SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended.................................................03-31-98
Commission File Number................................................ 2-83157
SOUTHEASTERN BANKING CORPORATION
--------------------------------
(Exact name of registrant as specified in charter)
GEORGIA 58-1423423
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1010 NORTHWAY STREET
DARIEN, GEORGIA 31305
- --------------------------------------- ----------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (912) 437-4141
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING
- ----- ------------------
Common Stock - $1.25 Par Value 3,580,797 Shares at 4-30-98
THIS DOCUMENT CONSISTS OF 16 PAGES.
THE EXHIBIT INDEX IS LOCATED AT PAGE 15.
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 3/31/98 12/31/97
------- --------
<S> <C> <C>
Cash and due from banks $ 15,041,987 $ 21,376,483
Federal funds sold 23,080,000 18,365,000
------------- -------------
Cash and cash equivalents 38,121,987 39,741,483
Investment securities:
Held-to-maturity (market value of
approximately $20,048,000 and
$20,158,000 at March 31, 1998 and
December 31, 1997) 19,276,174 19,348,874
Available-for-sale, at market value 91,234,029 89,323,195
------------- -------------
Total investment securities 110,510,203 108,672,069
Loans, gross 166,714,977 190,455,167
Unearned income (3,652,989) (3,632,308)
Allowance for loan losses (3,877,344) (3,705,273)
------------- -------------
Loans, net 159,184,644 183,117,586
Premises and equipment, net 6,481,257 7,594,389
Intangible assets 1,620,050 3,058,197
Other assets 5,071,515 5,714,109
------------- -------------
Total assets $ 320,989,656 $ 347,897,833
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits $ 50,325,952 $ 56,824,279
Interest-bearing deposits 227,168,160 245,544,420
------------- -------------
Total deposits 277,494,112 302,368,699
U.S. Treasury demand note 1,046,194 3,770,688
Other liabilities 4,100,078 3,889,789
------------- -------------
Total liabilities 282,640,384 310,029,176
Stockholders' equity:
Common stock - $1.25 par value; authorized
10,000,000 shares; issued and outstanding 4,475,996 4,475,996
3,580,797 shares
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 32,425,587 31,986,080
------------- -------------
Realized stockholders' equity 38,293,306 37,853,799
Accumulated other comprehensive income-
unrealized gains on investment securities 55,966 14,858
------------- -------------
Total stockholders' equity 38,349,272 37,868,657
------------- -------------
Total liabilities and stockholders' equity $ 320,989,656 $ 347,897,833
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
------- --------
<S> <C> <C>
Interest income:
Loans, including fees $ 4,736,984 $ 5,035,826
Federal funds sold 261,764 233,975
Investment securities:
Taxable 1,336,605 1,357,371
Tax-exempt 247,034 285,934
------------ ------------
Total interest income 6,582,387 6,913,106
------------ ------------
Interest expense:
Deposits 2,765,071 2,867,981
U.S. Treasury demand note 16,520 14,487
Note payable to bank 21,146
------------ ------------
Total interest expense 2,781,591 2,903,614
------------ ------------
Net interest income 3,800,796 4,009,492
Provision for loan losses 315,000 625,000
------------ ------------
Net interest income after
provision for loan losses 3,485,796 3,384,492
------------ -----------
Noninterest income:
Service charges on deposit accounts 631,879 750,623
Investment securities gains (losses), net 8,123 11,327
Gain on sale of branches before tax
provision of $559,731 101,908
Other operating income 251,742 241,347
------------ ------------
Total noninterest income 993,652 1,003,297
------------ ------------
Noninterest expense:
Salaries and employee benefits 1,553,118 1,638,941
Net occupancy and equipment 429,757 513,976
Other operating expense 746,208 765,349
------------ ------------
Total noninterest expense 2,729,083 2,918,266
------------ ------------
Income before income taxes 1,750,365 1,469,523
Income tax expense 1,072,019 464,043
------------ ------------
Net income $ 678,346 $ 1,005,480
============ ============
Net income per common share - basic $ 0.19 $ 0.28
============ ============
Dividends per share $ 0.06 2/3 $ 0.06 1/3
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
------- --------
<S> <C> <C>
Net income: $ 678,346 $ 1,005,480
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (net of income
tax expense of $23,939 at March 31, 1998 46,469 (350,942)
and income tax benefit of $180,788 at
March 31, 1997)
Less: Reclassification adjustment for gains
included in net income (net of income tax
benefit of $2,762 and $3,851 at March 31,
1998 and 1997) (5,361) (7,476)
--------- ----------
Total other comprehensive income 41,108 (358,418)
--------- ----------
Comprehensive income $ 719,454 $ 647,062
========= ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 678,346 $ 1,005,480
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 315,000 625,000
Depreciation 235,932 276,354
Amortization and accretion, net 14,247 71,872
Investment securities gains, net (8,123) (11,327)
Net gains on sales of other real estate (13,398) (21,582)
Gain on sale of branches before tax
provision (101,908)
Changes in assets and liabilities:
Decrease in other assets 789,460 203,707
Increase (decrease) in other liabilities 689,599 (243,090)
------------ ------------
Net cash provided by operating activities 2,599,155 1,906,414
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of investment securities:
Held-to-maturity 972,300 2,527,000
Available-for-sale 37,936,413 8,484,450
Proceeds from sales of investment securities:
Available-for-sale 3,501,562
Proceeds from sales of other real estate 57,207 8,470
Purchases of investment securities:
Held-to-maturity (904,668)
Available-for-sale (43,234,987) (14,022,500)
Net decrease in loans 5,785,903 2,106,175
Additions to premises and equipment, net (72,140) (64,358)
Net funds paid in sale of branches (13,589,236)
------------ ------------
Net cash used in investing activities (9,547,646) (960,763)
------------ ------------
Cash flows from financing activities:
Net increase in demand, NOW, and
saving deposits 6,647,331 885,780
Net increase (decrease) in certificates of deposit 1,871,662 (695,639)
Net (decrease) increase in U.S. Treasury demand note (2,724,494) 1,692,923
Payments on note payable (450,000)
Cash dividends paid (465,504) (441,512)
------------ ------------
Net cash provided by financing activities 5,328,995 991,552
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,619,496) 1,937,203
Cash and cash equivalents at beginning of year 39,741,483 32,505,525
------------ ------------
Cash and cash equivalents at March 31 $ 38,121,987 $ 34,442,728
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
1. ACCOUNTING AND REPORTING POLICY FOR INTERIM PERIODS
All adjustments necessary to a fair statement of the results for the
interim periods presented have been made. These adjustments include
estimated accruals for various fringe benefit and other transactions
normally determined or settled at year-end. These adjustments are of a
normal, recurring nature.
2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Adoption of this statement did not have a significant impact on
the Company's financial condition or results of operations.
3. SALE OF BRANCHES
On January 16, 1998, the Company sold its three offices in Alachua County,
Florida to First National Bank of Alachua. Cash, loans, and premises and
equipment with book values of approximately $32,159,000 were sold while
deposits and other liabilities totaling approximately $33,646,000 were
divested. The premium paid to the Company totaled $1,487,461, resulting in
a pretax gain of approximately $101,908 for book purposes and $1,487,461
for tax purposes. The book tax provision on the sale aggregated $559,731,
resulting in an after tax loss of $457,823.
5
<PAGE>
SOUTHEASTERN BANKING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southeastern Banking Corporation (the Company) is a bank holding company
headquartered in Darien, Georgia. Its two subsidiaries, Southeastern Bank and
Southeastern Bank of Florida, operate full-service banking offices in southeast
Georgia and northeast Florida. Southeastern Bank (SEB), a state banking
association incorporated under the laws of the State of Georgia, operates from
its main office in Darien and its branch offices in Douglas, Eulonia, Folkston,
Hazlehurst, Hoboken, Kingsland, Nahunta, Nicholls, St. Marys, and Woodbine. At
March 31, 1998, SEB had total assets of approximately $278,416,000(1).
Southeastern Bank of Florida (SEBF), a state banking association incorporated
under the laws of the State of Florida, operates from its main office in Yulee
and its branch offices in Callahan and Hilliard. SEBF acquired the Callahan,
Hilliard, and Yulee offices of Compass Bank in North Florida's Nassau County on
February 15, 1996. Geographically, Nassau County borders Camden and Charlton
Counties in south Georgia where SEB has offices. SEBF received approximately
$22,982,000 in assets and assumed approximately $23,709,000 in deposit and other
liabilities. Prior to January 16, 1998, SEBF also had offices in Alachua,
Gainesville, and Jonesville. On January 16, 1998, SEBF sold its three offices in
central Florida to First National Bank of Alachua. Cash, loans, and fixed assets
sold by SEBF on January 16 aggregated approximately $32,159,000; deposits &
other liabilities divested totaled $33,646,000. The sale of these locations
enables the Company to concentrate its resources and strengthen its presence in
its northeast Florida and southeast Georgia markets. SEBF had total assets of
approximately $42,908,000(1) at March 31, 1998 versus $75,675,000(1) at year-end
1997.
The Company has filed applications with its regulators to merge SEBF into
SEB. Provided all necessary regulatory approvals are obtained, the merger is
expected to be completed by July 1998. The merger of these two subsidiaries will
reduce the duplicative overhead costs associated with two separate entities.
Total assets declined $26,908,177 or 7.73% at March 31, 1998 compared to
year-end 1997 after increasing $1,395,523 or 0.42% during the same period in
1997. Virtually all of the decline in total assets was attributable to the
January branch sale; this decline was partially offset by asset growth at SEB
during the first three months of 1998. Including short-term instruments,
investment securities increased to 37% of earning assets at March 31, 1998 from
35% at year-end 1997 and March 31, 1997. Loans comprised 55% of earning assets
at March 31, 1998 versus 59% at December 31, 1997.
(1) Stand-alone basis
(2) Investment securities with original maturities of three months or less.
LOANS
Net loans declined $23,760,871 or 12.72% since year-end 1997.
Approximately 73% of the current period drop was attributable to the sale of the
Alachua offices. The remaining 27% decline resulted mainly from the repayment of
large commercial loans at SEB. The net loans to deposit ratio was 58.76% at
March 31, 1998 versus 61.79% and 61.52% at year-end 1997 and March 31, 1997.
During the year-ago period, net loans declined 1.38%. The Company remains
focused on quality loan growth in its northeast Florida and southeast Georgia
markets.
Nonperforming loans represented 0.41% of net loans at March 31, 1998
compared to 0.62% at year-end 1997 and 0.89% at March 31, 1997. The current
period decline in nonperforming loans resulted primarily from the reduction in
nonaccrual loan balances since 1997. At March 31, 1998, approximately 94% of
nonperforming loans pertained to four borrowers. Additionally, approximately
$833,000 or 35% of loans past due 90 days or more pertained to eight separate
borrowers. Management is unaware of any other material concentrations within
nonperforming loans. The table on the next page provides information about
nonperforming loans and other assets.
6
<PAGE>
NONPERFORMING ASSETS
(Amounts in thousands) 3/31/98 12/31/97 3/31/97 12/31/96
- ---------------------- ------- -------- ------- --------
Nonaccrual loans $ 282 $ 775 $1,196 $ 686
Restructured loans(1) 384 389 415 418
------ ------ ------ ------
Total nonperforming loans 666 1,164 1,611 1,104
Foreclosed real estate(2) 1,009 722 654 726
------ ------ ------ ------
Total nonperforming assets $1,675 $1,886 $2,265 $1,830
====== ====== ====== ======
Accruing loans past due 90 days or more $2,387 $1,767 $2,267 $1,100
====== ====== ====== ======
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foreclosure or in
settlement of debts previously contracted.
Nonperforming loans include loans classified as nonaccrual when it appears that
future collection of principal or interest according to contractual terms is
doubtful and loans whose terms have been restructured to provide for a reduction
or deferral of either interest or principal because of a deterioration in the
financial position of the borrower. Foreclosed real estate represents real
property acquired by actual foreclosure or directly by title or deed transfer in
settlement of debt. The Company continues to accrue interest on consumer loans
that are contractually past due 90 days or more, if in management's opinion the
interest is collectible, up to the time of repossessing the underlying
collateral or charging the loan amount against the allowance for loan losses.
The Company changes the status of loans categorized as commercial, financial,
agricultural, and real estate to nonaccrual when the loan becomes past due 90
days or more and management determines that the ultimate collectibility of the
loan is doubtful or the borrower has declared bankruptcy. All nonaccrual loans
are reduced to the lesser of the market value of the underlying real estate or
other collateral as determined by an independent appraisal or the principal
balance of the loan being placed on nonaccrual status. Accrued interest on any
loan switched to nonaccrual status is reversed. All known potential problem
loans were included in nonperforming loans for all periods presented except
December 31, 1996. Potential problem loans not included in nonperforming loans
at December 31, 1996 totaled approximately $1,400,000. Subsequent to year-end
1996, these potential problem loans were placed on nonaccrual status and
charged-off to their estimated collectible values. The Company had no
concentration of loans to borrowers engaged in any single industry that exceeded
10% of total loans for any of the periods presented. A significant portion of
the Company's loans are collateralized by real estate; at March 31, 1998, loans
secured by real estate aggregated approximately $110,749,000.
The Company maintains an allowance for loan losses available to absorb
potential losses in the loan portfolio. As a percent of net loans, the allowance
increased to 2.38% at March 31, 1998 from 1.98% at year-end 1997. The
substantial jump in the allowance ratio was foremost a function of the decline
in net loans outstanding since December 31, 1997. The provision provided from
income returned to pre-1997 levels, totaling $315,000 at March 31, 1998 versus
$625,000 at March 31, 1997 and $300,000 at March 31, 1996. The increased
provision last year was necessary to cover actual and anticipated charge-offs in
the commercial loan portfolio. Net charge-offs totaled $142,929 at March 31,
1998, down appreciably from 1997's $462,564. Changes to the allowance as a
percent of total nonperforming assets were not significant for the periods
presented. Activity in the allowance is presented in the table on the next page.
7
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES THREE MONTHS ENDED MARCH 31
(Amounts in thousands) -------------------------------
- ------------------------- 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,705 $ 3,735 $ 3,532
Provision for loan losses 315 625 300
Charge-offs:
Commercial, financial, and agricultural 41 369 35
Real estate - construction 0 0 0
Real estate - mortgage 24 1 65
Consumer, including credit cards 204 212 162
-------- -------- --------
Total charge-offs 269 582 262
-------- -------- --------
Recoveries:
Commercial, financial, and agricultural 34 19 13
Real estate - construction 0 0 0
Real estate - mortgage 3 1 2
Consumer, including credit cards 89 99 73
-------- -------- --------
Total recoveries 126 119 88
-------- -------- --------
Net charge-offs 143 463 174
-------- -------- --------
Allowances for loan losses at March 31 $ 3,877 $ 3,897 $ 3,658
======== ======== ========
Net loans outstanding(1) at March 31 $163,062 $181,212 $173,590
======== ======== ========
Average loans outstanding at March 31 $170,608 $182,411 $168,219
======== ======== ========
Ratios:
Allowance to net loans 2.38% 2.15% 2.11%
======== ======== ========
Net charge-offs to average loans (annualized) 0.34% 1.02% 0.41%
======== ======== ========
Provision to average loans (annualized) 0.74% 1.37% 0.71%
======== ======== ========
<FN>
- ----------
(1) Net of unearned income
</FN>
</TABLE>
Management believes the allowance was adequate at March 31, 1998 based on
conditions reasonably known to management; however, the allowance may increase
or decrease based on loan growth, changes in internally generated credit
ratings, changes in general economic conditions of the Company's trade areas, or
historical loan loss experience. These factors are analyzed and reviewed on a
continual basis to determine if any changes to the provision for loan losses
should be made. Management estimates that the provision for the entire fiscal
1998 will approximate $1,260,000. Net charge-offs are expected to remain
substantially lower in 1998 than 1997.
OTHER ASSETS
Gross premises and equipment declined $1,012,539 during the first quarter
of 1998 due to the sale of the Alachua County branches; offsetting capital
expenditures during the three month period totaled a mere $72,140. During the
year-ago period, gross premises and equipment declined due to the transfer of
the Hawthorne Road real property values to other real estate. Southeastern Bank
of Florida's Hawthorne Road office was closed on January 31, 1997 due to its low
deposit and loan volumes and poor growth prospects; this closing had minimal
impact on our financial position.
Intangible assets declined during the first three months of 1998 due to
the elimination of goodwill associated with the Alachua offices. The elimination
of the Alachua intangible had a favorable impact on the Company's capital
ratios; see the Capital Resources section of this Analysis for details. Other
assets declined $642,594 or 11.25%. The current period decline resulted largely
from reductions in accrued interest receivables on loans and investment
securities at both SEBF and SEB. The SEBF decline represented a byproduct of the
January branch sale. The SEB decline resulted from lower loan volumes since
year-end 1997. The decline in accrued interest receivables was negated in part
by a $287,000 increase in foreclosed real estate. The nonperforming assets table
on the previous page provides comparative details on foreclosed real estate
balances.
8
<PAGE>
LIQUIDITY
Liquidity is managed to ensure sufficient cash flow to satisfy demands for
credit, deposit withdrawals, and other corporate needs. The Company meets most
of its daily liquidity needs through the management of cash and federal funds
sold. Additional liquidity is provided by payments and maturities of the loan
and investment securities portfolios. The investment portfolio has been
structured to meet liquidity needs prior to asset maturity when necessary.
QUARTER-END DEPOSITS
The Company's core deposit base is the foundation for its liquidity
position. Deposits declined $24,874,587 or 8.23% at March 31, 1998 compared to
year-end 1997. Interest-bearing deposits posted the largest decline, dropping
$18,376,260 or 7.48%. Noninterest-bearing deposits declined $6,498,327 or
11.44%. Time, savings, and interest-bearing demand deposits(1) represented
49.57%, 33.16%, and 17.27% of interest-bearing deposits at March 31, 1998 versus
51.67%, 31.62%, and 16.69% at year-end 1997. SEBF's deposits declined
approximately $32,148,000 or 48.12% on a stand-alone basis since year-end 1997;
the decrease in SEBF's deposits was entirely attributable to the sale of the
Alachua offices. SEBF's deposit decline was mitigated by deposit growth of
approximately $7,273,000 at SEB. Approximately 87% and 13% of quarter-end
deposits at March 31, 1998 were attributable to SEB and SEBF, respectively.
During the same period last year, deposits grew $190,141 or 0.06%.
Interest-bearing deposits increased $2,152,501 or 0.90%, while
noninterest-bearing deposits declined $1,962,360 or 3.58%.
AVERAGE DEPOSITS
As a consequence of the January branch sale, average deposits declined
during the first quarter of 1998. Savings balances continued to represent a
larger portion of deposits, underscoring the popularity of the SMARTSAVER
account that was introduced in March 1996. The composition of average deposits
at March 31 for each of the last three years is shown in the table below:
<TABLE>
<CAPTION>
3/31/98 3/31/97 3/31/96(2)
------------------ ------------------ ------------------
DEPOSITS AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
(AMOUNTS IN THOUSANDS) BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
- ---------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 50,810 18.42% $ 53,466 18.24% $ 51,216 19.19%
Interest-bearing demand deposits(1) 39,031 14.15% 45,610 15.56% 52,784 19.78%
Savings 71,800 26.03% 68,633 23.42% 30,896 11.57%
Time deposits 114,213 41.40% 125,363 42.78% 132,027 49.46%
-------- ------ -------- ------ -------- ------
Total $275,854 100.00% $293,072 100.00% $266,923 100.00%
======== ====== ======== ====== ======== ======
<FN>
- ----------
(1) Includes NOW and money market accounts.
(2) These 1996 averages do not fully reflect the impact of increased savings
deposits or deposits assumed from the Nassau County branches.
(3) The Company became a member of the Federal Home Loan Bank of Atlanta
(FHLB) in 1997; to date, the Company has not received any FHLB advances.
</FN>
</TABLE>
In addition to deposits and the other liquidity sources above, the Company
utilizes short-term borrowings as needed in the form of U.S. Treasury demand
notes, FHLB advances(3), and federal funds purchased. The Company has unsecured
lines of credit for federal funds purchased from correspondent banks totaling
$11,500,000. At March 31, 1998 and December 31, 1997, the Company had no amounts
outstanding under these lines.
9
<PAGE>
INTEREST RATE AND MARKET RISK/
INTEREST RATE SENSITIVITY
The normal course of business activity exposes the Company to interest
rate risk. Fluctuations in interest rates may result in changes in the fair
market value of the Company's financial instruments, cash flows, and net
interest income. The Company attempts to maintain a relatively neutral interest
rate sensitivity position by structuring the balance sheet so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any time constitute interest rate sensitivity. An indicator of
interest rate sensitivity is the difference between interest rate sensitive
assets and interest rate sensitive liabilities; this difference is known as the
interest rate sensitivity gap.
The gap analysis below provides a snapshot of the Company's interest rate
sensitivity position at March 31, 1998:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY AT MARCH 31, 1998
(Amounts in thousands) -------------------------------------------------------------------
- ---------------------- REPRICING WITHIN
-----------------------------------------------------
MORE
0 - 3 4 - 12 ONE - FIVE THAN FIVE
MONTHS MONTHS YEARS YEARS TOTAL
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS:
Federal funds sold $ 23,080 $ 23,080
Securities(1) 19,102 15,816 62,524 11,654 109,096
Loans(3) 59,914 19,882 47,583 39,054 166,433
--------- --------- --------- --------- ---------
Total interest rate sensitive assets 102,096 35,698 110,107 50,708 298,609
--------- --------- --------- --------- ---------
INTEREST RATE SENSITIVE LIABILITIES:
Deposits(2) 139,555 61,167 26,359 87 227,168
U.S. Treasury demand note 1,046 1,046
--------- --------- --------- --------- ---------
Total interest rate sensitive
liabilities 140,601 61,167 26,359 87 228,214
--------- --------- --------- --------- ---------
Interest rate sensitivity gap $ (38,505) $ (25,469) $ 83,748 $ 50,621 $ 70,395
========= ========= ========= ========= =========
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (38,505) $ (63,974) $ 19,774 $ 70,395
========= ========= ========= =========
Ratio of cumulative gap to total interest
rate sensitive assets (12.89)% (21.42)% 6.62% 23.57%
========= ========= ========= =========
Ratio of cumulative interest rate sensitive
assets to interest rate sensitive liabilities 72.61% 68.29% 108.67% 130.85%
========= ========= ========= =========
Cumulative gap at December 31, 1997(3) $ (57,546) $ (88,526) $ 14,367 $ 66,329
========= ========= ========= =========
Cumulative gap at March 31, 1997(3) $ (42,385) $ (66,401) $ 38,617 $ 69,252
========= ========= ========= =========
<FN>
- ----------
(1) Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for
mortgage-backed securities is based on expected average lives which may be
different from the contractual terms. Equity securities are excluded.
(2) NOW, money market, and savings account balances are included in the 0-3
months repricing category.
(3) At March 31, 1997, distribution of maturities for installment loans was
based on scheduled contractual payments. At March 31, 1998 and December 31,
1997, no cash flow assumptions other than final contractual maturities were
made for installment loans with fixed rates. Nonaccrual loans have been
excluded from the 1998 and year-end 1997 totals.
</FN>
</TABLE>
As expected, the Company's cumulative gap position remained negative
through the one year time interval at March 31, 1998. A negative gap position
indicates that the Company's rate sensitive liabilities will reprice faster than
its rate sensitive assets. The decline in our gap position through the one year
time interval since 1997 results largely from the divestiture of the Alachua
deposits; these deposits were concentrated within the one year repricing
categories.
The gap analysis does not fully reflect the complexities of the Company's
interest rate sensitivity position and the impact of interest rate movements on
the Company's financial position, cash flows, and interest income. For example,
the gap analysis presumes that all loan(3) and securities(1) will perform
according to their contractual
10
<PAGE>
maturities when, in many cases, actual loan terms are much shorter than the
original terms and securities are subject to early redemption. In addition, the
repricing of various categories of assets and liabilities is subject to
competitive pressures, customer needs, and other external factors. The Company
monitors and adjusts its exposure to interest rate risks within specific policy
guidelines based on its view of current and expected market conditions.
CAPITAL RESOURCES
Realized stockholders' equity grew $439,506 or 1.16% during the first
quarter of 1998. Book value per share increased $0.12 during the three month
period to $10.69 at March 31, 1998. Dividends declared year-to-date totaled $.06
2/3 at March 31, 1998 versus $0.06 1/3 at March 31, 1997, a 5.27% increase. The
change in accumulated other comprehensive income was not significant at March
31, 1998 compared to year-end 1997. Accumulated other comprehensive income
measures net fluctuations in the market values of our investment securities
classified as available-for-sale.
Capital adequacy is measured with a framework that makes capital
requirements sensitive to the risk profiles of individual banking companies.
Regulatory guidelines define capital as either Tier 1 (primary stockholders'
equity) or Tier 2 (certain debt instruments and a portion of the allowance for
loan losses). The Company and its subsidiaries are subject to a minimum Tier 1
capital to risk-weighted assets ratio of 4% and a total capital (Tier 1 plus
Tier 2) to risk-weighted assets ratio of 8%. Additionally, the Company is
subject to a Tier 1 leverage ratio that measures the ratio of Tier 1 capital to
average quarterly assets. Unrecognized gains and losses on investment securities
are excluded from the calculation of risk-based capital.
The regulatory agencies have defined "well-capitalized" institutions as
those whose capital ratios equal or exceed the following ratios: Tier 1 capital
ratio of 6%, total risk-based capital ratio of 10%, and Tier 1 leverage ratio of
5%. Our capital ratios for the most recent periods are presented in the table
below:
<TABLE>
<CAPTION>
CAPITAL RATIOS
(Amounts in thousands) 3/31/98 12/31/97 3/31/97 12/31/96
- ----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Tier 1 capital:
Realized stockholders' equity $ 38,293 $ 37,854 $ 35,056 $ 34,277
Intangible assets and other
adjustments (1,638) (3,075) (3,331) (3,434)
-------- -------- -------- --------
Total Tier 1 capital 36,655 34,779 31,725 30,843
-------- -------- -------- --------
Tier 2 capital:
Portion of allowance for loan losses 2,143 2,444 2,377 2,400
Allowable long-term debt -- -- -- --
-------- -------- -------- --------
Total Tier 2 capital 2,143 2,444 2,377 2,400
-------- -------- -------- --------
Total risk-based capital $ 38,798 $ 37,223 $ 34,101 $ 33,243
======== ======== ======== ========
Risk-weighted assets $169,745 $194,224 $188,616 $190,630
======== ======== ======== ========
Risk-based ratios:
Tier 1 capital 21.59% 17.91% 16.82% 16.18%
======== ======== ======== ========
Total risk-based capital 22.86% 19.16% 18.08% 17.44%
======== ======== ======== ========
Tier 1 leverage ratio 11.61% 10.31% 9.59% 9.42%
======== ======== ======== ========
Realized stockholders' equity
to assets 11.93% 10.88% 10.38% 10.20%
======== ======== ======== ========
</TABLE>
Due to the elimination of certain intangible assets, the sale of the Alachua
County locations did not have a negative impact on our capital ratios.
11
<PAGE>
RESULTS OF OPERATIONS
Net income for the first quarter totaled $678,346 or $0.19 per share
compared to $1,005,480 or $0.28 per share in 1997. The primary factor in our
first quarter results was the after tax loss associated with the January 16,
1998 sale of our Alachua County offices. Including state and federal income tax
expense of $559,731, the Company recognized an after-tax loss of $457,823 on the
sale of the Alachua offices. The tax effect of the sale of the central Florida
locations was anticipated by management in 1997 and represented a necessary
byproduct of the Company's efforts to focus on the creation of more profitable
operations within its southeast Georgia and northeast Florida markets.
Fortunately, this tax liability constitutes a nonrecurring charge. Excluding the
after-tax loss from the sale of the Alachua locations, net income totaled
$1,136,169 at March 31, 1998 versus $1,005,480 at March 31, 1997. First quarter
earnings declined $131,233 or 11.54% in 1997 when compared to the same period in
1996. Virtually all of the 1997 decline in earnings was attributable to a
$325,000 increase in the provision for loan losses at March 31, 1997 compared to
1996. The increased provision in 1997 was necessary to cover actual and
anticipated charge-offs in the commercial loan portfolio. As further discussed
in the Financial Condition section of this Analysis, the provision provided from
income at March 31, 1998 returned to pre-1997 levels, declining $310,000 or
49.60% form March 31, 1997 and increasing a mere $15,000 from March 31, 1996.
The return on beginning equity at March 31 for each of the last three years was
7.17%, 11.73%, and 14.88%.
NET INTEREST INCOME
Net interest income declined $208,696 or 5.21% during the first three
months of 1998 compared to 1997 after increasing $294,201 or 7.92% during the
same period in 1997. Approximately 76% of the net interest income decline at
March 31, 1998 was attributable to SEBF and the sale of the Alachua offices. The
remaining 24% decline was due to SEB. Although SEB's total interest income
increased marginally, net interest income declined due to overall increases in
average balances and rates paid on deposits. The table on the next page provides
comparative details about average balances, income/expense, and average yields
earned and rates paid on interest-earning assets and interest-bearing
liabilities at March 31, 1998, 1997, and 1996.
NONINTEREST INCOME AND EXPENSE
Virtually all of the fluctuation in noninterest income and expense during
the first three months of 1998 was due to the sale of the Alachua County
branches and the elimination of the corresponding income and expenses that
accrued to those locations. During the same period last year, noninterest income
grew $45,012 or 4.70%. Increases in service charges on deposit accounts and
gains on investment securities were the major factors in the 1997 noninterest
income results. Service charges on deposit accounts rose $37,319 or 5.23% at
March 31, 1997 after increasing $76,493 or 12.01% in 1996. Deposits assumed from
the Nassau County branches accounted for the majority of the 1997 improvement in
service charges on deposit accounts and 53% of the 1996 improvement; the Nassau
County locations were acquired on February 15, 1996. Salaries and employee
benefits were up $66,705 or 4.24% at March 31, 1997 compared to 1996. Most of
the increase was due to an entire quarter of salaries and employee benefits on
the Nassau County locations in 1997 versus 1996. Net occupancy and equipment
expense increased 6.08% during the first quarter of 1997 compared to 1996; most
of the 1997 increase was attributable to a full quarter of depreciation and
other occupancy expenses on the Nassau County locations. Other operating expense
grew $96,940 or 14.50% during the 1997 first quarter due largely to increased
legal and accounting fees and advertising expenses.
YEAR 2000
The Company's computer hardware and software are configured to operate
effectively in the year 2000 and beyond; as such, the Company has not incurred
and does not expect to incur any significant costs in regards to its in-house
computer system. The Company remains in discussion with its vendors and
customers about their progress in addressing Year 2000 issues.
12
<PAGE>
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES
PAID
<TABLE>
<CAPTION>
AT MARCH 31
-----------------------------------------------------------------------------------------
1998 1997 1996(5)
---- ---- ----
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
(AMOUNTS IN THOUSANDS) BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ---------------------- -------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans, net(1)(3) $170,608 $ 4,754 11.15% $182,411 $ 5,043 11.06% $168,219 $ 4,759 11.32%
Federal funds sold 19,419 262 5.39% 17,970 234 5.21% 12,142 159 5.25%
Taxable investment securities(2) 87,671 1,337 6.10% 86,949 1,357 6.24% 77,319 1,162 6.01%
Tax-exempt investment securities(3) 17,743 373 8.42% 19,755 432 8.74% 20,814 477 9.16%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets $295,441 $ 6,726 9.11% $307,085 $ 7,066 9.20% $278,494 $ 6,557 9.42%
======== ======= ====== ======== ======= ====== ======== ======= ======
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing demand deposits(4) $ 39,031 $ 289 2.96% $ 45,610 $ 329 2.89% $ 52,784 $ 397 3.01%
Savings(6) 71,800 815 4.54% 68,633 767 4.47% 30,896 251 3.25%
Time deposits 114,213 1,661 5.82% 125,363 1,773 5.66% 132,027 1,970 5.97%
U.S.Treasury demand note 966 17 6.84% 1,280 14 4.53% 972 15 6.12%
Note payable 1,167 21 7.26% 2,232 41 7.42%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities $226,010 $ 2,782 4.92% $242,053 $ 2,904 4.80% $218,911 $ 2,674 4.89%
======== ======= ====== ======== ======= ====== ======== ======= ======
Excess of interest-earning assets
over interest-bearing liabilities $ 69,431 $ 65,032 59,583
======== ======== ========
Interest rate spread 4.19% 4.40% 4.53%
====== ====== ======
NET INTEREST INCOME $ 3,944 $ 4,162 $ 3,883
======= ======= =======
NET INTEREST MARGIN 5.34% 5.42% 5.58%
====== ====== ======
<FN>
(1)Average loans are shown net of unearned income. Nonperforming loans are
included. Additionally, interest income includes loan fees.
(2)Includes investment securities with original maturities of three months or
less.
(3)Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%
(4)NOW and money market accounts.
(5)Certain reclassifications were made to conform with current year
presentation.
(6)For details on deposit components, refer to the Liquidity section of this
Analysis.
</FN>
</TABLE>
13
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. Adoption
of this statement did not have a significant impact on the Company's financial
condition or results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing analysis reviews important factors affecting the financial
condition and results of operations of the Company for the periods shown. The
Company has made, and may continue to make, various forward-looking statements
with respect to business and financial matters. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipates," "intends," "goal," "continued," "estimates," "expects,"
"projects," "potential," "plans," "should," "believe," and scheduled." Although
these statements are made in good faith and are believed to have a reasonable
basis, the Company cautions that these forward-looking statements are subject
to numerous assumptions, risks, and uncertainties, all of which may change over
time. Actual results could vary significantly from forward-looking statements.
This analysis should be read in conjunction with the Consolidated Financial
Statements and related notes.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(NOT APPLICABLE)
ITEM 2. CHANGES IN SECURITIES
(NOT APPLICABLE)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(NOT APPLICABLE)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(NOT APPLICABLE)
ITEM 5. OTHER INFORMATION
(NOT APPLICABLE)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
EXHIBIT TABLE PAGE
------------------------------------- ----
Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
(b) Reports on Form 8-K - NONE
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(REGISTRANT)
By: /s/ S. MICHAEL LITTLE
-----------------------------------
S. Michael Little, Vice President
By: /s/ WANDA D. PITTS
-----------------------------------
Wanda D. Pitts, Secretary
Date: MAY 13, 1998
----------------------
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,042
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,080
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,234
<INVESTMENTS-CARRYING> 19,276
<INVESTMENTS-MARKET> 20,048
<LOANS> 163,062
<ALLOWANCE> 3,877
<TOTAL-ASSETS> 320,990
<DEPOSITS> 277,494
<SHORT-TERM> 1,046
<LIABILITIES-OTHER> 4,100
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 33,873
<TOTAL-LIABILITIES-AND-EQUITY> 320,990
<INTEREST-LOAN> 4,737
<INTEREST-INVEST> 1,584
<INTEREST-OTHER> 262
<INTEREST-TOTAL> 6,582
<INTEREST-DEPOSIT> 2,765
<INTEREST-EXPENSE> 2,782
<INTEREST-INCOME-NET> 3,801
<LOAN-LOSSES> 315
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 2,729
<INCOME-PRETAX> 1,750
<INCOME-PRE-EXTRAORDINARY> 678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 678
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 5.34
<LOANS-NON> 282
<LOANS-PAST> 2,387
<LOANS-TROUBLED> 384
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,705
<CHARGE-OFFS> 269
<RECOVERIES> 126
<ALLOWANCE-CLOSE> 3,877
<ALLOWANCE-DOMESTIC> 2,148
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,729
</TABLE>
