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 Quarterly Period Ended..........................................09-30-99
Commission File Number...................................................2-83157
SOUTHEASTERN BANKING CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its 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 10-31-99
This Document consists of 24 pages.
The Exhibit Index is located at page 23.
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,111,414 $ 14,464,719
Federal funds sold 2,170,000 15,670,000
------------- -------------
Cash and cash equivalents 14,281,414 30,134,719
Investment securities
Held-to-maturity (market value of approximately $28,472,000
and $24,948,000 at September 30, 1999 and December 31, 1998) 28,783,883 23,873,246
Available-for-sale, at market value 121,227,500 109,157,838
------------- -------------
Total investment securities 150,011,383 133,031,084
Loans, gross 164,256,487 168,044,357
Unearned income (1,966,084) (3,283,218)
Allowance for loan losses (3,245,763) (3,406,626)
------------- -------------
Loans, net 159,044,640 161,354,513
Premises and equipment, net 6,707,726 6,603,948
Intangible assets 1,333,965 1,477,007
Other assets 6,397,970 5,332,061
------------- -------------
TOTAL ASSETS $ 337,777,098 $ 337,933,332
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 51,922,677 $ 58,261,917
Interest-bearing deposits 238,632,332 234,434,679
------------- -------------
Total deposits 290,555,009 292,696,596
U. S. Treasury demand note 2,579,590 816,053
Other liabilities 3,271,338 3,270,386
------------- -------------
Total liabilities 296,405,937 296,783,035
------------- -------------
STOCKHOLDERS' EQUITY
Common stock - $1.25 par value; authorized 10,000,000
shares; issued and outstanding 3,580,797 shares 4,475,996 4,475,996
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 37,478,314 34,993,625
------------- -------------
Realized stockholders' equity 43,346,033 40,861,344
Accumulated other comprehensive income - unrealized (losses)
gains on available-for-sale securities, net of tax (1,974,872) 288,953
------------- -------------
Total stockholders' equity 41,371,161 41,150,297
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 337,777,098 $ 337,933,332
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
QUARTER NINE MONTHS
-------------------------- --------------------------
PERIOD ENDED SEPTEMBER 30, 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,271,350 $ 4,626,991 $12,791,754 $13,926,290
Federal funds sold 6,138 96,756 286,203 556,000
Investment securities
Taxable 1,908,500 1,763,538 5,413,073 4,676,607
Tax-exempt 327,143 275,290 944,025 781,134
----------- ----------- ----------- -----------
Total interest income 6,513,131 6,762,575 19,435,055 19,940,031
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,674,996 2,939,756 8,170,603 8,559,683
Federal funds purchased 21,550 -- 24,755 --
U. S. Treasury demand note 10,820 13,232 26,450 39,917
----------- ----------- ----------- -----------
Total interest expense 2,707,366 2,952,988 8,221,808 8,599,600
----------- ----------- ----------- -----------
Net interest income 3,805,765 3,809,587 11,213,247 11,340,431
PROVISION FOR LOAN LOSSES 300,000 300,000 900,000 930,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,505,765 3,509,587 10,313,247 10,410,431
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 657,535 613,747 1,882,099 1,865,121
Investment securities gains, net 3,738 (7,027) 3,738 1,096
Gain on sale of branches before tax provision
of $559,731 -- -- -- 101,908
Other operating income 207,354 188,622 702,104 639,071
----------- ----------- ----------- -----------
Total noninterest income 868,627 795,342 2,587,941 2,607,196
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,466,825 1,459,451 4,348,178 4,470,191
Occupancy and equipment 454,851 432,167 1,333,389 1,278,834
Other operating expense 674,920 610,957 2,170,398 2,079,493
----------- ----------- ----------- -----------
Total noninterest expense 2,596,596 2,502,575 7,851,965 7,828,518
----------- ----------- ----------- -----------
Income before income taxes 1,777,796 1,802,354 5,049,223 5,189,109
INCOME TAX EXPENSE 528,878 553,489 1,490,294 2,123,091
----------- ----------- ----------- -----------
NET INCOME $ 1,248,918 $ 1,248,865 $ 3,558,929 $ 3,066,018
=========== =========== =========== ===========
NET INCOME PER SHARE - BASIC $ 0.35 $ 0.35 $ 0.99 $ 0.86
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $4,475,996 $1,391,723 $31,986,080 $ 14,858 $37,868,657
Comprehensive income:
Net income -- -- 3,066,018 -- 3,066,018
Other comprehensive income, net
of tax effect of $196,347:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- 381,145 381,145
-----------
Comprehensive income 3,447,163
-----------
Cash dividends declared
($0.20 per share) -- -- (716,517) -- (716,517)
---------- ---------- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 1998 $4,475,996 $1,391,723 $34,335,581 $ 396,003 $40,599,303
========== ========== =========== ========== ===========
BALANCE, DECEMBER 31, 1998 $4,475,996 $1,391,723 $34,993,625 $ 288,953 $41,150,297
Comprehensive income:
Net income -- -- 3,558,929 -- 3,558,929
Other comprehensive income, net
of tax effect of $1,166,213:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- (2,263,825) (2,263,825)
-----------
Comprehensive income 1,295,104
-----------
Cash dividends declared
($0.30 per share) -- -- (1,074,240) -- (1,074,240)
---------- ---------- ----------- ------------ -----------
Balance, September 30, 1999 $4,475,996 $1,391,723 $37,478,314 $ (1,974,872) $41,371,161
========== ========== =========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,558,929 $ 3,066,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900,000 930,000
Depreciation 639,716 625,287
Amortization and accretion, net 193,573 153,711
Deferred income tax benefit -- (17,998)
Investment securities gains, net (3,738) (1,096)
Net losses (gains) on sales of other real estate 13,018 (102,293)
Gain on sale of branches before tax provision -- (101,908)
Changes in assets and liabilities:
Decrease in other assets 216,513 264,057
Increase in other liabilities 311,407 258,623
------------ ------------
Net cash provided by operating activities 5,829,418 5,074,401
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Held-to-maturity 1,085,000 3,460,800
Available-for-sale 47,825,386 43,739,486
Proceeds from sales of investment securities:
Available-for-sale 1,001,562 4,992,122
Proceeds from sales of other real estate 660,103 699,186
Purchases of investment securities:
Held-to-maturity (6,011,457) (5,485,878)
Available-for-sale (64,357,623) (70,183,788)
Net increase in short-term securities -- (3,994,620)
Net decrease in loans 484,984 1,707,018
Additions to premises and equipment, net (607,935) (489,837)
Net funds paid in sale of branches -- (13,589,236)
------------ ------------
Net cash used in investing activities (19,919,980) (39,144,747)
------------ ------------
FINANCING ACTIVITIES
Net (decrease) increase in demand, NOW, and savings deposits (7,197,761) 4,197,037
Net increase in certificates of deposit 5,056,175 9,465,869
Net increase (decrease) in U. S. Treasury demand note 1,763,537 (2,676,207)
Cash dividends paid (1,384,694) (943,182)
------------ ------------
Net cash (used in) provided by financing activities (1,762,743) 10,043,517
------------ ------------
Net decrease in cash and cash equivalents (15,853,305) (24,026,829)
Cash and cash equivalents at beginning of year 30,134,719 39,741,483
------------ ------------
Cash and cash equivalents at September 30 $ 14,281,414 $ 15,714,654
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 quarter and
nine months ended September 30, 1999 are not necessarily indicative of
trends or results to be expected for the year ended December 31, 1999. 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, 1998.
2. RECLASSIFICATIONS
Certain prior year amounts have been restated to conform with the current
year financial statement presentation.
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.
4. 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.
5. NEW ACCOUNTING PRONOUNCEMENTS
Effective 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." The new statement requires
all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting rules for hedging instruments. The transition
provisions of SFAS 133 permit a one-time transfer of debt securities
categorized as held-to-maturity into the available-for-sale category
without calling into question the entity's intent to hold other debt
securities to maturity in the future. Because the Company has not
historically entered into derivative contracts either to hedge existing
risks or for speculative purposes, adoption of SFAS 133 is not expected to
have a material impact on the consolidated financial statements.
6
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE 1998 ANNUAL REPORT ON FORM
10-K AND THE CONSOLIDATED FINANCIAL STATEMENTS & RELATED NOTES ON PAGES 1 - 6 OF
THIS QUARTERLY FILING.
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation (the Company) is a financial services 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, 1998, SEBF, with offices in
Callahan, Hilliard, and Yulee, merged with and into SEB. 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.
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.
For additional information regarding the sale of the Alachua offices, refer to
the disclosures provided under Results of Operations. SEB's assets totaled
approximately $337,206,000 at September 30, 1999 versus $340,412,000 at June 30,
1999 and $337,327,000 at year-end 1998.
Additionally, prior to mid-1998, the Company had no subsidiaries other than
commercial banks. In 1998, the Company formed an insurance subsidiary, SBC
Financial Services, Inc. (SBCF), to sell insurance and annuity products,
initially to customers in Georgia. The Company has invested $100,000 in SBCF
to-date and expects to make additional capital investments in its new subsidiary
during its first few years of operation. As it develops, SBCF is expected to
supplement and grow existing noninterest income, thereby increasing the
Company's profitability and shareholder value. The insurance subsidiary had a
nominal impact on the Company's financial condition and results of operations
during the first nine months of 1999.
FINANCIAL CONDITION
Consolidated assets approximated $338 million at September 30, 1999, down
$156,234 or 0.05% from year-end 1998 but up $9,776,187 or 2.98% from September
30, 1998. The increase in total assets since September 30, 1998 has transpired
from growth in deposits, principally interest-bearing deposits. Pertinent
details on deposits and deposit components are provided in the Liquidity section
of this Analysis. During the first nine months of 1998, total assets declined
$19,896,922 or 5.72%. Virtually all of the 1998 decline in total assets was
attributable to the January branch sale; this decline was partially offset by
asset growth at the remaining SEB locations during the first three quarters of
1998.
INVESTMENT SECURITIES
On a carrying value basis, investment securities exceeded $150 million at
September 30, 1999, growing $16,980,299 or 12.76% since December 31, 1998.
Securities represented 48% of earning assets at September 30, 1999 versus 42%
and 44% at year-end 1998 and September 30, 1998. The growth in
7
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
investment securities since the year-earlier period resulted from the placement
of funds available from other sources, including declines in loans and federal
funds sold, in the portfolio. No significant changes have occurred in the
investment securities mix at September 30, 1999. The amortized cost and
estimated fair value of investment securities are delineated in the table below:
<TABLE>
<CAPTION>
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1999 COST GAINS LOSSES VALUE
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $99,403 $ 23 $ 2,131 $97,295
Mortgage-backed securities 23,729 7 891 22,845
Equity securities 1,088 - - 1,088
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
124,220 30 3,022 121,228
Held-to-maturity:
States and political subdivisions 28,784 324 636 28,472
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
Total investment securities $153,004 $ 354 $ 3,658 $149,700
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
</TABLE>
As shown, the market value of the securities portfolio declined at September 30,
1999; refer to the Capital Adequacy section of this Analysis for more details.
The Company does not have a concentration in the obligations of any issuer other
than the U.S. Government and its agencies.
LOANS
Loans, net of unearned income,(1) declined $361,054 since June 30 or $2,470,736
year-to-date. As a percent of deposits, net loans aggregated 55.86% at September
30, 1999 versus 55.21% at mid-year 1999, 56.29% at December 31, 1998, and 58.91%
a year ago. A continuing drop in commercial loans outstanding was the chief
factor in the year-to-date decline. Although commercial loan demand has slowed,
consumer loan demand has increased. The consumer portfolio grew an appreciable
1.22% since year-end 1998 and, more markedly, 4.42% since the 1998 third
quarter. The 1999 improvement in the consumer portfolio occurred since June 30,
reversing moderate declines during the first two quarters. Growth in the
consumer portfolio is especially welcome, because consumer loans remain the
Company's highest interest-earning assets. To reiterate the discussion in the
1998 Annual Report, management is committed to growing the consumer portfolio
and reversing the downward drift in the commercial portfolio by a) utilizing
competitive pricing on loan products and b) developing additional loan
relationships, all without compromising portfolio quality. During the year-ago
period, net loans declined $20,330,224 or 10.88%. More than 84% of the 1998 drop
was attributable to the Alachua divestiture. The remaining decline resulted from
overall decreases in commercial loans outstanding at other SEB locations. Loans
outstanding are presented by type in the table on the next page.
(1)See separate discussion on unearned income within this Analysis.
8
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------------------- ------------------ ------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
LOANS BY CATEGORY 1999 1998 1998
- -------------------------------------------------------- ------------------- ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial, and agricultural $ 63,905 $ 69,125 $ 71,086
Real estate - construction 2,966 2,318 2,621
Real estate - mortgage 60,373 60,035 60,921
Consumer, including credit cards 37,012 36,566 35,444
- -------------------------------------------------------- ------------------- ------------------ ------------------
Loans, gross 164,256 168,044 170,072
Unearned income 1,966 3,283 3,579
- -------------------------------------------------------- ------------------- ------------------ ------------------
Loans, net $162,290 $164,761 $166,493
- -------------------------------------------------------- ------------------- ------------------ ------------------
</TABLE>
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.
Although the Company's loan portfolio is diversified, significant portions of
its loans are collateralized by real estate. At September 30, 1999 and December
31, 1998, gross loans secured by real estate totaled approximately $103,323,000
and $105,010,000. A geographic concentration in loans ensues given the Company's
operations within a regional area of southeast Georgia and northeast Florida.
Commitments to extend credit and standby letters of credit approximated $18.4
million at September 30, 1999; because a substantial amount of these contracts
expire without being drawn upon, total contractual amounts do not represent
future credit exposure or liquidity requirements.
UNEARNED INCOME
Primarily reflecting accounting changes made to comply with new tax legislation,
unearned income declined considerably at September 30, 1999 versus the other
periods presented. Specifically, effective January 1999, the IRS prohibits the
use of any method other than the constant, or level, yield method in computing
interest income on short-term consumer loans. Although interest income on most
loans has been recognized using the level yield method, interest income on
certain loans made on a discount basis was recognized using the
sum-of-the-months digit method. In general, the posting of loans under the
sum-of-the-months digit method created unearned interest balances and
accelerated interest income recognition. As no new loans will be booked under
the sum-of-the-months digit method and, further, as pre-1999 loans mature or are
otherwise redeemed, the interest portion of the unearned balance is expected to
wane. Additionally, the change in timing of interest recognition on certain
short-term consumer loans is projected to lower interest income by approximately
$135,000 in fiscal 1999 as compared to prior years. More details on the
Company's accounting and reporting policies on loans and related income are
contained in the footnotes accompanying the 1998 10-K filing.
NONPERFORMING ASSETS
Nonperforming loans, a central component of nonperforming assets, aggregated
approximately $1,137,000 at September 30, 1999, down $109,000 or 8.75% from
year-end 1998 but up $604,000, or more than double, from September 30, 1998. As
a percent of net loans, nonperforming loans totaled 0.70% at September 30, 1999
compared to 0.76% and 0.32% at year-end 1998 and September 30, 1998. The
increase in nonperforming loans since September 30, 1998 resulted from net
additions to nonaccrual
9
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
balances. No reduction in nonaccrual balances has been made for the portion of
such loans wholly or partially guaranteed by the U.S. Small Business
Administration. For the three periods presented, such guarantees would have
reduced nonaccrual balances by $48,000, $84,000, and $57,000. More than 93%, or
$1,066,000, of nonperforming loan balances at September 30, 1999 pertained to
five separate borrowers; further segregated, $873,000 or 76.78% of total
balances applied to merely two borrowers and 45% to a single borrower. After
rising $615,000 during the first quarter, foreclosed real estate balances,
another component of nonperforming assets, fell $484,000 to $909,000 at
September 30, 1999. Approximately 70% of foreclosed real estate balances at
September 30 were derived from funding originally extended to five borrowers;
more significantly, $258,000 or 28.38% of total balances applied to a solo
borrower. Foreclosed real estate balances remained concentrated, overall, in
residential real estate at September 30, 1999. Loans past due 90 plus days
aggregated $1,435,000 at September 30, 1999, the lowest level in two years.
Loans to four separate borrowers composed 13.17% of loans past due 90 days or
more at September 30, 1999; management is unaware of any other material
concentrations within these past due balances. Details on a certain group of
loans that comprise the bulk of the fluctuations in nonperforming asset balances
year-to-date are provided in later sections of this Analysis. The table below
provides further information about nonperforming assets and loans past due 90
days or more:
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------------------- ------------------ ------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
NONPERFORMING ASSETS 1999 1998 1998
- -------------------------------------------------------- ------------------- ------------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Commercial, financial, and agricultural $ 514 $ 622 $ 88
Real estate - construction 67 0 0
Real estate - mortgage 143 240 65
Consumer, including credit cards 51 10 3
- -------------------------------------------------------- ------------------- ------------------ ------------------
Total nonaccrual loans 775 872 156
Restructured loans(1) 362 374 377
- -------------------------------------------------------- ------------------- ------------------ ------------------
Total nonperforming loans 1,137 1,246 533
Foreclosed real estate(2) 909 778 851
- -------------------------------------------------------- ------------------- ------------------ ------------------
Total nonperforming assets $2,046 $2,024 $1,384
- -------------------------------------------------------- ------------------- ------------------ ------------------
Accruing loans past due 90 days or more $1,435 $1,607 $2,513
- -------------------------------------------------------- ------------------- ------------------ ------------------
</TABLE>
(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.
Loans classified as nonaccrual have been placed in nonperforming, or impaired,
status because the borrower's ability to make future principal and/or interest
payments has become uncertain. The Company considers a loan to be nonaccrual
with the occurrence of any one of the following events: a) interest or principal
has been in default 90 days or more, unless the loan is well-secured and in the
process of collection; b) collection of recorded interest or principal is not
anticipated; or c) the income on the loan is recognized using the cash versus
accrual basis of accounting due to deterioration in the financial condition of
the borrower. Smaller balance consumer loans are generally not subject to the
above-referenced guidelines and are normally placed on nonaccrual status or else
charged-off when payments have been in default 90 days or more. Nonaccrual loans
are reduced to the lower of the principal balance of the loan or the market
value of the underlying real estate or other collateral. Any impairment in the
principal balance is charged against the allowance for loan losses. Accrued
interest on any loan switched to
10
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
nonaccrual status is reversed. Interest income on nonaccrual loans, if
subsequently recognized, is recorded on a cash basis. No interest is
subsequently recognized on nonaccrual (or former nonaccrual) loans until all
principal has been collected. Loans are classified as restructured when either
interest or principal has been reduced or deferred because of deterioration in
the borrower's financial position. Foreclosed real estate represents real
property acquired by foreclosure or directly by title or deed transfer in
settlement of debt. Provisions for subsequent devaluations of foreclosed real
estate are charged to operations, while costs associated with improving the
properties are generally capitalized.
Since year-end, a group of loans, primarily real estate, with principal balances
approximating $1,295,000 were recognized as significantly impaired. These
particular loans were not substantially past due, and their impairment could not
be reasonably measured, at December 31, 1998. To-date in 1999, these problem
loans have been charged-off in excess of $500,000 to their estimated net
realizable values. Approximately $67,000 of these loans were placed on, and
remain in, nonaccrual status. The real estate collateral underlying the balance,
or $691,000, of these loans was acquired by foreclosure and classified as other
real estate; through October 31, $506,000 or 73% of the acquired properties had
been sold to third parties. This group of loans accounts for the majority of the
fluctuations, both upward and downward, in nonperforming asset balances
year-to-date. No additional material charge-offs, if any, are expected on these
particular loans. Management is diligently pursuing remedies under law in
seeking to recover these charge-offs but deems any material recovery unlikely.
Although disturbingly high, the charge-offs recognized on these problem loans
are not expected to result in an upward revision of the 1999 budgeted loan loss
provision of $1,200,000. Additionally, management is unaware of any other large,
notable potential problem loans at September 30, 1999 that should be included in
the table above or otherwise discussed. All known potential problem loans were
included in nonperforming loans at September 30, 1998.
ALLOWANCE FOR LOAN LOSSES
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 totaled
2.00% at September 30, 1999, down 7 basis points from year-end 1998. The decline
in the allowance ratio stemmed foremost from high charge-offs recognized since
year-end. Net charge-offs totaled $1,060,863, up considerably, or $568,014, from
1998's $492,849. Approximately 51% of the 1999 charge-offs through September 30
were attributable to the problem loans discussed earlier. Management is
optimistic that charge-offs at December 31, 1999, including the charge-offs
associated with the problem loans previously mentioned, will be substantially
lower than year-end 1998 and 1997 levels. Management is not content with the
charge-off trends recognized the last few years and has implemented several
long-term strategies to reduce charge-off levels, including: a) a revised loan
grading system, b) periodic external loan review, and c) managerial and staff
changes at various locations. Changes to the allowance as a percent of total
nonperforming loans were not significant for the periods presented. The
quarterly provision from income totaled $300,000 at September 30, 1999,
unchanged from the year-earlier period. Year-to-date, the provision aggregated
$900,000, down $30,000 or 3.23% from 1998. Activity in the allowance is
presented in the table on the following page.
11
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------- ------------------------------------------
ALLOWANCE FOR LOAN LOSSES
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,407 $ 3,705 $ 3,735
Provision for loan losses 900 930 1,385
Charge-offs:
Commercial, financial, and agricultural 470 203 1,095
Real estate - construction 351 0 0
Real estate - mortgage 96 82 138
Consumer, including credit cards 671 525 585
- ----------------------------------------------------------------------- ------------- -------------- -------------
Total charge-offs 1,588 810 1,818
- ----------------------------------------------------------------------- ------------- -------------- -------------
Recoveries:
Commercial, financial, and agricultural 210 71 84
Real estate - construction 0 0 0
Real estate - mortgage 26 8 5
Consumer, including credit cards 291 238 305
- ----------------------------------------------------------------------- ------------- -------------- -------------
Total recoveries 527 317 394
- ----------------------------------------------------------------------- ------------- -------------- -------------
Net charge-offs 1,061 493 1,424
- ----------------------------------------------------------------------- ------------- -------------- -------------
Allowance for loan losses at September 30 $ 3,246 $ 4,142 $ 3,696
- ----------------------------------------------------------------------- ------------- -------------- -------------
Net loans outstanding(1) at September 30 $162,290 $166,493 $186,493
- ----------------------------------------------------------------------- ------------- -------------- -------------
Average net loans outstanding(1) at September 30 $162,954 $165,512 $186,168
- ----------------------------------------------------------------------- ------------- -------------- -------------
Ratios:
Allowance to net loans 2.00% 2.49% 1.98%
- ----------------------------------------------------------------------- ------------- -------------- -------------
Net charge-offs to average loans (annualized) 0.87% 0.40% 1.02%
- ----------------------------------------------------------------------- ------------- -------------- -------------
Provision to average loans (annualized) 0.74% 0.75% 0.99%
- ----------------------------------------------------------------------- ------------- -------------- -------------
</TABLE>
(1) Net of unearned income
Management believes the allowance was adequate at September 30, 1999 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,
changes in customer bankruptcy filings, 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 loan loss provision will approximate $300,000 during the fourth quarter
of 1999.
OTHER ASSETS
Gross premises and equipment increased $607,935 during the first nine months of
1999. More than 88% of the 1999 expenditures to-date are computer-related;
purchases include a loan platform system, upgraded network/branch communication
equipment, and down payments on imaging, PC banking, and voice banking systems.
The remaining costs associated with the imaging system, payment of which is due
at, or prior to, final implementation, are expected to total $350,000. The
managerial decision to purchase the imaging system was predicated on the
following known benefits:
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
o Customer Service. The imaging system will supplement and otherwise
enhance existing customer service by providing, on paper or
electronic device, compact statements and other documents that are
easier to read, store, and reconcile than existing alternatives.
The system will also facilitate faster retrieval of documents for
customer research. Both commercial and individual customers will
benefit.
o LowerOverhead. The imaging system will reduce certain overhead costs
inherent in document processing, including postage, proof
maintenance, supplies, and personnel expense.
o Competitive Edge. The imaging system will provide an additional
marketing tool for promoting SEB services.
Implementation of the imaging system is expected to occur in phases, with
partial implementation by December 1999 and full implementation by February
2000.
The remaining costs relative to the PC, or internet, and voice banking systems
aggregate approximately $50,000. Like the imaging system, the PC and voice
banking systems will augment existing customer service and provide competitive
advantages in promoting and selling SEB services. With the voice banking system,
customers will be able to obtain certain account balance and other information
virtually anytime, anywhere by phone. The PC banking system will serve as an
alternative delivery channel for many bank services: Customers will be able to
open and monitor accounts on-line, e-mail customer service representatives, and
pay bills, all at customer convenience. Commercial customers, particularly those
with large transactional volumes, will be able to utilize the bill paying
capabilities of the PC banking system as part of cash, or treasury, management.
Implementation of both the internet and voice banking systems is planned prior
to mid-year 2000.
Other than the remaining amounts due on the imaging, PC, and voice banking
systems, the Company had no material plans or commitments for capital
expenditures as of September 30, 1999. The computer expenditures made to-date
in, and planned for, 1999 have not been made because of, and do not constitute
costs of, the Year 2000. For specifics on the Company's Year 2000 plan and costs
adhering to same, refer to the Year 2000 section of this Analysis. During the
year-ago period, gross premises and equipment declined $1,012,539 due to the
sale of the Alachua County offices; offsetting capital expenditures totaled
$489,837. Approximately 66%, or $320,000, of the 1998 expenditures through
September 30 pertained to the construction of a new branch facility for SEB's
Nicholls location.
Adjusted for the net additions to foreclosed real estate previously mentioned,
other assets grew $935,473 or 20.54% year-to-date. An increase in the deferred
tax effects of mark-to-market accounting for investment securities was the
dominant factor in the 1999 results to-date. A $227,000 drop in interest
receivables negated, in part, the jump in deferred tax assets. Variations in
interest payment cycles produced most of the interest receivables decline. Last
year, intangible assets declined 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 positive impact on the
Company's capital ratios.
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
13
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 September 30, 1999, investment securities with carrying values of
approximately $7,887,000 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, including U.S.
Treasury demand notes, Federal Home Loan Bank advances, and federal funds
purchased. The unsecured federal funds lines of credit from other banks, each
with varying terms and expiration dates, total $17,500,000. No amounts were
drawn against these lines at September 30, 1999 or December 31, 1998. The
Company has developed a liquidity policy that specifically addresses Year 2000
liquidity issues; refer to the Year 2000 section of this Analysis for details.
DEPOSITS
Deposits declined $2,141,587 or 0.73% at September 30, 1999 compared to year-end
1998. Noninteresting-bearing deposits fell $6,339,240 or 10.88%, while
interest-bearing deposits climbed $4,197,653 or 1.79%. Interest-bearing deposits
comprised 82.13% of total deposits at September 30, 1999, up 204 basis points
from December 31, 1998. The distribution of interest-bearing balances at
September 30, 1999 and certain comparable quarter-end dates is shown in the
table below:
<TABLE>
<CAPTION>
- ---------------------------------------- ------------------------- ------------------------ --------------------------
SEPTEMBER 30, 1999 DECEMBER 31, 1998 SEPTEMBER 30, 1998
------------------------- ------------------------ --------------------------
PERCENT PERCENT PERCENT
DEPOSITS BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
- ---------------------------------------- ------------ ------------ ------------ ----------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits(1) $ 40,926 17.15% $ 43,617 18.61% $ 39,176 16.82%
Savings 74,715 31.31% 72,883 31.09% 73,588 31.59%
Time certificates /less than/ $100,000 76,428 32.03% 78,409 33.44% 79,093 33.95%
Time certificates > = $100,000 46,563 19.51% 39,526 16.86% 41,098 17.64%
- ---------------------------------------- ------------ ------------ ------------ ----------- ------------- ------------
Total interest-bearing deposits $238,632 100.00% $234,435 100.00% $232,955 100.00%
- ---------------------------------------- ------------ ------------ ------------ ----------- ------------- ------------
</TABLE>
(1) Includes NOW and money market accounts.
Last year, the January divestiture resulted in a deposit decline exceeding
$33,000,000; by September 30, 1998, deposit growth in the remaining SEB
locations had offset approximately 40% of the divestiture decline. Since the
introduction of the SMARTSAVER account in March 1996, savings balances have
constituted a substantially higher percentage of interest-bearing balances than
historical norms, particularly on an average basis. The composition of average
deposits and the fluctuations therein at September 30 for each of the last three
years is shown in the Average Balances table included in the Operations section
of this Analysis.
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
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 September 30, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------------------------------------------------- ------------
REPRICING WITHIN
-------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
SEPTEMBER 30, 1999 MONTHS MONTHS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Securities(1) $ 1,969 $ 7,070 $100,636 $42,241 $151,916
Loans, gross(2) 49,669 15,751 65,227 32,834 163,481
- -------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 51,638 22,821 165,863 75,075 315,397
- -------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 138,391 76,962 23,165 114 238,632
U.S. Treasury demand note 2,580 2,580
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 140,971 76,962 23,165 114 241,212
- -------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(89,333) $(54,141) $142,698 $74,961 $74,185
===================================================================================================================
CUMULATIVE GAP $(89,333) $(143,474) $(776) $74,185
===================================================================================================================
Ratio of cumulative gap to total
rate sensitive assets (28.32)% (45.49)% (0.25)% 23.52%
- -------------------------------------------------------------------------------------------------------------------
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 36.63% 34.17% 99.68% 130.76%
- -------------------------------------------------------------------------------------------------------------------
Cumulative gap at December 31, 1998 $(75,213) $(97,301) $15,058 $76,837
- -------------------------------------------------------------------------------------------------------------------
Cumulative gap at September 30, 1998 $(65,461) $(91,449) $16,546 $76,791
===================================================================================================================
</TABLE>
(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) No cash flow assumptions other than final contractual maturities have been
made for installment loans with fixed rates. Nonaccrual loans are excluded.
(3) NOW, money market, and savings account balances are included in the 0-3
months repricing category.
As in the prior periods shown, the Company's gap position remained negative in
the short-term repricing intervals at September 30, 1999. A negative gap
position indicates that the Company is liability sensitive, and, hence, its rate
sensitive liabilities will reprice faster than its rate sensitive assets. Cash
flows available from declines in loans, federal funds sold, and other sources
to-date in 1999, and also, in 1998, were used to purchase investment securities,
principally securities with contractual maturities exceeding one year.
Management is committed to reversing the decline in loans outstanding that has
necessitated placement of substantial funds in alternative interest-earning
assets.
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 loans(2) and securities(1) will perform
according to
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
their contractual 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.
Although 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, the Company's financial position and results of operations
could be significantly impacted by changes in interest rate and market risks.
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 SEB are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to
risk-weighted assets) of 8%, and Tier 1 leverage ratio (Tier 1 to average
quarterly assets) of 4%. To be considered a "well-capitalized" institution, the
Tier 1 capital, total capital, and Tier 1 leverage ratios must equal or exceed
6%, 10%, and 5%, respectively. Banks and bank holding companies are prohibited
from including unrealized gains and losses on debt securities in the calculation
of risk-based capital but are permitted to include up to 45 percent of net
unrealized pre-tax holding gains on equity securities in Tier 2 capital. At
September 30, 1999 and 1998, the Company did not have any unrealized gains on
equity securities includible in the risk-based capital calculations. The Company
is committed to maintaining its well-capitalized status.
Due to the elimination of certain intangible assets, the sale of the Alachua
County locations in 1998 did not negatively impact the Company's capital ratios.
Capital ratios for the most recent periods are presented in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------- ------------------- ------------------ ------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
CAPITAL RATIOS(1) 1999 1998 1998
- -------------------------------------------------------- ------------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 capital:
Realized stockholders' equity $ 43,346 $ 40,861 $40,203
Intangible assets and other adjustments (1,343) (1,486) (1,539)
- -------------------------------------------------------- ------------------- ------------------ -----------------
Total Tier 1 capital 42,003 39,375 38,664
- -------------------------------------------------------- ------------------- ------------------ -----------------
Tier 2 capital:
Portion of allowance for loan losses 2,237 2,216 2,206
Allowable long-term debt - - -
- -------------------------------------------------------- ------------------- ------------------ -----------------
Total Tier 2 capital 2,237 2,216 2,206
- -------------------------------------------------------- ------------------- ------------------ -----------------
Total risk-based capital $ 44,240 $ 41,591 $40,870
=================================================================================================================
Risk-weighted assets $177,940 $176,052 $174,518
=================================================================================================================
Risk-based ratios:
Tier 1 capital 23.61% 22.37% 22.15%
=================================================================================================================
Total risk-based capital 24.86% 23.62% 23.42%
=================================================================================================================
Tier 1 leverage ratio 12.42% 11.78% 11.82%
=================================================================================================================
Realized stockholders' equity to assets 12.76% 12.10% 12.28%
=================================================================================================================
</TABLE>
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier 3
capital.
16
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Book value per share grew $0.70 or 6.13% during the nine month period to $12.11
at September 30, 1999. Dividends declared rose 50% to $0.10 per quarter, or
$0.30 year-to-date, at September 30, 1999 versus 1998. For particulars on the
Company's dividend policy, refer to the subsection immediately following.
Accumulated other comprehensive income, which measures net fluctuations in the
fair values of investment securities, fell $2,263,825 since year-end 1998.
Movement in interest rates remained the overriding factor in the fair value
results. Further details on investment securities and associated fair values are
contained in the Financial Condition section of this Analysis.
DIVIDEND POLICY
The Parent Company is a legal entity separate and distinct from its
subsidiaries, and its revenues and liquidity position depend primarily on the
payment of dividends from its subsidiaries. State banking regulations limit the
amount of dividends SEB may pay without prior approval of the regulatory
agencies. Year-to-date, SEB has paid 75%, or $1,674,000, of the $2,233,000 in
cash dividends available to the Company in 1999 without such prior approval. The
Company uses dividends paid by SEB in order to pay quarterly dividends to its
own shareholders. Management anticipates that the Company will continue to pay
regular cash dividends.
RESULTS OF OPERATIONS
Net income for the 1999 third quarter totaled $1,248,918 or $0.35 per share, up
$43,583 or 3.62% from the 1999 second quarter but virtually unchanged from the
1998 third quarter. For the year-to-date period, net income aggregated
$3,558,929, improving $492,911 or 16.08% from 1998. On a per share basis, net
income grew to $0.99 at September 30, 1999 from $0.86 and $0.94 in 1998 and
1997. Likewise, the return on beginning equity increased 81 basis points to
11.61% at September 30, 1999 from 10.80% a year ago. During the year-earlier
period, the Company recognized a $457,823 nonrecurring after-tax loss on the
January 1998 sale of the central Florida locations. The effects of the Alachua
divestiture on the Company's financial position and results of operations,
including the nonrecurring tax effects, represented a long-term strategic move
to enable the Company to focus on the creation of more profitable operations
within its southeast Georgia and northeast Florida markets. Excluding the
after-tax loss on the sale of the Alachua locations, net income grew 1.00% or
$35,088 during the first nine months of 1999 compared to 1998. Overall growth in
noninterest income, partly negated by reductions in net interest income and
higher operating costs, was the prime factor in the earnings improvement
year-to-date. Additional details on noninterest income/expense and net interest
income results are provided in the next two subsections of this Analysis.
Net Interest Income
Net interest income for the 1999 third quarter remained practically
indistinguishable from 1998 levels, varying, or declining, a mere $3,822.
Year-to-date, net interest income totaled $11,213,247, down $127,184 or 1.12%
from the same period in 1998. Similarly, the net interest margin and net
interest spread fell to 4.93% and 3.81%, respectively, from 5.21% and 4.01% a
year ago. A continuing drop in average balances and yields on commercial loans
was the key element in the year-to-date decline. Cash flows from declines in
loans and other sources to-date in 1999, and also, in 1998, were placed in
investment securities which yield, on average, considerably less than loans of
the same duration. As noted in the Loan section of
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
this Analysis, recent tax legislation has necessitated changes in the way the
Company recognizes interest income on certain short-term consumer loans; the
change in income recognition has effectively lowered the yield on these consumer
loans, thereby reducing income results on a same loan basis. The decline in
consumer yields was largely mitigated by volume, or average balance, increases
in consumer balances during the first nine months of 1999 compared to 1998.
The overall decline in interest earnings on assets which resulted from drops in
average balances, yields, or a combination thereof, was partially offset by a 44
basis point decrease in cost of funds. Management, through its Asset/Liability
Committee, has aggressively sought repricing opportunities for deposits,
particularly in certain Georgia markets. As discussed in the 1998 Annual Report,
interest margins and spreads will almost certainly continue to narrow as the
Company continues to face intense competition for loans and deposit dollars from
other banks and credit unions in virtually all its markets. Volume of assets and
deposits will become even more important as margins decline. Strategies
implemented by management to increase average loans outstanding include a)
utilization of more competitive pricing on loan products and b) development of
additional loan relationships, all without compromising portfolio quality.
Management's strategy for deposits is to reduce costs of funds and employ
alternative sources of financing when feasible. During the first nine months of
1998 compared to 1997, net interest income declined $880,130 or 7.20%. The
majority of the net interest income decline at September 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 liabilities at
September 30, 1999, 1998, and 1997.
Noninterest Income and Expense
Omitting the pre-tax gain of $101,908 recognized on the sale of the Alachua
offices in 1998, noninterest income grew $82,653 or 3.30% year-to-date at
September 30, 1999 compared to 1998. A $63,033 or 9.86% improvement in other
operating income and a $16,978 or 0.91% increase in service charges on deposit
accounts were the major elements in the nine month results. By type and amount,
the chief components of other operating income at September 30, 1999 were
mortgage origination fees, $128,410; commissions on the sale of credit life
insurance (generated by SEB), $141,566; safe deposit box rentals, $65,245; and
income on sale of check products, $51,174. Combined, these four income items
comprised 55.03% of other operating income year-to-date. Salaries and employee
benefits rose a moderate $7,374 during the third quarter after declining
$129,387 during the first half of 1999. The vast majority, or 84.65%, of
employee expenses were vested in salaries and other direct compensation,
including related payroll taxes, at September 30, 1999. Profit-sharing accruals
and other fringe benefits composed the remaining 7.16% and 8.19% of employee
expenses. The division of employee expenses between compensation,
profit-sharing, and other fringe benefits remained consistent with historical
norms at September 30, 1999. The 4.27% increase in net occupancy and equipment
expense year-to-date derived, in large part, from higher computer costs. The
Company began leasing new operating system hardware in the 1998 second quarter;
the newly leased hardware replaced a hardware system owned by the Company that
was fully depreciated. Because replacement of the operating system hardware was
not accelerated due to Year 2000 issues, the new lease amounts are not being
disclosed as Year 2000 costs. Refer to the separate disclosures provided under
Year 2000 for further details. Other operating expenses increased $90,905 or
4.37% at September 30, 1999 compared to 1998. A net loss on sales of other real
estate was the primary factor in the year-to-date increase. No individual
component of other operating expenses aggregated or exceeded 10% of the three
quarter total at September 30, 1999 or 1998. Excluding the pre-tax gain on the
sale of the central Florida locations, noninterest income declined $259,626 or
9.08% during the first nine months of 1998 compared to 1997. Likewise,
noninterest expense fell $814,828 or 9.32%. Virtually all of the fluctuation in
noninterest income and expense during the first nine 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.
18
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID
1999 1998
---------------------------- -----------------------------
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
NINE MONTHS ENDED SEPTEMBER 30, BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ----------------------------------------- --------- -------- ------ -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net(1),(2),(4) $162,954 $ 12,829 10.50% $165,512 $ 13,967 11.28%
Federal funds sold 8,093 286 4.71% 13,623 556 5.46%
Taxable investment securities(3) 121,724 5,413 5.93% 103,538 4,677 6.03%
Tax-exempt investment securities(3),(4) 24,560 1,427 7.75% 19,076 1,177 8.25%
-------- -------- ----- -------- -------- -----
Total interest-earning assets $317,331 $ 19,955 8.38% $301,749 $ 20,377 9.02%
======== ======== ===== ======== ======== =====
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $ 43,804 $ 925 2.82% $ 39,742 $ 902 3.03%
Savings 74,697 2,248 4.01% 72,762 2,514 4.62%
Time deposits 120,205 4,998 5.54% 116,160 5,144 5.92%
Federal funds purchased 622 25 5.36% -- -- --
U.S. Treasury demand note 760 26 4.60% 971 40 5.45%
Note payable -- -- -- -- -- --
-------- -------- ----- -------- -------- ------
Total interest-bearing liabilities $240,088 $ 8,222 4.57% $229,635 $ 8,600 5.01%
======== ======== ===== ======== ======== =====
Excess of interest-earning assets
over interest-bearing liabilities $ 77,243 $ 72,114
======== ======== ===== ======== ======== =====
INTEREST RATE SPREAD 3.81% 4.01%
======== ======== ===== ======== ======== =====
NET INTEREST INCOME $ 11,733 $ 11,777
======== ======== ===== ======== ======== ======
NET INTEREST MARGIN 4.93% 5.21%
======== ======== ===== ======== ======== =====
1997
-------- ------- -------
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/
NINE MONTHS ENDED SEPTEMBER 30, BALANCES EXPENSE RATES
- ----------------------------------------- -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net(1),(2),(4) $186,168 $ 15,517 11.14%
Federal funds sold 14,739 577 5.23%
Taxable investment securities(3) 88,903 4,190 6.30%
Tax-exempt investment securities(3),(4) 19,266 1,256 8.71%
-------- -------- -----
Total interest-earning assets $309,076 $ 21,540 9.32%
======== ======== =====
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $ 44,246 $ 950 2.89%
Savings 72,103 2,413 4.49%
Time deposits 125,583 5,414 5.74%
Federal funds purchased -- -- --
U.S. Treasury demand note 1,236 49 5.29%
Note payable 731 41 7.48%
-------- -------- -----
Total interest-bearing liabilities $243,899 $ 8,867 4.86%
======== ======== =====
Excess of interest-earning assets
over interest-bearing liabilities $ 65,177
======== ======== =====
INTEREST RATE SPREAD 4.46%
======== ======== =====
NET INTEREST INCOME $ 12,673
======== ======== =====
NET INTEREST MARGIN 5.48%
======== ======== =====
</TABLE>
- ----------
(1) Average loans are shown net of unearned income. Nonperforming loans are
included.
(2) Includes loan fees.
(3) Securities are presented on an amortized cost basis. Investment securities
with original maturities of three months or less are included, as
applicable.
(4) Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustment has been made for any state tax benefits.
(5) NOW and money market accounts.
19
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
YEAR 2000
The Company is currently addressing a universal situation commonly referred to
as the "Year 2000" problem. The Year 2000 problem pertains to the inability of
certain computer software programs and equipment to properly recognize and
process date-sensitive information relative to the Year 2000 and beyond. The
problem is not limited to computer systems and could potentially affect any
device that has an embedded microchip. In 1997, the Company developed a plan to
address the impact of the Year 2000 problem on its data processing systems,
non-information technology systems, and related infrastructure. In developing
its Year 2000 plan, the Company utilized guidelines developed by the federal
banking regulators which apply to all financial institutions. The Company
remains in regular dialogue with and receives guidance from its regulators about
its Year 2000 plan. The Company's Year 2000 plan consists of five distinct
phases:
PHASE I - AWARENESS: Identify hardware, software, and processes/devices
that use or process date information. Survey
selected third parties to determine the status of
their Year 2000 compliance.
PHASE II - ASSESSMENT: Identify Year 2000 data processing deficiencies
and related implications.
PHASE III - RENOVATION: Determine an appropriate solution for each
deficiency.
PHASE IV - VALIDATION: Conduct appropriate systems testing, including
testing with third parties.
PHASE V - IMPLEMENTATION: Implement designed solutions. Continue monitoring
third party renovations.
Year 2000 efforts are progressing as scheduled. The Company has completed phases
I, II, III, and IV of its plan and, except for ongoing monitoring of third party
renovations, has completed phase V. Testing of all mission critical systems was
completed in 1998, and testing of all non-critical systems was completed earlier
this year. Certain additional testing may be conducted after completion of the
implementation phase.
THIRD PARTY READINESS
The Company has sent questionnaires to its major loan customers inquiring about
the status of their Year 2000 plans. Based on the results of these
questionnaires and on-site visits, a Year 2000 risk rating has been assigned to
all borrowers covered by the Year 2000 credit risk policy. These Year 2000
credit risk assessments have been included by the Company in its evaluation of
the allowance for loan losses. Based on these assessments, the Company does not
believe the Year 2000 problems should, on an aggregate basis, impact its
borrowers' ability to make loan payments.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
"Critical" vendors supply services consumed on an ongoing basis that, if
interrupted, would materially disrupt the Company's ability to conduct
operations. The Company has identified all critical vendors and servicers,
including its item processing and utility vendors, and has received
certifications/assurances of Year 2000 compliance from same. The Company will
continue to assess the Year 2000 progress of critical vendors throughout 1999.
The progress of less critical vendors is also being monitored, and follow-up
action is being taken as needed.
CONTINGENCY PLANS
The Company has prepared contingency plans pertaining specifically to Year 2000
risks. These contingency plans have been designed to provide for ongoing
operations or early business resumption, including utilization of back-up
systems, in cases of Year 2000 failures. In conjunction with its contingency
planning, the Company has also developed a Year 2000 liquidity policy that
addresses the need for additional supplies of cash and alternative funding
sources, including the Federal Reserve discount window, to cover any temporary
liquidity shortages. The Year 2000 contingency plans will continue to be tested
in certain respects and thereafter refined as additional information becomes
available.
YEAR 2000 RISKS
While the Company currently believes that its plan for dealing with the Year
2000 issue will result in timely and adequate modification of affected systems,
failure to do so, or the failure of customers and other third parties to modify,
upgrade, or replace their affected systems, could have material adverse impacts
on the Company's business, operations, or financial condition in the future.
Given the numerous and significant uncertainties involved with the Year 2000
issue, there can be no assurance that Year 2000 related estimates and
anticipated results will be achieved. Reasonably likely consequences of failure
by the Company or third parties to resolve the Year 2000 problem include, among
other things, disruptions in customer service, delays in rendering item
processing, invoice and collection errors, inability of loan customers to
service their loans, unusual withdrawals of deposits, and maintenance of higher
currency reserves. The Company believes that its Year 2000 readiness program,
including related contingency planning, should greatly reduce the possibility of
significant interruptions of normal operations.
COSTS
Except for overhead costs associated with staff development & implementation of
its Year 2000 plan and replacement of one non-critical system at a cost of
approximately $5,000, the Company has not incurred any significant costs related
to the Year 2000 issue. The Company began leasing new operating system hardware
in 1998; the newly leased hardware replaced a hardware system owned by the
Company that was fully depreciated. Because replacement of the operating system
hardware was not accelerated due to Year 2000 issues, the new lease amounts are
not being disclosed as Year 2000 costs. The Company has not incurred any
incremental Year 2000 costs in regards to its main software system.
Implementation and refinement of the Company's Year 2000 plan is an ongoing
process. Consequently, the cost estimates and timetable given above are subject
to change. The foregoing statements regarding Year 2000 matters constitute Year
2000 readiness disclosures under the Year 2000 Information and Readiness
Disclosure Act. For additional information regarding Year 2000 matters, refer to
the disclosures provided under Forward-Looking Statements.
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Company are discussed in Note 5
to the Consolidated Financial Statements and, further, in the 1998 Form 10-K
previously filed with the Securities and Exchange Commission.
Various other accounting proposals concerning the banking industry are pending
with the Financial Accounting Standards Board. Given the inherent uncertainty of
the proposal process, the Company cannot assess the impact of any such proposals
on its financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company has made, and may continue to make, various written or oral
forward-looking statements with respect to business and financial matters,
including statements contained in this report, filings with the Securities and
Exchange Commission, and reports to shareholders. All statements which address
operating performance, events or developments that we expect or anticipate will
occur in the future, including statements related to loan growth, deposit
growth, per share growth, and statements expressing general sentiment about
future operating results and non-historical information, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance. The Company undertakes no obligation to
update any forward-looking statements in light of new information or future
events.
Certain factors that could affect financial performance or cause actual results
to vary significantly from estimates contained in or underlying forward-looking
statements include:
o Interest rate fluctuations and other market conditions.
o Strength of the consumer and commercial credit sectors as well as real
estate markets.
o Changes in laws and regulations, including changes in accounting
standards, monetary policies, and taxation requirements (including tax
rate changes, new tax laws, and revised tax law interpretations).
o Competitive pricing and other pressures on loans and deposits and the
Company's ability to maintain market shares in its trade areas.
o The inherent uncertainties in achieving Year 2000 compliance with
respect to the Company and its vendors, suppliers, and loan customers.
o The outcome of litigation which depends on judicial interpretations of
law and findings of juries.
o Other risks and uncertainties as detailed from time to time in Company
filings with the Securities and Exchange Commission.
The foregoing list of factors is not exclusive. This Analysis should be read in
conjunction with the Consolidated Financial Statements and related notes.
22
<PAGE>
SOUTHEASTERN BANKING CORPORATION
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
23
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SIGNATURES
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: NOVEMBER 12, 1999
24
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27 Financial Data Schedule (for SEC use only).
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,111
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,170
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,228
<INVESTMENTS-CARRYING> 28,784
<INVESTMENTS-MARKET> 28,472
<LOANS> 162,290
<ALLOWANCE> 3,246
<TOTAL-ASSETS> 337,777
<DEPOSITS> 290,555
<SHORT-TERM> 2,580
<LIABILITIES-OTHER> 3,271
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 36,895
<TOTAL-LIABILITIES-AND-EQUITY> 337,777
<INTEREST-LOAN> 12,792
<INTEREST-INVEST> 6,357
<INTEREST-OTHER> 286
<INTEREST-TOTAL> 19,435
<INTEREST-DEPOSIT> 8,171
<INTEREST-EXPENSE> 8,222
<INTEREST-INCOME-NET> 11,213
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 7,852
<INCOME-PRETAX> 5,049
<INCOME-PRE-EXTRAORDINARY> 3,559
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,559
<EPS-BASIC> 0.99
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 4.93
<LOANS-NON> 775
<LOANS-PAST> 1,435
<LOANS-TROUBLED> 362
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,407
<CHARGE-OFFS> 1,588
<RECOVERIES> 527
<ALLOWANCE-CLOSE> 3,246
<ALLOWANCE-DOMESTIC> 2,567
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 697
</TABLE>
