UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER 2-83157
SOUTHEASTERN BANKING CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1423423
- - ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. BOX 455, 1010 NORTHWAY STREET, DARIEN, GEORGIA 31305
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 437-4141
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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.
YES [X] NO [ ]
As of July 31, 2000, 3,436,696 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding.
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
=======================================================================================================
ASSETS
Cash and due from banks $ 15,644,039 $ 14,016,035
Federal funds sold -- 2,800,000
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents 15,644,039 16,816,035
Investment securities
Held-to-maturity (market value of approximately $26,915,000
and $27,476,000 at June 30, 2000 and December 31, 1999) 27,455,462 28,017,607
Available-for-sale, at market value 119,691,615 117,893,972
- - -------------------------------------------------------------------------------------------------------
Total investment securities 147,147,077 145,911,579
Loans, gross 179,881,777 167,644,071
Unearned income (1,079,075) (1,649,960)
Allowance for loan losses (3,525,116) (3,222,889)
- - -------------------------------------------------------------------------------------------------------
Loans, net 175,277,586 162,771,222
Premises and equipment, net 7,003,435 6,708,814
Intangible assets 1,190,922 1,286,284
Other assets 7,104,641 7,050,954
- - -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 353,367,700 $ 340,544,888
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 55,438,831 $ 52,670,994
Interest-bearing deposits 241,154,662 237,613,267
- - -------------------------------------------------------------------------------------------------------
Total deposits 296,593,493 290,284,261
Federal funds purchased 885,000 3,950,000
U. S. Treasury demand note 2,497,863 1,909,498
Federal Home Loan Bank advances 10,000,000 --
Other liabilities 2,888,007 3,248,193
- - -------------------------------------------------------------------------------------------------------
Total liabilities 312,864,363 299,391,952
- - -------------------------------------------------------------------------------------------------------
Common stock ($1.25 par value; 10,000,000 shares authorized;
3,580,797 shares issued; 3,436,696 and 3,580,797 shares
outstanding at June 30, 2000 and December 31, 1999) 4,475,996 4,475,996
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 39,995,136 38,159,815
Treasury stock, at cost (144,101 shares) (2,485,742) --
- - -------------------------------------------------------------------------------------------------------
Realized shareholders' equity 43,377,113 44,027,534
Accumulated other comprehensive income - unrealized
losses on available-for-sale securities, net of tax (2,873,776) (2,874,598)
- - -------------------------------------------------------------------------------------------------------
Total shareholders' equity 40,503,337 41,152,936
- - -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 353,367,700 $ 340,544,888
=======================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER SIX MONTHS
----------------------------- ----------------------------
PERIOD ENDED JUNE 30, 2000 1999 2000 1999
========================================================================================================================
INTEREST INCOME
Loans, including fees $ 4,603,140 $ 4,244,829 $ 8,937,639 $ 8,520,404
Federal funds sold 19,899 84,653 124,305 280,065
Investment securities
Taxable 1,938,015 1,841,185 3,816,607 3,504,573
Tax-exempt 310,321 313,043 624,853 616,882
- - ------------------------------------------------------------------------------------------------------------------------
Total interest income 6,871,375 6,483,710 13,503,404 12,921,924
- - ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,725,685 2,735,130 5,399,389 5,495,607
Federal funds purchased 35,197 3,205 36,199 3,205
U. S. Treasury demand note 15,718 7,856 28,960 15,630
Federal Home Loan Bank advances 104,198 -- 116,531 --
- - ------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,880,798 2,746,191 5,581,079 5,514,442
- - ------------------------------------------------------------------------------------------------------------------------
Net interest income 3,990,577 3,737,519 7,922,325 7,407,482
PROVISION FOR LOAN LOSSES 300,000 300,000 600,000 600,000
- - ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,690,577 3,437,519 7,322,325 6,807,482
- - ------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 596,814 642,244 1,183,362 1,224,564
Investment securities gains, net (56) -- 6,844 --
Other operating income 249,712 242,838 498,886 494,750
- - ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 846,470 885,082 1,689,092 1,719,314
- - ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,555,103 1,439,853 3,085,015 2,881,353
Occupancy and equipment, net 496,863 432,328 966,141 878,538
Other operating expense 685,644 742,158 1,353,390 1,495,478
- - ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,737,610 2,614,339 5,404,546 5,255,369
- - ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,799,437 1,708,262 3,606,871 3,271,427
INCOME TAX EXPENSE 529,925 502,927 1,069,801 961,416
- - ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,269,512 $ 1,205,335 $ 2,537,070 $ 2,310,011
========================================================================================================================
NET INCOME PER AVERAGE SHARE - BASIC $ 0.37 $ 0.34 $ 0.72 $ 0.65
========================================================================================================================
Average common shares - basic 3,446,197 3,580,797 3,513,497 3,580,797
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
===================================================================================================================================
BALANCE, DECEMBER 31, 1998 $ 4,475,996 $ 1,391,723 $ 34,993,625 -- $ 288,953 $ 41,150,297
Comprehensive income:
Net income -- -- 2,310,011 -- -- 2,310,011
Other comprehensive income, net
of tax effect of $863,118:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- -- (1,675,464) (1,675,464)
------------
Comprehensive income 634,547
------------
Cash dividends declared
($0.20 per share) -- -- (716,159) -- -- (716,159)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 $ 4,475,996 $ 1,391,723 $ 36,587,477 -- $ (1,386,511) $ 41,068,685
===================================================================================================================================
BALANCE, DECEMBER 31, 1999 $ 4,475,996 $ 1,391,723 $ 38,159,815 -- $ (2,874,598) $ 41,152,936
Comprehensive income:
Net income -- -- 2,537,070 -- -- 2,537,070
Other comprehensive income, net
of tax effect of $423:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- -- 822 822
------------
Comprehensive income 2,537,892
------------
Cash dividends declared
($0.20 per share) -- -- (701,749) -- -- (701,749)
Acquisition of treasury stock -- -- -- (2,485,742) -- (2,485,742)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 4,475,996 $ 1,391,723 $ 39,995,136 $ (2,485,742) $ (2,873,776) $ 40,503,337
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 1999
=====================================================================================================
OPERATING ACTIVITIES
Net income $ 2,537,070 $ 2,310,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600,000 600,000
Depreciation 430,034 473,291
Amortization and accretion, net 92,655 135,524
Investment securities gains, net (6,844) --
Net gains on sales of other real estate (94,591) (5,475)
Changes in assets and liabilities:
Increase in other assets (499,152) (209,228)
Decrease in other liabilities (95,120) (8,484)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,964,052 3,295,639
- - -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal collections and maturities of investment securities:
Held-to-maturity 1,951,400 760,000
Available-for-sale 3,452,881 43,524,451
Proceeds from sales of investment securities available-for-sale 2,996,719 --
Purchases of investment securities held-to-maturity (1,396,354) (4,962,186)
Purchases of investment securities available-for-sale (8,229,345) (63,357,623)
Net (increase) decrease in loans (12,928,054) 566,613
Proceeds from sales of other real estate 290,129 231,341
Capital expenditures, net (653,464) (466,427)
- - -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,516,088) (23,703,831)
- - -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 6,309,232 1,912,223
Net decrease in federal funds purchased (3,065,000) 410,000
Net increase in U. S. Treasury demand note 588,365 1,141,191
Proceeds from Federal Home Loan Bank advances 10,000,000 --
Purchase of treasury stock (2,485,742) --
Dividends paid (966,815) (1,026,615)
- - -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,380,040 2,436,799
- - -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,171,996) (17,971,393)
Cash and cash equivalents at beginning of year 16,816,035 30,134,719
- - -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 15,644,039 $ 12,163,326
=====================================================================================================
SUPPLEMENTAL DISCLOSURE
CASH PAID DURING THE PERIOD
Interest $ 5,703,441 $ 5,532,225
Income taxes $ 1,130,000 $ 1,102,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Real estate acquired through foreclosure $ 67,720 $ 999,212
Loans made in connection with sales of foreclosed real estate $ 246,030 $ 301,609
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING AND REPORTING POLICY FOR INTERIM PERIODS
The accompanying unaudited consolidated financial statements of
Southeastern Banking Corporation (the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. These statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the
opinion of management, all adjustments necessary for a fair
presentation have been made. These adjustments, consisting of normal,
recurring accruals, include estimates for various fringe benefit and
other transactions normally determined or settled at year-end.
Operating results for the quarter and six months ended June 30, 2000
are not necessarily indicative of trends or results to be expected for
the year ended December 31, 2000. For further information, refer to the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999.
2. PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," effective for fiscal
years beginning after June 15, 2000. The new statement requires all
derivatives to be recorded on the balance sheet at fair value and
establishes new accounting rules for hedging instruments. The
transition provisions of SFAS 133 permit a one-time transfer of debt
securities categorized as held-to-maturity into the available-for-sale
category without calling into question the entity's intent to hold
other debt securities to maturity in the future. Because the Company
has not historically entered into derivative contracts either to hedge
existing risks or for speculative purposes, adoption of SFAS 133 is not
expected to have a material impact on the consolidated financial
statements.
3. FEDERAL HOME LOAN BANK ADVANCES
During the first six months of 2000, the Company drew two advances
totaling $10.0 million under its credit facility with the Federal Home
Loan Bank of Atlanta (FHLB). The first advance, which matures March 17,
2010, accrues interest at an effective rate of 6.00%, payable
quarterly. The 5.0 million advance is convertible into a three-month
Libor-based floating rate advance on or after March 17, 2001 at the
option of the FHLB. Proceeds from the advance were used to fund the
purchase of various U.S. Agency securities. The second $5.0 million
advance, which matures December 1, 2000, accrues interest at an
effective rate of 7.15%, payable monthly. Proceeds from the second
advance were used to meet general liquidity needs. Maximum borrowings
under this credit facility approximate 16% of the bank subsidiary's
total assets; at June 30, 2000, unused borrowings aggregated
approximately $46.4 million. Mortgage-backed securities with aggregate
carrying values of approximately $10.4 million were pledged to
collateralize current and future advances under this line of credit. No
amounts were drawn against this line at December 31, 1999.
4. TREASURY STOCK
In March 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in treasury stock. On April 7, 2000, the Company purchased
144,101 shares of its common stock from one
5
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
group of shareholders at a purchase price of $17.25 per share. The
purchase of the treasury stock decreased the Company's outstanding
common stock from 3,580,797 shares to 3,436,696 shares. The maximum
consideration available for additional treasury purchases at prices to
be determined in the future is $4,514,258. Any acquisition of
additional shares will be dictated by market conditions.
6
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE 1999 ANNUAL REPORT ON FORM
10-K AND THE CONSOLIDATED FINANCIAL STATEMENTS & RELATED NOTES ON PAGES 1 - 6 OF
THIS QUARTERLY FILING.
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation (the Company) is a financial services company
headquartered in Darien, Georgia. Prior to June 25, 1998, the Company had two
bank subsidiaries - Southeastern Bank (SEB) and Southeastern Bank of Florida
(SEBF). At the close of business on June 25, 1998, SEBF, with offices in
Callahan, Hilliard, and Yulee, merged with and into SEB. SEB, a state banking
association also headquartered in Darien, now operates fourteen full-service
banking offices in southeast Georgia and northeast Florida. Unless otherwise
indicated, the ensuing Analysis presumes that SEB and SEBF have operated as a
single entity for all periods presented and discussed.
Prior to January 16, 1998, SEB also had offices in Alachua, Gainesville, and
Jonesville, Florida. On January 16, 1998, SEB sold its three offices in central
Florida to First National Bank of Alachua. Cash, loans, and fixed assets sold by
SEB aggregated approximately $32,159,000; deposits and other liabilities
divested totaled $33,646,000. The Company recognized a pretax gain of $101,908
but after-tax loss of $457,823 on the sale of these branches. The sale of these
locations has enabled the Company to concentrate its resources and strengthen
its presence in its northeast Florida and southeast Georgia markets. For
additional information regarding the sale of the Alachua offices, refer to the
disclosures provided under Results of Operations. SEB's assets totaled
approximately $352,653,000 at June 30, 2000 versus $352,452,000 at March 31,
2000 and $339,801,000 at year-end 1999.
Additionally, prior to mid-1998, the Company had no subsidiaries other than
commercial banks. In 1998, the Company formed an insurance subsidiary, SBC
Financial Services, Inc. (SBCF), to sell insurance and annuity products,
initially to customers in Georgia. The Company has invested $100,000 in SBCF
to-date and expects to make additional capital investments in SBCF during its
first few years of operation. As it develops, SBCF is expected to supplement and
grow existing noninterest income, thereby increasing the Company's profitability
and shareholder value. The insurance subsidiary had a nominal impact on the
Company's financial condition and results of operations during the first half of
2000.
FINANCIAL CONDITION
Consolidated assets exceeded $353 million at June 30, 2000, up $12,822,812 or
3.77% from year-end 1999 and up $12,371,506 or 3.63% from June 30, 1999. The
growth in total assets since 1999 has ensued from growth in deposits and other
funding sources, including advances from the Federal Home Loan Bank (FHLB).
Additional details on deposits and the FHLB advances are provided in the
Liquidity section of this Analysis. During the year-earlier period, total assets
increased 0.91% or $3,062,862.
Investment Securities
On a carrying value basis, investment securities grew $1,235,498 or 0.85% since
year-end 1999. Purchases of securities during the six month period approximated
$9,626,000, and redemptions, $8,394,000. Proceeds from a $5 million FHLB advance
funded the majority of the net securities purchases during the first half of
2000. Consistent with 1999 levels, securities comprised 46% of earning assets at
June 30, 2000. No significant changes have occurred in the investment securities
mix since
7
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
1999. The amortized cost and estimated fair value of investment securities are
delineated in the table below:
- - --------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 2000 COST GAINS LOSSES VALUE
- - --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $102,169 -- $ 3,158 $99,011
Mortgage-backed securities 20,789 $ 2 1,198 19,593
Equity securities 1,088 -- -- 1,088
- - --------------------------------------------------------------------------------------------------------------------
124,046 2 4,356 119,692
Held-to-maturity:
States and political subdivisions 27,455 184 724 26,915
- - --------------------------------------------------------------------------------------------------------------------
Total investment securities $151,501 $ 186 $ 5,080 $146,607
===================================================================================================================
As shown, the market value of the securities portfolio remained approximately 3%
below the cost basis at mid-year 2000; refer to the Capital Adequacy section of
this Analysis for more details. The Company does not have a concentration in the
obligations of any issuer other than the U.S. Government and its agencies.
Loans
Loans, net of unearned income, grew $5,327,912 since the first quarter, or
$12,808,591 year-to-date, to exceed $178 million at June 30, 2000.
Appreciatively, quarter-end loans at June 30, 2000 comprised the largest
quarter-end balance in over two years. The net loans to deposits ratio totaled
60.29% at mid-year 2000 versus 57.18% at December 31, 1999 and 55.21% a year
ago. Growth in the commercial and real estate-construction portfolios fueled the
2000 improvement to-date. Reversing 1999 declines, gross commercial loans
increased $7,790,000 or 11.54% at mid-year 2000 compared to December 31, 1999.
The majority, or 61%, of the improvement in the commercial portfolio was
attributable to growth in nonfarm real estate loans. Management has initiated
various programs to increase loan production and is optimistic that commercial
loan volumes throughout 2000 will, on average, continue to exceed 1999 levels.
Programs initiated to increase loan production emphasize utilization of
competitive pricing on loan products and development of additional loan
relationships, all without compromising portfolio quality. Real
estate-construction loans grew a considerable $3,400,000 or 107.56% at June 30,
2000 compared to December 31, 1999. Most of the loans in the real
estate-construction portfolio are preparatory to customers' attainment of
permanent financing or developer's sale and are, by nature, short-term and
somewhat cyclical; swings in these account balances are normal and to be
expected. Although the Company, like peer institutions of similar size,
originates permanent mortgages for new construction, it traditionally does not
hold or service long-term mortgage loans for its own portfolio. Rather,
permanent mortgages are typically brokered through a mortgage underwriter or
government agency. The Company receives mortgage origination fees for its
participation in these origination transactions; refer to the disclosures
provided under Results of Operations for more details. The real-estate
construction portfolio is expected to decline moderately during the remainder of
2000 as various large land development loans originated in the first quarter
paydown. Although commercial and real estate-construction loans grew, consumer
loans fell $757,000 or 2.03% year-to-date. A softening of consumer demand in the
Company's trade areas was the prime element in the year-to-date results.
Consumer loans remain the Company's highest-yielding interest-earning assets,
and the Company is
8
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
committed to reversing the decline in this portfolio. During
the same period last year, net loans declined $2,109,682 or 1.28%. A drop in
commercial loans outstanding was the principal factor in the 1999 results. Loans
outstanding are presented by type in the table below:
- - -------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
LOANS BY CATEGORY 2000 1999 1999
- - -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Commercial, financial, and agricultural $75,305 $67,515 $65,479
Real estate - construction 6,561 3,161 2,767
Real estate - mortgage(1) 61,461 59,656 60,633
Consumer, including credit cards 36,555 37,312 36,154
- - -------------------------------------------------------------------------------------------------------------------
Loans, gross 179,882 167,644 165,033
Unearned income 1,079 1,650 2,382
- - -------------------------------------------------------------------------------------------------------------------
Loans, net $178,803 $165,994 $162,651
==================================================================================================================
(1) Typically have final maturities of 15 years or less.
The Company had no concentration of loans to borrowers engaged in any single
industry that exceeded 10% of total loans for any of the periods presented.
Although the Company's loan portfolio is diversified, significant portions of
its loans are collateralized by real estate. At June 30, 2000 and December 31,
1999, gross loans secured by real estate approximated $112,968,000 and
$103,170,000. As required by policy, real estate loans are collateralized based
on certain loan-to-appraised value ratios. A geographic concentration in loans
arises given the Company's operations within a regional area of southeast
Georgia and northeast Florida. Commitments to extend credit and standby letters
of credit approximated $18,380,000 at June 30, 2000; because a substantial
amount of these contracts expire without being drawn upon, total contractual
amounts do not represent future credit exposure or liquidity requirements.
UNEARNED INCOME
Primarily reflecting accounting changes made to comply with new tax legislation,
unearned income declined considerably at June 30, 2000 versus the other periods
presented. Specifically, effective January 1999, the IRS prohibits the use of
any method other than the constant, or level, yield method in computing interest
income on short-term consumer loans. Although interest income on most loans has
been recognized using the level yield method, interest income on certain loans
was recognized using the sum-of-the-months digit method. In general, the posting
of loans under the sum-of-the-months digit method created unearned interest
balances and accelerated interest income recognition. As no new loans will be
booked under the sum-of-the-months digit method and, further, as pre-1999 loans
mature or are otherwise redeemed, the interest portion of the unearned balance
is expected to wane. Additionally, the change in timing of interest recognition
on certain short-term consumer loans is projected to lower interest income by
approximately $55,000 in fiscal 2000 as compared to 1999; in 1999, the change in
interest recognition lowered interest income by an estimated $135,000. More
details on the Company's accounting and reporting policies on loans and related
income are contained in the footnotes accompanying the 1999 10-K filing.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans, and
foreclosed real estate balances. Overall, nonperforming assets aggregated
$1,454,000, or less than 0.42% of total assets, at mid-year
9
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
2000. Nonperforming loans, the largest component of nonperforming assets,
approximated $906,000 at mid-year 2000, down $136,000 or 13.05% since December
31, 1999 and down $434,000 or 32.39% since mid-year 1999. As a percent of net
loans, nonperforming loans totaled 0.51% at June 30, 2000 versus 0.63% and 0.82%
at year-end 1999 and June 30, 1999. Approximately 97% of the improvement in
nonperforming loans since 1999 was attributable to reductions in nonaccrual
balances. Nonaccrual balances have not been adjusted for the portion of such
loans wholly or partially guaranteed by the U.S. Small Business Administration.
For the three periods presented, such guarantees would have reduced nonaccrual
balances by $38,000, $44,000, and $51,000. At June 30, 2000, 92.49% of
nonperforming loan balances pertained to four separate borrowers; more
significantly, $640,000 or 70.64% pertained to merely two borrowers and 39% to a
solo borrower. The allowance for loan losses approximated 3.89X the
nonperforming loans balance at mid-year 2000 versus 3.03X a year ago. Foreclosed
real estate balances fell $591,000 or 51.89% since mid-year 1999 to $548,000 at
June 30, 2000. More than 70% of foreclosed real estate balances at June 30 were
derived from funding originally extended to three separate borrowers; further
segregated, 58.21% of total balances applied to two borrowers. Foreclosed real
estate balances remained concentrated in residential real estate at June 30,
2000. Loans to six separate borrowers comprised $487,000 or 28.33% of loans past
due 90 plus days at June 30, 2000; management is unaware of any other material
concentrations within these past due balances. Details on a certain group of
loans that composed the majority of the fluctuations in nonperforming asset
balances last year are provided in later sections of this Analysis. The table
below provides further information about nonperforming assets and loans past due
90 days or more:
- - -------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
NONPERFORMING ASSETS 2000 1999 1999
- - -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Nonaccrual loans:
Commercial, financial, and agricultural $ 454 $ 492 $ 575
Real estate - construction - - 83
Real estate - mortgage 90 175 295
Consumer, including credit cards 8 18 21
- - -------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 552 685 974
Restructured loans(1) 354 357 366
- - -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 906 1,042 1,340
Foreclosed real estate(2) 548 858 1,139
- - -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,454 $1,900 $2,479
==================================================================================================================
Accruing loans past due 90 days or more $1,719 $1,467 $1,559
==================================================================================================================
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foreclosure or in
settlement of debts previously contracted.
All known potential problem loans were included in nonperforming loans for the
three periods presented.
SIGNIFICANT PROBLEM LOANS. Prior to June 30, 1999, a group of loans, primarily
real estate, with principal balances approximating $1,295,000 were recognized as
significantly impaired. During 1999, these problem loans were charged-off in
excess of $500,000 to their estimated net realizable values. The real estate
collateral underlying the balance, or $758,000, of these loans was acquired by
foreclosure and classified as other real estate; through July 31, 2000, $694,000
or 92% of the acquired properties had been sold to third parties. No material
losses, if any, are expected on the sale of the remaining other real
10
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
estate parcels. This group of loans accounted for the majority of the
fluctuations in nonperforming asset balances during 1999 and, to a lesser
extent, in 2000 as well. Management has diligently pursued remedies under law in
seeking to recover the charge-offs on these loans but deems any material
recovery unlikely.
POLICY NOTE. Loans classified as nonaccrual have been placed in nonperforming,
or impaired, status because the borrower's ability to make future principal
and/or interest payments has become uncertain. The Company considers a loan to
be nonaccrual with the occurrence of any one of the following events: a)
interest or principal has been in default 90 days or more, unless the loan is
well-secured and in the process of collection; b) collection of recorded
interest or principal is not anticipated; or c) the income on the loan is
recognized using the cash versus accrual basis of accounting due to
deterioration in the financial condition of the borrower. Smaller balance
consumer loans are generally not subject to the above-referenced guidelines and
are normally placed on nonaccrual status or else charged-off when payments have
been in default 90 days or more. Nonaccrual loans are reduced to the lower of
the principal balance of the loan or the market value of the underlying real
estate or other collateral. Any impairment in the principal balance is charged
against the allowance for loan losses. Accrued interest on any loan switched to
nonaccrual status is reversed. Interest income on nonaccrual loans, if
subsequently recognized, is recorded on a cash basis. No interest is
subsequently recognized on nonaccrual (or former nonaccrual) loans until all
principal has been collected. Loans are classified as restructured when either
interest or principal has been reduced or deferred because of deterioration in
the borrower's financial position. Foreclosed real estate represents real
property acquired by foreclosure or directly by title or deed transfer in
settlement of debt. Provisions for subsequent devaluations of foreclosed real
estate are charged to operations, while costs associated with improving the
properties are generally capitalized.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. The allowance to net loans ratio totaled 1.97% at
mid-year 2000, up 3 basis points from year-end 1999. Net charge-offs totaled
$297,774, down substantially, or $547,693, from 1999's $845,467, which was up
$580,496 from June 30, 1998. Approximately 63% of the high charge-offs at June
30, 1999 were attributable to the problem loans discussed earlier. Long-term
strategies implemented by management to reduce and minimize charge-off levels
include: a) a revised loan grading system, b) periodic external loan review, c)
formation of a full-time collection department, and d) managerial and staff
changes at various locations. Management is optimistic that charge-off volumes
in 2000 will remain substantially below 1999 levels. The quarterly and six month
provision from income totaled $300,000 and $600,000 at June 30, 2000, unchanged
from the year-earlier period. Activity in the allowance is presented in the
table on the next page.
11
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
SIX MONTHS ENDED JUNE 30, 2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning of year $ 3,223 $ 3,407 $ 3,705
Provision for loan losses 600 600 630
Charge-offs:
Commercial, financial, and agricultural 88 393 130
Real estate - construction - 335 -
Real estate - mortgage 55 95 33
Consumer, including credit cards 415 456 368
- - -------------------------------------------------------------------------------------------------------------------
Total charge-offs 558 1,279 531
- - -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 18 204 46
Real estate - construction - - -
Real estate - mortgage 18 18 5
Consumer, including credit cards 224 211 215
- - -------------------------------------------------------------------------------------------------------------------
Total recoveries 260 433 266
- - -------------------------------------------------------------------------------------------------------------------
Net charge-offs 298 846 265
- - -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at June 30 $ 3,525 $ 3,161 $ 4,070
==================================================================================================================
Net loans outstanding(1) at June 30 $178,803 $162,651 $161,943
==================================================================================================================
Average net loans outstanding(1) at June 30 $171,359 $163,422 $166,570
==================================================================================================================
Ratios:
Allowance to net loans 1.97% 1.94% 2.51%
==================================================================================================================
Net charge-offs to average loans (annualized) 0.35% 1.04% 0.32%
==================================================================================================================
Provision to average loans (annualized) 0.70% 0.73% 0.76%
==================================================================================================================
(1) Net of unearned income
Management believes the allowance was adequate at June 30, 2000 based on
conditions reasonably known to management; however, the allowance may increase
or decrease based on loan growth, changes in internally generated credit
ratings, changes in general economic conditions of the Company's trade areas,
changes in customer bankruptcy filings, or historical loan loss experience.
These factors are analyzed and reviewed on a continual basis to determine if any
changes to the provision for loan losses should be made. Management has budgeted
a loan loss provision of $600,000 for the second half of 2000.
Other Assets
Capital expenditures exceeded $653,000 during the first six months of 2000.
Final payments on the check imaging, internet banking, and voice banking systems
comprised the bulk of the 2000 expenditures to-date. Additional funds were
expended on the purchase of new vehicles for the bank fleet and the installation
of new drive-in units and ATMs at various locations. As projected, the total
cost of the check imaging system, including the down payment made in mid-1999,
approximated $700,000. The managerial decision to purchase the check imaging
system was predicated on the following known benefits:
o Customer Service. The imaging system supplements and otherwise
enhances existing customer service by providing, on paper or
electronic device, compact statements and other
12
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
documents that are easier to read, store, and reconcile than
existing alternatives. The system also facilitates faster retrieval
of documents for customer research. Both commercial and consumer
customers benefit.
o Lower Overhead. The imaging system reduces certain overhead costs
inherent in document processing, including postage, proof
maintenance, supplies, and personnel expense.
o Competitive Edge. The imaging system provides an additional
marketing tool for promoting SEB services.
The imaging system was fully operational by February 29, 2000.
The remaining costs relative to the internet, or PC, and voice banking systems
aggregated approximately $30,000. Like the imaging system, the internet and
voice banking systems augment existing customer service and provide competitive
advantages in promoting and selling SEB services. With the voice banking system,
customers can access account balance and other information with one quick phone
call, 24 hours a day, 7 days a week. The internet banking system available
through the Company's website at WWW.SOUTHEASTERNBANK.COM serves as an
alternative delivery channel for many bank services: Customers can open and
monitor accounts on-line, transfer funds, e-mail customer service
representatives, and pay bills, all at customer convenience. Commercial
customers, particularly those with large transactional volumes, can further
utilize the bill paying, direct deposit, and ACH capabilities of the internet
banking system as part of cash, or treasury, management. Implementation of both
the internet and voice banking systems was completed during the first quarter.
The Company had no material plans or commitments for capital expenditures as of
June 30, 2000. The computer expenditures made in 2000 and other periods
referenced were not made because of, and do not constitute costs of, the Year
2000. For particulars on the Company's transition to the Year 2000 and costs
adhering to same, refer to the Year 2000 section of this Analysis.
Adjusted for the net reductions in foreclosed real estate previously mentioned,
other assets jumped $364,432 or 5.89% at June 30, 2000 compared to year-end
1999. An increase in interest receivables was the predominant factor in the
year-to-date results. Accruals derived from overall higher loan volumes produced
most of the interest receivables growth. The decline in intangible assets was
attributable to regular amortization. Deposit base premiums and goodwill compose
the intangible assets balance.
LIQUIDITY
Liquidity is managed to ensure sufficient cash flow to satisfy demands for
credit, deposit withdrawals, and other corporate needs. The Company meets most
of its daily liquidity needs through the management of cash and federal funds
sold. Additional liquidity is provided by payments and maturities, including
both principal and interest, of the loan and investment securities portfolios.
At June 30, 2000, loans(1) and investment securities with carrying values
exceeding $54 million and $6 million were scheduled to mature in one year or
less. The investment portfolio has also been structured to meet liquidity needs
prior to asset maturity when necessary. The Company's liquidity position is
further strengthened by its access, on both a short- and long-term basis, to
local and regional funding sources.
Funding sources primarily comprise customer-based core deposits but also include
borrowed funds and cash flows from operations. Customer-based core deposits, the
Company's largest and most cost-effective source of funding, comprised 85% of
the funding base at June 30, 2000 compared to 83% at year-end 1999. Borrowed
funds, which variously encompass U.S. Treasury demand notes, federal funds
13
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
purchased, and FHLB advances, totaled $13,382,863 at mid-year 2000 versus
$5,859,498 at December 31, 1999. More specifically, the maximum amount of U.S.
Treasury demand notes available to the Company at June 30, 2000 totaled
$3,000,000, of which $2,497,863 was outstanding and $502,137 undrawn. Unused
borrowings under unsecured federal funds lines of credit from other banks, each
with varying terms and expiration dates, totaled $23,115,000. Additionally,
under a credit facility with the FHLB, the Company can borrow up to 16% of SEB's
total assets; at June 30, 2000, unused borrowings approximated $46.4 million.
Refer to the subsection entitled FHLB Advances for details on the Company's
outstanding balance with the FHLB. Cash flows from operations also constitute a
significant source of liquidity. Net cash from operations derives primarily from
net income adjusted for noncash items such as depreciation and amortization,
accretion, and the provision for loan losses.
Management believes the Company has the funding capacity, from operating
activities or otherwise, to meet its financial commitments in 2000, including
any commitments for capital expenditures described in the Other Assets section
of this Analysis. Refer to the Capital Adequacy section of this Analysis for
details on intercompany dividend policy.
(1) No cash flow assumptions other than final contractual maturities have been
made for installment loans. Nonaccrual loans are excluded.
Deposits
Deposits exceeded $296 million at June 30, 2000, increasing $6,309,232 or 2.17%
since December 31, 1999. Noninterest-bearing deposits grew $2,767,837 or 5.25%,
while interest-bearing deposits climbed $3,541,395 or 1.49%. Noninterest-bearing
deposits comprised 18.69%, and interest-bearing deposits, 81.31%, of total
deposits at June 30, 2000. The distribution of interest-bearing balances at June
30, 2000 and certain comparable quarter-end dates is shown in the table below:
- - ---------------------------------------------------------------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999
- - ---------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
DEPOSITS BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
- - ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-bearing demand deposits(1) $47,926 19.87% $45,569 19.18% $43,530 18.10%
Savings 77,076 31.96% 72,348 30.45% 75,130 31.25%
Time certificates < $100,000 71,031 29.46% 75,251 31.67% 77,121 32.08%
Time certificates >= $100,000 45,122 18.71% 44,445 18.70% 44,657 18.57%
- - ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $241,155 100.00% $237,613 100.00% $240,438 100.00%
====================================================================================================================
(1) NOW and money market accounts.
The composition of average deposits and the fluctuations therein at June 30 for
each of the last three years is shown in the Average Balances table included in
the Operations section of this Analysis.
FHLB Advances
During the first six months of 2000, the Company drew two advances totaling
$10.0 million under its credit facility with the FHLB. The first advance, which
matures March 17, 2010, accrues interest at an effective rate of 6.00%, payable
quarterly. The $5.0 million advance is convertible into a three-month
Libor-based floating rate on or after March 17, 2001 at the option of the FHLB.
Proceeds from the advance were used to fund the purchase of various U.S. Agency
securities. The second $5.0 million advance, which matures December 1, 2000,
accrues interest at an effective interest rate of 7.15%, payable monthly.
Proceeds from the second advance were used to meet general liquidity needs.
14
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mortgage-backed securities with aggregate carrying values of approximately $10.4
million were pledged to collateralize current and future advances under this
line of credit. No amounts were drawn against this line at December 31, 1999.
INTEREST RATE AND MARKET RISK/INTEREST RATE SENSITIVITY
The normal course of business activity exposes the Company to interest rate
risk. Fluctuations in interest rates may result in changes in the fair market
value of the Company's financial instruments, cash flows, and net interest
income. The Company attempts to maintain a relatively neutral interest rate
sensitivity position by structuring the balance sheet so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any time constitute interest rate sensitivity. An indicator of
interest rate sensitivity is the difference between interest rate sensitive
assets and interest rate sensitive liabilities; this difference is known as the
interest rate sensitivity gap.
The gap analysis below provides a snapshot of the Company's interest rate
sensitivity position at June 30, 2000:
- - --------------------------------------------------------------------------------------------------------------------
REPRICING WITHIN
-------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
JUNE 30, 2000 MONTHS MONTHS YEARS YEARS TOTAL
- - --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
INTEREST RATE SENSITIVE ASSETS
Securities(1) $ 2,307 $ 5,939 $102,437 $39,730 $150,413
Loans, gross(2) 54,219 26,079 69,652 29,380 179,330
- - --------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 56,526 32,018 172,089 69,110 329,743
- - --------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 157,138 58,797 25,194 26 241,155
Federal funds purchased 885 - - - 885
U.S. Treasury demand note 2,498 - - - 2,498
Federal Home Loan Bank advances - 5,000 - 5,000 10,000
- - --------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 160,521 63,797 25,194 5,026 254,538
- - --------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(103,995) $(31,779) $146,895 $64,084 $75,205
====================================================================================================================
CUMULATIVE GAP $(103,995) $(135,774) $11,121 $75,205
====================================================================================================================
Ratio of cumulative gap to total
rate sensitive assets (31.54)% (41.18)% 3.37% 22.81%
====================================================================================================================
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 35.21% 39.47% 104.46% 129.55%
====================================================================================================================
Cumulative gap at December 31, 1999 $(99,992) $(142,141) $ 3,459 $75,466
====================================================================================================================
Cumulative gap at June 30, 1999 $(90,723) $(136,074) $ (3,362) $76,754
====================================================================================================================
(1) Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for
mortgage-backed securities is based on expected average lives which may be
different from the contractual terms. Equity securities are excluded.
(2) No cash flow assumptions other than final contractual maturities have been
made for installment loans with fixed rates. Nonaccrual loans are excluded.
(3) NOW, money market, and savings account balances are included in the 0-3
months repricing category.
15
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As shown in the table above, the Company's gap position remained negative
through the short-term repricing intervals at June 30, 2000, totaling $(103,995)
at three months and $(135,774) through one-year. A negative gap position
indicates that the Company is liability sensitive, and, hence, its rate
sensitive liabilities will reprice faster than its rate sensitive assets.
Excluding traditionally nonvolatile NOW and savings balances from the gap
calculation, the cumulative gap at June 30, 2000 totaled $(4,110) at three
months and $(35,889) at twelve months. As discussed in earlier sections of this
Analysis, loans outstanding jumped an appreciative $12,808,591 or 7.72% since
year-end 1999, comprising the largest quarter-end balance since the Alachua
divestiture. Management is optimistic that continuing growth in loans
outstanding, particularly variable rate loans tied to prime or a similar index,
will likewise improve the gap position. In prior periods, declines in loans had
necessitated placement of substantial funds in alternative interest-earning
assets, principally investment securities with contractual maturities exceeding
one year.
The gap analysis does not fully reflect the complexities of the Company's
interest rate sensitivity position and the impact of interest rate movements on
the Company's financial position, cash flows, and interest income. For example,
the gap analysis presumes that all loans(2) and securities(1) will perform
according to their contractual maturities when, in many cases, actual loan terms
are much shorter than the original terms and securities are subject to early
redemption. In addition, the repricing of various categories of assets and
liabilities is subject to competitive pressures, customer needs, and other
external factors. Although the Company monitors and adjusts its exposure to
interest rate risks within specific policy guidelines based on its view of
current and expected market conditions, the Company's financial position and
results of operations could be significantly impacted by changes in interest
rate and market risks.
(1)(2) See notes 1 and 2 on preceding page.
CAPITAL ADEQUACY
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. These regulations
define capital as either Tier 1 (primarily shareholders' equity) or Tier 2
(certain debt instruments and a portion of the allowance for loan losses). The
Company and SEB are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to
risk-weighted assets) of 8%, and Tier 1 leverage ratio (Tier 1 to average
quarterly assets) of 4%. To be considered a "well-capitalized" institution, the
Tier 1 capital, total capital, and Tier 1 leverage ratios must equal or exceed
6%, 10%, and 5%, respectively. Banks and bank holding companies are prohibited
from including unrealized gains and losses on debt securities in the calculation
of risk-based capital but are permitted to include up to 45 percent of net
unrealized pre-tax holding gains on equity securities in Tier 2 capital. The
Company did not have any unrealized gains on equity securities includible in the
risk-based capital calculations for any of the periods presented. The Company is
committed to maintaining its well-capitalized status.
Due to the purchase of treasury stock, capital ratios declined at June 30, 2000
compared to 1999. Capital ratios for the most recent periods are presented in
the table on the next page.
16
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - -------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
CAPITAL RATIOS(1) 2000 1999 1999
- - -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Tier 1 capital:
Realized shareholders' equity $43,377 $44,028 $42,455
Intangible assets and other adjustments (1,213) (1,309) (1,391)
- - -------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 42,164 42,719 41,064
- - ------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,425 2,278 2,244
Allowable long-term debt - - -
- - ------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 2,425 2,278 2,244
- - ------------------------------------------------------------------------------------------------------------------
Total risk-based capital $44,589 $44,997 $43,308
==================================================================================================================
Risk-weighted assets $192,873 $181,326 $178,588
==================================================================================================================
Risk-based ratios:
Tier 1 capital 21.86% 23.56% 22.99%
==================================================================================================================
Total risk-based capital 23.12% 24.82% 24.25%
==================================================================================================================
Tier 1 leverage ratio 11.96% 12.57% 12.08%
==================================================================================================================
Realized shareholders' equity to assets 12.18% 12.82% 12.41%
==================================================================================================================
(1) The Company is not subject to the market risk capital guidelines
promulgated by the regulatory authorities; these guidelines created Tier 3
capital.
On a per share basis, realized book value rose 2.60% during the six month period
to $12.62 at June 30, 2000. Dividends declared totaled $0.20 year-to-date at
June 30, 2000, unchanged from 1999 but up substantially, or 50%, from 1998. For
specifics on the Company's dividend policy, refer to the subsection immediately
following. Accumulated other comprehensive income, which measures net
fluctuations in the fair values of investment securities, improved a slight $822
at June 30, 2000 compared to year-end 1999. Movement in interest rates remained
the overriding factor in the fair value results. The Financial Condition section
of this Analysis contains further details on investment securities and
associated fair values.
In March 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in treasury stock. On April 7, 2000, the Company purchased 144,101
shares of its common stock from one group of shareholders at a purchase price of
$17.25 per share. The purchase of the treasury stock decreased the Company's
outstanding common stock from 3,580,797 shares to 3,436,696 shares. The maximum
consideration available for additional treasury purchases, at prices to be
determined in the future, is $4,514,258. Any acquisition of additional shares
will be dictated by market conditions. In accordance with generally accepted
accounting principles, 1999 and other prior period amounts have not been
restated to reflect the treasury stock purchase.
Refer to the Other Assets and Liquidity sections of this Analysis for details on
planned capital expenditures.
Dividend Policy
The Parent Company is a legal entity separate and distinct from its
subsidiaries, and its revenues and liquidity position depend primarily on the
payment of dividends from its subsidiaries. State banking
17
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
regulations limit the amount of dividends SEB may pay without prior approval of
the regulatory agencies. Year-to-date, SEB has paid $2,731,000 in dividends to
the Company. A $1,500,000 special dividend approved by the regulators helped the
Company fund the initial treasury stock purchase described in the preceding
section. The additional $1,231,000 payout represented 50% of the $2,462,000 in
regular cash dividends available to the Company in 2000 without prior regulatory
approval. The Company uses regular dividends paid by SEB in order to pay
quarterly dividends to its own shareholders. Management anticipates that the
Company will continue to pay cash dividends on a recurring basis.
RESULTS OF OPERATIONS
Net income for the 2000 second quarter aggregated $1,269,512 or $0.37 per share,
up $64,177 or 5.32% from the 1999 second quarter but virtually unchanged from
the 2000 first quarter. Year-to-date, net income grew $227,059 or 9.83% to
$2,537,070 at June 30, 2000 from $2,310,011 in 1999. Similarly, per share income
for the half-year period improved $0.07 to $0.72 at June 30, 2000 from $0.65 in
1999. As further discussed in the next subsection of this Analysis, the earnings
improvement at June 30, 2000 was attributable to a 6.95% rise in net interest
income. Six month earnings increased $492,858 or 27.12% in 1999 when compared to
the same period in 1998. The most significant factor affecting comparative
results was the $457,823 nonrecurring after-tax loss associated with the sale of
the central Florida locations in January 1998. The effects of the Alachua
divestiture on the Company's results of operations, including the nonrecurring
tax effects, were anticipated by management and represented a long-term
strategic move to enable the Company to focus on the creation of more profitable
operations within its southeast Georgia and northeast Florida markets.
Net Interest Income
Net interest income grew $253,058 or 6.77% during the second quarter of 2000
compared to 1999. For the year-to-date period, net interest income exceeded
$7,922,000, improving $514,843 or 6.95% from 1999. Likewise, the net interest
margin and net interest spread increased to 5.06% and 3.96%, respectively, from
4.88% and 3.77% a year ago. Interest earnings on loans and investment securities
improved $417,235 and $320,005 over year-to-date results in 1999 while earnings
on federal funds sold fell $155,760. Overall improvements in average asset
balances precipitated the year-to-date results, because asset yields increased
only marginally from 1999. Although interest expense on deposits fell $96,218 or
1.75%, interest expense on other borrowed funds increased $162,855, resulting in
a $66,637 or 1.21% hike in total interest expense year-to-date. Refer to the
Liquidity section of this Analysis for more details on FHLB advances and other
borrowed funds. As a group, cost of funds remained slightly below 1999 levels,
totaling 4.51% at June 30, 2000 versus 4.59% at June 30, 1999. The 8 basis point
drop in cost of funds resulted from reductions in deposit rates at June 30, 2000
versus 1999. Given the rising rate environment currently propelled by the
Federal Reserve, management expects costs of funds and corresponding interest
expense to increase during the remainder of 2000 as deposits and other funds
reprice at higher levels. During the first six months of 1999 compared to 1998,
net interest income declined $123,362 or 1.64%. A drop in average balances and
yields on commercial loans produced most of the 1999 decline. Cash flows from
declines in loans and other sources in 1999 were placed in investment securities
which yield, on average, considerably less than loans of the same duration.
The intense competition for loans and deposits continues in 2000 and shows no
sign of abating. The high number of new and existing financial institutions in
the Company's market areas essentially guarantees downward pressure on net
interest spreads and margins as all participants struggle to amass and grow
market share. Volume of assets and deposits will become even more important as
margins decline. Strategies implemented by management to increase average loans
outstanding include utilization of more competitive pricing on loan products and
development of additional loan relationships, all without compromising portfolio
quality. Management's strategy for deposits is to reduce costs of funds and
employ alternative sources of financing when feasible. Comparative details about
average balances, income/expense, and average yields earned and rates paid on
interest-earning assets and liabilities at June 30 for each of the last three
years are provided in the table on the next page.
Noninterest Income and Expense
Noninterest income declined $30,222 or 1.76% year-to-date at June 30, 2000
compared to 1999. A $41,202 drop in service charges on deposit accounts was the
main element in the six month results. The other operating portion of
noninterest income aggregated $498,886 during the first half of 2000. By type
and amount, the chief components of other operating income at June 30, 2000 were
mortgage origination fees, $78,234; commissions on the sale of credit life
insurance (generated by SEB), $109,992; safe deposit box rentals, $55,113; and
income on sale of check products, $30,257. Together, these four income items
comprised 54.84% of other operating income year-to-date. Salaries and employee
benefits rose an additional $115,250 during the second quarter, or $203,662
during the six month period, to $3,085,015 year-to-date at June 30, 2000
compared to 1999. The vast majority, or 84%, of employee expenses remained
concentrated in salaries and other direct compensation, including related
payroll taxes, at June 30, 2000. Profit-sharing accruals and other fringe
benefits constituted the remaining 7% and 9% of employee expenses. The division
of employee expenses between compensation, profit-sharing, and other fringe
benefits remained consistent with historical norms at June 30, 2000 and 1999.
When compared to the same period in the prior year, net occupancy and equipment
expense increased 9.97% or $87,603 year-to-date at June 30, 2000 and 3.76% at
June 30, 1999. The increase in both periods resulted largely from higher
computer costs, including depreciation expense associated with the new check
imaging, internet banking, and voice banking systems. Other operating expenses
fell 9.50% or $142,088 at June 30, 2000 compared to 1999. A net improvement on
sales of foreclosed real estate was the key factor in the 2000 results. Other
operating expenses grew $26,942 or 1.83% at June 30, 1999 compared to 1998.
Besides marketing and supplies expense, no individual component of other
operating expenses aggregated or exceeded 10% of the total at June 30, 2000 or
1999.
YEAR 2000
Information technology products and equipment were expected to experience
miscalculations, malfunctions, or disruptions when attempting to process
information containing dates subsequent to December 31, 1999, if not
successfully remediated. These potential problems were collectively referred to
as the "Year 2000" problem. Over the past several years, the Company developed
and implemented a plan to address the anticipated impacts of the Year 2000
problem on its data processing systems, non-information technology systems, and
related infrastructure. The Company surveyed selected third parties, including
major loan customers, vendors, and suppliers, to determine the status of their
Year 2000 compliance programs. Additionally, the Company prepared contingency
plans outlining procedures to be implemented if the Company or significant third
parties experienced disruptions to critical business activities as a result of
the Year 2000 problem.
18
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES
PAID
=================================================================================================================================
2000 1999 1998
------------------------------------------------------------------------------------------
AVERAGE BALANCES(6) AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
SIX MONTHS ENDED JUNE 30, BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
================================================================================================================================
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans, net(1)(2)(4) $171,359 $ 8,994 10.50% $163,422 $ 8,545 10.46% $166,570 $ 9,327 11.20%
Federal funds sold 4,299 124 5.77% 11,931 280 4.69% 16,826 459 5.46%
Taxable investment securities(3) 127,241 3,817 6.01% 118,137 3,505 5.94% 96,564 2,913 6.03%
Tax-exempt investment securities(3)(4) 24,885 946 7.60% 23,969 933 7.79% 18,512 765 8.26%
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $327,784 $13,881 8.47% $317,459 $13,263 8.36% $298,472 $13,464 9.02%
- - -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $47,248 $ 664 2.81% $45,488 $ 651 2.86% $39,333 $ 591 2.99%
Savings 76,743 1,544 4.02% 74,616 1,511 4.05% 72,578 1,663 4.58%
Time deposits 117,815 3,191 5.42% 119,426 3,334 5.58% 114,785 3,366 5.86%
Federal funds purchased 1,027 36 6.75% 142 3 4.75% - - -
U. S. Treasury demand note 994 29 5.84% 660 16 4.85% 996 27 5.42%
Federal Home Loan Bank advances 3,737 117 6.26% - - - - - -
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $247,564 $ 5,581 4.51% $240,332 $ 5,515 4.59% $227,692 $ 5,647 4.96%
===============================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $80,220 $77,127 $70,780
===============================================================================================================================
INTEREST RATE SPREAD 3.96% 3.77% 4.06%
===============================================================================================================================
NET INTEREST INCOME $ 8,300 $ 7,748 $ 7,817
===============================================================================================================================
NET INTEREST MARGIN 5.06% 4.88% 5.24%
===============================================================================================================================
(1) Average loans are shown net of unearned income. Nonperforming loans are
included.
(2) Includes loan fees.
(3) Securities are presented on an amortized cost basis. Investment securities
with original maturities of three months or less are included, as
applicable.
(4) Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustment has been made for any state tax benefits.
(5) NOW and money market accounts.
(6) Averages presented generally represent average daily balances.
19
The Company successfully completed its transition to the Year 2000 with no
impact on the Company's results of operations or financial condition other than
the cost of the project. In addition, the Company is unaware of any significant
third party relationships which were negatively impacted by their lack of Year
2000 readiness. However, given the many elements and potential consequences
associated with Year 2000 compliance, there can be no assurance that unforeseen
circumstances may not arise, or that the Company will not in the future identify
equipment or systems which are not Year 2000 compliant.
Costs
Except for overhead costs associated with staff development & implementation of
its Year 2000 plan and replacement of one non-critical system at a cost of
approximately $5,000, the Company did not, in prior years incur, and has not in
2000 incurred, any significant costs related to the Year 2000 issue. The Company
began leasing new operating system hardware in 1998; the newly leased hardware
replaced a hardware system owned by the Company that was fully depreciated.
Because replacement of the operating system hardware was not accelerated due to
Year 2000 issues, the new lease amounts are not being disclosed as Year 2000
costs. The Company has not incurred any incremental Year 2000 costs in regards
to its main software system.
For further information regarding Year 2000 matters, refer to the disclosures
under Forward-Looking Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Company are discussed in Note 2
to the Consolidated Financial Statements and, further, in the 1999 Form 10-K
previously filed with the Securities and Exchange Commission.
Various other accounting proposals affecting the banking industry are pending
with the Financial Accounting Standards Board. Given the inherent uncertainty of
the proposal process, the Company cannot assess the impact of any such proposals
on its financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives have made, and may continue to make, various
written or oral forward-looking statements with respect to business and
financial matters, including statements contained in this report, filings with
the Securities and Exchange Commission, and reports to shareholders. Generally,
the words "believe," "expect," "intend," "estimate," "anticipate," "project,"
"will," "should," and similar expressions identify forward-looking statements.
All statements which address operating performance, events or developments that
we expect or anticipate will occur in the future, including statements related
to loan growth, deposit growth, per share growth, and statements expressing
general sentiment about future operating results and non-historical information,
are forward-looking statements within the meaning of the Act. The
forward-looking statements are and will be based on management's then current
views and assumptions regarding future events and operating performance. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements in light of new information or future events.
20
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain factors that could affect financial performance or cause actual results
to vary significantly from estimates contained in or underlying forward-looking
statements include:
o Interest rate fluctuations and other market conditions.
o Strength of the consumer and commercial credit sectors as well as
real estate markets.
o Changes in laws and regulations, including changes in accounting
standards, monetary policies, and taxation requirements (including
tax rate changes, new tax laws, and revised tax law
interpretations).
o Competitive pricing and other pressures on loans and deposits and
the Company's ability to maintain market shares in its trade
areas.
o Unforeseen circumstances affecting Year 2000 compliance by the
Company and its vendors, suppliers, and loan customers.
o The outcome of litigation which depends on judicial
interpretations of law and findings of juries.
o Other risks and uncertainties as detailed from time to time in
Company filings with the Securities and Exchange Commission.
The foregoing list of factors is not exclusive. This Analysis should be read in
conjunction with the consolidated financial statements and related notes.
21
SOUTHEASTERN BANKING CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(NOT APPLICABLE)
ITEM 2. CHANGES IN SECURITIES
(NOT APPLICABLE)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(NOT APPLICABLE)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(NOT APPLICABLE)
ITEM 5. OTHER INFORMATION
(NOT APPLICABLE)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
EXHIBIT TABLE PAGE
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Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
Exhibit 99 Report of Independent Certified Public Accountants
(b) Reports on Form 8-K - NONE
SOUTHEASTERN BANKING CORPORATION
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(REGISTRANT)
By: /s/ S. MICHAEL LITTLE
-----------------------------------------------
S. MICHAEL LITTLE, EXECUTIVE VICE PRESIDENT
By: /s/ ALYSON GRAY
-----------------------------------------------
ALYSON GRAY, VICE PRESIDENT
Date: AUGUST 14, 2000
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