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, 2008.
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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 ______________.
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 [ ] Non-accelerated filer [ ]
(do not check if a smaller
reporting company)
Accelerated filer [X] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
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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:
5,421,771 shares of common stock, $3.00 par value per share, outstanding as
of April 30, 2008.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007 3
Consolidated Statements of Income for the Three
Months ended March 31, 2008 and 2007 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2008 and 2007 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
Part II Other Information
Item 1. Legal Proceedings *
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits 27
Signature 28
* No information submitted under this caption
1
PART I
FINANCIAL INFORMATION
2
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
March 31,
2008 December 31,
Assets (Unaudited) 2007
------------ --------------
Cash and due from banks $ 21,261 $ 24,558
Federal funds sold 8,027 -
Interest-bearing deposits in other banks 500 500
------------ --------------
Cash and cash equivalents 29,788 25,058
Investment securities
Available-for-sale 254,659 245,429
Held-to-maturity, at cost (fair values of
$1,470 and $1,467, respectively) 1,435 1,435
Loans held for sale 19,638 11,303
Loans 907,387 871,440
Less allowance for loan losses (12,808) (11,800)
------------ --------------
Loans, net 894,579 859,640
Premises and equipment, net 33,181 32,612
Accrued interest receivable 6,783 7,416
Bank-owned life insurance 16,825 16,660
Restricted equity securities 5,815 5,060
Other assets 8,837 8,367
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$ 1,271,540 $ 1,212,980
============ ==============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 112,716 $ 101,272
Interest-bearing:
NOW accounts 155,828 132,186
Savings 292,172 289,731
Money management accounts 80,326 73,609
Time deposits over $100,000 260,080 243,501
Other time deposits 114,839 111,867
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1,015,961 952,166
Federal funds purchased and securities sold
under repurchase agreements 62,270 81,166
Advances from Federal Home Loan Bank 69,000 59,000
Other borrowed funds 700 500
Accrued interest payable and other liabilities 11,261 10,390
Subordinated debentures 20,000 20,000
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Total liabilities 1,179,192 1,123,222
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Stockholders' equity:
Common stock, $3.00 par value; 10,000,000 shares
authorized; 5,433,614 and 5,433,614 shares issued in
2008 and 2007, respectively; 5,421,319 and 5,425,182
shares outstanding in 2008 and 2007, respectively 16,301 16,301
Additional paid-in capital 39,359 39,518
Retained earnings 36,159 34,228
Treasury stock, at cost; 12,295 and 8,432 shares in
2008 and 2007, respectively (403) (317)
Accumulated other comprehensive gain, net 932 28
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Total stockholders' equity 92,348 89,758
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$ 1,271,540 $ 1,212,980
============ ==============
See accompanying notes to consolidated financial statements.
3
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March, 31,
-----------------------
2008 2007
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Interest income:
Loans, including fees $ 16,393 $ 15,504
Investment securities 3,261 2,611
Federal funds sold 91 366
Interest-bearing deposits in other banks 6 6
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Total interest income 19,751 18,487
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Interest expense:
Deposits 7,877 7,492
Federal funds purchased and securities sold
under repurchase agreements 540 867
Other borrowings 1,069 1,075
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Total interest expense 9,486 9,434
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Net interest income 10,265 9,053
Provision for loan losses 1,271 576
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Net interest income after provision
for loan losses 8,994 8,477
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Noninterest income:
Service charges and fees on deposits 1,670 1,397
Gain on sales of loans 1,260 1,284
Gain / (loss) on sale of fixed assets 3 (52)
Investment securities gains, net 38 33
Retail investment income 289 323
Trust service fees 286 274
Increase in cash surrender value of
bank-owned life insurance 164 165
Miscellaneous income 221 168
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Total noninterest income 3,931 3,592
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Noninterest expense:
Salaries and other personnel expense 5,171 4,796
Occupancy expenses 1,026 760
Other operating expenses 2,724 2,215
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Total noninterest expense 8,921 7,771
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Income before income taxes 4,004 4,298
Income tax expense 1,369 1,539
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Net income $ 2,635 $ 2,759
========== ===========
Basic net income per share $ 0.49 $ 0.51
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Diluted net income per share $ 0.48 $ 0.50
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Weighted average common shares outstanding 5,417,388 5,433,639
========== ===========
Weighted average number of common and
common equivalent shares outstanding 5,468,606 5,503,845
========== ===========
See accompanying notes to consolidated financial statements.
4
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
2008 2007
----------------- ---------------
Cash flows from operating activities:
Net income $ 2,635 $ 2,759
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 537 367
Deferred income tax benefit (393) -
Provision for loan losses 1,271 576
Net investment securities gain (38) (33)
Net accretion of discount on investment securities (20) (65)
Increase in CSV of bank owned life insurance (165) (165)
Stock options compensation cost 51 134
(Gain) Loss on disposal of premises and equipment (3) 52
Gain on sales of loans (1,260) (1,284)
Real estate loans originated for sale (64,977) (63,281)
Proceeds from sales of real estate loans 57,902 69,552
Decrease in accrued interest receivable 633 82
(Increase) Decrease in other assets (225) 64
Increase (Decrease) in accrued interest payable and other liabilities 871 (570)
----------------- ---------------
Net cash (used) provided by operating activities (3,181) 8,188
----------------- ---------------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 3,950 -
Proceeds from maturities of available for sale securities 26,583 15,698
Proceeds from maturities of held-to-maturity securities - 1,035
Purchase of available for sale securities (38,241) (18,564)
Purchase of Federal Home Loan Bank stock (755) (76)
Net increase in loans (36,623) (29,492)
Additions to premises and equipment (1,157) (971)
Proceeds from sale of premises and equipment 54 8
----------------- ---------------
Net cash used in investing activities (46,189) (32,362)
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Cash flows from financing activities:
Net increase in deposits 63,795 72,869
Net decrease in federal funds purchased and
securities sold under repurchase agreements (18,896) (8,691)
Advances from Federal Home Loan Bank 10,000 -
Proceeds from other borrowed funds 200 -
Principal payments on other borrowed funds - (100)
Purchase of treasury stock (437) (42)
Payment of cash dividends (704) (707)
Proceeds from stock options exercised 129 -
Proceeds from Directors' stock purchase plan 13 -
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Net cash provided by financing activities 54,100 63,329
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Net increase in cash and cash equivalents $ 4,730 $ 39,155
Cash and cash equivalents at beginning of period 25,058 40,911
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Cash and cash equivalents at end of period $ 29,788 $ 80,066
================= ===============
Supplemental disclosures of cash paid during the period for:
Interest $ 10,117 $ 9,764
================= ===============
Income taxes $ - $ 817
================= ===============
Supplemental information on noncash investing activities:
Loans transferred to other real estate $ 412 $ -
================= ===============
See accompanying notes to consolidated financial statements.
5
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2008
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. Dollar amounts are rounded to thousands except
share and per share data.
The financial statements for the three months ended March 31, 2008 and 2007 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, 2007.
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, 2008 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 - Fair Value Measurements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements." at the beginning of our 2008 fiscal year. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurement. According to
SFAS No. 157, fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 applies to all assets
and liabilities that are being measured and reported on a fair value basis. This
statement enables the reader of the financial statements to assess the inputs
used to develop those measurements by establishing a hierarchy for ranking the
quality and reliability of the information used to determine fair values. This
statement
6
requires that assets and liabilities carried at fair value will be classified
and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or
liabilities.
Level 2: Significant other observable inputs other than level 1 prices,
such as quoted market prices for similar assets or liabilities, quoted prices in
markets that are not active, and other inputs that are observable or can be
corroborated by observable market data. Observable market based inputs or
unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
In determining the appropriate levels, the Company used the following methods
and significant assumptions to estimate the fair value of items:
Securities: The fair values of trading securities, held-to-maturity securities
- -----------
and securities available for sale are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing,
which is a mathematical technique widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities' relationship to other
benchmark quoted securities (Level 2 inputs).
Impaired Loans: The fair value of impaired loans is determined by reviewing the
- ---------------
estimated amount realizable from collateral liquidation based upon an appraisal
as well as the estimated amounts realizable from borrowers and guarantors (Level
3 inputs).
Investments in tax credits: The fair values for tax credits are measured on a
- ------------------------------
recurring basis and are based upon total credits and deductions remaining to be
allocated and total estimated credits and deductions to be allocated.(Level 3
inputs)
The table below presents the balances of assets and liabilities measured at
fair value on a recurring basis by level within the hierarchy:
7
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
March 31,
2008 (Dollars in thousands)
------------------------------------------------------
Available-for-sale securities $ 254,659 $ 420 $ 254,239 $ -
Tax credits 574 0 0 574
Held-to-maturity securities 1,470 0 1,470 0
---------- ----------- ------------- --------------
Total $ 256,703 $ 420 $ 255,709 $ 574
========== =========== ============= ==============
The table below presents a reconciliation and income statement classification of
gains and losses for all assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the quarter ended March 31,
2008:
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
Tax Credits
-------------------------
Beginning balance, Jan. 1, 2008 $ 594
Total realized losses included in earnings (20)
-------------------------
Ending balance, March 31, 2008 $ 574
=========================
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
March 31, Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
-----------------------------------------------------
Assets:
Impaired loans 1,244 1,244
The following represents impairment charges recognized during the period.
8
Impaired loans, which are measured for impairment using the fair value of
collateral for collateral-dependent loans, had a carrying amount of $1,244, with
a valuation allowance of $225. There was no additional provision for such loans
during the period.
In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of
FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The Company has not fully implemented SFAS 157 for
nonfinancial assets and liabilities. Nonfinancial assets at March 31, 2008
consist of other real estate owned, the amount of which was not material to the
financial statements.
Note 3 - 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, 2008 was $3,538
compared to $2,268 for the three months ended March 31, 2007.
Note 4 - Cash and Stock Dividends Declared
On January 23, 2008, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend was paid on February 22, 2008 to
shareholders of record as of February 8, 2008.
On April 16, 2008, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend is payable on May 14, 2008 to
shareholders of record as of May 2, 2008.
On April 23, 2008, the Company declared a 10% stock dividend that will be
payable on June 2, 2008 to shareholders of record as of May 22, 2008. No
fractional share will be issued. Shareholders entitled to a fractional share
will receive cash for the fractional share at the price equal to the closing
price of the stock as of the record date, adjusted for the stock dividend.
Note 5 - Recently Issued Accounting Standards on the Financial Statements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48), which prescribes a recognition threshold and measurement attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did
not have a material effect on the Company's consolidated
9
financial statements. The Company and its subsidiaries file a consolidated U.S.
federal income tax return and files in the state of Georgia and South Carolina.
These returns are subject to examination by taxing authorities for all years
after 2003.
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 adoption of this issue did not have a material impact on
the Company's consolidated financial statements.
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
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 new standard is effective for the Company on January 1, 2008.
The Company did not elect the fair value option for any financial assets or
financial liabilities as of January 1, 2008.
On January 1, 2008, the Company adopted FASB Emerging Issues Task Force Issue
No. 06-4, Accounting for Deferred Compensation and Postretirement Benefits
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue
requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants' employment
or retirement. The required accrued liability will be based on either the
post-employment benefit depending on the contractual terms of the underlying
agreement. This issue is effective for fiscal years beginning after December
15, 2007. The impact of adoption was not material to the Company's consolidated
financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollar amounts are expressed in thousands unless otherwise noted)
Overview
- --------
Southeastern Bank Financial Corporation (the "Company") operates two
wholly-owned subsidiaries primarily 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 nine 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. SB&T Capital Corporation ("the LPO") a
wholly owned subsidiary of the Bank, was organized on August 16, 2007 and opened
an office in Greenville, South Carolina. On November 1, 2007 the Bank entered
into an Operating Agreement with NMF Asset Management LLC ("NMF") whereby the
Bank became a 30% partner. NMF is an investment management firm that provides
services to individuals, trusts, pensions, nonprofit organizations as well as
other institutions. Southern Bank & Trust (the "Thrift"), a federally chartered
thrift, operates three full service branches in North Augusta and Aiken, South
Carolina. Effective first quarter 2008 the Thrift began originating mortgage
loans to be sold in the secondary market. The Company's operations campus is
located in Martinez, 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 2006 population of the
Augusta-Richmond County, GA-SC MSA was 523,249, 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 2006 population for the Athens-Clarke County,
GA MSA was 185,479, 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. In August 2007 the Company entered the
Greenville, SC market. The 2006 population for the Greenville-Mauldin-Easley,
SC MSA was 601,986, ranked third in the state of South Carolina. The Greenville
market area has a diversified economy based primarily on government,
manufacturing, construction, retail services, and health care.
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 12.87% of all deposits
11
and was the second largest depository institution at June 30, 2007, 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.
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 increased during the first three months of 2008 as compared to
the first three months of 2007 due to increased volumes somewhat offset by
decrease in rates. Interest income on investment securities increased due to
increase in volume and rates. Interest income on federal funds sold decreased
due to both volume and rate decreases. Service charges and fees on deposits
increased for the three months of 2008 as compared to the same period in 2007
due to increases in NSF income on both retail and business checking accounts and
debit/ATM card income, both the result of new account growth.
Table 1 - Selected Financial Data
March 31, December 31, December 31,
2008 2007 2003
----------- -------------- --------------
(Dollars in thousands)
Assets $1,271,540 $ 1,212,980 $ 630,633
Loans 927,025 882,743 432,679
Deposits 1,015,961 952,166 483,952
Return on average total assets 0.86% 1.04% 1.31%
Return on average equity 11.57% 14.03% 15.62%
The Company continues to experience steady asset 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 2003 was $7.9 million compared to net income of
$11.8 million for 2007. Net income for the three months ended March 31, 2008
was $2.6 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
12
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 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
collectability 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
13
that become uncollectible, based on evaluations of the collectability 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.
The provision for loan losses is the charge to operating earnings necessary to
maintain an adequate allowance for loan losses. The Company has developed
policies and procedures for evaluating the overall quality of its loan portfolio
and the timely identification of problem credits. Management continues to
review these policies and procedures and makes further improvements as needed.
The adequacy of the Company's allowance for loan losses and the effectiveness of
the Company's internal policies and procedures are also reviewed periodically by
the Company's regulators and the Company's internal loan review personnel. The
Company's regulators may advise the Company to recognize additions to the
allowance based upon 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.
The Company's Board of Directors, with the recommendation of management,
approves the appropriate level for the allowance for loan losses based upon
internal policies and procedures, historical loan loss ratios, loan volume, size
and character of the loan portfolio, concentrations of loans to specific
borrowers or industries, value of the collateral underlying the loans, specific
problem loans and current economic conditions and trends. The Company continues
to refine the methodology on which the level of the allowance for loan losses is
based, by comparing historical loss ratios utilized to actual experience and by
classifying loans for analysis based on similar risk characteristics. 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.
Performance Overview -- Net Income
- --------------------------------------
The Company's net income for the first quarter of 2008 was $2,635, which was a
decrease of $125 (4.5%) compared to net income of $2,759 for the first quarter
of 2007. Diluted net income per share for the three months ended March 31, 2008
was $0.48 compared to $0.50 for the three months ended March 31, 2007. The
decrease in net income for the three months ended March 31, 2008 as compared
with the three months ended March 31, 2007, was primarily a result of the
continued decline in net interest margin due to the Federal Reserve's actions,
the substantially higher provision for loan losses due to increased levels of
nonperforming assets, and increases in noninterest expense, somewhat offset by
increases in loan and investment interest income and noninterest income.
Interest income on loans increased due to increased volumes, somewhat offset by
decrease in rates. Investment interest income increased primarily due to both
volume and rate increases. Interest expense on deposits increased as a result
of higher volumes somewhat offset by a lower rates. Interest expense on federal
funds
14
purchased and securities sold under repurchase agreements decreased primarily
due to lower rates.
Factors contributing to the increase in noninterest income for the three months
ended March 31, 2008 were increases in service charges and fees on deposits due
to NSF income on retail and business checking accounts and debit/ATM card
income, both the result of new account growth. Noninterest expense increased
during the three months ended March 31, 2008 compared to the same period ended
March 31, 2007, primarily due to increases in salaries and premises and fixed
assets expense related to company growth and increases in other operating
expenses. The increase in other noninterest expenses for the three months ended
March 31, 2008 includes increases in processing, marketing, communication,
professional fees, and insurance and taxes expense. Loss on sale of fixed
assets decreased for the three-month period due to the replacement of ATMs and
automobiles in first quarter 2007.
Table 2 - Selected Balance Sheet Data
Variance
March 31, December 31, -----------------
2008 2007 Amount %
---------- ------------- -------- -------
(Dollars in thousands)
Cash and due from banks $ 21,261 $ 24,558 ($3,297) (13.4%)
Federal funds sold 8,027 - 8,027 N/A
Investment securities 256,094 246,864 9,230 3.7%
Loans 927,025 882,743 44,282 5.0%
Assets 1,271,540 1,212,980 58,560 4.8%
Deposits 1,015,961 952,166 63,795 6.7%
Securities sold under repurchase agreements 62,271 81,165 (18,894) (23.3%)
Liabilities 1,179,192 1,123,222 55,970 5.0%
Stockholders' equity 92,348 89,758 2,590 2.9%
Table 2 highlights significant changes in the balance sheet at March 31, 2008 as
compared to December 31, 2007. Assets increased $58,560, primarily the result
of higher balances for loans, investments and federal funds sold. These
increases were funded by increases in total deposits of $63,795, somewhat offset
by decreases in securities sold under repurchase agreements. Net income of
$2,635 less dividends paid of $704 also contributed to the funding.
The annualized return on average assets for the Company was 0.86% for the three
months ended March 31, 2008, compared to 1.06% for the same period last year.
While total assets have increased $163,957 since first quarter 2007, net income
has decreased $124 resulting in a decrease in ROA.
The annualized return on average stockholders' equity was 11.57% for the three
months ended March 31, 2008, compared to 13.97% for the same period last year.
The decrease
15
is primarily attributable to the decrease in net income coupled with an increase
in retained earnings due to net income and increases 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, 2008 Three Months Ended March 31, 2007
----------------------------------------- ----------------------------------------
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 $ 896,500 7.26% $ 16,393 $ 761,022 8.18% $ 15,504
Investment securities 248,618 5.25% 3,261 199,740 5.23% 2,611
Federal funds sold 14,977 2.43% 91 29,133 5.10% 366
Interest-bearing deposits in other banks 500 4.60% 6 513 5.07% 6
------------ ------------ --------- -------------
Total interest-earning assets $ 1,160,595 6.77% $ 19,751 $ 990,408 7.49% $ 18,487
------------ ------------ --------- -------------
Interest-bearing liabilities:
Deposits $ 874,421 3.61% $ 7,877 $ 718,678 4.23% $ 7,492
Federal funds purchased / securities
sold under repurchase agreements 64,306 3.37% 540 66,690 5.27% 867
Other borrowings 86,511 4.96% 1,069 80,593 5.41% 1,075
------------ ------------ --------- -------------
Total interest-bearing liabilities $ 1,025,238 3.71% $ 9,486 $ 865,961 4.42% $ 9,434
------------ ------------ --------- -------------
Net interest margin/income: 3.49% $ 10,265 3.61% $ 9,053
============ =============
Net interest income increased $1,211 (13.4%) 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 2007. Loan interest income increased
$889 in the three month period, while deposit interest expense increased $384 in
the three month period, all the result of continued growth of account balances
somewhat offset by a decrease in interest rates. The annual average balance for
loans was $896,500 at March 31, 2008 with an annualized average yield of 7.26%
compared to $761,022 at March 31, 2007 with an annualized average yield of
8.18%. Interest-bearing deposits had an average balance of $874,421 with an
annualized average rate of 3.61% at March 31, 2008 compared to $718,678 and
4.23% at March 31, 2007. Some of the other contributing factors during the
three month period included increases in interest income on investment
securities and
16
a decrease in interest expense on securities sold under agreement to repurchase,
somewhat offset by decreases in federal funds sold interest income, all the
result of increased volumes and lower interest rates.
The Company's net interest margin for the three months ended March 31, 2008
decreased 12 basis points to 3.49% as compared to 3.61% for the three months
ended March 31, 2007. The net interest margin deteriorated in the first quarter
as the average rate earned on assets decreased more quickly than the average
rate on interest-bearing deposits. The rate for earning assets decreased 73
basis points for the three month period with lower average yields on loans and
federal funds sold accounting for most of the decrease. The cost to fund
earning assets decreased 23 basis points for the three month period primarily
due to lower rates on deposits and securities sold under repurchase agreements.
During the first quarter the Federal Reserve decreased its targeted funds rate
three times for a total of 2.00%. Among other things, their action caused a
significant decrease in the Company's prime based loan yields.
Noninterest Income
- -------------------
Table 5 - Noninterest Income
Three Months Ended
March 31, Variance
----------------------- ------------------
2008 2007 Amount %
---------- ----------- -------- --------
(Dollars in thousands)
Service charges and fees
on deposits $ 1,670 $ 1,397 $ 273 19.5%
Gain on sales of loans 1,260 1,284 (24) (1.9%)
Gain on sale of fixed assets 3 (52) 55 (105.8%)
Investment securities
(losses) gains, net 38 33 5 15.2%
Retail investment income 289 323 (34) (10.5%)
Trust services fees 286 274 12 4.4%
Increase in cash surrender
value of bank-owned
life insurance 164 165 (1) (0.6%)
Miscellaneous income 221 168 53 31.5%
---------- ----------- -------- --------
Total noninterest income $ 3,931 $ 3,592 $ 339 9.4%
========== =========== ======== ========
Noninterest income increased $339 (9.4%) during the three-month period as
compared to the same period in 2007. The most significant change for the three
month period was an increase in service charges and fees on deposits due to
increases in NSF income on retail and business checking accounts and debit/ATM
card income, both the result of new account growth.
17
Noninterest Expense
- --------------------
Table 6 - Noninterest Expense
Three Months Ended
March 31, Variance
----------------------- --------------
2008 2007 Amount %
---------- ----------- ------- -----
(Dollars in thousands)
Salaries and other
personnel expense $ 5,171 $ 4,796 $ 375 7.8%
Occupancy expenses 1,026 760 266 35.0%
Other operating expenses 2,724 2,215 509 23.0%
---------- ----------- ------- -----
Total noninterest expense $ 8,921 $ 7,771 $ 1,150 14.8%
========== =========== ======= ====-
Noninterest expense increased $1.2 million (23.0%) during the three-month
period.
Salaries and other personnel expenses:
Salaries and other personnel expense increased for first quarter 2008 compared
to first quarter 2007 due to the opening of new full service branches in North
Augusta and Aiken, South Carolina for the Thrift as well as the opening of a new
branch in Evans, Georgia and adding of a loan production office in Greenville,
South Carolina for the Bank. This continued growth and expansion has resulted in
the addition of new personnel, resulting in increased salaries, which were
partially offset by decreases in commissions and increases in the contra salary
expense in compliance with SFAS No. 91.
Occupancy expenses:
The most significant changes in occupancy expense were increases in rent / lease
expense for both the North Augusta and Greenville, South Carolina offices.
Miscellaneous equipment purchases and depreciation expense increased primarily
due to opening of new branches as well as the opening of the new Operations
Campus in the last quarter of 2007.
Other operating expenses:
Other operating expenses increased $509 (14.8%) for the three-month period as
compared to the same period in 2007. Processing expenses increased $66 during
the three month period and were primarily due to ATM processing, retail checking
account expense and payroll processing fees. Marketing expenses increased $85
primarily due to increases in agency fees, and additional expenses for TV and
other print media advertising. Communications expense increased $82 due to
additional telephone trunk lines installed. Professional fees increased $109
due to the outsourcing of the Sarbanes Oxley testing as well as IT consulting
expenses. Insurance and tax expense increased
18
from 2007 due to the FDIC credit of $96 that was used in 2007 and an increase in
business and intangible taxes. Loss on sale of fixed assets decreased $55 for
the three-month period due to the replacement of ATMs and automobiles in 2007.
Income Taxes
- -------------
Income tax expense totaled $1.4 million in the first quarter of 2008 as compared
to $1.5 million in the first quarter of 2007. The effective tax rate for the
three months ended March 31, 2008 and 2007 was 34.2% and 35.8%, respectively.
For the three months ended March 31, 2008 as compared to the three months ended
March 31, 2007, a decrease in nondeductible stock option expense and an increase
in general business tax credits from a new Georgia low income housing state tax
credit, resulted in a decrease in income tax expense and the effective income
tax rate.
Asset Quality
- --------------
Table 5 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $8,017 at March 31, 2008,
compared to $5,495 at December 31, 2007. Significant changes from December 2007
to March 2008 include a $412 increase in other real estate owned, a $426
increase in non-performing assets with balances less than $100 and a $1,684
increase for customers with balances greater than $100 due to $1,697 from a
single new nonaccrual loan, somewhat offset by a $536 foreclosure as well as
payments on existing nonaccrual loan balances. The ratio of non-performing
assets to total loans and other real estate was 0.86% at March 31, 2008,
compared to 0.62% at December 31, 2007. 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, 2008 and December 31, 2007.
Table 7 - Non-Performing Assets
(Dollars in thousands)
March 31,2008 December 31,2007
--------------- ------------------
Nonaccrual loans $ 7,605 $ 5,495
Other real estate owned 412 -
--------------- ------------------
Total non-performing assets $ 8,017 $ 5,495
=============== ==================
Loans past due 90 days or more
and still accruing interest $ - $ -
=============== ==================
Non-performing assets to total assets 0.63% 0.45%
Non-performing assets to total loans and ORE 0.86% 0.62%
Allowance for loan loss to total non-performing assets 159.76% 214.74%
19
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, 2008 and December 31, 2007.
Table 8 - Loan Portfolio Composition
March 31, 2008 December 31, 2007
------------------- ----------------------
Amount % Amount %
--------- -------- --------- -----------
(Dollars in thousands)
Commercial financial and
agricultural $100,716 10.86% $ 93,318 10.57%
--------- -------- --------- -----------
Real estate
Commercial. 243,173 26.23% 236,358 26.78%
Residential. 196,028 21.15% 190,613 21.59%
Residential held for sale 19,638 2.12% 11,303 1.28%
Construction and
development 337,765 36.44% 318,438 36.07%
--------- -------- --------- -----------
Total real estate 796,604 85.93% 756,712 85.72%
--------- -------- --------- -----------
Lease financing. 36 0.00% 37 0.00%
Consumer
Direct 25,085 2.71% 25,569 2.90%
Indirect 3,831 0.41% 4,237 0.48%
Revolving 1,565 0.17% 3,819 0.43%
--------- -------- --------- -----------
Total consumer 30,481 3.29% 33,625 3.81%
--------- -------- --------- -----------
Deferred loan origination fees (812) -0.09% (949) -0.11%
--------- -------- --------- -----------
Total 927,025 100.00% $882,743 100.00%
========= ======== ========= ===========
At March 31, 2008, the loan portfolio is comprised of 85.93% real estate loans.
Commercial, financial and agricultural loans comprise 10.86%, and consumer loans
comprise 3.29% of the portfolio.
Commercial real estate comprises 26.23% 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 (36.44%) 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
20
conditions. The residential category, 21.15% 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, 2.12% 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, 2008 were $15.8 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 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 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 $1,271 was charged to expense for the
quarter ended March 31, 2008 compared to $576 for the quarter ended March 31,
2007. This increase is primarily due to an increased level of classified assets
and criticized debt as well as economic and environmental factors affecting the
portfolio.
Table 9 - Allowance for Loan Losses
(Dollars In Thousands)
2008 2007
-------- --------
Beginning balance, January 1 $11,800 $ 9,777
Provision charged to expense 1,271 576
Recoveries 204 231
Loans charged off (467) (310)
-------- --------
Ending balance, March 31 $12,808 $10,274
======== ========
At March 31, 2008 the ratio of allowance for loan losses to total loans was
1.41% compared to 1.35% at December 31, 2007 and 1.33% at March 31, 2007.
Management considers the current allowance for loan losses appropriate based
upon its analysis of risk in the portfolio, although there can be no assurance
that the assumptions underlying such analysis will continue to be correct.
21
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, 2008 was 91.3% compared to
92.7% at December 31, 2007 and 88.5% at March 31, 2007. Deposits at March 31,
2008 and December 31, 2007 include $91.8 million and $78.5 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 first mortgage loans, commercial real
estate loans and investment securities. These borrowings totaled $69.0 million
at March 31, 2008. GB&T maintains repurchase lines of credit with SunTrust
Robinson Humphrey, Atlanta, Georgia, for advances up to $20.0 of which no
amounts were outstanding at March 31, 2008. GB&T has a federal funds purchased
accommodation with Silverton 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 Silverton
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 $62.3 million at March 31, 2008.
Stockholders' equity to total assets was 7.26% at March 31, 2008 compared to
7.4% at December 31, 2007 and 7.39% at March 31, 2007. The capital of the
Company exceeded all required regulatory guidelines at March 31, 2008. The
Company's Tier 1 risk-based, total risk-based and leverage capital ratios were
11.04%, 12.30%, and 9.03%, respectively, at March 31, 2008. The following table
reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
22
Table 10 - Regulatory Capital Requirements
March 31, 2008
(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 $ 111,276 11.04% 40,325 4.00% 70,951 7.04%
Total capital 123,957 12.30% 80,650 8.00% 43,307 4.30%
Tier 1 leverage ratio 111,276 9.03% 49,312 4.00% 61,964 5.03%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $ 90,343 9.90% 36,494 4.00% 53,849 5.90%
Total capital 101,750 11.15% 72,989 8.00% 28,761 3.15%
Tier 1 leverage ratio 90,343 7.95% 51,106 4.50% 39,237 3.45%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital $ 14,027 15.21% 3,689 4.00% 10,338 11.21%
Total capital 15,181 16.46% 7,379 8.00% 7,802 8.46%
Tier 1 leverage ratio 14,027 15.14% 3,707 4.00% 10,320 11.14%
Southeastern Bank Financial Corporation and Georgia Bank & Trust Company are
regulated by the Department of Banking and Finance of the State of Georgia
(DBF). The DBF requires that state banks in Georgia generally maintain a
minimum ratio of Tier 1 capital to total assets of four and one-half percent
(4.5%) for banks and four percent (4%) for holding companies.
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
23
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.
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $174,788 at March 31, 2008. 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
Contractual Obligations Less Than 1 More than
(Dollars in thousands) Year 1 - 3 Years 3 - 5 Years 5 Years
- ---------------------------- ------------ ------------ ------------ ----------
Lines of credit $ 174,788 - - -
Lease agreements 337 640 355 141
Deposits 823,924 186,266 5,771 -
Securities sold under
repurchase agreements 62,270 - - -
FHLB advances 19,000 24,000 6,000 20,000
Other borrowings 700 - - -
------------ ------------ ------------ ----------
Total commitments and
contractual obligations $ 1,081,019 $ 210,906 $ 12,126 $ 20,141
============ ============ ============ ==========
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.
24
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 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, 2008, 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, 2007. 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, 2007 included in the
Company's 2007 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.
25
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, 2007, 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 2008. Of the 13,318 shares repurchased during the first
quarter of 2008, 10,894 were privately negotiated and 2,424 were made
in the open market.
- -----------------------------------------------------------------------------------------
Maximum Number (or
Total Number of Appropriate Dollar
Shares (or Units) Value) of Shares
Total Number Average Purchased as Part of (or Units) Yet Be
of Shares Price Paid Publicly Announced Purchased Under the
Period Purchased Per Share Plans or Programs Plans or Programs
- -----------------------------------------------------------------------------------------
January 1 through
January 31, 2008 10,894 33.25 23,125 76,875
- -----------------------------------------------------------------------------------------
February 1 through
February 29, 2008 500 33.71 23,625 76,375
- -----------------------------------------------------------------------------------------
March 1 through
March 31, 2008 1,924 30.24 25,549 74,451
- -----------------------------------------------------------------------------------------
Total 13,318 $ 32.83 25,549 74,451
- -----------------------------------------------------------------------------------------
26
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 2008.
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.
27
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 12, 2008 By: /s/ Darrell R. Rains
---------------- --------------------------------
Darrell R. Rains
Group Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)
28