      liabilities
                                                                                                        
                                                                                                        
                                                                                                        (56.58%)
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (52.48%)
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (79.01%)
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        108.88%


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







At
December 31, 2009 the difference between the Company’s liabilities and assets
repricing or maturing within one year was $100,409,000.  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 100 basis point increments up
and down from current interest rates.  This information is used to
monitor interest rate exposure risk relative to anticipated interest rate
trends.  Asset/liability management strategies are developed based on
this analysis in an effort to limit the Bank’s exposure to interest rate
risk.




The Bank
tracks its interest rate sensitivity on a quarterly basis using a model that
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.


31





At
December 31, 2009, the difference between the Bank’s liabilities and assets
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 $2,904,000, indicating that the Bank was liability
sensitive.  The most recent simulation model shows that the Bank’s net
interest income would increase $188,000 on an annual basis if rates increased
100 basis points, and would increase $69,000 on an annual basis if rates fell
100 basis points.  Net interest income increases under both scenarios
because the Bank’s assets reprice earlier within the twelve-month period than
its liabilities.  Because of this, the increase in the Bank’s interest
income under a rising rate scenario will be greater than the increase in its
interest expense over a twelve-month period.




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, 2009.  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, 2009
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, 2009, 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.


32





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 AND CORPORATE
GOVERNANCE




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 3, 2010 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 3, 2010,
to be filed with the SEC, is incorporated herein by reference.




ITEM 12. 
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.




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 3, 2010, 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 3, 2010, to
be filed with the SEC, is incorporated herein by reference.




ITEM
14.   PRINCIPAL ACCOUNTING FEES AND
SERVICES.




The information contained under the
heading “Principal Accounting 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 3, 2010, to be filed with the SEC, is
incorporated herein by reference.




33





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 8 of this Report:




1.
            Report
      of Independent Registered Public Accounting
Firm




2.
            Balance
      Sheets  - December 31, 2009 and
2008




3.
            Statements
      of Operations
              For
      the Years Ended December 31, 2009 and
2008




4.
            Statements
      of Changes in Shareholders Equity
              For
      the Years Ended December 31, 2009 and
2008




5.
            Statements
      of Cash Flows
              For
      the Years Ended December 31, 2009 and
2008







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.





34






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, 2009 and 2008, 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, 2009 and 2008, 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, 2009 included under Item 9A(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
 March 31,
2010
 
 
    
  
 OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Balance Sheets
 
 December
31, 2009 and 2008
 
 2009
              
              
              2008AssetsCash
      and due from banks, including reserverequirements of $25,000 and
      $25,000
              
              $
              24,736,354
              
              
              
              4,353,492Federal
      funds sold
              
              
              -
              
              
              
              15,709,000Cash and cash
      equivalents
              
              
              24,736,354
              
              
              
              20,062,492Investment
      securities available for sale
              
              
              66,903,283
              
              
              
              79,761,570Restricted
      equity securities
              
              
              556,300
              
              
              
              679,229Loans
      held for sale
              
              
              -
              
              
              
              1,638,561Loans,
      net
              
              
              176,340,490
              
              
              
              191,557,145Premises
      and equipment, net
              
              
              6,312,968
              
              
              
              6,903,890Other
      real estate owned
              
              
              6,915,161
              
              
              
              1,781,905Accrued
      interest receivable and other assets
              
              
              3,534,444
              
              
              
              5,770,757$
              285,299,000
              
              
              
              308,155,549Liabilities and
      Stockholders’ EquityDeposits:Demand
              
              $
              28,957,212
              
              
              
              27,413,165Interest-bearing
      demand
              
              
              55,249,265
              
              
              
              71,333,508Savings
              
              
              37,746,943
              
              
              
              38,011,673Time
              
              
              128,488,898
              
              
              
              138,279,806Total deposits
              
              
              250,442,318
              
              
              
              275,038,152Securities
      sold under repurchase agreements
              
              
              9,814,023
              
              
              
              6,453,272Accrued
      interest payable and other liabilities
              
              
              357,046
              
              
              
              866,937Total liabilities
              
              
              260,613,387
              
              
              
              282,358,361Stockholders’
      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
              
              
              18,301,063
              
              
              
              19,500,772Accumulated other comprehensive
      income
              
              
              341,588
              
              
              
              253,454Total stockholders’
      equity
              
              
              24,685,613
              
              
              
              25,797,188$
              285,299,000
              
              
              
              308,155,549
  See
accompanying notes to consolidated financial statements.
  F-1
  OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Statements of Operations
 
 For
the Years Ended December 31, 2009 and 2008
 
 2009
              
              
              2008Interest
      income:Interest and fees on
      loans
              
              $
              9,591,830
              
              
              
              11,317,394Interest on federal funds
      sold
              
              
              931
              
              
              
              288,246Interest and dividends on
      securities:U. S. government
      agencies
              
              
              2,708,371
              
              
              
              3,489,145State, county and
      municipal
              
              
              685,629
              
              
              
              845,679Other
              
              
              134,339
              
              
              
              143,491Total interest
    income
              
              
              13,121,100
              
              
              
              16,083,955Interest
      expense:Interest-bearing demand
      deposits
              
              
              462,688
              
              
              
              1,272,076Savings deposits
              
              
              456,869
              
              
              
              748,969Time deposits
              
              
              4,591,829
              
              
              
              5,900,965Other
              
              
              368,341
              
              
              
              178,999Total interest
      expense
              
              
              5,879,727
              
              
              
              8,101,009Net interest
    income
              
              
              7,241,373
              
              
              
              7,982,946Provision
      for loan losses
              
              
              2,140,000
              
              
              
              7,463,000Net interest income after
      provision for loan losses
              
              
              5,101,373
              
              
              
              519,946Other
      income:Service charges
              
              
              1,295,341
              
              
              
              1,523,231Gain on sale of
      securities
              
              
              250,720
              
              
              
              215,129Impairment
      loss on restricted equity securities
              
              
              (100,429
              )
              
              
              -Mortgage
      origination fee income
              
              
              365,893
              
              
              
              350,955Income
      on other real estate owned
              
              
              583,609
              
              
              
              4,200Miscellaneous
              
              
              866,710
              
              
              
              871,222Total other
income
              
              
              3,261,844
              
              
              
              2,964,737Other
      expenses:Salaries and employee
      benefits
              
              
              4,922,744
              
              
              
              5,311,899Occupancy
              
              
              1,351,865
              
              
              
              1,434,168Other operating
              
              
              4,358,146
              
              
              
              2,912,204Total other
    expenses
              
              
              10,632,755
              
              
              
              9,658,271Loss before income tax
      benefit
              
              
              (2,269,538
              )
              
              
              (6,173,588
              )Income
      tax benefit
              
              
              (1,069,829
              )
              
              
              (2,747,229
              )Net loss
              
              $
              (1,199,709
              )
              
              
              (3,426,359
              )Net loss per
share
              
              $
              (1.33
              )
              
              
              (3.81
              )
 
 See
accompanying notes to consolidated financial statements.
  F-2
  OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Statements of Comprehensive Income (Loss)
 
 For
the Years Ended December 31, 2009 and 2008
 
 2009
              
              
              2008Net
      loss
              
              $
              (1,199,709
              )
              
              
              (3,426,359
              )Other
      comprehensive income (loss), net of income taxes
(benefit):Unrealized gains on securities
      available for sale:Holding gains arising during
      period, net of taxexpense of $149,099 and $13,633
              
              
              243,681
              
              
              
              22,281Reclassification adjustment for
      gains included in netloss, net of taxes of $95,173 and
      $81,663
              
              
              (155,547
              )
              
              
              (133,466
              )Total other comprehensive income
      (loss)
              
              
              88,134
              
              
              
              (111,185
              )Comprehensive
      income (loss)
              
              $
              (1,111,575
              )
              
              
              (3,537,544
              )
  See
accompanying notes to consolidated financial statements.
  F-3
  OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Statements of Changes in Stockholders’ Equity
 
 For
the Years Ended December 31, 2009 and 2008
 
 
 Common
      Stock
              
              
              Additional
      Paid-In Capital
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Income (Loss)
              
              
              TotalBalance,
      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 available
      for 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
              
              
              
              25,797,188Change
      in net unrealized gain (loss)on investment securities available
      for sale, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              88,134
              
              
              
              88,134Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              (1,199,709
              )
              
              
              -
              
              
              
              (1,199,709
              )Balance,
      December 31, 2009
              
              $
              1,799,630
              
              
              
              4,243,332
              
              
              
              18,301,063
              
              
              
              341,588
              
              
              
              24,685,613
 
  See
accompanying notes to consolidated financial statements.
  F-4
  OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Statements of Cash Flows
 
 For
the Years Ended December 31, 2009 and 2008
 
 2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (1,199,709
              )
              
              
              (3,426,359
              )Adjustments
      to reconcile net loss to netcash provided (used) by operating
      activities:Depreciation, amortization and
      accretion
              
              
              615,582
              
              
              
              651,941Provision for loan
      losses
              
              
              2,140,000
              
              
              
              7,463,000Provision for deferred
      taxes
              
              
              94,357
              
              
              
              (13,119
              )Gains on sale of investment
      securities, net
              
              
              (250,720
              )
              
              
              (215,129
              )Impairment loss on restricted
      equity securities
              
              
              100,429
              
              
              
              -Loss
      on sale and disposal of fixed assets
              
              
              3,660
              
              
              
              -Loss on other real
      estate
              
              
              1,006,706
              
              
              
              -Change in:Accrued interest receivable and
      other assets
              
              
              1,996,442
              
              
              
              (4,299,415
              )Accrued interest payable and
      other liabilities
              
              
              (509,891
              )
              
              
              (395,658
              )Mortgage loans originated and
      held for sale
              
              
              1,638,561
              
              
              
              (575,378
              )Net cash provided (used) by
      operating activities
              
              
              5,635,417
              
              
              
              (810,117
              )Cash
      flows from investing activities:Purchase of investment securities
      available for sale
              
              
              (143,936,574
              )
              
              
              (28,916,088
              )Proceeds from calls and maturities
      of investment securitiesavailable for sale
              
              
              144,251,462
              
              
              
              31,936,266Proceeds from sales of investment
      securities availablefor sale
              
              
              12,937,169
              
              
              
              8,742,800Redemption
      of restricted equity securities
              
              
              22,500
              
              
              
              27,500Net change in
loans
              
              
              6,177,128
              
              
              
              (2,524,705
              )Purchases of premises and
      equipment
              
              
              (29,309
              )
              
              
              (216,176
              )Proceeds from sales of other real
      estate
              
              
              851,152
              
              
              
              157,306Net cash provided by investing
      activities
              
              
              20,273,528
              
              
              
              9,206,903Cash
      flows from financing activities:Net change in
    deposits
              
              
              (24,595,834
              )
              
              
              (11,486,416
              )Net change in securities sold
      under repurchase agreements
              
              
              3,360,751
              
              
              
              3,296,972Dividends paid
              
              
              -
              
              
              
              (1,034,787
              )Net cash used by financing
      activities
              
              
              (21,235,083
              )
              
              
              (9,224,231
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              4,673,862
              
              
              
              (827,445
              )Cash
      and cash equivalents at beginning of year
              
              
              20,062,492
              
              
              
              20,889,937Cash
      and cash equivalents at end of year
              
              $
              24,736,354
              
              
              
              20,062,492
  F-5
  OCONEE
FINANCIAL CORPORATION
 
 Consolidated
Statements of Cash Flows, continued
 
 For
the Years Ended December 31, 2009 and 2008
 
 2009
              
              
              2008Supplemental
      disclosures of cash flow information:Cash paid (received) during the
      year for:Interest
              
              $
              6,049,373
              
              
              
              8,464,094Income taxes
              
              $
              2,623,240
              
              
              
              281,500Noncash investing and financing
      activities:Change in net unrealized gain on
      investmentsecurities available for sale,
      net of tax
              
              $
              88,134
              
              
              
              (111,185
              )Transfer of loans to other real
      estate
              
              $
              7,177,958
              
              
              
              1,935,325Transfer of other real estate to
      loans
              
              $
              278,431
              
              
              
              -Change in dividends
      payable
              
              $
              -
              
              
              
              1,034,787
 
  See
accompanying notes to consolidated financial statements.
  F-6
  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 100% owned
      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.  On May 28, 2009, Putters, Inc.’s name was changed to Real
      Estate Holdings Georgia, Inc.  The subsidiary continues to be
      used as a real estate holding company to hold residential real estate
      subdivision on which the bank has foreclosed.
                
                On
      December 18, 2008, Motel Holdings Georgia, Inc. was incorporated as a 100%
      owned subsidiary of the Bank.  Motel Holdings Georgia, Inc. was
      formed as a real estate holding company for a motel that was foreclosed on
      by the bank in January 2009.  The motel is an operating motel
      managed by an independent third party.  The operations of the
      motel are included in our statements of operations since the date of
      foreclosure.
                
                Principles of
      Consolidation
                The
      consolidated financial statements include the financial statements of
      Oconee Financial Corporation and its wholly owned subsidiary, Oconee State
      Bank and the subsidiaries of the 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, other than temporary impairment on securities, 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 $20,675,256
      and $9,720 at December 31, 2009 and 2008, 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.
 F-7
 
 
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (1)
              Summary
      of Significant Accounting Policies, continued
                
                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.   The Company
      recognizes other than temporary impairment (OTTI) loss in earnings only
      when the Company (1) intends to sell the debt security; (2) more likely
      than not will be required to sell the security before recovery of its
      amortized cost basis or (3) does not expect to recover the entire
      amortized cost basis of the security.  In situations when the
      Company intends to sell or more likely than not will be required to sell
      the security before recovery of its amortized cost basis, the entire OTTI
      loss is recognized in earnings.  In all other situations, only
      the portion of the OTTI losses representing the credit loss is recognized
      in earnings, with the remaining portion being recognized in other
      comprehensive income, net of deferred taxes.
                  
                  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 are included in
      earnings  on the trade date and are derived using the specific
      identification method for determining the cost of securities
      sold.
                    
                    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.  Management reviews for impairment based on the ultimate
      recoverability of the cost basis in these stocks.
                        
                        Loans Held for
      Sale
                          Loans
      held for sale are carried at the lower of cost or market value. At
      December 31, 2009 and 2008, the carrying amount of mortgage loans held for
      sale approximates the market value. Loans held for sale consist of
      mortgage 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 principal and interest due
      according to the contractual terms of the loan will not be
      collected.  Interest on accruing impaired loans is recognized as
      long as such loans do not meet the criteria for nonaccrual
      status.
                                
                                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.  Loans are
      returned to accrual status when all the principal and interest amounts
      contractually due are brought current and future payments are reasonably
      assured.
                                  
                                  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 uncollectibility of the principal
      is confirmed. 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
      identified 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.
   F-8
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (1)
              Summary
      of Significant Accounting Policies,
  continued
  
 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
    yearsFurniture and
      equipment
              3 - 10
    years
  Other Real
      Estate
                Properties
      acquired through foreclosure are carried at the lower of cost 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.
 
 Transfers of Financial
      Assets
 Transfers
      of financial assets are accounted for as sales, when control over the
      assets has been surrendered.  Control over transferred assets is
      deemed to be surrendered when (1) the assets have been isolated from the
      Company - put presumptively beyond the reach of the transferor and its
      creditors, even in bankruptcy or other receivership, (2) the transferee
      obtains the right (free of conditions that constrain it from taking
      advantage of that right) to pledge or exchange the transferred assets, and
      (3) the Company does not maintain effective control over the transferred
      assets through an agreement to repurchase them before their maturity or
      the ability to unilaterally cause the holder to return specific
      assets.
 
 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.
 
 
 F-9
 
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (1)
              Summary
      of Significant Accounting Policies,
continued
 
 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.
 
 On
      January 1, 2009, the Company adopted the recent accounting guidance
      related to accounting for uncertainty in income taxes, which sets out a
      consistent framework to determine the appropriate level of tax reserves to
      maintain for uncertain tax
positions.
 
 Mortgage Banking
      Income
 Mortgage
      origination fee income represents net gains from the sale of mortgage
      loans and fees received from borrowers 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 year 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 2009 and 2008.  For each of those years, loss per share
      is calculated using the weighted average shares outstanding during the
      years of 899,815.
 
 Comprehensive
      Loss
  Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net loss.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net loss, are components of comprehensive
loss.
  Recent Accounting
Pronouncements
 On June
29, 2009, the FASB issued ASC105, Generally Accepted Accounting
Principles, an accounting pronouncement establishing the FASB Accounting Standards
CodificationTM (the “ASC”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental
entities.  This pronouncement was effective for financial statements
issued for interim and annual periods ending after September 15, 2009, for most
entities.  On the effective date, all non-SEC accounting and reporting
standards will be superseded.  The Company adopted this new accounting
pronouncement for the year ended December 31, 2009, as required, and adoption
did not have a material impact on the Company’s financial statements taken as a
whole.
 
 On April
9, 2009, the FASB issued three related accounting pronouncements intended to
provide additional application guidance and enhance disclosures regarding fair
value measurements and impairments of securities.  In particular,
these pronouncements: (1) provide guidelines for making fair value measurements
more consistent with the existing accounting principles when the volume and
level of activity for the asset or liability have decreased significantly; (2)
enhance consistency in financial reporting by increasing the frequency of fair
value disclosures and (3) modify existing general standards of accounting for
and disclosure of other-than-temporary impairment (“OTTI”) losses for impaired
debt securities.
 
 Both of
these pronouncements were effective for interim and annual periods ending after
June 15, 2009.  Entities were permitted to early adopt the provisions
of these pronouncements for interim and annual periods ending after March 15,
2009, but had to adopt all three concurrently.  The Company adopted
these provisions of these pronouncements for the year ended December 31, 2009,
as required, and adoption did not have a material impact on the financial
statements taken as a whole.
 
 
 F-10
  OCONEE
FINANCIAL CORPORATION
 Notes
to Consolidated Financial Statements, continued
 
 (2)
              Regulatory
      Matters and Management's Plan of
Action
 
 Overall
Summary of Results
 
 The
Company has incurred net losses from operations of $1.2 million and $3.4 million
for the two years ended December 31, 2009 and 2008.  During the same
periods the Company has reported net cash provided by (used in) operations of
$5.5 million and ($810,000).  During 2009 management made strategic
moves to address concerns raised by regulators including shrinking the Bank’s
total assets and loans, as both have a direct impact on regulatory capital
ratios.  At December 31, 2009 the Bank meets the required levels of
capital to be considered well capitalized under regulatory guidelines, however
due to the regulatory order discussed below the Bank is considered adequately
capitalized.
 
 Regulatory
Oversight
 
 As
reported to shareholders during the third quarter of 2009, the Bank entered into
a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the
“Consent Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”)
and the Georgia Department of Banking and Finance (the “GDBF”), whereby the Bank
consented to the issuance of an Order to Cease and Desist (the
“Order”).  Among other things, the Order provides that, unless
otherwise agreed by the FDIC and GDBF:
 
 ·
                the
      Bank must have and maintain a Tier 1 (Leverage) Capital ratio of not less
      than 8% and a Total Risk-based Capital ratio of at least
    10%;
 ·
                  the
      Bank must formulate a written plan to reduce the Bank’s adversely
      classified assets in accordance with a defined asset reduction
      schedule;
 ·
                  the
      Bank may not pay a cash dividend to Oconee Financial
      Corporation;
 ·
                the
      Bank must revise its budget and include formal goals and strategies to
      improve the Bank’s net interest margin, increase interest income, reduce
      discretionary expenses and improve and sustain earnings of the
      Bank;
 ·
                the
      Board of Directors of the Bank must review the adequacy of the allowance
      for loan and lease losses (the “ALLL”) and establish a comprehensive
      policy for determining the adequacy of the
ALLL;
 ·
                the
      Bank may not accept, renew or rollover brokered deposits without obtaining
      a brokered deposit waiver from the
FDIC.
 
 As of
December 31, 2009, the Bank was in compliance with all directives of the
Order.  Compliance with the consent order is monitored by a committee
made up of members of the Board of Directors of the Company.  Failure
to comply with the Order could result in further regulatory action and
oversight.
 
 Capital
Adequacy
 
 As of
December 31, 2009, the Bank was considered "adequately capitalized" as defined
by federal capital regulations.  Regulatory capital is a measure of a
financial institution's soundness.  Note 13, Regulatory Matters,
presents and discusses more fully the Bank's capital levels.  In
response to the Order, the Board of Directors has authorized management to begin
the process of raising additional capital through a stock
offering.  Management has begun the preparation of the offering
document which tentatively is expected to offer a minimum of 35,000 and maximum
of 450,000 shares of the Company’s common stock.  Upon completion of
the management’s due diligence and research, the Board of Directors will
formally vote on whether or not to proceed with the stock offering based on the
Bank’s capital position and potential need for additional capital.
 
 Asset
Quality
 
 The
losses reported in 2009 and 2008 are primarily the result of significant
provisions for loan losses, additional expenses related to foreclosed assets,
reductions in interest income related to the increase in non-performing loans
and an interest margin which has been impacted by the lowest interest rates in
decades.  The provision for loan losses for the years ended December
31, 2009 and 2008 were $2.1 million and $7.5 million,
respectively.  As of December 31, 2009 impaired and nonaccrual loans
were down $11 million, and net charge-offs were down $3.7 million compared to
the year ended December 31, 2008, while other real estate owned increased by
$5.1 million.  Impaired loans and foreclosed assets, although
currently carried at the lower of cost or fair value, could likely impact
future
  F-11
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (2)
              Regulatory
      Matters and Management's Plan of Action,
  continued
  Liquidity
 
 The Bank
actively manages and monitors liquidity on a daily basis.  At December
31, 2009 the Bank’s liquidity ratio was 22.5% which is adequate based on the
Bank’s policy and acceptable by the regulators considering the minimal amount of
brokered deposits held by the Bank.  The Bank has been able to
maintain a stable deposit base throughout 2009 and management anticipates this
to continue in 2010. The FDIC's temporary changes to increase the amount of
deposit insurance to $250,000 per deposit relationship and to provide unlimited
deposit insurance for certain transaction accounts under the Temporary Liquidity
Guarantee Program ("TLGP") have contributed to the Bank's stable deposit
base.  However, the TLGP program is scheduled to expire on June 30,
2010 which could impact the Bank's ability to retain previously insured
transaction accounts above $250,000 if the program is not
extended.  Despite these challenges, the Bank expects to maintain a
sound liquidity position throughout 2010.
 
 As noted
above, the Bank is working in full compliance with the Order and is actively
working toward returning to profitable operations.  However, if
operating losses were to continue to occur, these events could have a material
and adverse effect on the Company's results of operations and financial
position.
 
 (3)
              Investment
      Securities
  Investment
securities available for sale at December 31, 2009 and 2008 are as
follows:
 
 Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                ValueSecurities
      Available for SaleDecember
      31, 2009:Debt
      securities:U.S.
      Government and federal agency:U.S.
      Government-sponsoredenterprises
      (GSEs)*
              
              $
              28,989,082
              
              
              $
              191,702
              
              
              $
              (226,629
              )
              
              $
              28,954,155Corporate
              
              
              1,617,611
              
              
              
              -
              
              
              
              (133,300
              )
              
              
              1,484,311Mortgage-backed:GSE
      residential
              
              
              24,522,979
              
              
              
              800,214
              
              
              
              (12,795
              )
              
              
              25,310,398State,
      county, municipal
              
              
              11,223,018
              
              
              
              124,977
              
              
              
              193,576
              
              
              
              11,154,419Total
      debt securities
              
              
              66,532,690
              
              
              
              1,116,893
              
              
              
              (566,300
              )
              
              
              66,903,283
   
 F-12
 
 OCONEE
FINANCIAL CORPORATION
 Notes
to Consolidated Financial Statements, continued
 
 (3)
              Investment
      Securities, continued
 
 Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                ValueDecember
      31, 2008:Debt
      securities:U.S.
      Government and federal agency:U.S.
      Government-sponsoredenterprises
      (GSEs)*
              
              $
              37,171,757
              
              
              $
              959,666
              
              
              $
              -
              
              
              $
              38,131,423Corporate
              
              
              1,620,067
              
              
              
              -
              
              
              
              (158,461
              )
              
              
              1,461,606Mortgage-backed:GSE
      residential
              
              
              22,846,975
              
              
              
              517,867
              
              
              
              (790
              )
              
              
              23,364,052State,
      county, municipal
              
              
              17,714,238
              
              
              
              84,212
              
              
              
              (993,961
              )
              
              
              16,804,489Total
      debt securities
              
              
              79,353,037
              
              
              
              1,561,745
              
              
              
              (1,153,212
              )
              
              
              79,761,570
 
 *
              Such
      as Federal National Mortgage Association, Federal Home Loan Mortgage
      Corporation, and Federal Home Loan
Banks.
 
 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, 2009 and 2008 are summarized as follows:
 
 Less
      Than Twelve Months
              
              
              Over
      Twelve MonthsAvailable
      for Sale Securities
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Total
      Unrealized
                LossesDecember
      31, 2009:Debt
      securitiesU.S.
      Government andfederal
      agencies:GSEs
              
              $
              226,629
              
              
              $
              16,378,577
              
              
              $
              -
              
              
              $
              -
              
              
              $
              226,629Corporate
      bonds
              
              
              -
              
              
              
              -
              
              
              
              133,300
              
              
              
              1,484,311
              
              
              
              133,300Mortgage-backed
      securities:GSE
      residential
              
              
              39,291
              
              
              
              5,861,084
              
              
              
              -
              
              
              
              -
              
              
              
              39,291State,
      county, municipal
              
              
              71,729
              
              
              
              2,117,963
              
              
              
              95,351
              
              
              
              1,178,181
              
              
              
              167,080Total
      debt securities
              
              
              337,649
              
              
              
              24,357,624
              
              
              
              228,651
              
              
              
              2,662,492
              
              
              
              566,300
 
  F-13
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (3)
              Investment
      Securities, continued
 
 Less
      Than Twelve Months
              
              
              Over
      Twelve MonthsAvailable
      for Sale Securities
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Gross
                Unrealized
                Losses
              
              
              Fair
                Value
              
              
              Total
      Unrealized
                LossesDecember
      31, 2008:Debt
      securitiesU.S.
      Government andfederal
      agencies:Corporate
      bonds
              
              $
              158,461
              
              
              $
              1,620,067
              
              
              $
              -
              
              
              $
              -
              
              
              $
              158,461Mortgage-backed
      securities:GSE
      residential
              
              
              790
              
              
              
              208,311
              
              
              
              -
              
              
              
              -
              
              
              
              790State,
      county, municipal
              
              
              907,749
              
              
              
              10,033,908
              
              
              
              86,212
              
              
              
              692,675
              
              
              
              993,961Total
      debt securities
              
              
              1,067,000
              
              
              
              12,662,286
              
              
              
              86,212
              
              
              
              692,675
              
              
              
              1,153,212
 
 The
amortized cost and fair value of investment securities available for sale at
December 31, 2009, 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
              
              $
              430,000
              
              
              
              436,037Due
      from one to five years
              
              
              410,248
              
              
              
              414,309Due
      from five to ten years
              
              
              12,709,671
              
              
              
              12,758,979Due
      after ten years
              
              
              28,279,792
              
              
              
              27,983,560Mortgage-backed
      securities
              
              
              24,522,979
              
              
              
              25,310,398$
              66,352,690
              
              
              
              66,903,283
  
 The
proceeds from the sales and gross gains and gross losses realized by the Company
from sales of investment securities for the years ended December 31, 2009 and
2008 were as follows:
 
 2009
              
              
              2008Proceeds
      from sales
              
              $
              12,937,169
              
              
              
              8,742,800Gross
      gains realized
              
              $
              250,720
              
              
              
              215,129Gross
      losses realized
              
              
              -
              
              
              
              -Net
      gain realized
              
              $
              250,720
              
              
              
              215,129
  
 Securities
with a carrying value of approximately $50,976,000 and $63,014,000 at December
31, 2009 and 2008, respectively, were pledged to secure public deposits and for
other purposes as required by law.
 
 
 F-14
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (3)
              Investment
      Securities, continued
 
 Restricted
equity securities consist of the following:
 
 December
      31,2009
              
              
              2008Federal
      Home Loan Bank Stock
              
              $
              556,300
              
              
              
              578,800Silverton
      Financial Services, Inc. Stock
              
              
              -
              
              
              
              100,429$
              556,300
              
              
              
              679,229
 
 During
the second quarter of 2009, the Company recorded an other than temporary
impairment charge of $100,429 on its investment in Silverton Financial Services,
Inc. restricted equity securities.  The value of these securities was
determined to be totally impaired after Silverton Bank was placed in
receivership in May 2009.
 
 Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation.
 
 The
unrealized losses on these debt securities in a continuous loss position for
twelve months or more as of December 31, 2009 and 2008 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, 2009 were 10 out of 27 securities issued by state and political subdivisions
that contained unrealized losses, 14 of 24 securities issued by government
sponsored agencies, 3 of 28 mortgage-backed securities, and 2 of 2 other debt
securities that contained unrealized losses.
 
 GSE debt
securities.  The unrealized losses on the fourteen investments
in GSEs were caused by interest rate increases.  The contractual terms
of those investments do not permit the issuer to settle the securities at a
price less than the amortized cost bases of the investments.  Because
the Company does not intend to sell the investments and it is not more likely
than not that the Company will be required to sell the investments before
recovery of their amortized cost bases, which may be maturity, the Company does
not consider those investments to be other-than-temporarily impaired at December
31, 2009.
 
 Corporate
bonds.  The Company’s unrealized losses on investments in two
corporate bonds relates to investments in companies within the financial
services sector.  The unrealized losses are primarily caused by recent
decreases in profitability and profit forecasts by industry
analysts.  The Company currently does not believe it is probable that
it will be unable to collect all amounts due according to the contractual terms
of the investments.  Because the Company does not intend to sell the
investment and it is not more likely than not that the Company will be required
to sell the investments before recovery of its par value, which may be maturity,
it does not consider these investments to be other-than-temporarily impaired at
December 31, 2009.
 
 GSE residential mortgage-backed
securities.  The unrealized losses on the Company’s investment
in three GSE mortgage-backed securities were caused by interest rate
increases.  The contractual cash flows of those investments are
guaranteed by an agency of the U.S. Government.  Accordingly, it is
expected that the securities would not be settled at a price less than the
amortized cost bases of the Company’s investments.  Because the
decline in market value is attributable to changes in interest rates and not
credit quality, and because the Company does not intend to sell the investments
and it is not more likely than not that the Company will be required to sell the
investments before recovery of their amortized cost bases, which may be
maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2009.
  State and municipal securities.The unrealized losses for twelve months or longer relates to 10 municipal
securities. The unrealized losses are primarily caused by securities no longer
being insured and/or ratings being withdrawn given the current economic
environment, as well as changes in interest rates. Because the Company does not
intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider those
investments to be other-than-temporarily impaired at December 31,
2009.
 
 
 F-15
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
  (4)
              Loans
  Major
      classifications of loans at December 31, 2009 and 2008 are summarized as
      follows:
  2009
              
              
              2008Commercial,
      financial and agricultural
              
              $
              28,392,933
              
              
              
              28,028,762Real
      estate – mortgage
              
              
              114,252,957
              
              
              
              105,459,965Real
      estate – commercial construction
              
              
              29,567,486
              
              
              
              51,567,771Real
      estate – consumer construction
              
              
              801,464
              
              
              
              2,897,623Consumer
              
              
              6,768,441
              
              
              
              7,836,864Total loans
              
              
              179,783,281
              
              
              
              195,790,985Deferred
      fees and costs, net
              
              
              54,501
              
              
              
              18,578Less
      allowance for loan losses
              
              
              (3,497,292
              )
              
              
              (4,215,262
              )Total net loans
              
              $
              176,340,490
              
              
              
              191,557,145
  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, 2009 and 2008, the recorded investment in loans that were
considered to be impaired and on nonaccrual was approximately $17,706,000 and
$28,772,000, respectively.  Included in this amount was $7,200,000 and
$9,803,000 of impaired loans at December 31, 2009 and 2008, respectively, for
which there is no related allowance for loan losses.  Impaired loans at
December 31, 2009 and 2008 also included $10,474,000 and $18,969,000 of
impaired loans for which the related allowance for loan losses was $1,143,000
and $1,438,000, respectively.   In addition, the Company had
approximately $0 and $24,000 in loans past due more than ninety days and still
accruing interest at December 31, 2009 and 2008, respectively.  These
accounts were 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, 2009 and 2008 was approximately $25,558,000 and
$16,478,000, respectively.  For the years ended December 31, 2009 and
2008, the interest recognized on impaired loans was
immaterial.
  For the
years ended December 31, 2009 and 2008, troubled debt restructurings were $0 and
$4,351,000, respectively.  At December 31, 2009 and 2008, the Company
had loans totaling $0 and $4,351,000 that were modified in troubled debt
restructurings and impaired.  In years subsequent to a modification,
loans that are performing in accordance with their modified terms are not
reported as impaired loans.
 
 Changes
in the allowance for loan losses were as follows:
 
 Years
      Ended December 31,2009
              
              
              2008Balance
      at beginning of year
              
              $
              4,215,262
              
              
              
              3,335,825Provision
      for loan losses
              
              
              2,140,000
              
              
              
              7,463,000Amounts
      charged off
              
              
              (2,943,798
              )
              
              
              (6,625,721
              )Recoveries
      on amounts previously charged off
              
              
              85,828
              
              
              
              42,158Balance
      at end of year
              
              $
              3,497,292
              
              
              
              4,215,262
  
 F-16
 
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (5)
              Premises
      and Equipment
 
 Major
classifications of premises and equipment are summarized as
follows:
 
 December
      31,2009
              
              
              2008Land
              
              $
              1,354,181
              
              
              
              1,354,181Buildings
      and improvements
              
              
              5,947,419
              
              
              
              5,936,622Furniture
      and equipment
              
              
              5,879,896
              
              
              
              5,881,342Leasehold
      improvements
              
              
              115,673
              
              
              
              115,67313,297,169
              
              
              
              13,287,818Less
      accumulated depreciation
              
              
              6,984,201
              
              
              
              6,383,928$
              6,312,968
              
              
              
              6,903,890
 
 Depreciation
expense was $616,571 and $706,382 for the years ended December 31, 2009 and
2008, respectively.
 
 Future
minimum lease payments under current operating leases pertaining to banking
premises and equipment at December 31, 2009, are as follows:
 
 Years
      Ending December 31,2010
              
              $
              152,7072011
              
              
              139,0842012
              
              
              140,8742013
              
              
              142,6992014
              
              
              144,560Thereafter
              
              
              207,984Total
      minimum lease payments
              
              $
              927,908
 
 Total
rental expense for the years ended December 31, 2009 and 2008 was $162,336 and
$159,450, respectively.
 
 (6)
              Other
      Real Estate
 
 A summary of foreclosed assets are
presented as follows:
 
 Years
      Ended December 31,2009
              
              
              2008Balance,
      beginning of year
              
              $
              1,781,905
              
              
              $
              1Additions
              
              
              7,177,958
              
              
              
              1,935,325Disposals
              
              
              (851,152
              )
              
              
              (155,920
              )Charge-offs
              
              
              (971,839
              )
              
              
              (13,850
              )Internally
      financed sales
              
              
              (278,431
              )
              
              
              -Capitalized
      expenses
              
              
              91,587
              
              
              
              16,349Gain
      (loss) on sale
              
              
              (34,867
              )
              
              
              -Balance,
      end of year
              
              $
              6,915,161
              
              
              $
              1,781,905
 
 As of
December 31, 2009 and 2008 deferred gains on sales of foreclosed real estate of
$40,000 and $10,000 are included in the balance sheet as a reduction of
loans.
 
 
 F-17
 
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (6)
              Other
      Real Estate, continued
 
 Expenses
applicable to foreclosed assets include the following:
 
 Years
      Ended December 31,2009
              
              
              
              2008Net
      loss (gain) on sales of real estate
              
              $
              (34,867
              )
              
              
              -Provision
      for losses
              
              
              -
              
              
              
              -Operating
      expenses, net of rental income
              
              
              229,681
              
              
              
              254,489$
              194,814
              
              
              $
              254,489
 
 (7)
              Deposits
 The
aggregate amounts of certificates of deposit, each with a minimum denomination
of $100,000, were approximately $52,535,000 and $71,244,000 at December 31, 2009
and 2008, respectively.  The Company had brokered time deposits at
December 31, 2009 and 2008 of $9,397,000 and $17,979,000,
respectively.
 
 At
December 31, 2009, the scheduled maturities of certificates of deposits are as
follows:
 
 2010
              
              $
              108,458,4722011
              
              
              16,760,3772012
              
              
              750,3872013
              
              
              503,5722014
              
              
              2,016,090$
              128,488,898
 
 At
December 31, 2009, the Bank had concentrations of deposits of approximately
$30,669,000 and $28,699,000 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.
 
 (8)
              Income
      Taxes
 
 The
components of income tax benefit in the statements of operations are as
follows:
 
 2009
              
              
              2008Current benefit
              
              $
              (975,472
              )
              
              
              (2,699,668
              )Deferred
              
              
              (94,357
              )
              
              
              (13,119
              )Total income tax
      benefit
              
              $
              (1,069,829
              )
              
              
              (2,712,787
              )
 
 The
differences between income tax benefit and the amount computed by applying the
statutory federal income tax rate to losses before income benefit are as
follows:
 
 2009
              
              
              2008Pretax
      loss at statutory rates
              
              $
              (771,643
              )
              
              
              (2,099,020
              )Add
      (deduct):Tax
      exempt interest income
              
              
              (234,021
              )
              
              
              (288,919
              )Non-deductible
      interest expense
              
              
              20,389
              
              
              
              33,751State
      taxes, net of federal effect
              
              
              (197,018
              )
              
              
              (442,801
              )Other
              
              
              112,464
              
              
              
              84,202$
              (1,069,829
              )
              
              
              (2,712,787
              )
 
 
 F-18
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (8)
              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, 2009 and
2008.
 2009
              
              
              2008Deferred
      income tax assets:Allowance
      for loan losses
              
              $
              769,403
              
              
              
              1,164,777Other
      real estate
              
              
              224,045
              
              
              
              14,062Other
              
              
              184,130
              
              
              
              -Total
      gross deferred income tax assets
              
              
              1,177,578
              
              
              
              1,178,839Deferred
      income tax liabilities:Unrealized
      gains on investment securities available for sale
              
              
              (209,005
              )
              
              
              (155,079
              )Premises
      and equipment
              
              
              (353,575
              )
              
              
              (449,192
              )Total
      gross deferred income tax liabilities
              
              
              (562,580
              )
              
              
              (604,271
              )Net
      deferred income tax asset
              
              $
              614,998
              
              
              
              574,568
 
 (9)
              Securities
      Sold Under Repurchase Agreements
 Securities
sold under repurchase agreements, which are secured borrowings, generally mature
within one to four days from the transaction date.  Securities sold
under repurchase agreements are reflected at the amount of cash received in
connection with the transaction.  The Company may be required to
provide additional collateral based on the fair value of the underlying
securities.  The Company monitors the fair value of the underlying
securities on a daily basis.  Securities sold under repurchase
agreements at December 31, 2009 and 2008 were $9,814,000 and $6,453,000,
respectively.
 
 (10)
              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
      31,2009
              
              
              2008Beginning
      balance
              
              $
              6,958,101
              
              
              
              7,550,279New
      loans
              
              
              2,747,985
              
              
              
              1,970,123Repayments
              
              
              (1,178,978
              )
              
              
              (2,562,301
              )Change
      in related parties
              
              
              (4,459,092
              )
              
              
              -Ending
      balance
              
              $
              4,068,016
              
              
              
              6,958,101
 
 Deposits
from related parties totaled approximately $5,794,000 and $6,833,000 as of
December 31, 2009 and 2008, respectively.
 
 (11)
              Commitments
      and Contingencies
 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.
 
 
 F-19
 
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (11)
              Commitments
      and Contingencies, continued
 
 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
      Amount2009
              
              
              2008(in
      thousands)Financial
      instruments whose contractamounts represent credit
      risk:Commitments to extend
      credit
              
              $
              27,410
              
              
              
              26,153Standby letters of
      credit
              
              $
              570
              
              
              
              661
 
 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 had $5,000,000 and $7,000,000 available for the purchase of overnight
federal funds from two correspondent financial institutions as of December 31,
2009 and 2008, respectively.
 
 Contingencies
 In the
normal course of business, the Company is involved in various legal
proceedings.  In the opinion of management, any liability resulting
from such proceedings would not have a material effect on the Company’s
financial statements.
 
 (12)
              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 2009 and
      2008 were $71,764 and $227,367, respectively.  The Board of
      Directors suspended this plan indefinitely effective July 1,
      2009.
 
 (13)
              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, 2009 and 2008, the Company and the Bank met all capital adequacy
requirements to which they are subject.
   F-20
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (13)
              Regulatory
      Matters, continued
 As of
December 31, 2009, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately 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 following tables and
also must not be subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by federal banking
regulators.
 
 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):
 Actual
                
                
                For
      CapitalAdequacy Purposes
                
                
                To
      Be Well Capitalized
      Under Prompt
      Corrective Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioAs
      of December 31, 2009:Total Capital(to Risk-Weighted
      Assets)
                
                $
                26,721
                
                
                
                13.5
                %
                
                $
                15,878
                
                
                
                8.0
                %
                
                $
                19,848
                
                
                
                10.0
                %Tier 1 Capital(to Risk-Weighted
      Assets)
                
                $
                24,228
                
                
                
                12.2
                %
                
                $
                7,939
                
                
                
                4.0
                %
                
                $
                11,909
                
                
                
                6.0
                %Tier 1 Capital(to Average
    Assets)
                
                $
                24,228
                
                
                
                8.3
                %
                
                $
                11,709
                
                
                
                4.0
                %
                
                $
                14,637
                
                
                
                5.0
                %As
      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
                %
 
 (14)
              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, the ratio
of equity capital to total assets, and other specific regulatory
restrictions.  At December 31, 2009, no dividends could be declared
without regulatory approval.
 
 (15)
              Fair
      Value Disclosures
 
 Fair Value
Measurements
 Effective
January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and
Disclosures, which provides a framework for measuring fair value under
generally accepted accounting principles.  FASB ASC Topic 820 applies
to all financial instruments that are being measured and reported on a fair
value basis.
 
 The fair
value of a financial instrument is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  Fair value is best determined
based upon quoted market prices.  However, in many instances, there
are no quoted market prices for the Company’s various financial
instruments.  In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques.  Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows.  Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
 
 
 F-21
  
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (15)
              Fair
      Value Disclosures, continued
 
 The
recent fair value guidance provides a consistent definition of fair value, which
focuses on exit price in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under
current market conditions.  If there has been a significant decrease
in the volume and level of activity for the asset or liability, a change in
valuation technique or the use of multiple valuation techniques may be
appropriate.  In such instances, determining the price at which
willing market participants would transact at the measurement date under current
market conditions depends on the facts and circumstances and requires the use of
significant judgment.  The fair value is a reasonable point within the
range that is most representative of fair value under current market
conditions.
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures.  Securities available-for-sale and loans held for sale
are recorded at fair value on a recurring basis.  Additionally, from
time to time, the Company may be required to record at fair value other assets
on a nonrecurring basis, such as impaired loans and foreclosed
property
 
 Under
FASB ASC Topic 820, the Company groups assets and liabilities at fair value in
three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair
value.  These levels are:
 
 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 its impairment.  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, 2009, substantially all of the
impaired loans were evaluated based on the fair value of the collateral. In
accordance with FASB ASC Topic 820, 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.
   F-22
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (15)
              Fair
      Value Disclosures, continued
  Other Real Estate:
Other real estate is adjusted to fair value upon transfer of the loans to other
real estate. Subsequently, other real estate is carried at the lower of cost 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 other real estate as
nonrecurring Level 3.
  The
tables below presents the Company’s assets and liabilities measured at fair
value on a recurring basis as of December 31, 2009 and 2008, aggregated by the
level in the fair value hierarchy within which those measurements
fall.
  
 Balance
      at December 31, 2009(In
      thousands)
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)AssetsSecurities
              
              $
              66,903
              
              
              $
              -
              
              
              $
              66,903
              
              
              $
              -
 
 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, 2009(In
      thousands)
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)AssetsImpaired
      loans
              
              $
              17,706
              
              
              $
              -
              
              
              $
              -
              
              
              $
              17,706Other
      real estate
              
              
              6,915
              
              
              
              -
              
              
              
              -
              
              
              
              6,915
 
 Balance
      at December 31, 2008(In
      thousands)
              
              
              (Level
      1)
              
              
              (Level
      2)
              
              
              (Level
      3)AssetsImpaired
      loans
              
              $
              17,531
              
              
              $
              -
              
              
              $
              -
              
              
              $
              17,531Other
      real estate
              
              
              1,782
              
              
              
              -
              
              
              
              -
              
              
              
              1,782
  
 F-23
  
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (15)
              Fair
      Value Disclosures, continued
  For the
year ended December 31, 2009, the Company recognized adjustments related to
impaired loans and other real estate that are measured at fair value on a
nonrecurring basis. Approximately $1,960,000 of losses related to impaired loans
and $714,000 of losses related to other real estate were recognized as either
charge-offs or specific allocations within the allowance for loan losses for the
year ended December 31, 2009.
  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 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.  Loans held for sale are valued based on the current price
at which these loans could be sold into the secondary market.
 
 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, 2009 and 2008 are as follows:
 
 2009
              
              
              2008Carrying
              
              
              Estimated
              
              
              Carrying
              
              
              EstimatedAmount
              
              
              Fair Value
              
              
              Amount
              
              
              Fair ValueAssets:
              
              (In
      thousands)Cash and cash
      equivalents
              
              $
              24,736
              
              
              
              24,736
              
              
              
              20,062
              
              
              
              20,062Investment
      securities
              
              $
              66,903
              
              
              
              66,903
              
              
              
              79,762
              
              
              
              79,762Restricted equity
      securities
              
              $
              556
              
              
              
              556
              
              
              
              679
              
              
              
              679Loans held for
    sale
              
              $
              -
              
              
              
              -
              
              
              
              1,639
              
              
              
              1,639Loans, net
              
              $
              176,340
              
              
              
              174,696
              
              
              
              191,557
              
              
              
              191,214Liabilities:Deposits
      and securities sold underrepurchase agreement
              
              $
              260,256
              
              
              
              260,651
              
              
              
              281,491
              
              
              
              281,682
  
 F-24
  
 OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
  
 (16)
              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:
 2009
              
              
              2008Other
      IncomeIncome
      and fees from ATM’s
              
              $
              505,990
              
              
              
              484,438Other
      ExpensesFDIC
      insurance assessment expense
              
              $
              906,445
              
              
              
              173,262Professional
      fees
              
              $
              370,352
              
              
              
              380,755ATM
      process and settlement charges
              
              $
              351,889
              
              
              
              297,177Deposit
      program marketing expense
              
              $
              -
              
              
              
              246,234Other
      real estate expenses
              
              $
              813,290
              
              
              
              258,689
 
 (17)
              Oconee
      Financial Corporation (Parent Company Only) Financial
      Information
 
 Balance
Sheets
 December
31, 2009 and 2008
 2009
              
              
              2008AssetsCash
              
              $
              70,519
              
              
              
              167,865Investment
      in subsidiary
              
              
              24,569,959
              
              
              
              25,621,141Other
      assets
              
              
              45,135
              
              
              
              8,182$
              24,685,613
              
              
              
              25,797,188Liabilities and
      Stockholders’ EquityOther
      liabilities
              
              $
              -
              
              
              
              -Stockholders’
      equity
              
              
              24,685,613
              
              
              
              25,797,188$
              24,685,613
              
              
              
              25,797,188
 
 
 Statements
      of OperationsFor
      the Years Ended December 31, 2009 and
2008
 
 2009
              
              
              2008Dividends
      from subsidiary
              
              $
              -
              
              
              
              150,000Other
      expenses
              
              
              97,346
              
              
              
              51,825Earnings (loss) before income
      tax benefit and equity inundistributed loss of
      subsidiary
              
              
              (97,346
              )
              
              
              98,175Income
      tax benefit
              
              
              36,953
              
              
              
              19,673Earnings (loss) before equity
      in undistributed lossof subsidiary
              
              
              (60,393
              )
              
              
              117,848Equity
      in undistributed loss of subsidiary
              
              
              (1,139,316
              )
              
              
              (3,544,207
              )Net loss
              
              $
              (1,199,709
              )
              
              
              (3,426,359
              )
 
  F-25
  OCONEE
FINANCIAL CORPORATION
 
 Notes
to Consolidated Financial Statements, continued
 
 (17)
              Oconee
      Financial Corporation (Parent Company Only) Financial Information,
      continued
 
 Statements
of Cash Flows
 For the
Years Ended December 31, 2009 and 2008
 
 2009
              
              
              2008Cash
      flows from operating activities:Net loss
              
              $
              (1,199,709
              )
              
              
              (3,426,359
              )Adjustments to reconcile net
      lossto net cash provided by (used
      in) operating activities:Equity in undistributed loss of
      subsidiary
              
              
              1,139,316
              
              
              
              3,544,207Change in:Other assets
              
              
              (36,953
              )
              
              
              (8,182
              )Other
    liabilities
              
              
              -
              
              
              
              (692
              )Net cash (used in) provided by
      operating activities
              
              
              (97,346
              )
              
              
              108,974Cash
      flows from financing activities:Dividends
      paid
              
              
              -
              
              
              
              (1,034,787
              )Net
      cash used by financing activities
              
              
              -
              
              
              
              (1,034,787
              )Change
      in cash
              
              
              (97,346
              )
              
              
              (925,813
              )Cash
      at beginning of year
              
              
              167,865
              
              
              
              1,093,678Cash
      at end of year
              
              $
              70,519
              
              
              
              167,865


F-26





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 the 31st day of
March  2010.




OCONEE
      FINANCIAL CORPORATION
              (Registrant)
              
              By:           /s/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 31st day
of March,2010.




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/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




35