SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934
For the quarterly period ended March 31, 2007.
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or
Transition Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the transition period from to .
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Commission File No. 0-23980
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Southeastern Bank Financial Corporation
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(Exact name of registrant as specified in its charter)
Georgia 58-2005097
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(State of Incorporation) (I.R.S. Employer Identification No.)
3530 Wheeler Road, Augusta, Georgia 30909
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(Address of principal executive offices)
(706) 738-6990
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check whether the issuer is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of "accelerated filer and
large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
5,432,514 shares of common stock, $3.00 par value per share, outstanding as
of April 30, 2007.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006 3
Consolidated Statements of Income for the Three Months
ended March 31, 2007 and 2006 4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
Part II Other Information
Item 1. Legal Proceedings *
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits 29
Signature 30
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
ASSETS 2007 2006
--------------- ---------------
Cash and due from banks $ 27,550,298 $ 25,709,915
Federal funds sold 52,027,000 14,688,000
Interest-bearing deposits in other banks 512,690 512,690
--------------- ---------------
Cash and cash equivalents 80,089,988 40,910,605
Investment securities
Available-for-sale 203,052,083 199,135,716
Held-to-maturity, at cost (fair values of
$1,988,286 and $3,048,196, respectively) 1,935,488 2,970,619
Loans held for sale 9,870,968 14,857,315
Loans 764,287,169 735,111,615
Less allowance for loan losses (10,273,905) (9,776,779)
--------------- ---------------
Loans, net 754,013,264 725,334,836
Premises and equipment, net 23,955,291 23,402,588
Accrued interest receivable 5,900,961 5,982,654
Bank-owned life insurance 16,146,854 15,982,052
Restricted equity securities 5,011,981 4,936,281
Other assets 7,606,427 7,689,596
--------------- ---------------
$1,107,583,305 $1,041,202,262
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 111,366,348 $ 106,846,160
Interest-bearing:
NOW accounts 131,914,257 119,334,300
Savings 282,749,595 255,065,766
Money management accounts 50,245,625 45,897,176
Time deposits over $100,000 210,766,546 193,860,714
Other time deposits 87,589,731 80,758,973
--------------- ---------------
874,632,102 801,763,089
Federal funds purchased and securities sold
under repurchase agreements 61,328,650 70,019,551
Advances from Federal Home Loan Bank 60,000,000 60,000,000
Other borrowed funds 900,000 1,000,000
Accrued interest payable and other liabilities 8,925,585 9,495,498
Subordinated debentures 20,000,000 20,000,000
--------------- ---------------
Total liabilities 1,025,786,337 962,278,138
--------------- ---------------
Stockholders' equity:
Common stock, $3.00 par value; 10,000,000 shares
authorized; 5,434,045 and 5,433,285 shares issued in
2007 and 2006, respectively; 5,432,945 and 5,432,854
shares outstanding in 2007 and 2006, respectively 16,302,135 16,299,855
Additional paid-in capital 39,103,814 38,989,058
Retained earnings 27,339,916 25,287,006
Treasury stock, at cost; 1100 and 431 shares in
2007 and 2006, respectively (42,350) (16,809)
Accumulated other comprehensive loss, net (906,547) (1,634,986)
--------------- ---------------
Total stockholders' equity 81,796,968 78,924,124
--------------- ---------------
$1,107,583,305 $1,041,202,262
=============== ===============
See accompanying notes to consolidated financial statements.
3
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
------------------------
2007 2006
----------- -----------
Interest income:
Loans, including fees $15,503,670 $11,812,088
Investment securities 2,611,334 2,456,072
Federal funds sold 366,082 150,593
Interest-bearing deposits in other banks 6,490 7,975
----------- -----------
Total interest income 18,487,576 14,426,728
----------- -----------
Interest expense:
Deposits 7,492,193 4,918,651
Federal funds purchased and securities sold
under repurchase agreements 867,145 683,908
Other borrowings 1,074,739 846,988
----------- -----------
Total interest expense 9,434,077 6,449,547
----------- -----------
Net interest income 9,053,499 7,977,181
Provision for loan losses 575,798 503,792
----------- -----------
Net interest income after provision
for loan losses 8,477,701 7,473,389
----------- -----------
Noninterest income:
Service charges and fees on deposits 1,397,016 1,352,144
Gain on sales of loans 1,284,278 1,254,345
Investment securities gains, net 33,191 -
Retail investment income 323,239 167,411
Trust service fees 273,536 192,465
Increase in cash surrender value of
bank-owned life insurance 164,802 139,270
Miscellaneous income 167,679 149,625
----------- -----------
Total noninterest income 3,643,741 3,255,260
----------- -----------
Noninterest expense:
Salaries and other personnel expense 4,795,507 4,439,980
Occupancy expenses 760,344 748,736
Other operating expenses 2,266,935 1,977,171
----------- -----------
Total noninterest expense 7,822,786 7,165,887
----------- -----------
Income before income taxes 4,298,656 3,562,762
Income tax expense 1,539,376 1,102,787
----------- -----------
Net income $ 2,759,280 $ 2,459,975
=========== ===========
Basic net income per share $ 0.51 $ 0.47
=========== ===========
Diluted net income per share $ 0.50 $ 0.46
=========== ===========
Weighted average common shares outstanding 5,433,639 5,273,688
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 5,503,845 5,327,383
=========== ===========
See accompanying notes to consolidated financial statements.
4
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2007 2006
--------------- ---------------
Cash flows from operating activities:
Net income $ 2,759,280 $ 2,459,975
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 367,394 376,947
Provision for loan losses 575,798 503,792
Net accretion of discount on investment securities (64,551) (50,439)
Increase in CSV of bank owned life insurance (164,802) (139,270)
Stock options compensation cost 133,809 69,706
Loss (Gain) on disposal of premises and equipment 43,016 (2,941)
Gain on sales of loans (1,284,278) (1,254,345)
Real estate loans originated for sale (63,281,103) (60,698,915)
Proceeds from sales of real estate loans 69,551,728 67,629,556
Decrease in accrued interest receivable 81,693 14,230
Decrease (Increase) in other assets 63,720 (707,038)
(Decrease) Increase in accrued interest payable and other liabilities (569,913) 36,823
--------------- ---------------
Net cash provided by operating activities 8,211,791 8,238,081
--------------- ---------------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 15,697,534 6,420,409
Proceeds from maturities of held-to-maturity securities 1,035,000 -
Purchase of available for sale securities (18,563,981) (12,611,248)
Purchase of Federal Home Loan Bank stock (75,700) -
Net increase in loans (29,491,577) (31,576,989)
Purchase of Bank-owned life insurance - (3,500,000)
Additions to premises and equipment (971,313) (295,887)
Proceeds from sale of premises and equipment 8,200 6,638
--------------- ---------------
Net cash used in investing activities (32,361,837) (41,557,077)
--------------- ---------------
Cash flows from financing activities:
Net increase in deposits 72,869,013 61,448,017
Net decrease in federal funds purchased and
securities sold under repurchase agreements (8,690,901) (10,527,362)
Payments of Federal Home Loan Bank advances - (5,000,000)
Proceeds from subordinated debentures - 10,000,000
Principal payments on other borrowed funds (100,000) (650,000)
Purchase of treasury stock (42,350) -
Payment of cash dividends (706,370) (685,853)
Proceeds from stock options exercised 37 164,088
--------------- ---------------
Net cash provided by financing activities 63,329,429 54,748,890
--------------- ---------------
Net increase in cash and cash equivalents $ 39,179,383 $ 21,429,894
Cash and cash equivalents at beginning of period 40,910,605 22,563,056
--------------- ---------------
Cash and cash equivalents at end of period $ 80,089,988 $ 43,992,950
=============== ===============
Supplemental disclosures of cash paid during the period for:
Interest $ 9,763,822 $ 6,605,609
=============== ===============
Income taxes $ 816,891 $ 445,000
=============== ===============
See accompanying notes to consolidated financial statements.
5
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2007
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Southeastern Bank Financial Corporation (the "Company"), and its wholly-owned
subsidiaries, Georgia Bank & Trust Company (the "Bank") and Southern Bank &
Trust (the "Thrift"). Significant intercompany transactions and accounts are
eliminated in consolidation.
The financial statements for the three months ended March 31, 2007 and 2006 are
unaudited and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's annual report on
Form 10-K for the year ended December 31, 2006.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations and cash flows for the interim
periods have been made. All such adjustments are of a normal recurring nature.
The results of operations for the three months ended March 31, 2007 are not
necessarily indicative of the results of operations which the Company may
achieve for the entire year.
Some items in the prior period financial statements were reclassified to conform
to the current presentation.
Note 2 - Comprehensive Income
Other comprehensive income for the Company consists of changes in net unrealized
gains and losses on investment securities available for sale. Total
comprehensive income for the three months ended March 31, 2007 was $2,268,000
compared to $2,845,000 for the three months ended March 31, 2006.
Note 3 - Stock-based Compensation
During 2000, the Company adopted the 2000 Long-Term Incentive Plan (the 2000
Plan) which allows for stock option awards for up to 253,000 shares of the
Company's common stock to employees, officers, and directors of the Company.
The Company believes that such awards better align the interests of its
employees with those of its
6
shareholders. Under the provisions of the 2000 Plan, the option price is
determined by a committee of the board of directors at the time of grant and may
not be less than 100% of the fair value of the common stock on the date of the
grant of such option. Generally, when granted, these options vest over a
five-year period. However, there were 10,000 options granted in 2005, that vest
based on specific loan growth performance targets. All options must be
exercised within a ten-year period. As of March 31, 2007, all options under
this plan had been issued.
During 2006, the Company adopted the 2006 Long-Term Incentive Plan (the 2006
Plan), approved by shareholders at the annual meeting, which allows for stock
options awards for up to 250,000 shares of the Company's common stock to key
employees, officers, directors and independent contractors providing material
services to the Company. The purpose of the Plan is to enhance stockholder
investment by attracting, retaining and motivating key employees, officers,
directors and independent contractors of the Company, and to encourage stock
ownership by such persons by providing them with a means to acquire a
proprietary interest in the Company's success, and to align the interests of
management with those of stockholders. Under the provisions of the 2006 Plan,
the option price is determined by a committee of the board of directors at the
time of grant and may not be less than 100% of the fair value of the common
stock on the date of the grant of such option. Notwithstanding the foregoing,
in the case of an Incentive Stock Option granted to a Participant who is a Ten
Percent Stockholder, the Option Price shall not be less than one hundred and ten
percent (110%) of the Fair Market Value of the Common Stock on the Date of
Grant. Generally, when granted, these options vest over a five-year period.
All options must be exercised within a ten year period from the date of the
grant; however, options issued to a ten percent stockholder must be exercised
within a five year period from its date of grant. As of March 31, 2007, 62,334
options had been granted under this Plan.
The Company periodically purchases treasury stock and uses it for stock option
exercises, when available. If treasury stock is not available, additional stock
is issued. The Company estimates it will repurchase 25,000 shares or less
during the 2007 year.
The Company will accept as payment for options exercised, at the optionee's
discretion, cash or shares of the Company's stock at market value, or a
combination of cash and Company stock. For the three months ended March 31,
2007, the Company received $37 in cash and stock with a fair market value of
$18,000. For the three months ended March 31, 2006, the Company received
$164,088 in cash and additional stock with a fair market value of $22,000. All
options issued are incentive stock options and therefore, no tax benefit is
realized.
Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004),
Accounting for Stock-Based Compensation, which requires the Company to compute
the fair value of options at the date of grant and to recognize such costs as
compensation expense ratably over the vesting period of the options. For the
three months ended March 31, 2007 and March 31, 2006, the Company recognized
$134,000 and $70,000, respectively, as compensation expense resulting from all
stock options.
7
The fair value of each option is estimated on the date of grant using the
Black-Scholes valuation model that uses the assumptions noted in the following
table. Expected volatility is the measure of the amount by which the share
price is expected to fluctuate during a period. The method used to calculate
historical average annualized volatility is based on the closing price of the
first trade of each month. Expected dividends are based on the Company's
historical pattern of dividend payments. The Company uses historical data to
estimate option exercise and employee termination within the valuation model.
The risk-free rate is the U.S. Treasury note at the time of grant for the
expected term of the option.
The fair value of all options granted was determined using the following
weighted average assumptions as of grant date.
Three Months Ended
March
------------------------
2007 2006
----------- -----------
Options granted 17,500 5,000
Risk-free interest rate 4.88% 4.36%
Dividend yield 2.00% 2.00%
Expected life at date of grant 7.86 7.92
Volatility 38.83% 33.47%
8
A summary of activity for stock options with a specified vesting period follows:
For The Three Months Ended March 31, 2007 and 2006
-----------------------------------------------------
Weighted
Weighted average
average remaining Aggregate
exercise contractual life Intrinsic
Shares price/share in years Value
-------- ------------- ---------------- ----------
Options outstanding - December 31, 2006 237,785 $ 26.64
Granted in 2007 17,500 39.39
Options exercised in 2007 (1,200) (15.05)
-------- -------------
Options outstanding - March 31, 2007 254,085 $ 27.58 7.04 $2,393,481
======== ============= ================ ==========
Exercisable at March 31, 2007 139,205 $ 19.47 5.61 $2,440,264
======== ============= ================ ==========
Options outstanding - December 31, 2005 205,434 $ 21.35
Granted in 2006 5,000 39.25
Options exercised in 2006 (16,874) (11.00)
-------- -------------
Options outstanding - March 31, 2006 193,560 $ 22.72 7.11 $2,847,268
======== ============= ================ ==========
Exercisable at March 31, 2006 96,743 $ 17.12 6.25 $2,019,994
======== ============= ================ ==========
Information related to the stock options that vest over a specified period
follows:
March 31
-----------------
2007 2006
------- --------
Intrinsic value of options exercised $31,085 $455,606
Cash received from option exercises 37 164,088
Fair market value of stock received from option exercises 18,018 21,567
Weighted average grant-date fair value 15.97 14.13
All stock options issued are incentive stock options and therefore, no tax
benefit is realized.
As of March 31, 2007 and 2006, there was $1,702,000 and $707,000, respectively
of total unrecognized compensation cost related to nonvested options that vest
over a five year period. That cost is expected to be recognized over a weighted
average period of 3.8 years and 3.02 years, respectively.
9
The following table provides information for stock options that vest based on
specific loan growth performance targets.
For the Three Months Ended March 31, 2007 and 2006
--------------------------------------------------
Weighted
average
remaining Aggregate
Exercise contractual life Intrinsic
Shares price/share in years Value
------ ------------ ---------------- ----------
Options outstanding- December 31, 2006 10,000 $ 34.30
Granted in 2007 - -
Options exercised in 2007 - -
------ ------------
Options outstanding - March 31, 2007 10,000 $ 34.30 8.3 $ 27,000
====== ============ ================ ==========
Exercisable at March 31, 2007 2,000 $ 34.30 8.3 $ 54,000
====== ============ ================ ==========
Options outstanding- December 31, 2005 10,000 $ 34.30
Granted in 2006 - -
Options exercised in 2006 - -
------ ------------
Options outstanding - March 31, 2006 10,000 $ 34.30 9.3 $ 87,000
====== ============ ================ ==========
Exercisable at March 31, 2006 - $ - - $ -
====== ============ ================ ==========
As of March 31, 2007 and 2006, there was $83,000 and $66,000 of total
unrecognized compensation cost related to nonvested options granted based on
performance. That cost is expected to be recognized over a weighted average
period of 3.3 years and 4.3years, respectively.
Note 4 - Cash Dividend Declared
On January 17, 2007, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend was paid on February 21, 2007 to
shareholders of record as of February 9, 2007.
On April 14, 2007, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend is payable on May 21, 2007 to
shareholders of record as of May 9, 2007.
10
Note 5 - Recently Issued Accounting Standards on the Financial Statements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years
beginning after November 15, 2007. The Company has not completed its evaluation
of the impact of the adoption of this standard.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
Accounting for Purchases of Life Insurance - Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for
Purchases of Life Insurance). This issue requires that a policyholder consider
contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. It also requires that if the
contract provides for a greater surrender value if all individual policies in a
group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual
basis. Lastly, the issue discusses whether the cash surrender value should be
discounted when the policyholder is contractually limited in its ability to
surrender a policy. This issue is effective for fiscal years beginning after
December 15, 2006. The Company does not have any of the above mentioned
consideration in the Company's life insurance policies.
The Company does not expect that the following newly issued accounting standards
will have a material effect on the financial statements when adopted in future
years. In general, these standards revise the accounting for derivatives
embedded in other financial instruments for 2007, revise the recognition and
accounting for servicing of financial assets for 2007, and revise the accrual of
post-retirement benefits associated with providing split-dollar life insurance
for 2008. The Company did not have any of these assets or liabilities as of
March 31, 2007.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. The adoption of FIN
48 had no affect on the Company's financial statements. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. Should the accrual of any interest or penalties relative to unrecognized
tax benefits be necessary, it is the Company's policy to record such accruals in
its income taxes accounts; no such accruals exist as of January 1, 2007. The
Company and its subsidiaries file a consolidated U.S. federal income tax return
and files in the state of Georgia. These returns are subject to examination by
taxing authorities for all years after 2002.
In February 2007 the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities." SFAS No. 159 permits entities to choose to measure many financial
11
instruments and certain other items at fair value with an objective of improving
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS No. 159 are effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. Management is
currently evaluating the impact, if any, that adoption of SFAS No. 159 will have
on the Company's financial position, results of operations and liquidity.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
- --------
Southeastern Bank Financial Corporation (the "Company") operates two
wholly-owned subsidiaries in the Augusta-Richmond County, GA-SC metropolitan
area. Georgia Bank & Trust Company (the "Bank") was organized by a group of
local citizens and commenced business on August 28, 1989, with one branch
location. Today, it is Augusta's largest community banking company operating
eight full service branches in Augusta, Martinez, and Evans, Georgia, and one
branch in Athens, Georgia. Mortgage origination offices are located in Augusta,
Savannah and Athens, Georgia. Southern Bank & Trust (the "Thrift"), a federally
chartered thrift, opened its main office in Aiken, South Carolina on September
12, 2006. The Company's operations campus is located in Augusta, Georgia and
services both subsidiaries.
The Company's primary market area includes Richmond and Columbia Counties in
Georgia and Aiken County in South Carolina, all part of the Augusta-Richmond
County, GA-SC metropolitan statistical area (MSA). The 2005 population of the
Augusta-Richmond County, GA-SC MSA was 520,332, the second largest in Georgia
and fourth largest in South Carolina. The Augusta market area has a diversified
economy based principally on government, public utilities, health care,
manufacturing, construction, and wholesale and retail trade. Augusta is one of
the leading medical centers in the Southeast. The Company entered the Athens, GA
market in December 2005. The 2005 population for the Athens-Clarke County, GA
MSA was 175,085, ranked sixth in the state of Georgia. The Athens market area
has a diversified economy based primarily on government, retail services,
tourism, manufacturing, other services, and health care, with the largest share
of government jobs in the state.
The Company's services include the origination of residential and commercial
real estate loans, construction and development loans, and commercial and
consumer loans. The Company also offers a variety of deposit programs, including
noninterest-bearing demand, interest checking, money management, savings, and
time deposits. In the Augusta-Richmond County, GA-SC metropolitan area, GB&T had
12.34% of all deposits and was the second largest depository institution at June
30, 2006, as cited from the Federal Deposit Insurance Corporation's website.
Securities sold under repurchase agreements are also offered. Additional
services include wealth management, trust, retail investment, and mortgage. As a
matter of practice, most mortgage loans are sold in the secondary market;
however, some mortgage loans are placed in the portfolio based on
asset/liability management strategies. The Company continues to concentrate on
increasing its market share through various new deposit and loan products and
other financial services, by adding locations, and by focusing on the customer
relationship management philosophy. The Company is committed to building
life-long relationships with its customers, employees, shareholders, and the
communities it serves.
13
The Company's primary source of income is from its lending activities followed
by interest income from its investment activities, service charges and fees on
deposits, and gain on sales of mortgage loans in the secondary market. Interest
income on loans and investment securities increased during the first three
months of 2007 as compared to the first three months of 2006 due to rising
interest rates and increased volumes. Service charges and fees on deposits
increased for the three months of 2007 as compared to the same period in 2006
due to increases in NSF income on retail checking accounts and debit/ATM card
income, both the result of new account growth. However, this increase was
somewhat offset by the decision to discontinue daily overdraft balance fees and
debit card fees in 2007, and a decrease in service charge income primarily due
to the increase in the earnings credit applied to average balances maintained in
those accounts. Gain on sales of mortgage loans did not change significantly
during the first three months of 2007 compared to the same period in 2006.
Other significant contributors to income are trust services fees and retail
investment income.
Table 1 - Selected Financial Data
March 31, December 31, December 31,
2007 2006 2002
----------- -------------- --------------
(Dollars in thousands)
Assets $1,107,583 $ 1,041,202 $ 569,832
Loans 774,158 749,969 396,699
Deposits 874,632 801,763 439,557
Return on average total assets 1.06% 1.10% 1.14%
Return on average equity 13.97% 14.69% 13.95%
The Company continues to experience steady growth as evidenced in Table 1 above.
The Company has also achieved significant increases in loans and deposits and
continues to provide strong returns on assets and equity as noted in the table
above. Net income for 2002 was $6.0 million compared to net income of $11.2
million for 2006. Net income for the three months ended March 31, 2007 was $2.8
million. The Company has paid cash dividends of $0.13 per share each quarter
since 2004.
The Company meets its liquidity needs by managing cash and due from banks,
federal funds purchased and sold, maturity of investment securities, principal
repayments from mortgage-backed securities, and draws on lines of credit.
Additionally, liquidity can be managed through structuring deposit and loan
maturities. The Company funds loan and investment growth with core deposits,
securities sold under repurchase agreements and Federal Home Loan Bank advances.
During inflationary periods, interest rates generally increase and operating
expenses generally rise. When interest rates rise, variable rate loans and
investments produce higher earnings; however, deposit and other borrowings
interest expense also rise. The Company monitors its interest rate risk as it
applies to net income in a ramp up and down annually 200 basis points (2%)
scenario and as it applies
14
to economic value of equity in a shock up and down 200 (2%) basis points
scenario. The Company monitors operating expenses through responsibility center
budgeting.
Forward-Looking Statements
- ---------------------------
Southeastern Bank Financial Corporation may, from time to time, make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission (the "Commission") and its
reports to shareholders. Statements made in such documents, other than those
concerning historical information, should be considered forward-looking and
subject to various risks and uncertainties. Such forward-looking statements are
made based upon management's belief as well as assumptions made by, and
information currently available to, management pursuant to "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results may differ materially from the results anticipated in
forward-looking statements due to a variety of factors, including unanticipated
changes in the Company's local economies, the national economy, governmental
monetary and fiscal policies, deposit levels, loan demand, loan collateral
values and securities portfolio values; difficulties in interest rate risk
management; the effects of competition in the banking business; difficulties in
expanding the Company's business into new markets; changes in governmental
regulation relating to the banking industry, including regulations relating to
branching and acquisitions; failure of assumptions underlying the establishment
of reserves for loan losses, including the value of collateral underlying
delinquent loans; and other factors. The Company cautions that such factors are
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by, or on behalf of, the Company.
Critical Accounting Estimates
- -------------------------------
The accounting and financial reporting policies of the Company and its
subsidiaries conform to accounting principles generally accepted in the United
States of America and to general practices within the banking industry. Of
these policies, management has identified the allowance for loan losses as a
critical accounting estimate that requires difficult, subjective judgment and is
important to the presentation of the financial condition and results of
operations of the Company.
The allowance for loan losses is established through a provision for loan losses
charged to expense, which affects the Company's earnings directly. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries are added to
the allowance. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that become uncollectible, based on
evaluations of the collectibility of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, historical loss rates, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect a
borrower's ability to repay.
15
The Company segments its allowance for loan losses into the following three
major categories: 1) identified losses for impaired loans; 2) general allocation
for Classified/Watch loans; and 3) general allocation for loans with
satisfactory ratings. Risk ratings are initially assigned in accordance with the
Company's loan and collection policy. An organizationally independent department
reviews grade assignments on an ongoing basis. Management reviews current
information and events regarding a borrowers' financial condition and strengths,
cash flows available for debt repayment, the related collateral supporting the
loan and the effects of known and expected economic conditions. When the
evaluation reflects a greater than normal risk associated with the individual
loan, management classifies the loan accordingly. If the loan is determined to
be impaired, management allocates a portion of the allowance for loan losses for
that loan based upon the present value of future cash flows discounted at the
loan's effective interest rate, or the fair value of the collateral if
collection of the loan is deemed to be dependent upon the collateral. Regulatory
guidance is also considered. Cash receipts for accruing loans are applied to
principal and interest under the contractual terms of the loan agreement;
however, cash receipts on impaired and nonaccrual loans for which the accrual of
interest has been discontinued are generally applied first to principal and then
to interest income depending upon the overall risk of principal loss to the
Company. Impaired and Classified/Watch loans are aggressively monitored. The
allocation for loans rated satisfactory is further subdivided into various types
of loans as defined by regulatory reporting codes. The Company's management also
gives consideration to subjective factors such as, national and local economic
conditions, bankruptcy trends, unemployment trends, loan concentrations, and
competitive factors in the local market. These factors represent uncertainties
in the Company's business environment and are included in the various individual
components of the allowance for loan losses.
Performance Overview -- Net Income
- ----------------------------------
The Company's net income for the first quarter of 2007 was $2.8 million, which
was an increase of $299,000 (12.2%) compared to net income of $2.5 million for
the first quarter of 2006. Diluted net income per share for the three months
ended March 31, 2007 was $0.50 compared to $0.46 for the three months ended
March 31, 2006. The increase in net income for the three months ended March 31,
2007 as compared with the three months ended March 31, 2006, was primarily a
result of increases in net interest income and noninterest income, somewhat
offset by increases in noninterest expense. Interest income on both loans and
investment securities increased due to increased volumes and higher interest
rates. Interest expense on deposits, securities sold under repurchase agreements
and other borrowings increased as a result of rising interest rates and higher
volumes. Factors contributing to the increase in noninterest income for the
three months ended March 31, 2007 were increases in retail investment income and
trust income, primarily due to increased volume. Service charges and fees on
deposits increased for the three months of 2007 as compared to the same period
in 2006 due to increases in NSF income on retail checking accounts and debit/ATM
card income, both the result of new account growth. However, this increase was
somewhat offset by the decision to discontinue daily overdraft balance fees and
debit card fees in 2007, and a decrease in service charge income primarily due
to the increase in the earnings credit applied to
16
average balances maintained in those accounts. Increases in cash surrender
value of bank owed life insurance increased due to the purchase of additional
policies in February 2006. Noninterest expense increased during the three
months ended March 31, 2007 compared to the same period ended March 31, 2006,
primarily due to increases in salaries and employee benefits related to company
growth and increases in other operating expenses. The increase in other
noninterest expenses for the three months ended March 31, 2007 include increases
in processing expenses for ATM processing and retail investment services. Data
processing expense increased primarily due to software maintenance for Southern
Bank & Trust, an increase in the Bank's core software maintenance, the addition
of a merchant capture service agreement and additional AS400 disk space. Loss
on sale of fixed assets increased for the three-month period for the replacement
of ATMs and automobiles.
Table 2 - Selected Balance Sheet Data
Variance
March 31, December 31, -----------------------------
2007 2006 Amount %
------------- ------------- -------------- -------------
(Dollars in thousands)
Cash and due from banks $ 27,550 $ 25,710 $ 1,840 7.2%
Federal funds sold 52,027 14,688 37,339 254.2%
Investment securities 204,988 202,106 2,882 1.4%
Loans 774,158 749,969 24,189 3.2%
Assets 1,107,583 1,041,202 66,381 6.4%
Deposits 874,632 801,763 72,869 9.1%
Securities sold under repurchase agreements 61,329 70,020 (8,691) (12.4%)
Liabilities 1,025,786 962,278 63,508 6.6%
Stockholders' equity 81,797 78,924 2,873 3.6%
Table 2 highlights significant changes in the balance sheet at March 31, 2007 as
compared to December 31, 2006. Assets increased $66.4 million, primarily the
result of higher balances for loans and federal funds sold. These increases
were funded by increases in total deposits of $72.9 million, somewhat offset by
decreases in securities sold under repurchase agreements. Net income of $2.8
million less dividends paid of $706,000 also contributed to the funding.
The annualized return on average assets for the Company was 1.06% for the three
months ended March 31, 2007, compared to 1.13% for the same period last year.
While total assets have increased $185.6 million since first quarter 2006, net
income has only increased $299,000 resulting in a decrease in ROA. The
annualized return on average stockholders' equity was 13.97% for the three
months ended March 31, 2007, compared to 15.42% for the same period last year.
The decrease is primarily attributable to the issuance of common stock and the
related increase in additional paid in capital, the
17
increase in retained earnings due to net income and decreases in accumulated
other comprehensive income.
Net Interest Income
- ---------------------
The primary source of earnings for the Company is net interest income, which is
the difference between income on interest-earning assets, such as loans and
investment securities, and interest expense incurred on interest-bearing sources
of funds, such as deposits and borrowings. The following tables show the
average balances of interest-earning assets and interest-bearing liabilities,
annualized average yields earned and rates paid on those respective balances,
and the actual interest income and interest expense for the periods indicated.
Average balances are calculated based on daily balances, yields on non-taxable
investments are not reported on a tax equivalent basis and average balances for
loans include nonaccrual loans even though interest was not earned.
Table 3 - Average Balances, Income and Expenses, Yields and Rates
Three Months Ended March 31, 2007 Three Months Ended March 31, 2006
-------------------------------------- -------------------------------------
Annualized Annualized
Average Amount Average Amount
Average Yield or Paid or Average Yield or Paid or
Amount Rate Earned Amount Rate Earned
-------------------------------------- -------------------------------------
(Dollars in thousands)
Interest-earning assets:
Loans $ 761,022 8.18% $ 15,504 $ 607,873 7.88% $ 11,812
Investment securities 199,740 5.23% 2,611 201,813 4.94% 2,456
Federal funds sold 29,133 5.10% 366 13,893 4.41% 151
Interest-bearing deposits in other banks 513 5.07% 6 918 3.49% 8
-----------------------------------------------------------------------------
Total interest-earning assets $ 990,408 7.49% $ 18,487 $ 824,497 7.10% $ 14,427
----------- ------------ ----------- -----------
Interest-bearing liabilities:
Deposits $ 823,269 3.69% $ 7,492 $ 688,661 2.90% $ 4,919
Federal funds purchased / securities
sold under repurchase agreements 66,690 5.27% 867 62,895 4.41% 684
Other borrowings 80,593 5.41% 1,075 61,975 5.54% 847
----------- ------------ ----------- -----------
Total interest-bearing liabilities $ 970,552 3.94% $ 9,434 $ 813,531 3.22% $ 6,450
----------- ------------ ----------- -----------
Net interest margin/income: 3.76% $ 9,053 3.97% $ 7,977
============ ===========
Net interest income increased $1.1 million (13.5%) during the three-month period
as the result of increases in interest income that exceeded increases in
interest expense as compared to the same period in 2006. Loan interest income
increased $3.7 million in the three month period, while deposit interest expense
increased $2.6 million in the three month period, all the result of rising
interest rates and the continued growth of account balances. The annual average
balance for loans was $761.0 million at March 31, 2007 with an annualized
average yield of 8.18% compared to $607.9 million at March 31, 2006 with an
annualized average yield of 7.88%. Interest-bearing deposits had an annual
18
average balance of $823.3 million with an annualized average rate of 3.69% at
March 31, 2007 compared to $688.7 million and 2.90% at March 31, 2006. Some of
the other contributing factors during the three month period included increases
in interest income on investment securities, increases in interest expense on
federal funds purchased and securities sold under repurchase agreements, all the
result of increased volumes and higher interest rates.
The Company's net interest margin for the three months ended March 31, 2007 was
3.76% as compared to 3.97% for the three months ended March 31, 2006. The rate
for earning assets increased 39 basis points for the three month period with
higher average yields on loans and investment securities accounting for most of
the increase. The cost to fund earning assets increased 72 basis points for the
three month period primarily due to higher rates on deposits and securities sold
under repurchase agreements.
Noninterest Income
- -------------------
Table 5 - Noninterest Income
Three Months Ended
March 31, Variance
----------- ----------- ---------------
2007 2006 Amount %
----------- ----------- -------- -----
(Dollars in thousands)
Service charges and fees
on deposits $ 1,397 $ 1,352 $ 45 3.3%
Gain on sales of loans 1,284 1,254 30 2.4%
Investment securities
(losses) gains, net 33 - 33 N/A
Retail investment income 323 167 156 93.4%
Trust services fees 274 193 81 42.0%
Increase in cash surrender
value of bank-owned
life insurance 165 139 26 18.7%
Miscellaneous income 168 150 18 12.0%
----------- ----------- -------- -----
Total noninterest income $ 3,644 $ 3,255 $ 389 12.0%
=========== =========== ======== =====
Noninterest income increased $389,000 (12.0%) during the three-month period as
compared to the same period in 2006. The most significant changes for the three
month period were an increase in retail investment income due to production by
new personnel and increases in trust services fees due to increased sales from
the continued development of that area. Service charges and fees on deposits
increased for the three months of 2007 as compared to the same period in 2006
due to increases in NSF income on retail checking accounts and debit/ATM card
income, both the result of new account growth. However, this increase was
somewhat offset by the decision to discontinue daily overdraft balance fees and
debit card fees in 2007, and a decrease in service charge
19
income primarily due to the increase in the earnings credit applied to average
balances maintained in those accounts.
Noninterest Expense
- --------------------
Table 6 - Noninterest Expense
Three Months Ended
March 31, Variance
------------------------ ---------------
2007 2006 Amount %
----------- ----------- -------- -----
(Dollars in thousands)
Salaries and other
personnel expense $ 4,796 $ 4,440 $ 356 8.0%
Occupancy expenses 760 749 11 1.5%
Other operating expenses 2,267 1,977 290 14.7%
----------- ----------- -------- -----
Total noninterest expense $ 7,823 $ 7,166 $ 657 9.2%
=========== =========== ======== =====
Noninterest expense increased $657,000 (9.2%) during the three-month period.
Salaries and other personnel expense increased for first quarter 2007 compared
to first quarter 2006 due to the opening of Southern Bank & Trust in Aiken,
South Carolina, new personnel due to continued company growth, expansion of the
wealth management area, medical expenses and additional stock options expense,
somewhat offset by an increase in the contra salary expense in compliance with
SFAS No. 91. Other operating expenses increased $290,000 (14.7%) for the
three-month period as compared to the same period in 2006. Increases in
processing expenses during the three month period were primarily due to ATM
processing and retail investment services. Data processing expense increased
primarily due to software maintenance for Southern Bank & Trust, an increase in
the Bank's core software maintenance, the addition of a merchant capture service
agreement and additional AS400 disk space. Loss on sale of fixed assets
increased for the three-month period for the replacement of ATMs and
automobiles.
Income Taxes
- -------------
Income tax expense totaled $1.5 million in the first quarter of 2007 as compared
to $1.1 million in the first quarter of 2006. The effective tax rate for the
three months ended March 31, 2007 and 2006 was 35.8% and 31.0%, respectively.
For the three months ended March 31, 2007 as compared to the three months ended
March 31, 2006, a decrease in nontaxable interest income, an increase in
nondeductible stock option expense and an increase in the federal tax rate due
to anticipated higher income for the year, resulted in an increase in income tax
expense and the effective income tax rate.
20
Asset Quality
- --------------
Table 5 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $2.5 million at March 31,
2007, compared to $2.4 million at December 31, 2006. Significant changes from
December 2006 to March 2007 include a $237,000 increase in other real estate
owned, a $41,000 decrease in non-performing assets with balances less than
$100,000 and a $23,000 decrease for customers with balances greater than
$100,000. The ratio of non-performing assets to total loans and other real
estate was 0.30% at March 31, 2007, compared to 0.31% at December 31, 2006. The
control and monitoring of non-performing assets continues to be a priority of
management.
There were no loans past due 90 days or more and still accruing interest at
March 31, 2007 and December 31, 2006.
Table 7 - Non-Performing Assets
(Dollars in thousands)
March 31, December 31,
2007 2006
---------- -------------
Nonaccrual loans $ 2,287 $ 2,351
Other real estate owned 237 -
---------- -------------
Total non-performing assets $ 2,524 $ 2,351
========== =============
Loans past due 90 days or more
and still accruing interest $ - $ -
========== =============
Allowance for Loan Losses
- ----------------------------
The allowance for loan losses represents an allocation for probable incurred
loan losses in the loan portfolio. The adequacy of the allowance for loan
losses is evaluated periodically based on a review of all significant loans,
with particular emphasis on impaired, non-accruing, past due, and other loans
that management believes require special attention. The determination of the
allowance for loan losses is considered a critical accounting estimate of the
Company. See "Critical Accounting Estimates."
When reviewing the allowance for loan losses, it is important to understand to
whom the Company lends. The following table sets forth the composition of the
Company's loan portfolio as of March 31, 2007 and December 31, 2006.
21
Table 8 - Loan Portfolio Composition
March 31, 2007 December 31, 2006
------------------------- ------------------
Amount % Amount %
------------ ----------- --------- -------
(Dollars in thousands)
Commercial financial and
agricultural . . . . . . . . . $ 83,589 10.80% $ 80,823 10.78%
------------ ----------- --------- -------
Real estate
Commercial . . . . . . . . . 213,707 27.61% 198,453 26.46%
Residential. . . . . . . . . 160,335 20.71% 158,543 21.14%
Residential held for sale. . 9,871 1.28% 14,857 1.98%
Construction and
development. . . . . . . . 277,137 35.80% 266,875 35.58%
------------ ----------- --------- -------
Total real estate. . . . 661,050 85.39% 638,728 85.17%
------------ ----------- --------- -------
Lease financing. . . . . . . . 72 0.01% 116 0.02%
Consumer
Direct . . . . . . . . . . . 23,884 3.09% 24,146 3.22%
Indirect.. . . . . . . . . . 5,750 0.74% 6,232 0.83%
Revolving. . . . . . . . . . 752 0.10% 843 0.11%
------------ ----------- --------- -------
Total consumer . . . . . . 30,386 3.93% 31,221 4.16%
------------ ----------- --------- -------
Deferred loan origination fees (939) -0.12% (919) -0.12%
------------ ----------- --------- -------
Total. . . . . . . . . . . 774,158 100.00% $749,969 100.00%
============ =========== ========= =======
At March 31, 2007, the loan portfolio is comprised of 85.39% real estate loans.
Commercial, financial and agricultural loans comprise 10.80%, and consumer loans
comprise 3.93% of the portfolio.
Commercial real estate comprises 27.61% of the loan portfolio and is primarily
owner occupied properties where the operations of the commercial entity provide
the necessary cash flow to service the debt. For this portion of real estate
loan portfolio, repayment is not dependent upon the sale of the real estate held
as collateral. Construction and development (35.80%) has been an increasingly
important portion of the real estate loan portfolio. The Company carefully
monitors the loans in this category since the repayment of these loans is
generally dependent upon the sale of the real estate in the normal course of
business and can be impacted by national and local economic conditions. The
residential category, 20.71% of the portfolio, represents those loans that the
Company chooses to maintain in its portfolio rather than selling into the
secondary market for marketing and competitive reasons and commercial loans
secured by residential real estate. The residential held for sale category,
1.28% of the portfolio, comprises loans that are in the process of being sold
into the secondary market. In these loans, the credit has been approved by the
investor and the interest rate locked so that the Company minimizes credit and
interest rate risk with respect to these loans.
The Company has no large loan concentrations to individual borrowers. Unsecured
loans at March 31, 2007 were $11.3 million. 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
22
losses. Such agencies may advise additions to the allowance based on their
judgments about information available to them at the time of their examination.
Such regulatory guidance is considered, and the Company may recognize additions
to the allowance as a result.
Additions to the allowance for loan losses are made periodically to maintain the
allowance at an appropriate level based upon management's analysis of potential
risk in the loan portfolio. Loans determined to be uncollectible are charged to
the allowance for loan losses and subsequent recoveries are added to the
allowance. A provision for losses in the amount of $576,000 was charged to
expense for the quarter ended March 31, 2007 compared to $504,000 for the
quarter ended March 31, 2006. The increase in the provision for loan losses for
the three month period is primarily due to the $187,000 provision related to the
new Thrift's loan portfolio, offset by a decrease in classified/ watch loans, a
decrease in the unallocated reserve, and slower loan growth at the Bank.
Additionally, the Bank determined that the reserve for unfunded lines and
commitments and standby letters of credit was not needed at March 31, 2007. The
Bank had higher recoveries in the first quarter of 2006 as compared to the first
quarter of 2007.
Table 9 - Allowance for Loan Losses
2007 2006
-------- -------
Beginning balance, January 1 $ 9,777 $9,125
Provision charged to expense 576 504
Recoveries 231 259
Loans charged off (310) (418)
-------- -------
Ending balance, March 31 $10,274 $9,470
======== =======
At March 31, 2007 the ratio of allowance for loan losses to total loans was
1.33% compared to 1.30% at December 31, 2006 and 1.51% at March 31, 2006.
Management considers the current allowance for loan losses appropriate based
upon its analysis of the potential risk in the portfolio, although there can be
no assurance that the assumptions underlying such analysis will continue to be
correct.
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at March 31, 2007 was 88.5% compared to
93.5% at December 31, 2006 and 86.5% at March 31, 2006. The decrease in the
loan to deposit ratio from December 31, 2006 to March 31, 2007 reflects deposit
growth at a higher rate than loan growth during the period. The increase in the
loan to deposit ratio from March 31, 2006 to December 31, 2006 reflects loan
growth at a higher rate than deposit growth during that time period. Deposits
at March 31, 2007 and December 31, 2006 include $76.3 million and $67.4 million
of brokered certificates of deposit, respectively. GB&T has also utilized
borrowings from the Federal Home Loan Bank. GB&T maintains a line of credit
with the Federal Home Loan Bank approximating 10% of GB&T's total assets.
Federal Home Loan Bank advances are collateralized by eligible
23
first mortgage loans, commercial real estate loans and investment securities.
These borrowings totaled $60.0 million at March 31, 2007. GB&T maintains
repurchase lines of credit with SunTrust Robinson Humphrey, Atlanta, Georgia,
for advances up to $20.0 million and with The Bankers Bank, Atlanta, Georgia,
for advances up to $10.0 million of which no amounts were outstanding in either
case at March 31, 2007. GB&T has a federal funds purchased accommodation with
The Bankers Bank, Atlanta, Georgia, for advances up to $16.7 million and with
SunTrust Bank, Atlanta, Georgia for advances up to $10.0 million, while SB&T has
a federal funds purchased accommodation with The Bankers Bank, Atlanta, Georgia,
for advances up to $3.3 million. Additionally, liquidity needs can be satisfied
by the structuring of the maturities of investment securities and the pricing
and maturities on loans and deposits offered to customers. The Company also
uses retail securities sold under repurchase agreements to fund growth. Retail
securities sold under repurchase agreements were $61.3 million at March 31,
2007.
Stockholders' equity to total assets was 7.39% at March 31, 2007 compared to
7.58% at December 31, 2006 and 7.16% at March 31, 2006. Stockholders' equity as
of March 31, 2007 includes proceeds of $5.0 million from a private placement
stock offering held during the third and fourth quarters of 2006. The capital
of the Company exceeded all required regulatory guidelines at March 31, 2007.
The Company's Tier 1 risk-based, total risk-based and leverage capital ratios
were 11.86%, 13.07%, and 9.67%, respectively, at March 31, 2007. The following
table reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
24
Table 10 - Regulatory Capital Requirements
March 31, 2007
(Dollars in Thousands)
Required for capital
Actual adequacy purposes Excess
Amount Percent Amount Percent Amount Percent
------------------------ ----------------------- -----------------------
Southeastern Bank Financial
Corporation
Risk-based capital:
Tier 1 capital $ 102,564 11.86% 34,589 4.00% 67,975 7.86%
Total capital 113,054 13.07% 69,179 8.00% 43,875 5.07%
Tier 1 leverage ratio 102,564 9.67% 42,404 4.00% 60,160 5.67%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $ 77,908 9.57% 32,549 4.00% 45,359 5.57%
Total capital 87,653 10.77% 65,098 8.00% 22,555 2.77%
Tier 1 leverage ratio 77,908 7.77% 40,125 4.00% 37,783 3.77%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital $ 9,262 18.81% 1,970 4.00% 7,292 14.81%
Total capital 9,791 19.88% 3,940 8.00% 5,851 11.88%
Tier 1 leverage ratio 9,262 19.39% 1,911 4.00% 7,351 15.39%
Management is not aware of any events or uncertainties that are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or operations.
Commitments and Contractual Obligations
- ------------------------------------------
The Company is a party to lines of credit with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. Lines
of credit are unfunded commitments to extend credit. These instruments involve,
in varying degrees, exposure to credit and interest rate risk in excess of the
amounts recognized in the financial statements. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for unfunded commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Company
evaluates construction and acquisition and development loans for the percentage
completed before extending additional credit. The Company follows the same
credit policies in making commitments and contractual obligations as it does for
on-balance sheet instruments.
25
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $197.6 million at March 31, 2007. These commitments are
primarily at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company' contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date.
Table 11 - Commitments and More
Contractual Obligations Less than 1 - 3 3 - 5 than 5
($in thousands) 1 Year Years Years Years
- ---------------------------- ---------- ------- ------- -------
Lines of credit $ 197,627 - - -
Mortgage loan commitments $ 16,950
Lease agreements 141 202 73 157
Deposits 804,371 62,719 3,310 4,232
Securities sold under
repurchase agreements 61,329 - - -
FHLB advances 5,000 - 30,000 25,000
Other borrowings 900 - - -
---------- ------- ------- -------
Total commitments and
contractual obligations $1,086,318 $62,921 $33,383 $29,389
---------- ------- ------- -------
Although management regularly monitors the balance of outstanding commitments to
fund loans to ensure funding availability should the need arise, management
believes that the risk of all customers fully drawing on all these lines of
credit at the same time is remote.
Effects of Inflation and Changing Prices
- ----------------------------------------
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction and to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation can increase
a financial institution's cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and
26
similar items. Inflation and related increases in interest rates generally
decrease the market value of investments and loans held and may adversely affect
liquidity, earnings, and stockholders' equity. Mortgage originations and
refinancings tend to slow as interest rates increase, and can reduce the
Company's earnings from such activities and the income from the sale of
residential mortgage loans in the secondary market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2007, there were no substantial changes in the interest rate
sensitivity analysis or the sensitivity of market value of portfolio equity for
various changes in interest rates calculated as of December 31, 2006. The
foregoing disclosures related to the market risk of the Company should be read
in conjunction with the Company's audited consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 2006 included in the
Company's 2006 Annual Report on Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer
(principal executive officer) and its Group Vice President and Chief Financial
Officer (principal financial officer), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, such officers concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been
no changes in the Company's internal controls or, to the Company's knowledge, in
other factors during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
27
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of
their property is subject.
Item 1A. Risk Factors
In addition to the other information set forth in this
report, you should carefully consider the factors discussed in
Part I, "Item 1A. Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2006, which could
materially affect its business, financial condition or future
results. The risks described in the Annual Report on Form 10-K
are not the only risks facing the Company. Additional risks and
uncertainties not currently known to management or that
management currently deems to be immaterial also may materially
adversely affect the Company's business, financial condition
and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table sets forth information regarding the
Company's purchases of its common stock on a monthly basis during
the first quarter of 2007.
- --------------------------------------------------------------------------------------
Maximum Number
(or Appropriate
Total Number of Dollar Value) of
Total Shares (or Units) Shares (or Units)
Number of Average Purchased as Part of Yet Be Purchased
Shares Price Paid Publicly Announced Under the Plans or
Period Purchased Per Share Plans or Programs Programs
- ------------------ --------- ----------- --------------------- -------------------
January 1 through
January 31, 2007 - - 3,799 96,201
- ------------------ --------- ----------- --------------------- -------------------
February 1 through
February 28, 2007 - - 3,799 96,201
- ------------------ --------- ----------- --------------------- -------------------
March 1 through
March 31, 2007 1,100 38.50 4,899 95,101
- ------------------ --------- ----------- --------------------- -------------------
Total 1,100 $ 38.50 4,899 95,101
- --------------------------------------------------------------------------------------
28
On April 15, 2004, the Company announced the commencement of a
stock repurchase program, pursuant to which it will, from time to
time, repurchase up to 100,000 shares of its outstanding stock.
The program does not have a stated expiration date. No stock
repurchase programs were terminated during the first quarter of
2007.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
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 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
29
SOUTHEASTERN BANK FINANCIAL CORPORATION
Form 10-Q Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUTHEASTERN BANK FINANCIAL CORPORATION
Date: May 10, 2007 By: /s/ Darrell R. Rains
------------ ------------------------------------
Darrell R. Rains
Group Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)
30