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..........................................03-31-99
Commission File Number...................................................2-83157
SOUTHEASTERN BANKING CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1423423
- -------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 04-30-98
This Document consists of 23 pages.
The Exhibit Index is located at page 22.
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,285,233 $ 14,464,719
Federal funds sold 4,740,000 15,670,000
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 17,025,233 30,134,719
Investment securities
Held-to-maturity (market value of approximately $26,186,000
and $24,948,000 at March 31, 1999 and December 31, 1998) 25,416,498 23,873,246
Available-for-sale, at market value 122,652,758 109,157,838
- ------------------------------------------------------------------------------------------------------------------
Total investment securities 148,069,256 133,031,084
Loans, gross 166,021,068 168,044,357
Unearned income (2,941,915) (3,283,218)
Allowance for loan losses (3,149,079) (3,406,626)
- -----------------------------------------------------------------------------------------------------------------
Loans, net 159,930,074 161,354,513
Premises and equipment, net 6,532,624 6,603,948
Intangible assets 1,429,326 1,477,007
Other assets 5,618,373 5,332,061
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $338,604,886 $337,933,332
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 52,883,810 $ 58,261,917
Interest-bearing deposits 240,424,361 234,434,679
- -----------------------------------------------------------------------------------------------------------------
Total deposits 293,308,171 292,696,596
U. S. Treasury demand note 728,331 816,053
Other liabilities 3,074,661 3,270,386
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 297,111,163 296,783,035
- ------------------------------------------------------------------------------------------------------------------
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 35,740,222 34,993,625
- ------------------------------------------------------------------------------------------------------------------
Realized stockholders' equity 41,607,941 40,861,344
Accumulated other comprehensive income - unrealized (losses)
gains on available-for-sale securities, net of tax (114,218) 288,953
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,493,723 41,150,297
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $338,604,886 $337,933,332
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $4,275,575 $4,736,984
Federal funds sold 195,412 261,764
Investment securities
Taxable 1,663,388 1,336,605
Tax-exempt 303,839 247,034
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 6,438,214 6,582,387
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,760,477 2,765,071
U. S. Treasury demand note 7,774 16,520
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 2,768,251 2,781,591
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 3,669,963 3,800,796
PROVISION FOR LOAN LOSSES 300,000 315,000
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,369,963 3,485,796
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 582,320 631,879
Investment securities gains, net - 8,123
Gain on sale of branches before tax provision of $559,731 - 101,908
Other operating income 251,912 244,814
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 834,232 986,724
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,441,500 1,517,468
Occupancy and equipment 446,210 429,757
Other operating expense 753,320 774,930
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,641,030 2,722,155
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,563,165 1,750,365
INCOME TAX EXPENSE 458,489 1,072,019
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $1,104,676 $ 678,346
======================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.31 $ 0.19
======================================================================================================================
</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
THREE MONTHS ENDED MARCH 31, 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 -- -- 678,346 -- 678,346
Other comprehensive income, net
of tax effect of $21,177:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- 41,108 41,108
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 719,454
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
($0.06 2/3 per share) -- -- (238,839) -- (238,839)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 $ 4,475,996 $ 1,391,723 $ 32,425,587 $ 55,966 $ 38,349,272
===============================================================================================================================
BALANCE, DECEMBER 31, 1998 $ 4,475,996 $ 1,391,723 $ 34,993,625 $ 288,953 $ 41,150,297
Comprehensive income:
Net income -- -- 1,104,676 -- 1,104,676
Other comprehensive income, net
of tax effect of $207,694:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- (403,171) (403,171)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 701,505
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
($0.10 per share) -- -- (358,079) -- (358,079)
===============================================================================================================================
BALANCE, MARCH 31, 1999 $ 4,475,996 $ 1,391,723 $ 35,740,222 $ (114,218) $ 41,493,723
===============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,104,676 $ 678,346
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 315,000
Depreciation 233,134 235,932
Amortization and accretion, net 69,269 55,755
Investment securities gains, net - (8,123)
Net gains on sales of other real estate (4,544) (13,398)
Gain on sale of branches before tax provision - (101,908)
Changes in assets and liabilities:
Decrease in other assets 489,604 789,460
Increase in other liabilities 114,732 689,599
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,306,871 2,640,663
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Held-to-maturity 730,000 972,300
Available-for-sale 25,306,892 17,936,413
Proceeds from sales of investment securities:
Available-for-sale - 3,501,562
Proceeds from sales of other real estate 88,058 57,207
Purchases of investment securities:
Held-to-maturity (2,277,733) (904,668)
Available-for-sale (39,429,787) (13,278,497)
Net increase in short-term securities - (9,997,998)
Net decrease in loans 414,543 5,785,903
Additions to premises and equipment, net (103,648) (72,140)
Net funds paid in sale of branches - (13,589,236)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,271,675) (9,589,154)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand, NOW, and savings deposits (1,186,707) 6,647,331
Net increase in certificates of deposit 1,798,282 1,871,662
Net decrease in U. S. Treasury demand note (87,722) (2,724,494)
Cash dividends paid (668,535) (465,504)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (144,682) 5,328,995
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (13,109,486) (1,619,496)
Cash and cash equivalents at beginning of year 30,134,719 39,741,483
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $17,025,233 $38,121,987
- ----------------------------------------------------------------------------------------------------------------
</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 three months ended March 31, 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, 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 $338,054,000 at March 31, 1999 versus $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 expects to make additional capital
investments in its new subsidiary during its infancy. As it matures, 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 quarter of 1999.
FINANCIAL CONDITION
Total assets grew $671,554 or 0.20% since year-end 1998 and $17,615,230 or 5.49%
since March 31, 1998. The increase in total assets since March 31, 1998 has
transpired from growth in deposits, particularly interest-bearing deposits.
Pertinent details on deposits and deposit components are provided in the
Liquidity section of this Analysis. During the year-ago period, total assets
declined $26,908,177 or 7.73%. 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 months of
1998.
Investment Securities
Investment securities represented 47% of earning assets at March 31, 1999
compared to 42% and 37% at December 31, 1998 and March 31, 1998. Funds available
from declines in loans and other sources since the year earlier period have been
placed in investment securities. No significant changes have occurred in
7
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
the investment securities mix at March 31, 1999. The amortized cost and
estimated fair value of investment securities are delineated in the table below:
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1999 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
(In thousands)
Available-for-sale:
U. S. Treasury and U. S.
Government agencies $98,435 $ 218 $ 234 $98,419
Mortgage-backed securities 23,303 31 188 23,146
Equity securities 1,088 - - 1,088
- --------------------------------------------------------------------------------
122,826 249 422 122,653
Held-to-maturity:
States and political
subdivisions 25,416 840 70 26,186
- --------------------------------------------------------------------------------
Total investment securities $148,242 $ 1,089 $ 492 $148,839
================================================================================
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, declined $1,681,986 or 1.02% since year-end 1998.
As a percent of deposits, net loans aggregated 55.60% at March 31, 1999 compared
to 56.29% at year-end 1998 and 58.76% at March 31, 1998. A continuing drop in
commercial loans outstanding was the predominant factor in the year-to-date
decline. The consumer loan portfolio declined a slight $383,000 since December
31, 1998 but grew an appreciable $5,207,000 since the 1998 first quarter. Growth
in consumer loans 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 $23,760,871 or 12.72%. More than 70% of the 1998 drop
in loan balances was attributable to the sale of the Alachua offices. The
remaining decline resulted from overall decreases in commercial loans
outstanding at other SEB locations. Loans outstanding are presented by type in
the table below:
- -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
LOANS BY CATEGORY 1999 1998 1998
- -------------------------------------------------------------------------------
(In thousands)
Commercial, financial, and agricultural $ 68,402 $ 69,125 $ 74,734
Real estate - construction 1,715 2,318 2,419
Real estate - mortgage 59,722 60,035 58,586
Consumer, including credit cards 36,182 36,566 30,976
- -------------------------------------------------------------------------------
Loans, gross 166,021 168,044 166,715
Unearned income 2,942 3,283 3,653
- -------------------------------------------------------------------------------
Loans, net $163,079 $164,761 $163,062
- -------------------------------------------------------------------------------
8
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company had no concentration of loans to borrowers engaged in any single
industry that exceeded 10% of total loans for any of the periods presented. A
significant portion of the Company's loans are collateralized by real estate; at
March 31, 1999, gross loans secured by real estate approximated $104,806,000. 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 totaled approximately $16,240,000 and
$696,000 at March 31, 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.
Nonperforming loans, a central component of nonperforming assets, were up
$93,000 or 7.46% since December 31, 1998. As a percent of net loans,
nonperforming loans totaled 0.82% at March 31, 1999, effectively increasing 6
basis points from year-end 1998 and doubling, or increasing 41 basis points,
from 0.41% a year earlier. The 1999 increase in nonperforming loans was
attributable to the placement of certain real estate - construction loans on
nonaccrual status since the preceding year-end. 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. Such guarantees would have
reduced nonaccrual balances by $84,000 at both March 31, 1999 and year-end 1998
and by $66,000 at March 31, 1998. Loans to five separate borrowers comprised
$1,286,000 or 96% of nonperforming loan balances at March 31, 1999; further
segregated, 71.40% of nonperforming loan balances pertained to merely two
borrowers. Foreclosed real estate balances represented the largest portion of
nonperforming assets at March 31, 1999, increasing a substantial 79.05% to
$1,393,000 since year-end 1998. At March 31, 1999, 77.60% of foreclosed real
estate balances were derived from funding originally extended to four separate
borrowers; more significantly, 48.96% of total balances applied to a single
borrower. Foreclosed real estate balances were concentrated, overall, in
residential real estate at March 31, 1999. Of loans past due 90 plus days,
28.41% pertained to five customers. Details on a certain group of loans which
comprise virtually all 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:
- -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
NONPERFORMING ASSETS 1999 1998 1998
- -------------------------------------------------------------------------------
(In thousands)
Nonaccrual loans:
Commercial, financial, and $ 605 $ 622 $ 214
agricultural
Real estate - construction 156 0 0
Real estate - mortgage 200 240 65
Consumer, including credit cards 9 10 3
- -------------------------------------------------------------------------------
Total nonaccrual loans 970 872 282
Restructured loans(1) 369 374 384
- -------------------------------------------------------------------------------
Total nonperforming loans 1,339 1,246 666
Foreclosed real estate(2) 1,393 778 1,009
- -------------------------------------------------------------------------------
Total nonperforming assets $2,732 $2,024 $1,675
- -------------------------------------------------------------------------------
Accruing loans past due 90 days or more $2,119 $1,607 $2,387
- -------------------------------------------------------------------------------
(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.
9
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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. During the first three months of
1999, these problem loans were charged-off by approximately $448,000 to their
estimated net realizable values. Approximately $156,000 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. This group of loans accounts for virtually
all of the net additions to nonperforming asset balances year-to-date.
Subsequent to March 31, 1999, the portion of these loans included in nonaccrual
status was charged-off by approximately one-third, or $55,000, bringing total
charge-offs on these loans to $503,000. No additional charge-offs 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 March 31, 1999 that
should be included in the table above or otherwise discussed. All known
potential problem loans were included in nonperforming loans at March 31, 1998.
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. The allowance to net loans ratio totaled 1.93% at
March 31, 1999, down 14 basis points from December 31, 1998. The decline in the
allowance ratio resulted foremost from the high charge-offs recognized since
year-end. Net charge-offs totaled $557,547, up considerably from 1998's
$142,929. Approximately 80.29% of charge-offs at March 31, 1999 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
10
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 relatively consistent with 1998 levels, aggregating
$300,000 at March 31, 1999 versus $315,000 at March 31, 1998. Activity in the
allowance is presented in the table below:
- -------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED MARCH 31, 1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,407 $ 3,705 $ 3,735
Provision for loan losses 300 315 625
Charge-offs:
Commercial, financial, and agricultural 268 41 369
Real estate - construction 263 0 0
Real estate - mortgage 12 24 1
Consumer, including credit cards 220 204 212
- -------------------------------------------------------------------------------
Total charge-offs 763 269 582
- -------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 43 34 19
Real estate - construction 0 0 0
Real estate - mortgage 1 3 1
Consumer, including credit cards 161 89 99
- -------------------------------------------------------------------------------
Total recoveries 205 126 119
- -------------------------------------------------------------------------------
Net charge-offs 558 143 463
- -------------------------------------------------------------------------------
Allowance for loan losses at March 31 $ 3,149 $ 3,877 $ 3,897
- -------------------------------------------------------------------------------
Net loans outstanding(1) at March 31 $163,079 $163,062 $181,212
- -------------------------------------------------------------------------------
Average net loans outstanding(1) at March 31 $164,000 $170,608 $182,411
- -------------------------------------------------------------------------------
Ratios:
Allowance to net loans 1.93% 2.38% 2.15%
- -------------------------------------------------------------------------------
Net charge-offs to average loans (annualized) 1.36% 0.34% 1.02%
- -------------------------------------------------------------------------------
Provision to average loans (annualized) 0.73% 0.74% 1.37%
- -------------------------------------------------------------------------------
(1) Net of unearned income
Management believes the allowance was adequate at March 31, 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 $900,000 during the remainder of
1999.
11
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Assets
Gross premises and equipment increased a mere $103,648 during the first three
months of 1999. During the year-ago period, gross premises and equipment
declined $1,012,539 due to the sale of the Alachua County branches; offsetting
capital expenditures totaled less than $73,000. The Company had no material
plans or commitments for capital expenditures as of March 31, 1999.
Adjusted for the net additions to foreclosed real estate previously mentioned,
other assets declined $328,660 or 6.16% year-to-date. The current period decline
resulted mainly from reductions in accrued interest receivables on loans and
investment securities. The decline in interest receivables on loans arises from
overall lower loan volumes since year-end 1998. The decline in interest
receivables on investment securities resulted from variations in interest
payment cycles. The decline in interest receivables was negated, in part, by a
$207,000 increase in deferred tax assets. 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 March 31, 1999,
investment securities with carrying values of approximately $11,994,000 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 March 31, 1999 and
December 31, 1998, the Company had no amounts outstanding under these lines. The
Company is developing a liquidity policy that specifically addresses Year 2000
liquidity issues; refer to the Year 2000 section of this Analysis for details.
Deposits
Total deposits increased a mere $611,575 or 0.21% at March 31, 1999 since
year-end 1998. Noninterest-bearing deposits comprised 18.03% and
interest-bearing deposits, 81.97%, of total deposits at March 31, 1999. The
distribution of interest-bearing balances at March 31, 1999 and certain
comparable quarter-end dates is shown in the table on the next page.
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------------------------------------------------------
PERCENT PERCENT PERCENT
DEPOSITS BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits(1) $ 44,682 18.58% $ 43,617 18.61% $ 39,238 17.27%
Savings 76,009 31.62% 72,883 31.09% 75,333 33.16%
Time certificates under $100,000 78,323 32.58% 78,409 33.44% 76,513 33.68%
Time certificates $100,000 or more 41,410 17.22% 39,526 16.86% 36,084 15.89%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $240,424 100.00% $234,435 100.00% $227,168 100.00%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes NOW and money market accounts.
Last year, the January 1998 sale of the Alachua branches resulted in a deposit
decline exceeding $33,000,000; by March 31, 1998, deposit growth at the
remaining SEB locations had offset approximately 25.52% 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 March 31 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 March 31, 1999.
13
<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
MARCH 31, 1999 MONTHS MONTHS YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Federal funds sold $ 4,740 $ 4,740
Securities(1) 5,035 $ 9,194 $101,413 $31,513 147,155
Loans, gross(2) 50,704 21,919 56,250 36,179 165,052
- ---------------------------------------------------------------------------------------------
Total interest rate sensitive 60,479 31,113 157,663 67,692 316,947
assets
- ---------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 145,944 64,802 29,609 69 240,424
U. S. Treasury demand note 728 728
- ---------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 146,672 64,802 29,609 69 241,152
- ---------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(86,193) $ (33,689) $128,054 $67,623 $ 75,795
- ---------------------------------------------------------------------------------------------
CUMULATIVE GAP $(86,193) $(119,882) $ 8,172 $75,795
- ---------------------------------------------------------------------------------------------
Ratio of cumulative gap to total
rate sensitive assets (27.19)% (37.82)% 2.58% 23.91%
- ---------------------------------------------------------------------------------------------
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 41.23% 43.31% 103.39% 131.43%
- ---------------------------------------------------------------------------------------------
Cumulative gap at December 31, 1998 $(75,213) $(97,301) $15,058 $76,837
- ---------------------------------------------------------------------------------------------
Cumulative gap at March 31, 1998 $(38,505) $(63,974) $19,774 $70,395
- ---------------------------------------------------------------------------------------------
<FN>
(1) Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for mortgage-backed
securities is based on expected average lives which may be different from
the contractual terms. Equity securities are excluded.
(2) 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.
</FN>
</TABLE>
As in the prior periods shown, the Company's gap position remained negative
through the one year repricing interval at March 31, 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 Company monitors and adjusts its exposure to
interest rate risks within specific policy guidelines based on
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
(1,2) See notes 1 and 2 on the preceding page.
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
March 31, 1999, 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.
Capital ratios for the most recent periods are presented in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
CAPITAL RATIOS(1) 1999 1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Tier 1 capital:
Realized stockholders' equity $ 41,608 $ 40,861 $ 38,293
Intangible assets and other adjustments (1,429) (1,486) (1,638)
- --------------------------------------------------------------------------------
Total Tier 1 capital 40,179 39,375 36,655
- --------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,206 2,216 2,143
Allowable long-term debt - - -
- --------------------------------------------------------------------------------
Total Tier 2 capital 2,206 2,216 2,143
- --------------------------------------------------------------------------------
Total risk-based capital $ 42,385 $ 41,591 $ 38,798
- --------------------------------------------------------------------------------
Risk-weighted assets $175,576 $176,052 $169,745
- --------------------------------------------------------------------------------
Risk-based ratios:
Tier 1 capital 22.88% 22.37% 21.59%
- --------------------------------------------------------------------------------
Total risk-based capital 24.14% 23.62% 22.86%
- --------------------------------------------------------------------------------
Tier 1 leverage ratio 11.92% 11.78% 11.61%
- --------------------------------------------------------------------------------
Realized stockholders' equity to assets 12.29% 12.10% 11.93%
- --------------------------------------------------------------------------------
<FN>
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier 3
capital.
</FN>
</TABLE>
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
Book value per share grew $0.21 or 1.84% during the three month period to $11.62
at March 31, 1999. Dividends per share totaled $0.10 year-to-date at March 31,
1999, up 50% from 1998. For specific details on the Company's dividend policy,
refer to the subsection immediately following. Accumulated other comprehensive
income declined $403,171 at March 31, 1999 compared to year-end 1998.
Accumulated other comprehensive income measures net fluctuations in the fair
values of investment securities classified as available-for-sale.
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. The amount of cash dividends available from SEB for payment the
remainder of 1999 without such prior approval is approximately $1,675,000;
year-to-date, SEB has paid $558,000 in dividends to the Company. 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 first quarter totaled $1,104,676, up $426,330 or 62.85%
from the 1998 first quarter and up $99,196 from the 1997 first quarter. On a per
share basis, net income grew to $0.31 at March 31, 1999 from $0.19 and $0.28 in
1998 and 1997. During the year-ago 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 totaled $1,104,676 or $0.31 per share at March 31,
1999 versus $1,136,169 or $0.32 per share at March 31, 1998. Reductions in both
net interest and noninterest income, negated in part by overall declines in
noninterest expense, contributed to the effective $31,493 or 2.77% net earnings
decrease year-to-date. Factors impacting net interest and noninterest income
results are further discussed in the next two subsections of this Analysis. The
return on beginning equity at March 31 for each of the last three years was
10.81%, 7.17%, and 11.73%.
Net Interest Income
Net interest income declined $130,833 or 3.44% during the first three months of
1999 compared to 1998. Likewise, the net interest margin and net interest spread
fell to 4.85% and 3.74%, respectively, from 5.34% and 4.19% a year ago. The key
factor in the first quarter results was a continuing drop in average balances
and yields on commercial loans. 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 30
basis point decrease in cost of funds. Management, through its Asset/Liability
Committee, has aggressively sought repricing
16
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 three months of 1998 compared to 1997, net interest income declined
$208,696 or 5.21%. The majority, or 76%, of the net interest income decline at
March 31, 1998 was attributable to the sale of the Alachua offices. The
remaining 24% decline was due to results at the remaining SEB locations.
Comparative details about average balances, income/expense, and average yields
earned and rates paid on interest-earning assets and liabilities at March 31,
1999, 1998, and 1997 are provided in the table on the next page.
Noninterest Income and Expense
Excluding the pre-tax gain of $101,908 recognized on the sale of the Alachua
offices in 1998, noninterest income declined $50,584 or 5.72% at March 31, 1999
compared to 1998. A $49,599 drop in service charges on deposit accounts was the
main element in the first quarter results. The other operating portion of
noninterest income climbed a slight 2.90% to $251,912 during the first quarter
of 1999 compared to 1998. By type and amount, the chief components of other
operating income at March 31, 1999 were mortgage origination fees, $52,957;
commissions on the sale of credit life insurance (generated by SEB), $43,681;
and safe deposit box rentals, $43,145. Together, these three income items
comprised 55.49% of other operating income year-to-date. Salaries and employee
benefits fell $75,968 or 5.01% to $1,441,500 at March 31, 1999 compared to 1998.
The vast majority, or 84.29%, of employee expenses were vested in salaries and
other direct compensation, including related payroll taxes, at March 31, 1999.
Profit-sharing accruals and other fringe benefits represented the remaining
7.20% and 8.51% of employee expenses. The division of employee expenses between
compensation, profit-sharing, and other fringe benefits remained consistent with
historical norms at March 31, 1999. The 3.83% year-to-date increase in net
occupancy and equipment expense derived primarily 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 declined
a moderate 2.79% or $21,610 at March 31, 1999 compared to 1998. No individual
component of other operating expenses aggregated or exceeded 10% of the total at
March 31, 1999. Omitting the pre-tax gain on the sale of the central Florida
locations, noninterest income declined $118,481 or 11.81% at March 31, 1998
compared to 1997. Similarly, noninterest expense decreased $196,111 or 6.72%.
Virtually all of the fluctuation in noninterest income and expense during the
first three months of 1998 was due to the sale of the Alachua County branches
and the elimination of the corresponding income and expenses that accrued to
those locations.
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES
PAID
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ---------------------------- ----------------------------
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
THREE MONTHS ENDED MARCH 31, 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) $164,000 $ 4,287 10.46% $170,608 $ 4,754 11.15% $182,411 $ 5,043 11.06%
Federal funds sold 16,816 195 4.64% 19,419 262 5.39% 17,970 234 5.21%
Taxable investment
securities(3) 111,871 1,663 5.95% 87,671 1,337 6.10% 86,949 1,357 6.24%
Tax-exempt investment
securities(3), (4) 23,399 459 7.85% 17,743 373 8.42% 19,755 432 8.74%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets $316,086 $ 6,604 8.36% $295,441 $ 6,726 9.11% $307,085 $ 7,066 9.20%
======================================================================================================================
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing
demand deposits(5) $46,973 $ 336 2.86% $39,031 $ 289 2.96% $45,610 $ 329 2.89%
Savings(6) 74,194 764 4.12% 71,800 815 4.54% 68,633 767 4.47%
Time deposits 118,201 1,660 5.62% 114,213 1,661 5.82% 125,363 1,773 5.66%
U. S. Treasury demand
note 497 8 6.26% 966 17 6.84% 1,280 14 4.53%
Note payable 1,167 21 7.26%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities $239,865 $ 2,768 4.62% $226,010 $ 2,782 4.92% $242,053 $ 2,904 4.80%
======================================================================================================================
Excess of interest-
earning assets over
interest-bearing
liabilities $76,221 $69,431 $65,032
======================================================================================================================
INTEREST RATE SPREAD 3.74% 4.19% 4.40%
======================================================================================================================
NET INTEREST INCOME $ 3,836 $ 3,944 $ 4,162
======================================================================================================================
NET INTEREST MARGIN 4.85% 5.34% 5.42%
======================================================================================================================
<FN>
(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.
</FN>
</TABLE>
18
<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 has substantially completed phase V. Testing
of all mission critical systems was completed in 1998, and testing of all
non-critical systems will be completed no later than June 30, 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.
19
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Contingency Plans
The Company is preparing contingency plans pertaining specifically to Year 2000
risks. These contingency plans are being 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 is also developing a Year 2000 liquidity policy that will
address the need for additional supplies of cash and alternative funding sources
to cover any temporary liquidity shortages. The Company anticipates completion
of Year 2000 contingency plans by June 30, 1999. Once developed, 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 mid-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 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.
20
<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.
21
<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
The annual meeting of shareholders of the Company was held on
April 13, 1999. At the meeting, the following individuals
were elected directors: Leslie H. Blair, David H. Bluestein,
Gene F. Brannen, William Downey, Alyson Gray, Cornelius P.
Holland, III, Alva J. Hopkins, III, G. Norris Johnson, and S.
Michael Little. Votes for ranged from 2,825,187 to 2,825,487,
and votes withheld totaled 4,956.
The shareholders also approved setting the number of Directors
at 12, with 3 to be vacant until the elected Board deems it in
the Company's best interest to fill same. Votes for this
proposal were 2,771,447, against, 52,881, and abstained, 6,115
shares. The shareholders further approved the appointment of
independent auditors by the Audit Committee. Votes approving
the appointment totaled 2,805,891; votes abstained totaled
24,552.
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
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(REGISTRANT)
By: /s/ S. MICHAEL LITTLE
-------------------------------------------
S. MICHAEL LITTLE, VICE PRESIDENT
By: /s/ WANDA D. PITTS
-------------------------------------------
WANDA D. PITTS, SECRETARY
Date: MAY 11, 1999
---------------------------------
23
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
27 Financial Date Schedule
Submitted in electronic format only.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,285
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,740
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 122,653
<INVESTMENTS-CARRYING> 25,416
<INVESTMENTS-MARKET> 26,186
<LOANS> 163,079
<ALLOWANCE> 3,149
<TOTAL-ASSETS> 338,605
<DEPOSITS> 293,308
<SHORT-TERM> 728
<LIABILITIES-OTHER> 3,075
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 37,018
<TOTAL-LIABILITIES-AND-EQUITY> 338,605
<INTEREST-LOAN> 4,276
<INTEREST-INVEST> 1,967
<INTEREST-OTHER> 195
<INTEREST-TOTAL> 6,438
<INTEREST-DEPOSIT> 2,760
<INTEREST-EXPENSE> 2,768
<INTEREST-INCOME-NET> 3,670
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,641
<INCOME-PRETAX> 1,563
<INCOME-PRE-EXTRAORDINARY> 1,105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,105
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 4.85
<LOANS-NON> 970
<LOANS-PAST> 2,119
<LOANS-TROUBLED> 369
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,407
<CHARGE-OFFS> 763
<RECOVERIES> 205
<ALLOWANCE-CLOSE> 3,149
<ALLOWANCE-DOMESTIC> 2,504
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 645
</TABLE>
