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..........................................06-30-99
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 incorporation (I. R. S. Employer
or organization) Identification No.)
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 07-31-99
This Document consists of 24 pages.
The Exhibit Index is located at page 23.
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,163,326 $ 14,464,719
Federal funds sold -- 15,670,000
------------- -------------
Cash and cash equivalents 12,163,326 30,134,719
Investment securities
Held-to-maturity (market value of approximately $28,089,000
and $24,948,000 at June 30, 1999 and December 31, 1998) 28,065,991 23,873,246
Available-for-sale, at market value 126,421,706 109,157,838
------------- -------------
Total investment securities 154,487,697 133,031,084
Loans, gross 165,033,087 168,044,357
Unearned income (2,381,630) (3,283,218)
Allowance for loan losses (3,161,159) (3,406,626)
------------- -------------
Loans, net 159,490,298 161,354,513
Premises and equipment, net 6,718,276 6,603,948
Intangible assets 1,381,645 1,477,007
Other assets 6,754,952 5,332,061
------------- -------------
TOTAL ASSETS $ 340,996,194 $ 337,933,332
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 54,170,738 $ 58,261,917
Interest-bearing deposits 240,438,080 234,434,679
------------- -------------
Total deposits 294,608,818 292,696,596
Federal funds purchased 410,000 --
U. S. Treasury demand note 1,957,244 816,053
Other liabilities 2,951,447 3,270,386
------------- -------------
Total liabilities 299,927,509 296,783,035
------------- -------------
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 36,587,477 34,993,625
------------- -------------
Realized stockholders' equity 42,455,196 40,861,344
Accumulated other comprehensive income - unrealized (losses)
gains on available-for-sale securities, net of tax (1,386,511) 288,953
------------- -------------
Total stockholders' equity 41,068,685 41,150,297
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,996,194 $ 337,933,332
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
---------------------------- ----------------------------
PERIOD ENDED JUNE 30, 1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,244,829 $ 4,562,315 $ 8,520,404 $ 9,299,299
Federal funds sold 84,653 197,480 280,065 459,244
Investment securities
Taxable 1,841,185 1,576,464 3,504,573 2,913,069
Tax-exempt 313,043 258,810 616,882 505,844
----------- ----------- ----------- -----------
Total interest income 6,483,710 6,595,069 12,921,924 13,177,456
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,735,130 2,854,856 5,495,607 5,619,927
Federal funds purchased 3,205 -- 3,205 --
U. S. Treasury demand note 7,856 10,165 15,630 26,685
----------- ----------- ----------- -----------
Total interest expense 2,746,191 2,865,021 5,514,442 5,646,612
----------- ----------- ----------- -----------
Net interest income 3,737,519 3,730,048 7,407,482 7,530,844
PROVISION FOR LOAN LOSSES 300,000 315,000 600,000 630,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,437,519 3,415,048 6,807,482 6,900,844
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 642,244 619,495 1,224,564 1,251,374
Investment securities gains, net -- -- -- 8,123
Gain on sale of branches before tax provision
of $559,731 -- -- -- 101,908
Other operating income 242,838 205,635 494,750 450,449
----------- ----------- ----------- -----------
Total noninterest income 885,082 825,130 1,719,314 1,811,854
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,439,853 1,493,272 2,881,353 3,010,740
Occupancy and equipment 432,328 416,910 878,538 846,667
Other operating expense 742,158 693,606 1,495,478 1,468,536
----------- ----------- ----------- -----------
Total noninterest expense 2,614,339 2,603,788 5,255,369 5,325,943
----------- ----------- ----------- -----------
Income before income taxes 1,708,262 1,636,390 3,271,427 3,386,755
INCOME TAX EXPENSE 502,927 497,583 961,416 1,569,602
----------- ----------- ----------- -----------
NET INCOME $ 1,205,335 $ 1,138,807 $ 2,310,011 $ 1,817,153
=========== =========== =========== ===========
NET INCOME PER SHARE - BASIC $ 0.34 $ 0.32 $ 0.65 $ 0.51
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
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 -- -- 1,817,153 -- 1,817,153
Other comprehensive income, net
of tax effect of $24,108:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- 46,799 46,799
------------
Comprehensive income 1,863,952
------------
Cash dividends declared
($0.13 1/3 per share) -- -- (477,678) -- (477,678)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 $ 4,475,996 $ 1,391,723 $ 33,325,555 $ 61,657 $ 39,254,931
============ ============ ============ ============ ============
BALANCE, DECEMBER 31, 1998 $ 4,475,996 $ 1,391,723 $ 34,993,625 $ 288,953 $ 41,150,297
Comprehensive income:
Net income -- -- 2,310,011 -- 2,310,011
Other comprehensive income, net
of tax effect of $863,118:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- (1,675,464) (1,675,464)
------------
Comprehensive income 634,547
------------
Cash dividends declared
($0.20 per share) -- -- (716,159) -- (716,159)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 $ 4,475,996 $ 1,391,723 $ 36,587,477 $ (1,386,511) $ 41,068,685
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 1998
- ------------------------- ------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,310,011 $ 1,817,153
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600,000 630,000
Depreciation 473,291 453,739
Amortization and accretion, net 135,524 111,025
Deferred income tax benefit -- (17,998)
Investment securities gains, net -- (8,123)
Net gains on sales of other real estate (5,475) (62,690)
Gain on sale of branches before tax provision -- (101,908)
Changes in assets and liabilities:
(Increase) decrease in other assets (209,228) 363,410
(Decrease) increase in other liabilities (8,484) 185,228
------------ ------------
Net cash provided by operating activities 3,295,639 3,369,836
------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Held-to-maturity 760,000 2,245,700
Available-for-sale 43,524,451 31,323,334
Proceeds from sales of investment securities:
Available-for-sale -- 3,501,562
Proceeds from sales of other real estate 231,341 346,430
Purchases of investment securities:
Held-to-maturity (4,962,186) (3,871,688)
Available-for-sale (63,357,623) (47,449,531)
Net increase in short-term securities -- (4,995,525)
Net decrease in loans 566,613 6,465,982
Additions to premises and equipment, net (466,427) (244,290)
Net funds paid in sale of branches -- (13,589,236)
------------ ------------
Net cash used in investing activities (23,703,831) (26,267,262)
------------ ------------
FINANCING ACTIVITIES
Net (decrease) increase in demand, NOW, and savings deposits (1,931,399) 4,854,858
Net increase in certificates of deposit 3,843,622 7,017,536
Net increase in federal funds purchased 410,000 --
Net increase (decrease) in U. S. Treasury demand note 1,141,191 (808,279)
Cash dividends paid (1,026,615) (704,343)
------------ ------------
Net cash provided by financing activities 2,436,799 10,359,772
------------ ------------
Net decrease in cash and cash equivalents (17,971,393) (12,537,654)
Cash and cash equivalents at beginning of year 30,134,719 39,741,483
------------ ------------
Cash and cash equivalents at June 30 $ 12,163,326 $ 27,203,829
============ ============
</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 six months ended June 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 had total assets of
approximately $340,412,000 at June 30, 1999 versus $338,054,000 at March 31,
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. An inaugural investment of $50,000 was made
by the Company in SBCF. The Company has invested an additional $50,000 in SBCF
since 1998 and expects to make further 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 half of 1999.
FINANCIAL CONDITION
Total assets exceeded $340 million at June 30, 1999, up $3,062,862 or 0.91% from
year-end 1998 and up $14,335,634 or 4.39% from June 30, 1998. The increase in
total assets since June 30, 1998 has transpired from growth in deposits, in
particular, interest-bearing deposits. Pertinent details on deposits and deposit
components are provided in the Liquidity section of this Analysis. During the
first half of 1998, total assets declined $21,237,273 or 6.10%. 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 six months of 1998.
7
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Investment Securities
Investment securities increased a substantial $21,456,613 or 16.13% since
year-end 1998. As a percent of earning assets, securities aggregated 49% at June
30, 1999 versus 42% at both December 31, 1998 and June 30, 1998. Funds available
from declines in loans, federal funds sold, and other sources since the year-ago
period have been placed in investment securities. No significant changes have
occurred in the investment securities mix at June 30, 1999. The amortized cost
and estimated fair value of investment securities are outlined in the table
below:
<TABLE>
<CAPTION>
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 1999 COST GAINS LOSSES VALUE
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $102,393 $ 41 $ 1,394 $101,040
Mortgage-backed securities 25,041 16 763 24,294
Equity securities 1,088 -- -- 1,088
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
128,522 57 2,157 126,422
Held-to-maturity:
States and political subdivisions 28,066 430 407 28,089
- -------------------------------------------------- ---------------- --------------- --------------- ----------------
Total investment securities $156,588 $ 487 $ 2,564 $154,511
================ =============== =============== ================
</TABLE>
As shown, the market value of the securities portfolio declined at June 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 $427,696 since the first quarter or
$2,109,682 year-to-date. The net loans to deposit ratio totaled 55.21% at
mid-year 1999 versus 55.60% at March 31, 1999, 56.29% at year-end 1998, and
57.66% a year ago. A continuing drop in commercial loans outstanding was the
prime factor in the quarter and six month decline. The consumer loan portfolio
declined 1.13% since December 31, 1998 but grew an appreciable $3,423,000 or
10.46% since the 1998 second quarter. 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-earlier period, net loans
declined $24,880,191 or 13.32%. The majority, or 70%, of the 1998 decrease was
attributable to the Alachua divestiture. The remaining drop ensued 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>
JUNE 30, DECEMBER 31, JUNE 30,
LOANS BY CATEGORY 1999 1998 1998
- --------------------------------------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial, and agricultural $ 65,479 $ 69,125 $ 72,036
Real estate - construction 2,767 2,318 2,027
Real estate - mortgage 60,633 60,035 58,728
Consumer, including credit cards 36,154 36,566 32,731
-------- -------- --------
Loans, gross 165,033 168,044 165,522
Unearned income 2,382 3,283 3,579
-------- -------- --------
Loans, net $162,651 $164,761 $161,943
-------- -------- --------
</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, a significant portion of
its loans are collateralized by real estate. On a gross basis, loans secured by
real estate aggregated approximately $105,673,000 and $105,010,000 at June 30,
1999 and December 31, 1998. A geographic concentration in loans arises 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
$17,829,000 and $686,000 at June 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 June 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 represented the largest component of nonperforming assets at
mid-year 1999, increasing 7.54% to $1,340,000 since December 31, 1998. As a
percent of net loans, nonperforming loans totaled 0.82% at June 30, 1999
compared to 0.76% and 0.37% at year-end 1998 and June 30, 1998. The 1999
increase in nonperforming loans resulted predominantly from the placement of
certain real estate-construction and real estate-mortgage loans on nonaccrual
status since the preceding year-end. No
9
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $51,000, $84,000, and $61,000. At June 30, 1999, 92% of
nonperforming loan balances, including restructured balances, pertained to five
separate borrowers; more significantly, $934,000 or 69.70% of nonperforming
balances pertained to merely two borrowers and 42% to a solo borrower. After
jumping $615,000 during the first quarter, foreclosed real estate balances,
another component of nonperforming assets, fell $254,000 to $1,139,000 during
the second quarter. Approximately 76.65% of foreclosed real estate balances at
June 30 were derived from funding originally extended to four separate
borrowers; further segregated, 62.34% of total balances applied to two
borrowers. Foreclosed real estate balances were concentrated, overall, in
residential real estate at June 30, 1999. Loans past due 90 days or more were at
the lowest level since September 30, 1997, aggregating $1,559,000 at June 30,
1999. Loans to four separate borrowers comprised 17.45% of loans past due 90
plus days at June 30, 1999; management is unaware of any other material
concentrations within these past due balances. Details on a certain group of
loans that compose the bulk of the net additions to nonperforming assets
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>
JUNE 30, DECEMBER 31, JUNE 30,
NONPERFORMING ASSETS 1999 1998 1998
- --------------------------------------------------- -------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Commercial, financial, and agricultural $ 575 $ 622 $ 156
Real estate - construction 83 0 0
Real estate - mortgage 295 240 64
Consumer, including credit cards 21 10 2
------ ------ ------
Total nonaccrual loans 974 872 222
Restructured loans (1) 366 374 381
------ ------ ------
Total nonperforming loans 1,340 1,246 603
Foreclosed real estate (2) 1,139 778 1,041
------ ------ ------
Total nonperforming assets $2,479 $2,024 $1,644
------ ------ ------
Accruing loans past due 90 days or more $1,559 $1,607 $2,434
------ ------ ------
- ------------------
(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.
</TABLE>
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 a 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 a 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 $83,000 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 July 31, $226,000 or 33% of the acquired properties had
been sold to third parties. This group of loans accounts for the majority of the
net additions to 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 June 30, 1999 that should be included in the table
above or otherwise discussed. All known potential problem loans were included in
nonperforming loans at June 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 declined
13 basis points to 1.94% at mid-year 1999 from 2.07% at year-end 1998. The
decline in the allowance ratio resulted foremost from the high charge-offs
recognized since year-end. Net charge-offs totaled $845,467, up substantially,
or $580,496, from 1998's $264,971. Approximately 63% of charge-offs year-to-date
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
provision provided from income remained comparable to 1998 levels, aggregating
$600,000 at June 30, 1999 versus $630,000 at June 30, 1998. Activity in the
allowance is presented in the table on the next page.
11
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
SIX MONTHS ENDED JUNE 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 600 630 1,055
Charge-offs:
Commercial, financial, and agricultural 393 130 1,029
Real estate - construction 335 0 0
Real estate - mortgage 95 33 2
Consumer, including credit cards 456 368 390
-------- -------- --------
Total charge-offs 1,279 531 1,421
-------- -------- --------
Recoveries:
Commercial, financial, and agricultural 204 46 63
Real estate - construction 0 0 0
Real estate - mortgage 18 5 1
Consumer, including credit cards 211 215 222
-------- -------- --------
Total recoveries 433 266 286
-------- -------- --------
Net charge-offs 846 265 1,135
-------- -------- --------
Allowance for loan losses at June 30 $ 3,161 $ 4,070 $ 3,655
-------- -------- --------
Net loans outstanding(1) at June 30 $162,651 $161,943 $188,278
-------- -------- --------
Average net loans outstanding(1) at June 30 $163,422 $166,570 $184,168
-------- -------- --------
Ratios:
Allowance to net loans 1.94% 2.51% 1.94%
-------- -------- --------
Net charge-offs to average loans (annualized) 1.04% 0.32% 1.23%
-------- -------- --------
Provision to average loans (annualized) 0.73% 0.76% 1.15%
-------- -------- --------
- --------------
(1) Net of unearned income
</TABLE>
Management believes the allowance was adequate at June 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 $600,000 during the second half of
1999.
Other Assets
Gross premises and equipment increased $466,427 during the first six months of
1999. More than 89% of the 1999 expenditures to-date are computer-related;
purchases include a loan platform system, upgraded network/branch communication
equipment, and a down payment on imaging hardware and software. The remaining
costs associated with the imaging system, payment of which is due at, or prior
to, system implementation, are expected to total $350,000. The managerial
decision to purchase the imaging system
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
was predicated on the following known benefits:
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 Lower Overhead. 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 planned prior to December 31, 1999.
Other than the remaining amount due on the imaging system and the possible
purchase of equipment relative to PC, or internet, banking, the Company had no
material plans or commitments for capital expenditures as of June 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 particulars 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 locations;
offsetting capital expenditures totaled $244,290. Approximately 78% of the 1998
expenditures through June 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 $1,062,861 or 18.67% year-to-date. Increases in the deferred
tax effects of mark-to-market accounting for investment securities and higher
accrued interest receivables on securities were the principal factors in the
1999 results to-date. 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 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, 1999,
investment securities with carrying values of approximately $8,709,000 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, and federal funds purchased. The Company has unsecured federal funds
lines of credit from other banks totaling $11,000,000. At June 30, 1999, federal
funds drawn under these lines totaled $410,000. 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.
13
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Deposits
Deposits grew $1,912,222 or 0.65% at June 30, 1999 compared to year-end 1998.
Interest-bearing deposits climbed $6,003,401 or 2.56%, comprising 81.61% of
total deposits at June 30, 1999, while noninterest-bearing deposits dropped
$4,091,179 or 7.02%. The distribution of interest-bearing balances at June 30,
1999 and certain comparable quarter-end dates is shown in the table below:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 JUNE 30, 1998
---------------------- -------------------- ---------------------
PERCENT PERCENT PERCENT
DEPOSITS BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
- -------------------------------------------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-bearing demand deposits(1) $43,530 18.10% $43,617 18.61% $38,840 16.89%
Savings 75,130 31.25% 72,883 31.09% 73,328 31.90%
Time certificates less than $100,000 77,121 32.08% 78,409 33.44% 78,682 34.22%
Time certificates $100,000 or more 44,657 18.57% 39,526 16.86% 39,060 16.99%
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits $240,438 100.00% $234,435 100.00% $229,910 100.00%
======== ======= ======== ======= ======== =======
</TABLE>
- ---------------
(1) Includes NOW and money market accounts.
Last year, the January divestiture resulted in a deposit decline exceeding
$33,000,000; deposit growth at the remaining SEB locations mitigated
approximately 35.57% of the divestiture decline by June 30, 1998. 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 June 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 difference between interest rate sensitive
assets and interest rate sensitive liabilities; this difference is known as the
interest rate sensitivity gap.
The gap analysis on the next page provides a snapshot of the Company's interest
rate sensitivity position at June 30, 1999.
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
REPRICING WITHIN
-------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
JUNE 30, 1999 MONTHS MONTHS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Securities(1) $ 4,481 $ 5,576 $ 99,823 $45,620 $155,500
Loans, gross(2) 51,840 18,431 59,223 34,565 164,059
-------- --------- -------- ------- --------
Total interest rate sensitive assets 56,321 24,007 159,046 80,185 319,559
-------- --------- -------- ------- --------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 144,677 69,358 26,334 69 240,438
Federal funds purchased 410 410
U.S. Treasury demand note 1,957 1,957
-------- -------- -------- ------- --------
Total interest rate sensitive
liabilities 147,044 69,358 26,334 69 242,805
-------- --------- -------- ------- --------
Interest rate sensitivity gap $(90,723) $ (45,351) $132,712 $80,116 $ 76,754
-------- --------- -------- ------- --------
CUMULATIVE GAP $(90,723) $(136,074) $ (3,362) $76,754
- -------------------------------------------------------------------------------------------------------------------
Ratio of cumulative gap to total
rate sensitive assets (28.39)% (42.58)% (1.05)% 24.02%
-------- -------- -------- -------
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 38.30% 37.12% 98.61% 131.61%
-------- --------- -------- --------
Cumulative gap at December 31, 1998 $(75,213) $ (97,301) $ 15,058 $76,837
-------- --------- -------- -------
Cumulative gap at June 30, 1998 $(59,970) $ (84,189) $ 17,616 $72,741
-------- --------- -------- -------
- -----------------
(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.
</TABLE>
As in the prior periods shown, the Company's gap position remained negative in
the short-term repricing intervals at June 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 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
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 June
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>
JUNE 30, DECEMBER 31, JUNE 30,
CAPITAL RATIOS(1) 1999 1998 1998
- ----------------------------------------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 capital:
Realized stockholders' equity $ 42,455 $ 40,861 $ 39,193
Intangible assets and other adjustments (1,391) (1,486) (1,589)
--------- --------- ---------
Total Tier 1 capital 41,064 39,375 37,604
--------- --------- ---------
Tier 2 capital:
Portion of allowance for loan losses 2,244 2,216 2,148
Allowable long-term debt -- -- --
--------- --------- ---------
Total Tier 2 capital 2,244 2,216 2,148
--------- --------- ---------
Total risk-based capital $ 43,308 $ 41,591 $ 39,752
--------- --------- ---------
Risk-weighted assets $ 178,588 $ 176,052 $ 169,943
--------- --------- ---------
Risk-based ratios:
Tier 1 capital 22.99% 22.37% 22.13%
--------- --------- ---------
Total risk-based capital 24.25% 23.62% 23.39%
--------- --------- ---------
Tier 1 leverage ratio 12.08% 11.78% 11.69%
--------- --------- ---------
Realized stockholders' equity to assets 12.41% 12.10% 12.00%
========= ========= =========
- ----------------
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier 3
capital.
</TABLE>
16
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
On a per share basis, book value rose 3.94% during the six month period to
$11.86 at mid-year 1999. Dividends declared totaled $0.10 per quarter, or $0.20
year-to-date, at June 30, 1999, a 50% increase from last year. For specifics 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 classified as available-for-sale, declined
$1,675,464 at June 30, 1999 compared to year-end 1998. The Financial Condition
section of this Analysis contains further details on investment securities and
associated fair values.
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 50%, or $1,116,000, 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 second quarter aggregated $1,205,335, up $100,659 or
9.11% from the 1999 first quarter and up $66,528 or 5.84% from the 1998 second
quarter. On a per share basis, quarterly earnings totaled $0.34 at June 30, 1999
versus $0.31 at March 31, 1999 and $0.32 at June 30, 1998. Year-do-date, net
income grew $492,858 or 27.12% to $2,310,011 at June 30, 1999 from $1,817,153 in
1998. Similarly, per share income for the half-year period improved $0.14 to
$0.65 at June 30, 1999 from $0.51 in 1998. 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 increased $35,035 or 1.54% during
the first half of 1999 compared to 1998. Overall improvements in noninterest
income and declines in noninterest expense, negated by reductions in net
interest income, were the key factors in the earnings increase year-to-date.
Noninterest income/expense and net interest income results are further discussed
in the next two subsections of this Analysis. The return on beginning equity
totaled 11.31% at mid-year 1999 versus 9.60% and 12.02% in 1998 and 1997.
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net Interest Income
Net interest income for the 1999 second quarter remained virtually unchanged
from 1998 levels, growing a mere $7,471 or 0.20%. For the year-to-date period,
net interest income totaled $7,407,482, down $123,362 or 1.64% from the same
period in 1998. Likewise, the net interest margin and net interest spread fell
to 4.88% and 3.77%, respectively, from 5.24% and 4.06% a year ago. A continuing
drop in average balances and yields on commercial loans was the primary 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. 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 37
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 half of 1998
compared to 1997, net interest income declined $571,192 or 7.05%. 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 liabilities at June 30, 1999, 1998,
and 1997.
Noninterest Income and Expense
Excluding the pre-tax gain of $101,908 recognized on the sale of the Alachua
offices in 1998, noninterest income grew less than 1%, or $9,368, year-to-date
at June 30, 1999 compared to 1998. A $44,301 improvement in other operating
income, negated in part by a 2.14% decline in service charges on deposit
accounts, was the main element in the six month results. By type and amount, the
chief components of other operating income at June 30, 1999 were mortgage
origination fees, $98,851; commissions on the sale of credit life insurance
(generated by SEB), $90,578; safe deposit box rentals, $54,979; and income on
sale of check products, $31,371. Together, these four income items comprised
55.74% of other operating income year-to-date. Salaries and employee benefits
fell an additional $53,419 during the second quarter, or $129,387 during the six
month period, to $2,881,353 year-to-date at June 30, 1999 compared to 1998. The
vast majority, or 84.78%, of employee expenses were vested in salaries and other
direct compensation, including related payroll taxes, at June 30, 1999.
Profit-sharing accruals and other fringe benefits constituted the remaining
7.20% and 8.02% of employee expenses. The division of employee expenses between
compensation, profit-sharing, and other fringe benefits remained consistent with
historical norms at June 30, 1999. The $31,871 or 3.76% increase in net
occupancy and equipment expense during the half-year period derived almost
exclusively from higher computer costs. The Company began leasing new operating
system hardware in the 1998 second quarter; the newly leased hardware replaced a
hardware
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 rose a moderate 1.83% at June 30, 1999 compared to 1998. No
individual component of other operating expenses aggregated or exceeded 10% of
the mid-year total at June 30, 1999 or 1998. Omitting the pre-tax gain on the
sale of the central Florida locations, noninterest income declined $134,903 or
7.09% during the first six months of 1998 compared to 1997. Similarly,
noninterest expense decreased $542,966 or 9.16%. Virtually all of the
fluctuation in noninterest income and expense during the first half 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>
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
SIX MONTHS ENDED JUNE 30, BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net(1),(2),(4) $163,422 $ 8,545 10.46% $166,570 $ 9,327 11.20% $184,168 $ 10,221 11.10%
Federal funds sold 11,931 280 4.69% 16,826 459 5.46% 13,982 374 5.34%
Taxable investment securities(3) 118,137 3,505 5.94% 96,564 2,913 6.03% 89,667 2,793 6.23%
Tax-exempt investment
securities(3),(4) 23,969 933 7.79% 18,512 765 8.26% 19,421 853 8.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $317,459 $ 13,263 8.36% $298,472 $ 13,464 9.02% $307,238 $ 14,241 9.27%
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $ 45,488 $ 651 2.86% $ 39,333 $ 591 2.99% $ 44,981 $ 649 2.89%
Savings(6) 74,616 1,511 4.05% 72,578 1,663 4.58% 69,783 1,565 4.49%
Time deposits 119,426 3,334 5.58% 114,785 3,366 5.86% 125,034 3,554 5.68%
Federal funds purchased 142 3 4.75% -- -- -- -- -- --
U.S. Treasury demand note 660 16 4.85% 996 27 5.42% 1,256 33 5.29%
Note payable -- -- -- -- -- -- 946 35 7.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $240,332 $ 5,515 4.59% $227,692 $ 5,647 4.96% $242,000 $ 5,836 4.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 77,127 $ 70,780 $ 65,238
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 3.77% 4.06% 4.45%
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 7,748 $ 7,817 $ 8,405
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.88% 5.24% 5.47%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
6 Refer to the Liquidity section of this Analysis for additional details on
deposit components.
19
<PAGE>
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 has substantially completed phase V. Testing
of all mission critical systems was completed in 1998, and testing of all
non-critical systems, with the exception of one application scheduled for
completion in September 1999, was completed during the first half of 1999.
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.
"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.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 and implementation
of the Year 2000 plan, the Company has not incurred any significant costs
related to the Year 2000 issue. The Company expects to replace one non-critical
system that is not Year 2000 compliant by September 30, 1999. Replacement of
this particular system is expected to cost approximately $5,000. 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 completion dates 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Company are discussed in Note 5
to the Consolidated
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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:
/diamond/ Interest rate fluctuations and other market conditions.
/diamond/ Strength of the consumer and commercial credit sectors as well as real
estate markets.
/diamond/ 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).
/diamond/ Competitive pricing and other pressures on loans and deposits and the
Company's ability to maintain market shares in its trade areas.
/diamond/ The inherent uncertainties in achieving Year 2000 compliance with
respect to the Company and its vendors, suppliers, and loan
customers.
/diamond/ The outcome of litigation which depends on judicial interpretations of
law and findings of juries.
/diamond/ 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
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, 1999
24
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,163
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,422
<INVESTMENTS-CARRYING> 28,066
<INVESTMENTS-MARKET> 28,089
<LOANS> 162,651
<ALLOWANCE> 3,161
<TOTAL-ASSETS> 340,996
<DEPOSITS> 294,609
<SHORT-TERM> 2,367
<LIABILITIES-OTHER> 2,951
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 36,593
<TOTAL-LIABILITIES-AND-EQUITY> 340,996
<INTEREST-LOAN> 8,520
<INTEREST-INVEST> 4,121
<INTEREST-OTHER> 280
<INTEREST-TOTAL> 12,922
<INTEREST-DEPOSIT> 5,496
<INTEREST-EXPENSE> 5,514
<INTEREST-INCOME-NET> 7,407
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,255
<INCOME-PRETAX> 3,271
<INCOME-PRE-EXTRAORDINARY> 2,310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,310
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 4.88
<LOANS-NON> 974
<LOANS-PAST> 1,559
<LOANS-TROUBLED> 366
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,407
<CHARGE-OFFS> 1,279
<RECOVERIES> 433
<ALLOWANCE-CLOSE> 3,161
<ALLOWANCE-DOMESTIC> 2,316
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 845
</TABLE>
