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............................................... 06-30-98
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 numbcr 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 7-31-98
THIS DOCUMENT CONSISTS OF 16 PAGES.
THE EXHIBIT INDEX IS LOCATED AT PAGE 15.
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 6/30/98 12/31/97
------ ------- --------
<S> <C> <C>
Cash and due from banks $ 13,453,829 $ 21,376,483
Federal funds sold 13,750,000 18,365,000
------------- -------------
Cash and cash equivalents 27,203,829 39,741,483
Investment securities:
Held-to-maturity (market value of approximately
$21,701,000 and $20,158,000 at June 30, 1998
and December 31, 1997) 20,954,496 19,348,874
Available-for-sale, at market value 107,032,002 89,323,195
------------- -------------
Total investment securities 127,986,498 108,672,069
Loans, gross 165,521,279 190,455,167
Unearned income (3,578,611) (3,632,308)
Allowance for loan losses (4,070,303) (3,705,273)
------------- -------------
Loans, net 157,872,365 183,117,586
Premises and equipment, net 6,486,721 7,594,389
Intangible assets 1,572,369 3,058,197
Other assets 5,538,778 5,714,109
------------- -------------
Total assets $ 326,660,560 $ 347,897,833
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Liabilities:
Noninterest-bearing deposits $ 50,937,115 $ 56,824,279
Interest-bearing deposits 229,910,398 245,544,420
------------- -------------
Total deposits 280,847,513 302,368,699
U.S. Treasury demand note 2,962,409 3,770,688
Other liabilities 3,595,707 3,889,789
------------- -------------
Total liabilities 287,405,629 310,029,176
------------- -------------
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 33,325,555 31,986,080
------------- -------------
Realized stockholders'equity 39,193,274 37,853,799
Accumulated other comprehensive income -
unrealized gains on investment securities 61,657 14,858
------------- -------------
Total stockholders' equity 39,254,931 37,868,657
------------- -------------
Total liabilities and stockholder's equity $ 326,660,560 $ 347,897,833
============= =============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 1998 1997
----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 4,562,315 $ 5,170,820 $ 9,299,299 $10,206,646
Federal funds sold 197,480 139,611 459,244 373,586
Investment securities:
Taxable 1,576,464 1,435,166 2,913,069 2,792,537
Tax-exempt 258,810 279,218 505,844 565,152
----------- ----------- ----------- -----------
Total interest income 6,595,069 7,024,815 13,177,456 13,937,921
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,854,856 2,899,688 5,619,927 5,767,669
U.S. Treasury demand note 10,165 18,729 26,685 33,216
Note payable to bank -- 13,854 -- 35,000
----------- ----------- ----------- -----------
Total interest expense 2,865,021 2,932,271 5,646,612 5,835,885
----------- ----------- ----------- -----------
Net interest income 3,730,048 4,092,544 7,530,844 8,102,036
Provision for loan losses 315,000 430,000 630,000 1,055,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 3,415,048 3,662,544 6,900,844 7,047,036
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 619,495 757,618 1,251,374 1,508,241
Investment securities gains, net -- 2,000 8,123 13,327
Gain on sale of branches before tax
provision of $559,731 -- -- 101,908 --
Other operating income 255,859 139,086 507,601 380,433
----------- ----------- ----------- -----------
Total other income 875,354 898,704 1,869,006 1,902,001
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,528,772 1,661,741 3,081,890 3,300,682
Net occupancy and equipment 416,910 515,010 846,667 1,028,986
Other operating expense 708,330 831,044 1,454,538 1,596,393
----------- ----------- ----------- -----------
Total other expense 2,654,012 3,007,795 5,383,095 5,926,061
----------- ----------- ----------- -----------
Income before income taxes 1,636,390 1,553,453 3,386,755 3,022,976
Income tax expense 497,583 499,661 1,569,602 963,704
----------- ----------- ----------- -----------
Net income $ 1,138,807 $ 1,053,792 $ 1,817,153 $ 2,059,272
=========== =========== =========== ===========
Basic earnings per share $ 0.32 $ 0.30 $ 0.51 $ 0.58
=========== =========== =========== ===========
Dividends per share $ 0.06 2/3 $ 0.06 1/3 $ 0.13 1/3 $ 0.12 2/3
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 1998 1997
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income $ 1,138,807 $ 1,053,792 $ 1,817,153 $ 2,059,272
Other comprehensive income:
Unrealized gains on investment securities:
Unrealized holding gains arising during period 5,691 416,894 52,160 65,952
(net of income tax expense of $2,932 and $214,764 for the
quarter ended June 30, 1998 and 1997 and income tax
expense of $26,870 and $33,975 for the six months
ended June 30, 1998 and 1997)
Less: Reclassification adjustment for gains included
in net income (net of income tax benefit of $680 for
the quarter ended June 30, 1997 and income tax benefit
of $2,762 and $4,531 for the six months ended June 30,
1998 and 1997) (1,320) (5,361) (8,796)
----------- ----------- ----------- -----------
Total other comprehensive income 5,691 415,574 46,799 57,156
----------- ----------- ----------- -----------
Comprehensive income $ 1,144,498 $ 1,469,366 $ 1,863,952 $ 2,116,428
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1998 1997
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,817,153 $ 2,059,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 630,000 1,055,000
Depreciation 453,739 526,929
Amortization and accretion, net 111,025 140,574
Deferred income tax benefit (17,998) (16,032)
Investment securities gains, net (8,123) (13,327)
Net gains on sales of other real estate (62,690) (22,158)
Gain on sale of branches before tax provision (101,908) --
Changes in assets and liabilities:
Decrease (increase) in other assets 363,410 (215,642)
Increase (decrease) in other liabilities 185,228 (755,921)
------------ ------------
Net cash provided by operating activities 3,369,836 2,758,695
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of investment securities:
Held-to-maturity 2,245,700 2,961,900
Available-for-sale 31,323,334 12,870,461
Proceeds from sales of investment securities:
Available-for-sale 3,501,562 --
Proceeds from sales of other real estate 346,430 311,456
Purchase of investment securities:
Held-to-maturity (3,871,688) (1,006,354)
Available-for-sale (47,449,531) (19,023,984)
Net increase in short-term securities (4,995,525) --
Net decrease (increase) in loans 6,465,982 (5,868,784)
Additions to premises and equipment, net (244,290) (145,630)
Net funds paid in sale of branches (13,589,236) --
------------ ------------
Net cash used in investing activities (26,267,262) (9,900,935)
------------ ------------
Cash flows from financing activities:
Net increase in demand, NOW, and
savings deposits 4,854,858 335,261
Net increase in certificates of deposit 7,017,536 22,031
Net (decrease) increase in U.S. Treasury demand note (808,279) 1,251,530
Payments on note payable -- (850,000)
Cash dividends paid (704,343) (668,177)
------------ ------------
Net cash provided by financing activities 10,359,772 90,645
------------ ------------
Net decrease in cash and cash equivalents (12,537,654) (7,051,595)
Cash and cash equivalents at beginning of year 39,741,483 32,505,525
------------ ------------
Cash and cash equivalents at June 30 $ 27,203,829 $ 25,453,930
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30,1998
(UNAUDITED)
1. ACCOUNTING AND REPORTING POLICY FOR INTERIM PERIODS
The accompanying unaudited consolidated financial statements of
Southeastern Banking Corporation (the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. These statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the
opinion of management, all adjustments necessary for a fair presentation
have been made. These adjustments, consisting of normal, recurring
accruals, include estimates for various fringe benefit and other
transactions normally determined or settled at year-end. Operating
results for the six months ended June 30, 1998 are not necessarily
indicative of trends or results to be expected for the year ended
December 31, 1998. For further information, refer to the consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
2. 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.
3. MERGER OF BANK SUBSIDIARIES
At the close of business on June 25, 1998, Southeastern Bank of Florida
merged with and into Southeastern Bank. The banking offices of
Southeastern Bank of Florida are now operating as branches of Southeastern
Bank. The merger of these wholly-owned subsidiaries did not have a
significant impact on the Company's financial condition or results of
operations.
4. 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 consolidated financial statements.
5
<PAGE>
SOUTHEASTERN BANKING CORPORATION
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. Prior to June 25, 1998, the Company
had two bank subsidiaries - Southeastern Bank (SEB) and Southeastern Bank of
Florida (SEBF). At the close of business on June 25, SEBF, with offices in
Callahan, Hilliard, and Yulee, merged with and into SEB. The merger of these
two subsidiaries is expected to reduce the duplicative overhead costs associated
with two separate entities. SEB, a state banking association also headquartered
in Darien, now operates fourteen full-service banking offices in southeast
Georgia and northeast Florida. Unless otherwise indicated, the ensuing Analysis
presumes that SEB and SEBF have operated as a single entity for all periods
presented and discussed.
SEB 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 other
offices. SEB received approximately $22,982,000 in assets and assumed
approximately $23,709,000 in deposit and other liabilities. Prior to January 16,
1998, SEB also had offices in Alachua, Gainesville, and Jonesville, Florida. On
January 16, 1998, SEB sold its three offices in central Florida to First
National Bank of Alachua. Cash, loans, and fixed assets sold by SEB on January
16 aggregated approximately $32,159,000; deposits and other liabilities divested
totaled $33,646,000. The Company recognized a pretax gain of $101,908 but
after-tax loss of $457,823 on the sale of these branches. The sale of these
locations enables the Company to concentrate its resources and strengthen its
presence in its northeast Florida and southeast Georgia markets. SEB had total
assets of approximately $326,067,000 at June 30, 1998 versus $320,379,000 at
March 31, 1998 and $347,272,000 at year-end 1997.
Total assets declined $21,237,273 or 6.10% at June 30, 1998 compared to
year-end 1997. During the year-ago period, total assets grew $1,451,151 or
0.43%. Virtually all of the current decline in total assets was attributable to
the January branch sale; this decline was partially offset by asset growth at
other SEB locations during the first half of 1998. Including short-term
instruments,(1) investment securities represented 42% of earning assets at June
30, 1998 versus 35% at December 31, 1997. Loans declined to 53% of earning
assets at June 30, 1998 from 59% at year-end 1997 and 61% at June 30, 1997.
(1) Investment securities with original maturities of three months or less.
LOANS
Net loans declined an additional $1,119,320 since March 31, 1998,
declining an aggregate $24,880,191 or 13.32% year-to-date. The majority, or 70%,
of the six month decline was attributable to the Alachua divestiture. The
remaining drop resulted chiefly from customer repayment of large commercial
loans. The net loans to deposit ratio totaled 57.66% at June 30, 1998 compared
to 61.79% and 63.89% at year-end 1997 and June 30, 1997. During the same period
last year, net loans grew $4,539,043 or 2.47%. The Company remains focused on
quality loan growth in its northeast Florida and southeast Georgia markets.
Nonaccrual loans declined an appreciable 71.35% or $553,000 since
year-end 1997, comprising 0.14% of net loans at June 30, 1998. Total
nonperforming loans represented O.37% of net loans at June 30, 1998 compared to
0.62% and 0.96% at December 31, 1997 and June 30, 1997. Loans to three separate
borrowers comprised $560,000 or 93% of nonaccrual and restructured loan balances
at June 30, 1998. Additionally, approximately 32% of loans past due 90 days or
more pertained to eight separate borrowers. Management is unaware of any other
6
<PAGE>
material concentrations within nonperforming loans. The table below provides
further information about nonperforming assets and loans past due 90 days or
more:
NONPERFORMING ASSETS
(Amounts in thousands) 6/30/98 12/31/97 6/30/97 12/31/96
- ---------------------------------------- ------- -------- ------- --------
Nonaccrual loans $ 222 $ 775 $1,414 $ 686
Restructured loans(1) 381 389 395 418
------ ------ ------ ------
Total nonperforming loans 603 1,164 1,809 1,104
Foreclosed real estate(2) 1,041 722 570 726
------ ------ ------ ------
Total nonperforming assets $1,644 $1,886 $2,379 $1,830
====== ====== ====== ======
Accruing loans past due 90 days or more $2,434 $1,767 $1,578 $1,100
====== ====== ====== ======
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foresclosure 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.
Loans secured by real estate totaled approximately $107,273,000 at June 30,
1998.
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 53 basis points to 2.51% at June 30, 1998 from 1.98% at December 31,
1997. The substantial jump in the allowance ratio was foremost a function of the
decline in net loans outstanding since year-end 1997. The provision provided
from income returned to pre-1997 levels, aggregating $630,000 at mid-year 1998
versus $1,055,000 at June 30, 1997 and $600,000 at June 30, 1996. The increased
provision last year was necessary to cover higher charge-offs in the commercial
loan portfolio. Net charge-offs totaled $264,971 at June 30, 1998, down
substantially, or $869,094, from 1997's $1,134,065. 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>
SIX MONTHS ENDED JUNE 30
ALLOWANCE FOR LOAN LOSSES --------------------------------
(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 630 1,055 600
Charge-offs:
Commercial, financial, and agricultural 130 1,029 82
Real estate - construction 0 0 0
Real estate - mortgage 33 2 90
Consumer, including credit cards 368 390 315
-------- -------- --------
Total charge-offs 531 1,421 487
-------- -------- --------
Recoveries:
Commercial, financial, and agricultural 46 63 37
Real estate - construction 0 0 0
Real estate - mortgage 5 1 5
Consumer, including credit cards 215 222 122
-------- -------- --------
Total recoveries 266 286 164
-------- -------- --------
Net charge-offs 265 1,135 323
-------- -------- --------
Allowance for loan losses at June 30 $ 4,070 $ 3,655 $ 3,809
======== ======== ========
Net loans outstanding(1) at June 30 $161,943 $188,278 $180,820
======== ======== ========
Average loans outstanding at June 30 $166,570 $184,168 $172,043
======== ======== ========
Ratios:
Allowance to net loans 2.51% 1.94% 2.11%
======== ======== ========
Net charge-offs to average loans (annualized) 0.32% 1.23% 0.38%
======== ======== ========
Provision to average loans (annualized) 0.76% 1.15% 0.70%
======== ======== ========
<FN>
- ----------
1) Net of unearned income
</FN>
</TABLE>
Management believes the allowance was adequate at June 30, 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 will total
$600,000 during the second half of 1998. 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 six
months of 1998 due to the sale of the Alachua County branches; offsetting
capital expenditures during the six month period totaled $244,290. Approximately
78% of the 1998 expenditures to-date pertain to the construction of a new branch
facility for our Nicholls location. Gross premises and equipment declined last
year due largely to the transfer of the Hawthorne Road real property values to
other real estate. Southeastern Bank of Florida's Hawthorne Road office in
Gainesville 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 half of 1998 due to the
elimination of goodwill associated with the Alachua offices. As shown in the
Capital Adequacy section of this Analysis, the elimination of the Alachua
goodwill had a favorable impact on the Company's capital ratios. Other assets
declined $175,331 year-to-date. The other assets decline resulted primarily from
reductions in repossessed inventory balances and accrued interest receivables on
loans. The decline in accrued interest receivables represented a byproduct of
the January branch sale and overall lower loan volumes during the first two
quarters of 1998. The decline in accrued interest
8
<PAGE>
receivables and repossessed inventory balances was negated in part by a $319,000
increase in foreclosed real estate. The nonperforming assets table on page 7
provides comparative details on foreclosed real estate balances.
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 deposit growth and by payments
and maturities of the loan and investment securities portfolios. At June 30,
1998, investment securities with carrying values of approximately $24,422,000
were scheduled to mature in one year or less. The investment portfolio has also
been structured to meet liquidity needs prior to asset maturity when necessary.
The Company's liquidity position is further strengthened by its access to
short-term funding sources such as U.S. Treasury demand notes, Federal Home Loan
Bank advances,(1) and federal funds purchased. The Company has unsecured federal
funds lines of credit from other banks totaling $11,500,000. At June 30, 1998
and December 31, 1997, the Company had no amounts outstanding under these
lines.
AVERAGE DEPOSITS
As a consequence of the January branch sale, average deposits declined
during the first half 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 June 30 for
each of the last three years is shown in the Average Balances table included in
the Operations section of the Analysis.
(1) 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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 June 30, 1998:
<TABLE>
<CAPTION>
AT JUNE 30, 1998
INTEREST RATE SENSITIVITY ----------------------------------------------------------------------
(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 $ 13,750 -- -- -- $ 13,750
Securities(1) 9,959 18,019 81,409 17,177 126,564
Loans(3) 57,574 19,771 49,885 38,069 165,299
--------- --------- --------- --------- ---------
Total interest rate sensitive assets 81,283 37,790 131,294 55,246 305,613
--------- --------- --------- --------- ---------
INTEREST RATE SENSITIVE LIABILITIES:
Deposits(2) 138,291 62,009 29,489 121 229,910
U. S.Treasury demand note 2,962 -- -- -- 2,962
--------- --------- --------- --------- ---------
Total interest rate sensitive
liabilities 141,253 62,009 29,489 121 232,872
--------- --------- --------- --------- ---------
Interest rate sensitivity gap $ (59,970) $ (24,219) $ 101,805 $ 55,125 $ 72,741
========= ========= ========= ========= =========
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (59,970) $ (84,189) $ 17,616 $ 72,741
========= ========= ========= =========
Ratio of cumulative gap to total interest
rate sensitive assets (19.62)% (27.55)% 5.76% 23.80%
========= ========= ========= =========
Ratio of cumulative interest rate sensitive
assets to interest rate sensitive liabilities 57.54% 58.58% 107.57% 131.24%
========= ========= ========= =========
Cumulative gap at December 31, 1997(3) $ (57,546) $ (88,526) $ 14,367 $ 66,329
========= ========= ========= =========
Cumulative gap at June 30, 1997(3) $ (45,894) $ (71,119) $ 37,455 $ 67,200
========= ========= ========= =========
<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 June 30, 1997, distribution of maturities for installments loans was
based on scheduled contractual payments. At June 30, 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>
The overall change in our gap position was not significant at June 30,
1998 compared to year-end 1997. As expected, the Company's cumulative gap
position remained negative through the one year time interval. A negative gap
position indicates that the Company's rate sensitive liabilities will reprice
faster than its rate sensitive assets. Virtually all of the decline in rate
sensitive assets and liabilities since 1997 is attributable to the Alachua
divestiture.
The gap analysis does not fully reflect the complexities of the
Company's interest rate sensitivity position and the imact of interest rate
movements on the Company's financial position, cash flows, and interest income.
10
<PAGE>
For example, the gap analysis presumes that all loans(3) and securities(1) will
perform according to their contractual maturities when, in may 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 condition.
CAPITAL ADEQUACY
Federal banking regulators have established certain capital adequacy
standards required to be maintained by banks and bank holding companies. These
regulations define capital as either Tier 1 (primarily stockholders' equity) or
Tier 2 (certain debt instruments and a portion of the allowance for loan
losses). The Company and its subsidiary are subject to a minimum Tier 1 capital
ratio (Tier 1 capital to risk-weighted assets) of 4%, total capital(1) ratio
(Tier 1 plus Tier 2 to risk-weighted assets) of 8%, and Tier 1 leverage ratio
(Tier 1 to average quarterly assets) of 3%. To be considered a
"well-capitalized" institution, the Tier 1 capital ratio, total capital ratio,
and Tier 1 leverage ratio must equal or exceed 6%, 10% and 5%, respectively.
Unrecognized gains and losses on investment securities are excluded from the
calculation of risk-based capital. The Company is committed to maintaining a
well-capitalized bank.
Our capital ratios for the most recent periods are presented in the
table below.
<TABLE>
<CAPTION>
CAPITAL RATIOS(1)
(Amounts in thousands) 6/30/98 12/31/97 6/30/97 12/31/96
- ------------------------------------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Tier 1 capital:
Realized stockholders' equity $ 39,193 $ 37,854 $ 35,883 $ 34,277
Intangible assets and other adjustments (1,589) (3,075) (3,254) (3,434)
--------- --------- -------- ---------
Total Tier 1 capital 37,604 34,779 32,629 30,843
--------- --------- -------- ---------
Tier 2 capital:
Portion of allowance for loan losses 2,148 2,444 2,440 2,400
Allowable long-term debt -- -- -- --
--------- --------- -------- ---------
Total Tier 2 capital 2,148 2,444 2,440 2,400
--------- --------- -------- ---------
Total risk-based capital $ 39,752 $ 37,223 $ 35,069 $ 33,243
========= ========= ======== =========
Risk-weightcd assets $ 169,943 $ 194,224 $194,017 $190,630
========= ========= ======== =========
Risk-based ratios:
Tier 1 capital 22.13% 17.91% 16,83% 16.18%
========= ========= ======== =========
Total risk-based capital 23.39% 19.16% 18.09% 17.44%
========= ========= ======== =========
Tier 1 leverage ratio 11.69% 10.31% 9.90% 9.42%
========= ========= ======== =========
Realized stockholders'(1) equity
to assets 12.00% 10.88% 10.64% 10.20%
========= ========= ======== =========
<FN>
- ----------
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier 3
capital.
</FN>
</TABLE>
Due to the climination of certain intangible assets, the sale of the Alachua
County locations did not have a negative impact on our capital ratios. Book
value per share increased $0.38 to $10.95 during the first half of 1998.
Dividends per share totaled $0.13 1/3 year-to-date at June 30, 1998, up 5.27%
from 1997.
11
<PAGE>
RESULTS OF OPERATIONS
Net income for the second quarter totaled $1,138,807, up $85,015 or 8.07%
from the 1997 second quarter and up $460,461 or 67.88% from the 1998 first
quarter. For the year-to-date period, net income totaled $1,817,153, down
$242,119 or 11.76% from the same period in 1997. The primary factor in our
year-to-date 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, year-to-date earnings
totaled $2,274,976 at June 30, 1998 versus $2,059,272 at June 30, 1997. Our 1998
earnings to-date were also affected by an overall decline in net interest
income; refer to the next section of this Analysis for details. Earnings
declined $252,652 or 10.93% during the first six months of 1997 compared to
1996. A $455,000 increase in the provision for loan losses was the most
significant factor in the earnings decline a year ago. The increased provision
in 1997 was necessary to cover higher charge-offs in the commercial loan
portfolio. As further discussed in the Financial Condition section of this
Analysis, the provision provided from income returned to pre-1997 levels,
declining $425,000 or 40.28% at June 30, 1998 compared to 1997 and increasing a
mere $30,000 from June 30, 1996. On a per share basis, net income totaled $0.51,
$0.58, and $0.65 during the first half of 1998, 1997, and 1996. The annualized
return on beginning equity was 9.60% at June 30, 1998 versus 12.02% a year ago.
NET INTEREST INCOME
Net interest income declined $571,192 or 7.05% during the first half of
1998 compared to 1997 after increasing $521,459 or 6.88% during the same period
in 1997. Approximately 70% of the net interest income decline at June 30, 1998
was attributable to the sale of the Alachua offices. 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 June 30, 1998, 1997, and 1996.
NONINTEREST INCOME AND EXPENSE
Except for increases in other operating income attributable to mortgage
origination fees and book gains on sales of other real estate, virtually all of
the fluctuation in noninterest income and expense during the first two quarters
of 1998 resulted from the sale of the Alachua County branches and the
elimination of the corresponding income and expenses that accrued to those
locations. During the first half of 1997 compared to 1996, other income declined
$99,697 or 4.98%. Reduced gains on sales of other real estate, declines in
commissions on the sale of credit life insurance, and a $12,310 drop in service
charges on deposit accounts were principal factors in the 1997 results. Salaries
and employee benefits were up $96,489 or 3.01% at June 30, 1997 compared to
1996. Approximately 25% of the 1997 increase was attributable to an entire
half-year of salaries and employee benefits on the Nassau County locations in
1997 versus 1996; the remaining 75% increase in employee expenses last year
ensued from normal benefit accruals. Most of the $39,867 or 4.03% increase in
net occupancy and equipment expense at June 30, 1997 was due to a full six
months of depreciation and other occupancy expenses on the Nassau County
locations. Other operating expenses increased $148,610 or 10.26% during the
first half of 1997 due largely to increased legal and accounting fees and losses
on deposit accounts.
12
<PAGE>
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES
PAID
<TABLE>
<CAPTION>
AT JUNE 30
-----------------------------------------------------------------------------------------
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) $166,570 $ 9,327 11.20% $184,168 $10,221 11.10% $172,043 $ 9,731 11.31%
Federal funds sold 16,826 459 5.46% 13,982 374 5.34% 13,169 342 5.20%
Taxable investment securities(2) 96,564 2,913 6.03% 89,667 2,793 6.23% 85,020 2,563 6.03%
Tax-exempt investment securities(3) 18,512 765 8.26% 19,421 853 8.79% 21,130 964 9.12%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets $298,472 $13,464 9.02% $307,238 $14,241 9.27% $291,362 $13,600 9.34%
======== ======= ====== ======== ======= ====== ======== ======= ======
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing demand deposits(4) $ 39,333 $ 591 2.99% $ 44,981 $ 649 2.89% $ 51,488 $ 760 2.95%
Savings(6) 72,578 1,663 4.58% 69,783 1,565 4.49% 43,391 883 4.07%
Time deposits 114,785 3,366 5.86% 125,034 3,554 5.68% 133,452 3,932 5.89%
U.S.Treasury demand note 996 27 5.42% 1,256 33 5.29% 957 26 5.39%
Note payable 946 35 7.40% 2,107 78 7.38%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities $227,692 $ 5,647 4.96% $242,000 $ 5,836 4.82% $231,395 $ 5,679 4.91%
======== ======= ====== ======== ======= ====== ======== ======= ======
Excess of interest-earning assets
over interest-bearing liabilities $ 70,780 $ 65,238 $ 59,967
======== ======== ========
Interest rate spread 4.06% 4.45% 4.43%
====== ====== ======
NET INTEREST INCOME $ 7,817 $ 8,405 $ 7,921
======= ======= =======
NET INTEREST MARGIN 5.24% 5.47% 5.44%
====== ====== ======
<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>
YEAR 2000
The Company has developed and implemented a strategic plan to address
Year 2000 issues. The Year 2000 problem involves the risk that various systems
will not operate correctly beyond the century date change-over on January 1,
2000. The Company has identified the various systems impacted, assessed the
risks involved, and is currently testing the systems for compliance. Testing is
projected to be substantially complete by December 31, 1998. Because the
Company's computer hardware and software are configured to operate effectively
in the year 2000 and beyond, the Company has not incurred and does not expect to
incur any significant costs in regards to its in-house computer system. The
Company has contacted and remains in discussion with its vendors and major loan
customers about their progress in addressing their exposure to the Year 2000
issue.
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: August 12, 1998
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,454
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,032
<INVESTMENTS-CARRYING> 20,954
<INVESTMENTS-MARKET> 21,701
<LOANS> 161,943
<ALLOWANCE> 4,070
<TOTAL-ASSETS> 326,661
<DEPOSITS> 280,848
<SHORT-TERM> 2,962
<LIABILITIES-OTHER> 3,596
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 34,779
<TOTAL-LIABILITIES-AND-EQUITY> 326,661
<INTEREST-LOAN> 9,299
<INTEREST-INVEST> 3,419
<INTEREST-OTHER> 459
<INTEREST-TOTAL> 13,177
<INTEREST-DEPOSIT> 5,620
<INTEREST-EXPENSE> 5,646
<INTEREST-INCOME-NET> 7,531
<LOAN-LOSSES> 630
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 5,383
<INCOME-PRETAX> 3,387
<INCOME-PRE-EXTRAORDINARY> 1,817
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,817
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 5.24
<LOANS-NON> 222
<LOANS-PAST> 2,434
<LOANS-TROUBLED> 381
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,705
<CHARGE-OFFS> 531
<RECOVERIES> 266
<ALLOWANCE-CLOSE> 4,070
<ALLOWANCE-DOMESTIC> 2,255
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,815
</TABLE>
