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 June 30, 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:
5,974,850 shares of common stock, $3.00 par value per share, outstanding as
of July 31, 2008.
SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
Part I
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2008 and
December 31, 2007 3
Consolidated Statements of Income for the Three and Six
Months ended June 30, 2008 and 2007 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 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 26
Item 4. Controls and Procedures 26
Part II Other Information
Item 1. Legal Proceedings *
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 28
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
(Dollars in thousands, except share data)
June 30,
2008 December 31,
Assets (Unaudited) 2007
------------ --------------
Cash and due from banks $ 30,797 $ 24,558
Federal funds sold 2,900 -
Interest-bearing deposits in other banks 500 500
------------ --------------
Cash and cash equivalents 34,197 25,058
Investment securities
Available-for-sale 250,230 245,429
Held-to-maturity, at cost (fair values of
$700 and $1,467, respectively) 689 1,435
Loans held for sale 19,372 11,303
Loans 948,745 871,440
Less allowance for loan losses (14,324) (11,800)
------------ --------------
Loans, net 934,421 859,640
Premises and equipment, net 34,061 32,612
Accrued interest receivable 6,462 7,416
Bank-owned life insurance 17,019 16,660
Restricted equity securities 6,401 5,060
Other assets 11,132 8,367
------------ --------------
$ 1,313,984 $ 1,212,980
============ ==============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 115,804 $ 101,272
Interest-bearing:
NOW accounts 156,811 132,186
Savings 288,859 289,731
Money management accounts 75,518 73,609
Time deposits over $100,000 287,902 243,501
Other time deposits 125,479 111,867
------------ --------------
1,050,373 952,166
Federal funds purchased and securities sold
under repurchase agreements 61,425 81,166
Advances from Federal Home Loan Bank 81,000 59,000
Other borrowed funds 400 500
Accrued interest payable and other liabilities 9,790 10,390
Subordinated debentures 20,000 20,000
------------ --------------
Total liabilities 1,222,988 1,123,222
------------ --------------
Stockholders' equity:
Common stock, $3.00 par value; 10,000,000 shares
authorized; 5,976,811 and 5,976,811 shares issued in
2008 and 2007, respectively; 5,967,414 and 5,967,536
shares outstanding in 2008 and 2007, respectively 17,930 16,301
Additional paid-in capital 55,088 39,518
Retained earnings 20,475 34,228
Treasury stock, at cost; 9,397 and 9,275 shares in
2008 and 2007, respectively (278) (317)
Accumulated other comprehensive (loss) income, net (2,219) 28
------------ --------------
Total stockholders' equity 90,996 89,758
------------ --------------
$ 1,313,984 $ 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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
2008 2007 2008 2007
---------- ---------- ---------- ---------
Interest income:
Loans, including fees $ 15,087 $ 16,399 $ 31,480 $ 31,903
Investment securities 3,337 2,921 6,598 5,533
Federal funds sold 96 316 187 682
Interest-bearing deposits in other banks 6 7 12 13
---------- --------- ---------- ----------
Total interest income 18,526 19,643 38,277 38,131
---------- --------- ---------- ----------
Interest expense:
Deposits 7,166 8,165 15,042 15,657
Federal funds purchased and securities sold
under repurchase agreements 324 803 864 1,670
Other borrowings 993 1,189 2,063 2,264
---------- --------- ----------- ---------
Total interest expense 8,483 10,157 17,969 19,591
---------- --------- ----------- ---------
Net interest income 10,043 9,486 20,308 18,540
Provision for loan losses 1,652 1,030 2,923 1,606
---------- --------- ----------- ---------
Net interest income after provision
for loan losses 8,391 8,456 17,385 16,934
---------- --------- ----------- ---------
Noninterest income:
Service charges and fees on deposits 1,820 1,582 3,491 2,978
Gain on sales of loans 1,576 1,320 2,836 2,605
Investment securities gains, net 30 - 68 33
Gain (loss) on sale of fixed assets 5 (11) 8 (63)
Retail investment income 276 275 564 598
Trust service fees 299 285 584 558
Increase in cash surrender value of
bank-owned life insurance 194 161 358 326
Miscellaneous income 252 161 473 329
---------- --------- ----------- ---------
Total noninterest income 4,452 3,773 8,382 7,364
---------- --------- ----------- ---------
Noninterest expense:
Salaries and other personnel expense 5,383 4,628 10,554 9,424
Occupancy expenses 1,005 743 2,030 1,503
Other operating expenses 2,877 2,212 5,601 4,427
---------- --------- ----------- ---------
Total noninterest expense 9,265 7,583 18,185 15,354
---------- --------- ----------- ---------
Income before income taxes 3,578 4,646 7,582 8,944
Income tax expense 1,170 1,675 2,539 3,214
---------- --------- ---------- ----------
Net income $ 2,408 $ 2,971 $ 5,043 $ 5,730
========== ========= ========== ==========
Basic net income per share $ 0.40 $ 0.50 $ 0.85 $ 0.96
========== ========= ========== ==========
Diluted net income per share $ 0.40 $ 0.49 $ 0.84 $ 0.95
========== ========= ========== ==========
Weighted average common shares outstanding 5,965,978 5,975,559 5,962,471 5,976,195
========== ========= ========== ==========
Weighted average number of common and
common equivalent shares outstanding 6,020,119 6,049,907 6,021,581 6,051,869
========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
4
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
2008 2007
---------- ----------
Cash flows from operating activities:
Net income $ 5,043 $ 5,730
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,094 730
Deferred income tax benefit (1,003) -
Provision for loan losses 2,923 1,606
Net investment securities gains (68) (33)
Net accretion of discount on investment securities (88) (111)
Increase in CSV of bank owned life insurance (358) (326)
Stock options compensation cost 102 268
(Gain) loss on disposal of premises and equipment (8) 63
Loss on the sale of other real estate 4 -
Gain on sales of loans (2,836) (2,605)
Real estate loans originated for sale (135,588) (133,166)
Proceeds from sales of real estate loans 130,355 138,739
Decrease (Increase) in accrued interest receivable 955 (679)
Increase in other assets (363) (355)
Decrease in accrued interest payable and other liabilities (600) (1,713)
---------- ----------
Net cash (used) provided by operating activities (436) 8,148
---------- ----------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 15,121 -
Proceeds from maturities of available for sale securities 50,234 30,270
Proceeds from maturities of held to maturity securities 765 1,045
Purchase of available for sale securities (73,666) (56,713)
Purchase of restricted equity securities (1,341) (168)
Proceeds from redemption of FHLB stock - 225
Net increase in loans (78,117) (63,185)
Additions to premises and equipment (3,989) (3,166)
Proceeds from sale of other real estate 408 48
Proceeds from sale of premises and equipment 1,454 8
---------- ----------
Net cash used in investing activities (89,131) (91,636)
---------- ----------
Cash flows from financing activities:
Net increase in deposits 98,206 96,348
Net decrease in federal funds purchased and
securities sold under repurchase agreements (19,741) (438)
Advances from Federal Home Loan Bank 22,000 -
Payments of Federal Home Loan Bank advances - (5,000)
Principal payments on other borrowed funds (100) -
Purchase of treasury stock (437) (71)
Payment of cash dividends (1,409) (1,413)
Proceeds from stock options exercised 179 -
Proceeds from Directors' stock purchase plan 13 -
Cash paid for fractional shares (5) -
---------- ----------
Net cash provided by financing activities 98,706 89,426
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Net increase in cash and cash equivalents $ 9,139 $ 5,938
Cash and cash equivalents at beginning of period 25,058 40,911
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Cash and cash equivalents at end of period $ 34,197 $ 46,849
========== ==========
Supplemental disclosures of cash paid during the period for:
Interest $ 18,635 $ 19,931
========== ==========
Income taxes $ 3,640 $ 2,492
========== ==========
Supplemental information on noncash investing activities:
Loans transferred to other real estate $ 412 $ 341
========== ==========
See accompanying notes to consolidated financial statements.
5
SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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)
7
Assets and Liabilities Measured on a Recurring Basis
- ----------------------------------------------------
The table below presents the balances of assets and liabilities measured at fair
value on a recurring basis by level within the hierarchy:
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
June 30, Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
(Dollars in thousands)
---------------------------------------------------------
Available-for-sale securities $ 250,230 $ 291 $ 249,939 $ -
Tax credits 553 0 0 553
Held-to-maturity securities 700 0 700 0
-------------- ---------- ------------ -------------
Total $ 251,483 $ 291 $ 250,639 $ 553
============== ========== ============= ==============
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 June 30,
2008:
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
Tax Credits
-------------
Beginning balance, Jan. 1, 2008 $ 594
Total realized losses included in earnings (41)
-------------
Ending balance, June 30, 2008 $ 553
=============
Assets and Liabilities Measured on a Non-Recurring Basis
- ---------------------------------------------------------------
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
Quoted
Prices in
Active
Markets Significant
for Other Significant
June 30, Identical Observable Unobservable
Assets Inputs Inputs
2008 (Level 1) (Level 2) (Level 3)
-------------------------------------------------
Assets:
Impaired loans 14,949 14,949
The following represents impairment charges recognized during the period:
Impaired loans, which are measured for impairment using the fair value of
collateral for collateral-dependent loans, had a carrying amount of $14,949,
with a valuation allowance of $3,000.
8
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 June 30, 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 loss for the three months ended June 30, 2008 was $742 compared to
total comprehensive income of $647 for the three months ended June 30, 2007.
Total comprehensive income for the six months ended June 30, 2008 was $2,796
compared to $4,135 for the six months ended June 30, 2007.
Note 4 - Dividends Declared
On April 16, 2008, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend was paid on May 14, 2008 to
shareholders of record as of May 2, 2008.
On April 23, 2008, the Company declared a 10% stock dividend which was paid on
June 2, 2008 to shareholders of record as of May 22, 2008. No fractional shares
were issued. Shareholders entitled to fractional shares received cash for the
fractional shares at a price equal to the closing price of the stock as of the
record date, adjusted for the stock dividend. 542,343 additional shares of
common stock and 854 shares of treasury stock were issued in connection with the
stock dividend. The Company's earnings per share has been adjusted accordingly
for all periods presented.
On July 16, 2008, the Company declared a quarterly cash dividend of $0.13 per
share on outstanding shares. The dividend is payable on August 18, 2008 to
shareholders of record as of August 5, 2008.
Note 5 - Unrealized Losses on Investment Securities
Available for Sale securities are carried at fair market value with related
unrealized gains or losses included in stockholders' equity as accumulated other
comprehensive income. Unrealized losses have not been recognized into income
because the issuers are either obligations of the U.S. government or are of high
credit quality. Also, the decline in fair value is largely due to changes in
interest rates and the fair value is expected to recover as the obligations
approach maturity.
9
Note 6 - Recently Issued Accounting Standards on the 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 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 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
11
Augusta-Richmond County, GA-SC metropolitan area, GB&T had 12.87% of all
deposits 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 decreased during the first six months of 2008 as compared to the
first six months of 2007 due to lower interest rates offset in part by increased
levels of loans outstanding. Interest income on investment securities increased
due to higher interest rates. Service charges and fees on deposits increased
due to increases in NSF income on both retail and business checking accounts as
a result of new account growth. The introduction of risk based pricing required
by Fannie Mae and Freddie Mac which has resulted in higher coupon rates caused
the increased gain on sale of loans during the first six months of 2008 as
compared to the first six months of 2007.
Table 1 - Selected Financial Data
June 30, December 31, December 31,
2008 2007 2003
----------- -------------- --------------
(Dollars in thousands)
Assets $1,313,984 $ 1,212,980 $ 630,633
Loans 968,117 882,743 432,679
Deposits 1,050,373 952,166 483,952
Return on average total assets 0.80% 1.04% 1.31%
Return on average equity 11.53% 14.03% 15.62%
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 the year ended 2003 was $7.9 million compared to net
income of $11.8 million at year end 2007. Net income for the six months ended
June 30, 2008 was $5.0 million. The Company has paid cash dividends of $0.13
per share paid 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
12
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, Federal Home Loan Bank advances and other wholesale
funding including brokered certificates of deposit. 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
collectibility of the
13
principal is unlikely. Subsequent recoveries are added to the allowance. The
allowance is an amount that reflects management's estimate of the level of
inherent losses in the portfolio. Factors considered by management in
determining the adequacy of the allowance include, but are not limited to: (1)
detailed reviews of individual loans; (2) historical and current trends in loan
charge-offs for the various portfolio segments evaluated; (3) the level of the
allowance in relation to total loans and to historical loss levels; (4) levels
and trends in non-performing and past due loans; (5) collateral values of
properties securing loans; (6) management's assessment of economic conditions.
The Company's Board of Directors reviews the recommendations of management
regarding the appropriate level for the allowance for loan losses based upon
these factors.
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 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 applied to principal and interest income depending upon
the overall risk of principal loss to the Company.
Performance Overview -- Net Income
- ----------------------------------
The Company's net income for the second quarter of 2008 was $2,408, which was a
decrease of $563 (18.9%) compared to net income of $2,971 for the second quarter
of 2007. Diluted net income per share for the three months ended June 30, 2008
was $0.40 compared to $0.49 for the three months ended June 30, 2007. Net
income for the first six months of 2008 was $5,043, a decrease of $687 (12.0%)
compared with net income of $5,730 for the first six months of 2007. The
decrease in net income for the three and six months ended June 30, 2008 as
compared with the three and six months ended June 30, 2007, was primarily a
result of increases in the provision for loan losses due to increased levels of
nonperforming assets. Interest income on loans decreased due to lower interest
rates somewhat offset by increased volumes. Interest income on investment
securities increased due to increased volumes and higher interest rates.
Interest expense on deposits, securities sold under repurchase agreements and
other borrowings decreased as a result of lower interest rates.
14
Factors contributing to the increase in noninterest income for the six months
ended June 30, 2008, were primarily due to increases in service charges and fees
on deposits due to NSF income on retail and business checking accounts as a
result of new account growth. Noninterest expense increased during the three
and six months ended June 30, 2008 compared to the same periods ended June 30,
2007, due to increases in salaries, employee benefits, occupancy expense and
other operating expenses. Significant changes in other operating expenses
during the three and six month periods include increases in processing,
marketing, communications, professional fees, and insurance and tax expense.
Table 2 - Selected Balance Sheet Data
Variance
June 30, December 31, ---------------------
2008 2007 Amount %
------------- ------------- ---------- -------
(Dollars in thousands)
Cash and due from banks $ 30,797 $ 24,558 $ 6,239 25.4%
Federal funds sold 2,900 - 2,900 N/A
Investment securities 250,919 246,864 4,055 1.6%
Loans 968,117 882,743 85,374 9.7%
Assets 1,313,984 1,212,980 101,004 8.3%
Deposits 1,050,373 952,166 98,207 10.3%
Securities sold under repurchase agreements 61,425 81,166 (19,741) (24.3%)
Advances from Federal Home Loan Bank 81,000 59,000 22,000 37.3%
Liabilities 1,222,988 1,123,222 99,766 8.9%
Stockholders' equity 90,996 89,758 1,238 1.4%
Table 2 highlights significant changes in the balance sheet at June 30, 2008 as
compared to December 31, 2007. Assets increased $101,004, primarily the result
of higher balances for loans and investment securities as well as increases in
cash and due from banks. These increases were funded by increases in total
deposits of $98,207 along with increases in Federal Home Loan Bank advances,
somewhat offset by decreases in securities sold under repurchase agreements.
Net income of $5,043 less cash dividends paid of $1,409 also contributed to the
funding.
The annualized return on average assets for the Company was 0.80% for the six
months ended June 30, 2008, compared to 1.06% for the same period last year.
While total assets have increased $180,666 since second quarter 2007, net income
has decreased $563 resulting in a decrease in ROA.
The annualized return on average stockholders' equity was 11.53% for the six
months ended June 30, 2008, compared to 14.19% for the same period last year.
The decrease is primarily attributable to the decrease in net income and
increases in accumulated other comprehensive income.
15
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 table shows 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 June 30, 2008 Three Months Ended June 30, 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 $ 946,386 6.33% $ 15,087 $ 792,449 8.22% $ 16,399
Investment securities 251,467 5.31% 3,337 227,454 5.14% 2,921
Federal funds sold 19,628 1.96% 96 23,177 5.46% 316
Interest-bearing deposits in other
banks 500 4.60% 6 511 5.48% 7
---------- ----------- ---------- ---------
Total interest-earning assets $1,217,981 6.05% $ 18,526 $1,043,591 7.48% $ 19,643
---------- ----------- ---------- ---------
Interest-bearing liabilities:
Deposits $ 918,522 3.13% $ 7,166 $ 769,266 4.26% $ 8,165
Federal funds purchased / securities
sold under repurchase agreements 62,589 2.08% 324 61,431 5.24% 803
Other borrowings 100,145 3.98% 993 78,479 6.08% 1,189
---------- ----------- ---------- ---------
Total interest-bearing liabilities $1,081,256 3.15% $ 8,483 $ 909,176 4.48% $ 10,157
---------- ----------- ---------- ---------
Net interest margin/income: 3.25% $ 10,043 3.58% $ 9,486
=========== =========
16
Table 4 - Average Balances, Income and Expenses, Yields and Rates
Six Months Ended June 30, 2008 Six Months Ended June 30, 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 $ 921,443 6.78% $ 31,480 $ 776,823 8.20% $ 31,903
Investment securities 250,042 5.28% 6,598 216,130 5.12% 5,533
Federal funds sold 17,303 2.16% 187 26,138 5.26% 682
Interest-bearing deposits in other
banks 500 4.60% 12 512 5.27% 13
---------- ----------- ---------- ---------
Total interest-earning assets $1,189,288 6.40% $ 38,277 $1,019,603 7.47% $ 38,131
---------- ----------- ---------- ---------
Interest-bearing liabilities:
Deposits $ 896,472 3.37% $ 15,042 $ 744,111 4.24% $ 15,657
Federal funds purchased / securities
sold under repurchase agreements 63,447 2.73% 864 64,046 5.26% 1,670
Other borrowings 93,328 4.43% 2,063 79,531 5.74% 2,264
---------- ----------- ---------- ---------
Total interest-bearing liabilities $1,053,247 3.42% $ 17,969 $ 887,688 4.45% $ 19,591
---------- ----------- ---------- ---------
Net interest margin/income: 3.37% $ 20,308 3.59% $ 18,540
=========== =========
Net interest income increased $556 (5.9%) during the three-month period and
$1,768 (9.5%) during the six-month period as compared to the same period in
2007. Loan interest income decreased $1,312 and $423 in the three and six month
periods, respectively, while deposit interest expense decreased $999 and $615 in
the three and six month periods, respectively, all the result of decreasing
interest rates offset in part by the continued growth of account balances. The
annual average balance for loans was $921,443 at June 30, 2008 with an
annualized average yield of 6.78% compared to $776,823 at June 30, 2007 with an
annualized average yield of 8.20%. Interest-bearing deposits had an annual
average balance of $896,472 with an annualized average rate of 3.37% at June 30,
2008 compared to $744,111 and 4.24% at June 30, 2007. Other contributing
factors during both the three and six month periods included increases in
interest income on investment securities, decreases in interest expense on other
borrowings, securities sold under repurchase agreements and subordinated
debentures, all the result of lower interest rates.
The Company's net interest margin for the three and six months ended June 30,
2008 was 3.25% and 3.37% respectively as compared to 3.58% and 3.59% for the
three and six months ended June 30, 2007. The rate for earning assets decreased
143 basis points and 107 basis points for the three and six month periods,
respectively, with lower average yields on loans and federal funds sold
accounting for most of the decrease. The cost to fund earning assets decreased
133 basis points and 103 basis points for the three and six month periods,
respectively, primarily due to lower rates on deposits and securities sold under
repurchase agreements.
17
Noninterest Income
- -------------------
Table 5 - Noninterest Income
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
----------------------- ------------------- ---------------------- --------------------
2008 2007 Amount % 2008 2007 Amount %
-------------- ------- --------- -------- ------------- ------- ---------- --------
(Dollars in thousands) (Dollars in thousands)
Service charges and fees
on deposits $ 1,820 $1,581 $ 239 15.1% $ 3,491 $2,978 $ 513 17.2%
Gain on sales of loans 1,576 1,320 256 19.4% 2,836 2,605 231 8.9%
Investment securities
(losses) gains, net 30 - 30 N/A 68 33 35 104.2%
Gain on sale of fixed assets 5 (11) 16 (144.6%) 8 (63) 71 (112.2%)
Retail investment income 276 275 1 0.2% 564 598 (34) (5.7%)
Trust services fees 299 285 14 4.9% 584 558 26 4.7%
Increase in cash surrender
value of bank-owned
life insurance 194 161 33 20.6% 358 326 32 9.9%
Miscellaneous income 252 162 90 55.7% 473 329 144 43.7%
-------------- ------- --------- -------- ------------- ------- ---------- --------
Total noninterest income $ 4,452 $3,773 $ 679 18.0% $ 8,382 $7,364 $ 1,018 13.8%
============== ======= ========= ======== ============= ======= ========== ========
Noninterest income increased $679 (18.0%) during the three-month period and
increased $1,018 (13.8%) during the six-month period. The most significant
changes for the three and six month periods were increases in service charges
and fees on deposits and gain on sale of loans. Service charges and fees on
deposits increased primarily due to increases in NSF income on both retail and
business checking accounts as a result of new account growth. The increased
gain on sale of loans is due to the introduction of risk based pricing required
by Fannie Mae and Freddie Mac which has resulted in higher coupon rates.
Noninterest Expense
- --------------------
Table 6 - Noninterest Expense
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
---------------------- ---------------- --------------------- ----------------
2008 2007 Amount % 2008 2007 Amount %
-------------- ------ --------- ----- ----------- ------- --------- -----
(Dollars in thousands) (Dollars in thousands)
Salaries and other
personnel expense $ 5,383 $4,628 $ 755 16.3% $ 10,554 $ 9,424 $ 1,130 12.0%
Occupancy expenses 1,005 743 262 35.3% 2,030 1,503 527 35.1%
Other operating expenses 2,877 2,212 665 30.1% 5,601 4,427 1,174 26.5%
-------------- ------ --------- ----- ------------ ------- --------- -----
Total noninterest expense $ 9,265 $7,583 $ 1,682 22.2% $ 18,185 $15,354 $ 2,831 18.4%
============== ====== ========= ===== ============ ======= ========= =====
18
Noninterest expense increased $1,682 (22.2%) during the three-month period and
$2,831 (18.4%) during the six-month period.
Salaries and other personnel expenses:
Salaries and other personnel expense increased $755 (16.3%) during the
three-month period and $1,130 (12.0%) during the six-month period as compared to
the same period in 2007. This increase is primarily due to the opening of new
full service branches in North Augusta and Aiken, South Carolina and in Evans,
Georgia as well as the addition of a loan production office in Greenville, South
Carolina. The Company's continued growth and expansion has resulted in the
addition of new personnel, resulting in increased salaries, somewhat offset by
increases in contra salary expense in compliance with SFAS No. 91.
Occupancy expenses:
Increases in occupancy expenses during the three and six month periods were
primarily due to rent and lease expense for the North Augusta and Greenville,
South Carolina offices. Additionally, miscellaneous equipment purchases and
depreciation expense increased as a result of opening new branches and the new
Operations Campus in the last quarter of 2007.
Other operating expenses:
Other operating expenses increased $665 (30.1%) for the three-month period and
$1,174 (26.5%) for the six-month period. Increases in processing expenses
during both the three and six month periods were attributable to increases in
retail checking account expense, ATM processing and payroll processing fees.
Marketing expenses increased primarily due to additional expenses for TV and
other print media advertising. Communications expense increased as a result of
additional telephone expense. Increases in professional fees were attributable
to outsourcing of the Sarbanes Oxley testing as well as increased legal and
consulting fees. Insurance and tax expense increased for both the three-month
and six-month periods due to the FDIC credit of $96 that was used in 2007.
Income Taxes
- -------------
Income tax expense in the second quarter of 2008 totaled $1,170, a decrease of
$505 (30.2%) over the second quarter of 2007. The effective tax rate for the
three months ended June 30, 2008 and 2007 was 32.7% and 36.1%, respectively.
Income tax expense for the six months ended June 30, 2008 totaled $2,539 for an
effective tax rate of 33.5% compared to 35.9% for the six months ended June 30,
2007. The decrease in the effective tax rate for both the three and six month
periods is primarily due to the increased estimate of state tax credits and
lower pretax income while tax exempt income has remained consistent.
19
Asset Quality
- --------------
Table 7 which follows shows the current and prior period amounts of
non-performing assets. Non-performing assets were $27,689 at June 30, 2008,
compared to $5,495 at December 31, 2007 and $3,411 at June 30, 2007.
Significant changes from December 2007 to June 2008 include a $224 increase in
non-performing assets with balances less than $100, a $21,970 increase for
customers with balances greater than $100 due to $22,511 from new nonaccrual
loans, 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 2.86% at June 30, 2008, compared to 0.62% at December 31,
2007 and 0.42% at June 30, 2007. The control and monitoring of non-performing
assets continues to be a priority of management.
The increase in non-performing assets is comprised mainly of several loan
relationships in the ADC, commercial real estate and 1-4 family residential
mortgage categories, including certain participations purchased. The primary
reason for the increase is due to current market conditions which have slowed
the absorption of builders' completed homes and developed lots along with some
decline in property values.
There were no loans past due 90 days or more and still accruing at June 30,
2008, December 31, 2007 and June 30, 2007.
Table 7 - Non-Performing Assets
(Dollars in thousands)
June 30, December 31, June 30,
2008 2007 2007
---------- -------------- ----------
Nonaccrual loans $ 27,689 $ 5,495 $ 3,118
Other real estate owned - - 293
---------- -------------- ----------
Total non-performing assets $ 27,689 $ 5,495 $ 3,411
========== ============== ==========
Loans past due 90 days or more
and still accruing interest $ - $ - $ -
========== ============== ==========
Non-performing assets to total assets 2.11% 0.45% 0.30%
Non-performing assets to total loans and ORE 2.86% 0.62% 0.42%
Allowance for loan loss to total non-performing assets 51.73% 214.74% 326.39%
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
20
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 June 30, 2008 and December 31, 2007.
Table 8 - Loan Portfolio Composition
June 30,2008 December 31, 2007
--------------------- -------------------
Amount % Amount %
--------- ---------- ---------- -------
(Dollars in thousands)
Commercial financial and agricultural $100,096 10.34% $ 93,318 10.57%
--------- ---------- ---------- -------
Real estate
Commercial 262,846 27.15% 236,358 26.78%
Residential 197,902 20.44% 190,613 21.59%
Residential held for sale 19,372 2.00% 11,303 1.28%
Construction and
development 356,900 36.87% 318,438 36.07%
--------- ---------- ---------- -------
Total real estate 837,020 86.46% 756,712 85.72%
--------- ---------- ---------- -------
Lease financing 35 0.00% 37 0.00%
Consumer
Direct 25,521 2.64% 25,569 2.90%
Indirect 3,728 0.39% 4,237 0.48%
Revolving 2,460 0.25% 3,819 0.43%
--------- ---------- ---------- -------
Total consumer 31,709 3.28% 33,625 3.81%
--------- ---------- ---------- -------
Deferred loan origination fees (743) -0.08% (949) -0.11%
--------- ---------- ---------- -------
Total 968,117 100.00% $ 882,743 100.00%
========= ========== ========== =======
At June 30, 2008, the loan portfolio is comprised of 86.46% real estate loans.
Commercial, financial and agricultural loans comprise 10.34%, and consumer loans
comprise 3.28% of the portfolio.
Commercial real estate comprises 27.15% of the loan portfolio and is
approximately half 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 (36.87%)
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, 20.44% 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, 2.00% of the portfolio, comprises loans that are in the process of
being sold into the secondary market. In these
21
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 June 30, 2008 were $17.9 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 $1,650 was charged to expense for the
quarter ended June 30, 2008 compared to $1,030 for the quarter ended June 30,
2007, and $2,921 for the six months ended June 30, 2008 compared to $1,605 for
the six months ended June 30, 2007. The increase in provision for loan losses
for both three and six month periods is primarily due to an increase in
classified/watch loans, weaknesses in a few residential development loans
participated with other banks as well as the provision related to overall loan
growth, including the new Thrift's loan portfolio. The increase in the
allowance for loan losses as of June 30, 2008 as compared to June 30, 2007 is
primarily due to increases in outstanding loan balances, increases in the
allowance applicable to specific loans, and increases to the allowance due to
higher levels of Classified and Watch-rated debt as well as management's
assessment of current economic environment.
Table 9 - Allowance for Loan Losses
(Dollars in Thousands)
2008 2007
-------- --------
Beginning balance, January 1 $11,800 $ 9,777
Provision charged to expense 2,921 1,605
Recoveries 387 413
Loans charged off (784) (662)
-------- --------
Ending balance, June 30 $14,324 $11,133
======== ========
At June 30, 2008 the ratio of allowance for loan losses to total loans was 1.48%
compared to 1.34% at December 31, 2007 and 1.37% at June 30, 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.
22
Liquidity and Capital Resources
- ----------------------------------
The Company's liquidity remains adequate to meet operating and loan funding
requirements. The loan to deposit ratio at June 30, 2008 was 92.2% compared to
92.7% at December 31, 2007 and 90.1% at June 30, 2007. Deposits at June 30,
2008 and December 31, 2007 include $104,609 and $78,482 of brokered certificates
of deposit, respectively. The Bank and the Thrift have also utilized borrowings
from the Federal Home Loan Bank. They each maintain a line of credit with the
Federal Home Loan Bank approximating 10% of their total assets. Federal Home
Loan Bank advances are collateralized by eligible first mortgage loans,
commercial real estate loans and investment securities. These borrowings
totaled $81,000 at June 30, 2008. GB&T maintains repurchase lines of credit
with SunTrust Robinson Humphrey, Atlanta, Georgia, for advances up to $20,000 of
which no amounts were outstanding at June 30, 2008. GB&T has a federal funds
purchased accommodation with Silverton Bank, Atlanta, Georgia, for advances up
to $16,700 and with SunTrust Bank, Atlanta, Georgia for advances up to $10,000,
while SB&T has a federal funds purchased accommodation with Silverton Bank,
Atlanta, Georgia, for advances up to $3,300. 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 $57,911 at June
30, 2008.
Shareholders' equity to total assets was 6.93% at June 30, 2008 compared to
7.40% at December 31, 2007 and 7.22% at June 30, 2007. The capital of the
Company exceeded all required regulatory guidelines at June 30, 2008. The
Company's Tier 1 risk-based, total risk-based and leverage capital ratios were
10.73%, 11.98%, and 8.74%, respectively, at June 30, 2008. The following table
reflects the current regulatory capital levels in more detail, including
comparisons to the regulatory minimums.
23
Table 10 - Regulatory Capital Requirements
June 30, 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 $113,075 10.73% 42,158 4.00% 70,917 6.73%
Total capital 126,281 11.98% 84,315 8.00% 41,966 3.98%
Tier 1 leverage ratio 113,075 8.74% 51,768 4.00% 61,307 4.74%
Georgia Bank & Trust Company
Risk-based capital:
Tier 1 capital $ 93,122 9.87% 37,746 4.00% 55,376 5.87%
Total capital 104,931 11.12% 75,493 8.00% 29,438 3.12%
Tier 1 leverage ratio 93,122 7.86% 53,307 4.50% 39,815 3.36%
Southern Bank & Trust
Risk-based capital:
Tier 1 capital $ 14,052 13.16% 4,270 4.00% 9,782 9.16%
Total capital 15,388 14.41% 8,540 8.00% 6,848 6.41%
Tier 1 leverage ratio 14,052 13.30% 4,226 4.00% 9,826 9.30%
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
24
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.
Unfunded commitments to extend credit where contract amounts represent potential
credit risk totaled $178,966 at June 30, 2008. These commitments are primarily
at variable interest rates.
The Company's commitments are funded through internal funding sources of
scheduled repayments of loans and sales and maturities of investment securities
available for sale or external funding sources through acceptance of deposits
from customers or borrowings from other financial institutions.
The following table is a summary of the Company's commitments to extend credit,
commitments under contractual leases as well as the Company's contractual
obligations, consisting of deposits, FHLB advances, which are subject to early
termination options, and borrowed funds by contractual maturity date.
Table 11 - Commitments More
and Contractual Obligations Less than 1 - 3 3 - 5 than 5
($in thousands) 1 Year Years Years Years
- ------------------------------ ---------- ------- ------ -------
Lines of credit $ 178,966 - - -
Lease agreements 338 623 291 113
Deposits 1,005,259 39,213 5,449 452
Securities sold under
repurchase agreements 57,911 - - -
FHLB advances 29,000 32,000 - 20,000
Other borrowings 400 - - -
---------- ------- ------ -------
Total commitments and
contractual obligations $1,271,874 $71,836 $5,740 $20,565
========== ======= ====== =======
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
25
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 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 June 30, 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.
26
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 second quarter of 2008. No shares were repurchased during the
second quarter.
Maximum Number
Total Number of (or Appropriate
Total Shares (or Units) Dollar Value) of
Number of Average Purchased as Part of Shares (or Units) Yet
Shares Price Paid Publicly Announced Be Purchased Under
Period Purchased Per Share Plans or Programs the Plans or Programs
- --------------- --------- ---------- --------------------- ---------------------
April 1 through
April 30, 2008 - - 25,549 74,451
- --------------- --------- ---------- --------------------- ---------------------
May 1 through
May 31, 2008 - - 25,549 74,451
- --------------- --------- ---------- --------------------- ---------------------
June 1 through
June 30, 2008 - - 25,549 74,451
- --------------- --------- ---------- --------------------- ---------------------
Total - - 25,549 74,451
- --------------- --------- ---------- --------------------- ---------------------
On April 15, 2004, the Company announced the commencement of
a stock repurchase program, pursuant to which it will, from time
to time,
27
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 second quarter of 2008.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 23,
2008 at the Company's Cotton Exchange office located at 32 8th
Street, Augusta, Georgia.
(b) The following directors were elected for a term of one year
and until a successor is duly qualified and elected:
William J. Badger
R. Daniel Blanton
Warren Daniel
Edward G. Meybohm
Robert W. Pollard, Jr.
Larry S. Prather, Sr.
Randolph R. Smith
Ronald L. Thigpen
John W. Trulock, Jr.
W. Marshall Brown
Patrick D. Cunning
(c) The following matters were voted on at the meeting as was
previously identified in the Proxy materials forwarded to each
shareholder:
1. Proposal to elect the eleven individuals nominated by
management as Directors.
Votes were cast as follows:
Director For Withhold
-------- --- --------
William J. Badger 4,799,407 3,355
R. Daniel Blanton 4,796,907 5,855
Warren Daniel 4,799,407 3,355
Edward G. Meybohm 4,799,407 3,355
Robert W. Pollard, Jr. 4,796,907 5,855
Larry S. Prather, Sr. 4,799,407 3,355
Randolph R. Smith, M.D. 4,796,907 5,855
Ronald L. Thigpen 4,794,391 8,371
John W. Trulock, Jr. 4,799,407 3,355
W. Marshall Brown 4,799,407 3,355
Patrick D. Cunning 4,799,407 8,371
28
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: August 11, 2008 By: /s/ Darrell R. Rains
--------------- --------------------
Darrell R. Rains
Group Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)
30