SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended..............................................12-31-98
Commission File Number..................................................2-83157
SOUTHEASTERN BANKING CORPORATION
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1423423
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1010 NORTHWAY STREET
DARIEN, GEORGIA 31305
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (912) 437-4141
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Securities registered pursuant to Section 12(b) of the Act:
NONE
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
----------------
(Title of Class)
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 [ ]
As of February 26, 1999, 3,580,797 shares of $1.25 par value common stock
of Southeastern Banking Corporation (the Company) were issued and outstanding,
and the aggregate market value of the shares of $1.25 par value common stock of
the Company held by nonaffiliates was approximately $44,460,070 (based on a per
share price of $19.25 which is based on over-the-counter trades executed by
principal market-makers).
This Document consists of 59 pages.
The Exhibit Index is located at page 57.
<PAGE>
SOUTHEASTERN BANKING CORPORATION
DOCUMENTS INCORPORATED BY REFERENCE
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PART NUMBER AND ITEM
DOCUMENTS INCORPORATED NUMBER OF FORM 10-K INTO
BY REFERENCE WHICH INCORPORATED
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The Company's Annual Report Part IV - Item 14
on Form 10-K for the Year
Ended December 31, 1990
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ii
<PAGE>
PART I
ITEM 1. BUSINESS.
1. HISTORY AND ORGANIZATION. Southeastern Banking Corporation (the Company) and
its wholly-owned subsidiaries, Southeastern Bank and SBC Financial Services,
Inc., provide a full array of financial services to meet the needs of
individual, corporate, and government customers in southeast Georgia and
northeast Florida. The Company's corporate offices are located at 1010 Northway
Street, Darien, Georgia.
The Company was formed in 1980 to serve as the parent holding company of its
then sole subsidiary bank, The Citizens Bank, Folkston, Georgia, which later
changed its name to Southeastern Bank (SEB). In 1983, the Company acquired The
Darien Bank, Darien, Georgia. Since 1983, the Company has acquired three
additional financial institutions in the southeast Georgia market. These
acquisitions were consummated by merging the acquired bank with SEB; the
acquired banks were subsequently converted to branches of SEB. In this manner,
the Company acquired The Camden County State Bank, Woodbine, Georgia, in 1984;
the Jeff Davis Bank, Hazlehurst, Georgia, in 1986; and the Nicholls State Bank,
Nicholls, Georgia, in 1988. In 1990, SEB merged with and into The Darien Bank,
with The Darien Bank being the surviving bank in the merger operating under its
1888 Charter. Immediately, The Darien Bank changed its name to "Southeastern
Bank." SEB is a state banking association incorporated under the laws of the
State of Georgia.
In 1991, the Company acquired the Folkston, St. Marys, and Douglas, Georgia,
offices of First Georgia Savings Bank, a savings bank in Brunswick, Georgia.
Offices located in St. Marys and Douglas are now operating as branches of SEB,
but the First Georgia office in Folkston was closed and merged into the existing
Folkston branch. In 1993, the Company acquired the Folkston and St. Marys
offices of Bank South, N.A., Atlanta, Georgia. Both of the acquired offices were
closed and merged into existing offices of the Company.
On October 14, 1994, the Company acquired 100% of the outstanding common stock
of United Citizens Bank of Alachua County, Alachua, Florida under the name
Southeastern Bank of Florida (SEBF). The aggregate consideration paid by the
Company pursuant to the transaction was approximately $5,139,000, payable in
cash to the shareholders of Alachua. On February 15, 1996, the Company acquired
the Callahan, Hilliard, and Yulee offices of Compass Bank in northeast Florida's
Nassau County; the Company received approximately $22,982,000 in assets and
assumed approximately $23,709,000 in deposit and other liabilities.
Geographically, Nassau County borders Camden and Charlton Counties in southeast
Georgia where the Company has other offices.
On January 16, 1998, SEBF sold its three offices in central Florida to First
National Bank of Alachua. Cash, loans, and fixed assets sold on January 16
aggregated approximately $32,159,000; deposits and other liabilities divested
totaled $33,646,000. The sale of these locations enables the Company to
concentrate its resources and strengthen its presence in its northeast Florida
and southeast Georgia markets. At the close of business on June 25, 1998, SEBF
merged with and into SEB. The merger of the two bank subsidiaries is expected to
reduce the duplicative overhead costs associated with two separate entities. For
additional information regarding the branch sale and the SEBF-SEB merger, see
Notes 1 and 2 to the consolidated financial statements.
1
<PAGE>
SBC Financial Services, Inc. (SBCF) was formed in 1998 to sell insurance and
annuity products to the public. An initial 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 fee income, thereby increasing the Company's
profitability and shareholder value. SBCF is currently licensed to sell
insurance in Georgia. The insurance subsidiary had minimal impact on the
Company's financial condition and results of operations in 1998.
2. BUSINESS. SEB, the Company's commercial bank subsidiary, offers a wide range
of services to meet the financial needs of its customer base through its branch
and atm network in northeast Florida and southeast Georgia. SEB's primary
business comprises traditional deposit and credit services as well as official
check services, wire transfers, and safe deposit box rentals. Deposit services
offered include time certificates plus NOW, money market, savings, and
individual retirement accounts. Credit services include commercial and
installment loans, long-term mortgage originations, credit cards, and standby
letters of credit. Commercial loans are made primarily to fund real estate
construction and to meet the needs of customers engaged in the agriculture,
timber, seafood, and other industries. Installment loans are made for both
consumer and non-consumer purposes. At December 31, 1998, SEB operated fourteen
full-service banking offices with total assets exceeding $337 million. A list of
SEB offices is provided in Part I, Item 2. SBCF, the Company's insurance
subsidiary, provides insurance agent and brokerage services for general
insurance. In addition to fixed and indexed annuities, products offered include
life, health, auto, homeowner's, and business owner's insurance. As the
insurance program develops, SBCF plans to expand its product offerings.
The Federal Reserve Bank of Atlanta is the principal correspondent of the
Company's bank subsidiary. SEB also maintains accounts with other correspondent
banks in Georgia, Florida, and Alabama. SBCF sells insurance in conjunction with
two subagents, Community Bank Marketing and Palmer & Cay. In exchange for
providing marketing and other support, the subagents receive a varying
percentage of the commissions earned on insurance and annuity sales.
At December 31, 1998, the Company and its subsidiaries had 154 and 14 full and
part-time employees. Three of these employees are licensed to sell insurance to
customers in Georgia.
3. COMPETITION. The diversity of the Company's trade area results in varying
degrees of competition in each of its Georgia and Florida markets. With the
exception of Brantley County in Georgia, the Company has direct competition with
other commercial banks, savings and loan associations, and credit unions in each
market area. The Company currently competes directly with one federal credit
union but no commercial banks or savings and loan associations in Brantley
County. In mid-1999, another state-chartered commercial bank is scheduled to
open in Brantley County; this new bank will intensify competition in this market
area.
Previously, the Georgia legislature imposed restrictions on intrastate
branching. In 1996, the Georgia General Assembly passed an intrastate branching
bill that relaxes these restrictions: Effective July 1, 1996, Georgia banks were
permitted to branch into three additional counties, and effective July 1, 1998,
all branching restrictions were removed. The intrastate branching bill gives the
Company opportunities for growth as well as intensifies competition. The Florida
legislature does not have any restrictions on intrastate branching.
The Company faces increasingly aggressive competition from other domestic
lending institutions and from numerous other providers of financial services.
The ability of nonbanking financial institutions to provide services previously
reserved for commercial banks has intensified competition. Because these
nonbanking
2
<PAGE>
financial institutions are not subject to the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater
flexibility.
4. SUPERVISION AND REGULATION. As a bank holding company, the Company is subject
to the supervision and regulation of the Board of Governors of the Federal
Reserve System (Federal Reserve). SEB, an insured state non-member bank
chartered by the Georgia Department of Banking and Finance (GDBF), is subject to
supervision and regulation by the GDBF and the Federal Deposit Insurance
Corporation. Various federal and state laws also regulate the operations of SEB,
requiring the maintenance of reserves against deposits, limiting the nature of
loans and interest that may be charged thereon, and restricting investments and
services offered. SEB's operations are also affected by numerous consumer laws
and regulations. In addition to the impact of regulation, the Company is also
significantly affected by the actions of the Federal Reserve as it attempts to
control the money supply and credit availability in order to influence the
economy. The Company's nonbank subsidiary is regulated and supervised by
applicable bank, insurance, and various other regulatory agencies.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, bank holding companies from any state may now acquire banks located in any
other state, subject to certain conditions, including concentration limits. A
bank may now establish branches across state lines by merging with a bank in
another state (unless applicable state law prohibits such interstate mergers),
provided certain conditions are met.
The Company is expected to act as a source of financial strength to, and commit
resources to support, its bank subsidiary. The federal banking agencies have
broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the applicable institution is "well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
or "critically undercapitalized," as those terms are defined under regulations
issued by each of the federal banking agencies. The Company and its bank
subsidiary are considered "well-capitalized" by their respective federal banking
regulators. The Company's capital position is delineated in Note 15 to the
consolidated financial statements and in the Capital Adequacy section of Part
II, Item 7.
There are various legal and regulatory limits on the amount of dividends the
bank subsidiary may pay the Company. Additionally, federal and state regulatory
agencies have the authority to prevent a bank or bank holding company from
engaging in any activity that, in the opinion of the agency, would constitute an
unsafe or unsound practice.
There have been a number of legislative and regulatory proposals that would have
an impact on the operation of bank holding companies and their subsidiaries. It
is impossible to predict whether or in what form these proposals may be adopted
in the future and, if adopted, what their effect will be on the Company.
ITEM 2. PROPERTIES.
COMPANY PROPERTY. The Company's executive offices are located in SEB's main
banking office at 1010 Northway Street, Darien, Georgia.
BANKING FACILITIES. Besides its main office in Darien, SEB has thirteen branch
offices in northeast Florida and southeast Georgia as shown in the table on the
next page.
3
<PAGE>
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BRANCH LOCATIONS
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FLORIDA 305 South Kings Road 1376 East State Road
Nassau County Nassau County
CALLAHAN, FLORIDA 32011 YULEE, FLORIDA 32097
7964 W. County Road 108
Nassau County
HILLIARD, FLORIDA 32046
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GEORGIA 620 S. Peterson Street Highway 40 East
Coffee County Camden County
DOUGLAS, GEORGIA 31533 KINGSLAND, GEORGIA 31548
Highway 17 110 Bacon Street
McIntosh County Brantley County
EULONIA, GEORGIA 31331 NAHUNTA, GEORGIA 31553
101 Love Street 910 Van Streat Highway
Charlton County Coffee County
FOLKSTON, GEORGIA 31537 NICHOLLS, GEORGIA 31554
14 Hinson Street 2512 Osborne Road
Jeff Davis County Camden County
HAZLEHURST, GEORGIA 31539 ST. MARYS, GEORGIA 31558
107 E. Main Street Bedell Avenue & Highway 17
Brantley County Camden County
HOBOKEN, GEORGIA 31542 WOODBINE, GEORGIA 31569
- --------------------------------------------------------------------------------
At December 31, 1998, the Company owned all of its banking facilities. See Note
7 to the consolidated financial statements for further property information.
INSURANCE FACILITIES. SBCF leases office space from SEB at 1010 Northway Street,
Darien, Georgia.
ITEM 3. LEGAL PROCEEDINGS.
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
4
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
Prior to November 1996, the Company's stock was not traded publicly and no
specific market prices could be quoted. Sales prices were obtained from
information volunteered by shareholders and the Company's service as transfer
agent. In November 1996, a principal market-maker, and in late 1997, a second
market-maker,(1) began trading the Company's stock publicly over-the-counter
under the symbol "SEBC." The high and low sales prices for 1998, 1997, and the
fourth quarter of 1996 are based on information being posted to electronic
bulletin boards by the market-makers, as applicable. These market prices may
include dealer mark-up, markdown, and/or commission.
The table below sets forth the high and low sales prices and the cash dividends
declared on the Company's common stock during the periods indicated. The market
price and dividend data have been restated to give retroactive effect to the
stock split paid on August 9, 1996.
SALES PRICE
MARKET SALES PRICE & ------------------- DIVIDENDS
DIVIDENDS DECLARED QUARTER HIGH LOW DECLARED
- -----------------------------------------------------------------------------
1998 4TH 21 17 1/2 0.18 2/3
3RD 21 1/2 21 0.06 2/3
2ND 24 18 1/2 0.06 2/3
1ST 23 17 1/2 0.06 2/3
1997 4th 18 3/8 17 0.13
3rd 18 1/2 17 1/2 0.06 1/3
2nd 18 1/2 17 0.06 1/3
1st 18 1/2 17 0.06 1/3
1996 4th 16 12 2/3 0.12 1/3
3rd 12 2/3 12 2/3 0.06
2nd 12 10 1/3 0.06
1st 10 1/3 10 1/3 0.06
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(1) The second market-maker did not complete any trades until 1998.
The Company had 447 shareholders of record at December 31, 1998.
The Company has paid regular cash dividends on a quarterly basis every year
since its inception. Additionally, in recent years, the Company has declared a
special dividend in the fourth quarter of each year. Management anticipates that
the Company will continue to pay regular and special cash dividends.
The Company is a legal entity separate and distinct from its subsidiaries, and
its revenues depend primarily on the payment of dividends from its subsidiaries.
State banking regulations limit the amount of dividends the Company's bank
subsidiary may pay without prior approval of the regulatory agencies. The amount
of
5
<PAGE>
cash dividends available from the bank subsidiary for payment in 1999 without
such prior approval is approximately $2,233,000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
FINANCIAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31
Total assets $337,933 $347,898 $335,826 $296,956 $283,814
Loans, net of unearned income 164,761 186,823 183,739 165,385 156,272
Allowance for loan losses 3,407 3,705 3,735 3,532 3,257
Deposits 292,697 302,369 294,353 259,540 251,030
Long-term debt 0 0 1,450 2,525 3,500
Realized stockholders' equity 40,861 37,854 34,277 30,558 27,298
- ------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 15,217 $ 16,391 $ 15,636 $ 14,617 $ 12,601
Provision for loan losses 1,230 1,715 1,475 1,200 1,130
Net income 4,393 4,722 4,805 4,287 3,651
Common dividends paid 1,182 1,122 1,062 1,003 943
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PER COMMON SHARE
Basic earnings $ 1.23 $ 1.32 $ 1.34 $ 1.20 $ 1.02
Dividends declared 0.38 2/3 0.32 0.30 1/3 0.28 2/3 0.27
Book value 11.41 10.57 9.57 8.53 7.62
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FINANCIAL RATIOS
Return on average assets 1.35% 1.40% 1.49% 1.50% 1.47%
Return on beginning equity 11.60 13.78 15.72 15.70 14.83
Tier 1 capital ratio 22.37 17.91 16.18 16.26 15.07
Total capital ratio 23.62 19.16 17.44 17.52 16.33
Tier 1 leverage ratio 11.78 10.31 9.42 9.67 8.79
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The per share data has been restated to give retroactive effect to the stock
split paid on August 9, 1996. The book value per share excludes the effects of
mark-to-market accounting for investment securities.
See Notes 2 and 3 to the consolidated financial statements for information
regarding business combinations and divestitures.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS AND FINANCIAL CONDITION
Southeastern Banking Corporation is a financial services company headquartered
in Darien, Georgia. Prior to June 25, 1998, the Company had two bank
subsidiaries - SEB and SEBF. At the close of business on June 25, SEBF, with
offices in Callahan, Hilliard, and Yulee, merged with and into SEB. The merger
of SEB and SEBF is expected to reduce duplicative overhead costs associated with
two separate entities. SEB, a state banking association also headquartered in
Darien, now operates fourteen full-service banking offices in southeast Georgia
and northeast Florida. Unless otherwise indicated, the ensuing Analysis presumes
that SEB and SEBF have operated as a single entity for all periods presented and
discussed.
SEB acquired the Callahan, Hilliard, and Yulee offices of Compass Bank in North
Florida's Nassau County on February 15, 1996. Geographically, Nassau County
borders Camden and Charlton Counties in south Georgia where SEB has other
offices. SEB received approximately $22,982,000 in assets and assumed
approximately $23,709,000 in deposit and other liabilities. Prior to January 16,
1998, SEB also had offices in Alachua, Gainesville, and Jonesville, Florida. On
January 16, 1998, SEB sold its three offices in central Florida to First
National Bank of Alachua. Cash, loans, and fixed assets sold by SEB on January
16 aggregated approximately $32,159,000; deposits and other liabilities divested
totaled $33,646,000. The Company recognized a pretax gain of $101,908 but
after-tax loss of $457,823 on the sale of these branches. The sale of these
locations enables the Company to concentrate its resources and strengthen its
presence in its northeast Florida and southeast Georgia markets. 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
$337,327,000 at year-end 1998 versus $327,419,000 at September 30, 1998 and
$347,274,000 at December 31, 1997.
Additionally, prior to 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
in 1998.
Total assets declined $9,964,501 or 2.86% at December 31, 1998 compared to
year-end 1997. During the year-ago period, total assets grew $12,072,215 or
3.59%. 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 1998. Investment securities increased to 42% of
earning assets at December 31, 1998 from 35% at December 31, 1997; the vast
majority of year-end holdings were concentrated in U. S. Government and agency
obligations. Loans comprised 53% of earning assets at year-end 1998 versus 59%
at December 31, 1997 and 60% at December 31, 1996.
Loans
Net loans(1) declined $22,061,720 or 11.81% at year-end 1998 compared to 1997.
The net loans to deposit ratio aggregated 56.29% at December 31, 1998 versus
61.79% and 62.42% at year-end 1997 and 1996. The majority, or 79%, of the 1998
decline in loan balances was attributable to the Alachua divestiture.
(1) Net of unearned income.
7
<PAGE>
The remaining drop resulted from overall declines in commercial loans
outstanding at other SEB locations. The decline in commercial loans outstanding
resulted from multiple factors, including normal pay-offs, the loss of several
sizeable loans to competitors offering below market fixed rates over unusually
long repayment terms, and the removal of several large problem credits from the
portfolio. In the latter case, the Company primarily encouraged several large
problem credits whose financial condition had deteriorated to seek alternative
financing. Although commercial loan demand has slowed in the Company's market
areas, consumer loan demand has grown. The consumer loan portfolio grew an
appreciable 2.8% from 1998 to 1997. Management is committed to growing the
consumer portfolio and reversing the decline in the commercial portfolio by a)
utilizing competitive pricing on loan products and b) developing additional loan
relationships with strong borrowers, all without compromising portfolio quality.
In 1997, net loans grew $3,083,670 or 1.68%.
Nonperforming loans, the chief component of nonperforming assets, aggregated
approximately $1,246,000 at year-end 1998, increasing $82,000 or 7.04% from
year-end 1997. As a percent of net loans, nonperforming loans totaled 0.76%,
0.62%, and 0.60% at December 31, 1998, 1997, and 1996. The 1998 increase in
nonperforming loans resulted from net additions to nonaccrual balances since
1997. No reduction in nonaccrual balances has been made for the portion of such
loans wholly or partially guaranteed by the U.S. Small Business Administration.
For each of the last three years, such guarantees would have reduced nonaccrual
balances by $84,000, $68,000, and $0. Foreclosed real estate balances, another
component of nonperforming assets, were up approximately $56,000 at year-end
1998 compared to December 31, 1997 but down $73,000 from September 30, 1998. At
December 31, 1998, 92% of nonperforming loans pertained to four separate
borrowers; more significantly, 78% of total balances pertained to merely two
borrowers. Approximately 61.18% of foreclosed real estate balances were derived
from funding originally extended to four separate borrowers. Although the
largest individual parcels consisted of commercial properties, overall
foreclosed real estate balances consisted predominantly of residential real
estate at year-end 1998. Of the loans past due 90 days or more at year-end,
25.89% pertained to six customers. Except as otherwise indicated, management is
unaware of any other material concentrations within nonperforming loans. The
table below provides further information about nonperforming assets and loans
past due 90 days or more:
NONPERFORMING ASSETS
AT DECEMBER 31, 1998 1997 1996
- -------------------- ------ ------ ------
(IN THOUSANDS)
Nonaccrual loans:
Commercial, financial, and agricultural $ 622 $ 675 $ 417
Real estate - construction 0 0 0
Real estate - mortgage 240 93 212
Consumer, including credit cards 10 7 57
------ ------ ------
Total nonaccrual loans 872 775 686
Restructured loans(1) 374 389 418
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Total nonperforming loans 1,246 1,164 1,104
Foreclosed real estate(2) 778 722 726
------ ------ ------
Total nonperforming assets $2,024 $1,886 $1,830
====== ====== ======
Accruing loans past due 90 days or more $1,607 $1,767 $1,100
====== ====== ======
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foreclosure or in
settlement of debts previously contracted.
8
<PAGE>
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. Unrecognized interest income
on nonaccrual and restructured loans totaled approximately $49,000, $143,000,
and $71,000 in 1998, 1997, and 1996. See Note 6 to the consolidated financial
statements for additional information about nonaccrual and restructured loans.
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.
Subsequent to December 31, 1998, a group of loans totaling approximately
$1,295,000 were placed on nonaccrual status. These particular problem loans were
not substantially past due, and the impairment of these loans could not be
reasonably measured at year-end 1998. Since year-end, these problem loans have
been charged-off by approximately $400,000 to their estimated net realizable
values. The high charge-offs recognized on these problem loans is 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, significant
potential problem loans at December 31, 1998 that should be included in the
table above or otherwise discussed. All known potential problem loans were
included in nonperforming loans for the other periods presented except December
31, 1996. Potential problem loans not included in nonperforming loans at
December 31, 1996 totaled approximately $1,400,000; subsequent to year-end 1996,
these potential problem loans were placed on nonaccrual status and also
charged-off to their estimated collectible values. The Company had no
concentration of loans to borrowers engaged in any single industry that exceeded
10% of total loans for any of the periods presented. A significant portion of
the Company's loans are collateralized by real estate. On a gross basis, loans
secured by real estate approximated $105,010,000 at year-end 1998.
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. As a percent of net loans, the allowance increased
9 basis points to 2.07% at year-end 1998 from 1.98% at year-end 1997. The
improvement in the allowance ratio was foremost a function of the decline in net
loans outstanding since year-end 1997, because charge-offs in 1998, particularly
the fourth quarter, were higher than originally anticipated. The provision
provided from income returned to pre-1996 levels, totaling $1,230,000 in 1998
versus $1,715,000 in 1997, $1,475,000 in 1996, and $1,200,000 in 1995.
9
<PAGE>
Increased provisions in both 1997 and 1996 were necessary to cover heavy
charge-offs in the commercial loan portfolio. Net charge-offs totaled $1,528,647
in 1998, down 12.36% or $215,607, from 1997. Although 1998 charge-offs were
lower than 1997 levels, management is not content with the charge-off trends
recognized the last few years. Management 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. 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.
Changes to the allowance as a percent of total nonperforming loans were not
significant for the periods presented. Activity in the allowance is presented in
the table below:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,705 $ 3,735 $ 3,532
Provision for loan losses 1,230 1,715 1,475
Charge-offs:
Commercial, financial, and agricultural 829 1,187 996
Real estate - construction 0 0 0
Real estate - mortgage 330 202 167
Consumer, including credit cards 802 845 791
-------- -------- --------
Total charge-offs 1,961 2,234 1,954
-------- -------- --------
Recoveries:
Commercial, financial, and agricultural 117 99 388
Real estate - construction 0 0 0
Real estate - mortgage 15 6 16
Consumer, including credit cards 301 384 278
-------- -------- --------
Total recoveries 433 489 682
-------- -------- --------
Net charge-offs 1,528 1,745 1,272
-------- -------- --------
Allowance for loan losses at December 31 $ 3,407 $ 3,705 $ 3,735
======== ======== ========
Net loans outstanding(1) at December 31 $164,761 $186,823 $183,739
======== ======== ========
Average loans outstanding at December 31 $165,391 $186,174 $177,522
======== ======== ========
Ratios:
Allowance to net loans 2.07% 1.98% 2.03%
======== ======== ========
Net charge-offs to average loans 0.92% 0.94% 0.72%
======== ======== ========
Provision to average loans 0.74% 0.92% 0.83%
======== ======== ========
</TABLE>
(1) Net of unearned income
Management believes the allowance was adequate at December 31, 1998 based on
conditions reasonably known to management; however, the allowance may increase
or decrease based on loan growth, changes in internally generated credit
ratings, changes in general economic conditions of the Company's trade areas,
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 projects
that the loan loss provision in 1999 will remain consistent with 1998 levels,
approximating $1,200,000.
10
<PAGE>
Other Assets
Gross premises and equipment declined $1,012,539 during 1998 due to the sale of
the Alachua County branches; offsetting capital expenditures totaled $805,131.
Approximately 59% of the 1998 expenditures pertained to the construction of a
new branch facility for SEB's Nicholls location. Adjusted for the transfer of
the Hawthorne Road real property values to other real estate, gross premises and
equipment increased $179,487 in 1997. Southeastern Bank of Florida's Hawthorne
Road office in Gainesville was closed on January 31, 1997 due to its low deposit
and loan volumes and poor growth prospects; this closing had minimal impact on
the Company's financial position.
Intangible assets declined during 1998 due to the elimination of goodwill
associated with the Alachua offices. As shown in the Capital Adequacy section of
this Analysis, the elimination of the Alachua goodwill had a favorable impact on
the Company's capital ratios. Other assets declined $382,048 or 6.69%. The other
assets decline resulted primarily from reductions in repossessed inventory
balances and accrued interest receivables on loans. The decline in accrued
interest receivables represented a byproduct of the January branch sale and
overall lower loan volumes during 1998.
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 December 31,
1998, investment securities with carrying values of approximately $13,900,000
were scheduled to mature in one year or less. The investment portfolio has also
been structured to meet liquidity needs prior to asset maturity when necessary.
The Company's liquidity position is further strengthened by its access to
short-term funding sources such as U. S. Treasury demand notes, Federal Home
Loan Bank advances,(1) and federal funds purchased. The Company has unsecured
federal funds lines of credit from other banks totaling $11,000,000. At December
31, 1998 and 1997, the Company had no amounts outstanding under these lines.
Deposits
The January branch sale resulted in a deposit decline of approximately
$33,400,000. By year-end 1998, deposit growth at the remaining SEB locations had
mitigated all but 29% of the divestiture decline. Savings balances continued to
represent a larger portion of deposits during 1998, underscoring the popularity
of the SMARTSAVER account that was introduced in March 1996. The composition of
average deposits and the fluctuations therein for each of the last three years
is shown in the Average Balances table included in the Operations section of
this Analysis.
(1) The Company became a member of the Federal Home Loan Bank of Atlanta (FHLB)
in 1997; to date, the Company has not received any FHLB advances.
11
<PAGE>
INTEREST RATE AND MARKET RISK/
INTEREST RATE SENSITIVITY
The normal course of business activity exposes the Company to interest rate
risk. Fluctuations in interest rates may result in changes in the fair market
value of the Company's financial instruments, cash flows, and net interest
income. The Company attempts to maintain a relatively neutral interest rate
sensitivity position by structuring the balance sheet so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any time constitute interest rate sensitivity. An indicator of
interest rate sensitivity is the difference between interest rate sensitive
assets and interest rate sensitive liabilities; this difference is known as the
interest rate sensitivity gap.
The gap analysis below provides a snapshot of the Company's interest rate
sensitivity position at year-end 1998:
<TABLE>
<CAPTION>
REPRICING WITHIN
--------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
DECEMBER 31, 1998 MONTHS MONTHS YEARS YEARS TOTAL
- ------------------------- --------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Federal funds sold $ 15,670 -- -- -- $ 15,670
Securities(1) 3,706 $ 12,432 $ 90,963 $ 24,599 131,700
Loans - gross(2) 53,682 21,604 54,618 37,268 167,172
--------- --------- --------- --------- ---------
Total interest rate sensitive assets 73,058 34,036 145,581 61,867 314,542
--------- --------- --------- --------- ---------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 145,001 56,124 33,222 88 234,435
U. S. Treasury demand note 3,270 3,270
--------- ---------
Total interest rate sensitive
liabilities 148,271 56,124 33,222 88 237,705
--------- --------- --------- --------- ---------
Interest rate sensitivity gap $ (75,213) $ (22,088) $ 112,359 $ 61,779 $ 76,837
========= ========= ========= ========= =========
CUMULATIVE GAP $ (75,213) $ (97,301) $ 15,058 $ 76,837
========= ========= ========= =========
Ratio of cumulative gap to total
rate sensitive assets (23.91)% (30.93)% 4.79% 24.43%
========= ========= ========= =========
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 49.27% 52.40% 106.34% 132.32%
========= ========= ========= =========
Cumulative gap at December 31, 1997 $ (57,546) $ (88,526) $ 14,367 $ 66,329
========= ========= ========= =========
Cumulative gap at December 31, 1996(2) $ (37,567) $ (63,773) $ 28,934 $ 67,670
========= ========= ========= =========
</TABLE>
(1) Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for
mortgage-backed securities is based on expected average lives which may be
different from the contractual terms. Equity securities are excluded.
(2) At December 31, 1996, distribution of maturities for installment loans was
based on scheduled contractual payments. At December 31, 1998 and 1997, no
cash flow assumptions other than final contractual maturities were made for
installment loans with fixed rates. Nonaccrual loans have been excluded
from the 1998 and 1997 totals.
(3) NOW, money market, and savings account balances are included in the 0-3
months repricing category.
12
<PAGE>
In 1998, as in the prior periods shown, the Company's gap position remained
negative through the one year repricing interval. 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. The
negative growth in the one year gap position was foremost attributable to
declines in loans, particularly loans which reprice in three months or less. As
discussed in earlier sections of this Analysis, the decline in loan balances
resulted from both the Alachua divestiture and ebbing loan demand at the
remaining SEB locations. Cash flows available from declines in loans and other
sources in 1998 were used to purchase investment securities, principally
securities with contractual maturities exceeding one year.
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 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) and (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
December 31, 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.
Capital ratios for the most recent periods are presented in the table on the
next page.
13
<PAGE>
<TABLE>
<CAPTION>
CAPITAL RATIOS(1)
AT DECEMBER 31, 1998 1997 1996
- ---------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S>
Tier 1 capital: <C> <C> <C>
Realized stockholders' equity $ 40,861 $ 37,854 $ 34,277
Intangible assets and other adjustments (1,486) (3,075) (3,434)
--------- --------- ---------
Total Tier 1 capital 39,375 34,779 30,843
--------- --------- ---------
Tier 2 capital:
Portion of allowance for loan losses 2,216 2,444 2,400
Allowable long-term debt -- -- --
--------- --------- ---------
Total Tier 2 capital 2,216 2,444 2,400
--------- --------- ---------
Total risk-based capital $ 41,591 $ 37,223 $ 33,243
========= ========= =========
Risk-weighted assets $ 176,052 $ 194,224 $ 190,630
========= ========= =========
Risk-based ratios:
Tier 1 capital 22.37% 17.91% 16.18%
========= ========= =========
Total risk-based capital 23.62% 19.16% 17.44%
========= ========= =========
Tier 1 leverage ratio 11.78% 10.31% 9.42%
========= ========= =========
Realized stockholders' equity to assets 12.10% 10.88% 10.20%
========= ========= =========
</TABLE>
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier
3 capital.
Due to the elimination of certain intangible assets, the sale of the Alachua
County locations did not have a negative impact on the Company's capital ratios.
Book value per share increased $0.84 during 1998 to $11.41 at December 31, 1998.
Dividends declared totaled $0.38 2/3 in 1998, up 20.83% from 1997. Accumulated
other comprehensive income grew $274,095 to $288,953 at year-end 1998.
Accumulated other comprehensive income measures net fluctuations in the fair
values of investment securities classified as available-for-sale.
RESULTS OF OPERATIONS
Net income for the fourth quarter totaled $1,326,580, down $26,080 or 1.93% from
the 1997 fourth quarter but up $77,715 or 6.22% from the 1998 third quarter. For
the year, net income totaled $4,392,598, down $329,297 or 6.97% from 1997. A
prime factor in the 1998 results was the after-tax loss associated with the
January 16, 1998 sale of the Alachua County offices. Including state and federal
income tax expense of $559,731, the Company recognized a nonrecurring after-tax
loss of $457,823 on the sale of the Alachua offices. The effects of the Alachua
divestiture on the Company's financial position and results of operation,
including the nonrecurring tax effects, were anticipated by management in 1997
and represented a necessary byproduct of the Company's efforts to focus on the
long-term creation of more profitable operations in its other markets. Excluding
the after-tax loss from the sale of the Alachua locations, net income totaled
$4,850,421 in 1998 versus $4,721,895 in 1997. The sale of the earning assets in
central Florida also resulted in a reduction in the Company's normal operating
income, particularly net interest income; these reductions plus overall declines
in 1998 net interest income are
14
<PAGE>
delineated in the next section of this Analysis. Earnings declined $83,332 or
1.73% in 1997 compared to 1996. A $240,000 increase in the provision for loan
losses was the most significant factor in the 1997 earnings decline. Increased
provisions in 1997 and also, 1996, were necessary to cover higher charge-offs in
the commercial loan portfolio. As further discussed in the Financial Condition
section of this Analysis, the provision provided from income in 1998 returned to
pre-1996 levels, declining $485,000 or 28.28% in 1998 compared to 1997 and
declining $245,000 from 1996. On a per share basis, net income totaled $1.23,
$1.32, and $1.34 in 1998, 1997, and 1996. The return on beginning equity for the
same periods was 11.60%, 13.78%, and 15.72%. The return on average assets
declined 3.57% to 1.35% in 1998.
Net Interest Income
Net interest income declined $1,174,412 or 7.16% in 1998 compared to 1997 after
increasing $754,728 or 4.83% in 1997. Approximately 60% of the net interest
decline in 1998 was attributable to the sale of the Alachua offices. The
remaining 40% decline resulted mainly from a substantial drop in average
commercial loans outstanding and overall higher costs of funds at other SEB
locations. Funds available from declines in loans and other sources have been
placed in investment securities which unfortunately, yield significantly less
than loans. As the Company continues to face intense competition from other
banks and credit unions in virtually all its markets, interest margins and
spreads will almost certainly continue to narrow. Volume of assets and deposits
will become even more important as margins decline. As previously mentioned,
management has implemented several strategies to increase average loans
outstanding: a) utilize competitive pricing on loan products and b) develop
additional loan relationships with strong borrowers, all without compromising
portfolio quality. Management's strategy for deposits is to reduce costs of
funds and employ alternative sources of financing when feasible. The table on
the next page provides comparative details about average balances,
income/expense, and average yields earned and rates paid on interest-earning
assets and interest-bearing liabilities for each of the last three years.
Noninterest Income and Expense
Except for increases in other operating income attributable to mortgage
origination fees, virtually all of the fluctuation in noninterest income and
expense during 1998 resulted from the sale of the Alachua County branches and
the elimination of the corresponding income and expenses that accrued to those
locations. In 1997, noninterest income declined $229,839 or 5.60%. Reduced gains
on sales of other real estate, declines in commissions on the sale of credit
life insurance, and a $139,437 drop in service charges on deposit accounts were
prime factors in the 1997 noninterest income results. Salaries and employee
benefits were up $88,049 or 1.41% in 1997 compared to 1996; the increase ensued
from normal benefit accruals. Net occupancy and equipment expense increased a
mere 1.02% or $20,999 in 1997 versus 1996 while other operating expenses climbed
$244,331 or 7.98%. The year-ago increase in other operating expenses resulted
largely from higher legal and accounting fees and losses on deposit accounts.
15
<PAGE>
<TABLE>
<CAPTION>
SELECTED STATISTICAL INFORMATION
1998 1997
----------------------------------- ------------------------------------
AVERAGE BALANCES AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
YEAR ENDED DECEMBER 31, BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ---------------------- --------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 11,859 $ 13,229
Interest-earning assets:
Loans, net (1),(2),(3) 165,391 $ 18,557 11.22% 186,174 $ 20,866 11.21%
Federal funds sold 13,573 727 5.37% 15,571 842 5.42%
Taxable investment securities 105,575 6,398 6.08% 89,508 5,552 6.22%
Tax-exempt investment securities(3) 20,304 1,597 7.87% 19,107 1,668 8.73%
--------- --------- -------- --------- --------- --------
Total interest-earning assets 304,843 27,279 8.96% 310,360 28,928 9.33%
--------- --------- -------- --------- --------- --------
Allowance for loan losses (3,924) (3,727)
Premises and equipment, net 6,790 8,062
Intangible and other assets 6,680 8,610
Unrealized gains (losses) on
investment securities 246 (401)
--------- --------- -------- --------- --------- --------
TOTAL ASSETS $ 326,494 $ 336,133
========= ========= ======== ========= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 51,783 $ 53,005
Interest-bearing liabilities:
Interest-bearing demand deposits(4) 40,310 $ 1,208 3.00% 42,766 $ 1,237 2.89%
Savings 73,330 3,313 4.52% 72,453 3,296 4.55%
Time deposits 116,865 6,900 5.90% 126,295 7,284 5.77%
U. S. Treasury demand note 924 51 5.52% 1,269 66 5.20%
Note payable 553 41 7.48%
--------- --------- -------- --------- --------- --------
Total interest-bearing liabilities 231,429 11,472 4.96% 243,336 11,924 4.90%
--------- --------- -------- --------- --------- --------
Other liabilities 3,667 3,834
Realized stockholders' equity 39,453 36,223
Unrealized gains (losses) on
investment securities, net of tax 162 (265)
--------- --------- -------- --------- --------- --------
Total Liabilities and
Stockholders' Equity $ 326,494 $ 336,133
========= ========= ======= ========= ========= ========
Excess of interest-earning assets
over interest-bearing liabilities $ 73,414 $ 67,024
========= ========= ======== ========= ========= ========
INTEREST RATE SPREAD 4.00% 4.43%
========= ========= ======== ========= ========= ========
NET INTEREST INCOME $ 15,807 $ 17,004
========= ========= ======== ========= ========= ========
NET INTEREST MARGIN 5.19% 5.48%
========= ========= ======== ========= ========= ========
1996
-----------------------------------
AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE RATES
--------- --------- --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 13,355
Interest-earning assets:
Loans, net(1),(2),(3) 177,522 $ 20,059 11.30%
Federal funds sold 9,722 508 5.23%
Taxable investment securities 87,974 5,393 6.13%
Tax-exempt investment securities(3) 21,593 1,956 9.06%
--------- --------- --------
Total interest-earning assets 296,811 27,916 9.41%
--------- --------- --------
Allowance for loan losses (3,828)
Premises and equipment, net 8,444
Intangible and other assets 9,074
Unrealized gains (losses) on
investment securities (567)
--------- --------- --------
TOTAL ASSETS $ 323,289
========= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 51,594
Interest-bearing liabilities:
Interest-bearing demand deposits(4) 48,247 $ 1,419 2.94%
Savings 53,342 2,299 4.31%
Time deposits 131,048 7,680 5.86%
U. S. Treasury demand note 1,080 56 5.19%
Note payable 1,804 133 7.39%
========= ========= ========
Total interest-bearing liabilities 235,521 11,587 4.92%
--------- --------- --------
Other liabilities 3,919
Realized stockholders' equity 32,629
Unrealized gains (losses) on
investment securities, net of tax (374)
--------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 323,289
========= ========= ========
Excess of interest-earning assets
over interest-bearing liabilities $ 61,290
========= ========= ========
INTEREST RATE SPREAD 4.49%
========= ========= ========
NET INTEREST INCOME $ 16,329
========= ========= ========
NET INTEREST MARGIN 5.50%
========= ========= ========
</TABLE>
(1) Average loans are shown net of unearned income. Nonperforming loans are
included.
(2) Interest income includes loan fees of approximately $977,000, $1,074,000,
and $922,000 in 1998, 1997, and 1996.
(3) Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. The
taxable-equivalent amounts included in the above table aggregated
approximately $591,000, $613,000, and $692,000 in 1998, 1997, and 1996. No
adjustment has been made for any state tax benefits.
(4) NOW and money market accounts.
16
<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 proper recognize and process
date-sensitive information relative to the Year 2000 and beyond. In 1997, the
Company developed a plan to address the impact of the Year 2000 problem on its
data processing systems and related infrastructure. 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, and III of its plan and has substantially completed phases IV and 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, 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 vendors, and has received
certifications/assurances of Year 2000 compliance from same. The Company will
continue to assess the Year 2000 progress of critical vendors throughout 1999.
The progress of less critical vendors is also being monitored, and follow-up
action is being taken as needed.
Contingency Plans
The Company is preparing contingency plans pertaining specifically to Year 2000
risks. Contingency plans may include utilization of back-up systems and
maintenance of large cash reserves. The Company anticipates completion of Year
2000 contingency plans during the first half of 1999. Once developed, Year 2000
contingency plans will be tested in certain respects and thereafter refined as
additional information becomes available.
17
<PAGE>
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, 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. For additional information regarding Year 2000 matters, refer to the
disclosures provided under Forward-Looking Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." After financial assets
have been transferred, SFAS 125 requires recognition of the financial and
servicing assets controlled and liabilities incurred, removal of financial
assets when control has been surrendered, and removal of liabilities when they
have been extinguished. SFAS 125 applies to transfers and servicing of financial
assets and extinguishment of liabilities that occurred after December 31, 1996.
Adoption of this statement did not have a significant impact on the Company's
financial condition or results of operations.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128
establishes accounting standards for computation, presentation, and disclosure
of earnings per share for entities with publicly held common stock. This
statement is effective for financial statements issued for periods ending after
December 15, 1997. Adoption of this statement had no impact on the Company's
reported earnings per share.
18
<PAGE>
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 financial
condition or results of operations.
Effective January 1, 1998, the Company also adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
disclosure of segment information about services, geographic areas, and major
customers. The Company acts as an independent community financial services
provider and offers traditional banking and insurance services to individual,
commercial, and government customers. Because the Company views SEB as one
versus multiple segments for financial reporting purposes, no segmentation of
bank operations between services, types of customers, and market areas is
provided. Additionally, because SBCF did not have a significant impact on the
Company's financial condition or results of operations in 1998, no segment
information is provided for the Company's insurance business at December 31,
1998. Parent Company only financial information is provided in Note 13 of the
consolidated financial statements.
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.
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 verbal
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. Certain factors that could affect
financial performance or cause actual results to vary significantly from
estimates contained in or underlying forward-looking statements include:
/bullet/ Interest rate fluctuations and other market conditions.
/bullet/ Strength of the consumer and commercial credit sectors as well as real
estate markets.
19
<PAGE>
/bullet/ Changes in laws and regulations, including changes in accounting
standards and taxation requirements (including tax rate changes, new
tax laws, and revised tax law interpretations).
/bullet/ Competitive pricing and other pressures on loans and deposits and the
Company's ability to maintain market shares in its trade areas.
/bullet/ The inherent uncertainties in achieving Year 2000 compliance with
respect to the Company and its vendors, suppliers, and loan customers.
/bullet/ The outcome of litigation which depends on judicial interpretations of
law and findings of juries.
/bullet/ 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item commences on page 29. Selected Statistical Information
begins on page 21. Both the financial statements and statistical information
presented should be read in conjunction with the accompanying management
discussion of Southeastern Banking Corporation and subsidiaries.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about average balances, income/expense, and
average yields earned and rates paid on interest-earning assets and
interest-bearing liabilities for each of the last three years. The table below
summarizes the changes in interest income and interest expense attributable to
volume and rates in 1998 and 1997.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
INTEREST ----------------------------------------------------------------------
DIFFERENTIAL (1) VOLUME RATE NET VOLUME RATE NET
- ---------------------------------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
Loans(2),(3) $(2,332) $ 23 $(2,309) $ 971 $ (164) $ 807
Federal funds sold (107) (8) (115) 316 18 334
Taxable investment securities 976 (130) 846 95 64 159
Tax-exempt investment securities(3) 100 (171) (71) (219) (69) (288)
------- ------- ------- ------- ------- -------
Total interest income (1,363) (286) (1,649) 1,163 (151) 1,012
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits(4) (73) 44 (29) (159) (23) (182)
Savings 40 (23) 17 863 134 997
Time deposits (554) 170 (384) (275) (121) (396)
U. S. Treasury demand note (19) 4 (15) 10 10
Note payable(5) (41) (41) (94) 2 (92)
------- ------- ------- ------- ------- -------
Total interest expense (647) 195 (452) 345 (8) 337
------- ------- ------- ------- ------- -------
NET CHANGE IN NET INTEREST INCOME $ (716) $ (481) $(1,197) $ 818 $ (143) $ 675
======= ======= ======= ======= ======= =======
</TABLE>
(1) Changes in net interest income are attributed to either changes in average
balances (volume change) or changes in average rates (rate change) for
earning assets and sources of funds on which interest is received or paid.
Volume change is calculated as change in volume times the previous rate
while rate change is change in rate times the previous volume. The
rate/volume change, change in rate times change in volume, is allocated
between volume change and rate change at the ratio each component bears to
the absolute value of their total.
(2) Includes loan fees. See the average balances table included in the
Operations section of Part II, Item 7 for more details.
(3) 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 or the nondeductible
portion of interest expense.
(4) NOW and money market accounts.
(5) The entire change in net interest income attributable to the Company's
early redemption of the term loan has been allocated to the change in
volume.
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
INVESTMENT SECURITIES
Investment securities available-for-sale (carried at estimated fair value) and
held-to-maturity (carried at amortized cost) for each of the last three years
are presented in the table below. The maturity distribution of these securities
and their weighted average yields are presented in an additional table on the
next page.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
INVESTMENT SECURITIES BY CATEGORY AMORTIZED FAIR UNREALIZED UNREALIZED
AT DECEMBER 31, COST VALUE GAINS LOSSES
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U. S. Treasury and
U. S. Government agencies
1998 $ 86,656 $ 87,115 $ 483 $ 24
1997 81,730 81,760 195 165
1996 75,669 75,330 203 542
Mortgage-backed securities
1998 21,171 21,150 33 54
1997 6,520 6,513 33 40
1996 8,062 7,986 39 115
Equity securities
1998 893 893
1997 1,050 1,050
1996 260 260
- --------------------------------------------------------------------------------------
Total available-for-sale
1998 108,720 109,158 516 78
1997 89,300 89,323 228 205
1996 83,991 83,576 242 657
HELD-TO-MATURITY
States and political subdivisions
1998 23,873 24,947 1,074
1997 19,349 20,158 818 9
1996 22,321 23,172 888 37
- --------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
1998 $132,593 $134,105 $ 1,590 $ 78
1997 108,649 109,481 1,046 214
1996 106,312 106,748 1,130 694
======================================================================================
</TABLE>
22
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
The distribution of maturities and the weighted average yields of debt
securities at December 31, 1998 are shown in the table below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION
OF INVESTMENT SECURITIES 1 YEAR 1 - 5 5 - 10 AFTER 10
DECEMBER 31, 1998 OR LESS YEARS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DISTRIBUTION OF MATURITIES
AMORTIZED COST:
U.S. Treasury and
U.S. Government agencies $ 12,010 $ 66,156 $ 8,250 $ 240 $ 86,656
Mortgage-backed securities (1) 1,013 19,141 1,017 21,171
States and political subdivisions 1,452 7,329 6,106 8,986 23,873
- ------------------------------------------------------------------------------------------------------
Total debt securities $ 14,475 $ 92,626 $ 15,373 $ 9,226 $131,700
======================================================================================================
FAIR VALUE:
U.S. Treasury and
U.S. Government agencies $ 12,078 $ 66,511 $ 8,299 $ 227 $ 87,115
Mortgage-backed securities (1) 1,020 19,112 1,018 21,150
States and political subdivisions 1,468 7,570 6,498 9,411 24,947
- ------------------------------------------------------------------------------------------------------
Total debt securities $ 14,566 $93,193 $ 15,815 $ 9,638 $133,212
======================================================================================================
WEIGHTED AVERAGE YIELD:
U.S. Treasury and
U.S. Government agencies 6.00% 5.98% 6.04% 5.00% 5.98%
Mortgage-backed securities(1) 6.82% 5.96% 6.08% 6.01%
States and political subdivisions(2) 8.16% 7.85% 8.12% 7.48% 7.80%
- ------------------------------------------------------------------------------------------------------
Total debt securities 6.28% 6.12% 6.87% 7.42% 6.32%
======================================================================================================
</TABLE>
(1) Distribution of maturities for mortgage-backed securities is based on
expected average lives which may be different from the contractual terms.
(2) The weighted average yields for tax-exempt securities have been calculated
on a taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustments have been made for any state income tax effects or the
nondeductible portion of interest expense pertaining to tax-exempt income.
The Company had no investments in the obligations of any state or municipality
which exceeded 10% of stockholders' equity at December 31, 1998.
23
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
LOANS
Loans outstanding are presented by type below:
<TABLE>
<CAPTION>
LOANS BY CATEGORY
AT DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 69,125 $ 92,587 $ 88,899 $ 76,453 $ 69,574
Real estate - construction 2,318 4,029 3,416 6,260 5,944
Real estate - mortgage 60,035 59,652 59,515 53,509 52,954
Consumer, including credit cards 36,566 34,187 35,550 33,006 31,750
-------- -------- -------- -------- --------
Loans, gross 168,044 190,455 187,380 169,228 160,222
Unearned income 3,283 3,632 3,641 3,843 3,950
-------- -------- -------- -------- --------
Loans, net $164,761 $186,823 $183,739 $165,385 $156,272
======== ======== ======== ======== ========
</TABLE>
The amount of certain gross loans outstanding at December 31, 1998, based on
remaining contractual repayments of principal, are shown by maturity and
interest rate sensitivity in the table below:
<TABLE>
<CAPTION>
REMAINING MATURITIES OF SELECTED LOANS
--------------------------------------
LOAN MATURITY AND MORE
INTEREST RATE SENSITIVITY WITHIN ONE - FIVE THAN FIVE
DECEMBER 31, 1998 TOTAL ONE YEAR YEARS YEARS
- ----------------------------------------- ------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN MATURITY
Commercial, financial, and agricultural(1) $68,503 $21,724 $29,665 $17,114
Real estate - construction 2,318 1,694 203 421
------- ------- ------- -------
Total $70,821 $23,418 $29,868 $17,535
======= ======= ======= =======
Interest rate sensitivity
Selected loans with:
Predetermined interest rates $15,688 $ 9,443
Floating or adjustable interest rates 14,180 8,092
------- -------
Total $29,868 $17,535
======= =======
</TABLE>
(1) Excludes nonaccrual loans totaling approximately $622.
The above maturity schedule is not necessarily indicative of future principal
reductions since each loan is evaluated at maturity and, in many instances, is
renewed in part or in total.
24
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
Nonperforming assets for each of the last five years are presented in the table
below:
NONPERFORMING ASSETS
AT DECEMBER 31, 1998 1997 1996 1995 1994
- --------------------------------------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 872 $ 775 $ 686 $ 632 $2,214
Restructured loans(1) 374 389 418
------ ------ ------ ----- ------
Total nonperforming loans 1,246 1,164 1,104 632 2,214
Foreclosed real estate(2) 778 722 726 1,393 534
------ ------ ------ ------ ------
Total nonperforming assets $2,024 $1,886 $1,830 $2,025 $2,748
====== ====== ====== ====== ======
Accruing loans past due 90 days or more $1,607 $1,767 $1,100 $1,245 $1,009
====== ====== ====== ====== ======
Ratios:
Nonperforming loans to net loans 0.76% 0.62% 0.60% 0.38% 1.42%
====== ====== ====== ====== ======
Nonperforming assets to net loans
plus foreclosed real estate 1.22% 1.01% 0.99% 1.21% 1.75%
====== ====== ====== ====== ======
</TABLE>
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foreclosure or in
settlement of debts previously contracted.
The Company's nonperforming loans and assets for the three years ended December
31, 1998 are discussed and policies pertaining to same are delineated in the
Loan section of Part II, Item 7 (management discussion); accordingly, the
discussion below is limited to nonperforming asset levels at year-end 1995 and
1994:
a) In 1995 and 1994, unrecognized income on nonaccrual and restructured loans
totaled approximately $137,000 and $194,000.
b) All known potential problem loans were included in nonperforming loans at
December 31, 1995 and 1994.
c) The Company had no concentration of loans to borrowers engaged in any
single industry that exceeded 10% of total loans at year-end 1995 and 1994.
25
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. 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. Activity in the allowance for each of the last five
years is presented in the table below:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ---------------------------------------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,705 $ 3,735 $ 3,532 $ 3,257 $ 2,475
Allowance of purchased bank 458
Provision for loan losses 1,230 1,715 1,475 1,200 1,130
Charge-offs:
Commercial, financial, and agricultural 829 1,187 996 752 744
Real estate - construction 0 0 0 0 0
Real estate - mortgage 330 202 167 135 50
Consumer, including credit cards 802 845 791 589 533
-------- -------- -------- -------- --------
Total charge-offs 1,961 2,234 1,954 1,476 1,327
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial, and agricultural 117 99 388 156 161
Real estate - construction 0 0 0 0 0
Real estate - mortgage 15 6 16 34 14
Consumer, including credit cards 301 384 278 361 346
-------- -------- -------- -------- --------
Total recoveries 433 489 682 551 521
-------- -------- -------- -------- --------
Net charge-offs 1,528 1,745 1,272 925 806
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 3,407 $ 3,705 $ 3,735 $ 3,532 $ 3,257
======== ======== ======== ======== ========
Net loans outstanding(1) at December 31 $164,761 $186,823 $183,739 $165,385 $156,272
======== ======== ======== ======== ========
Average loans outstanding at December 31 $165,391 $186,174 $177,522 $160,679 $131,579
======== ======== ======== ======== ========
Ratios:
Allowance to net loans 2.07% 1.98% 2.03% 2.14% 2.08%
======== ======== ======== ======== ========
Net charge-offs to average loans 0.92% 0.94% 0.72% 0.58% 0.61%
======== ======== ======== ======== ========
Provision to average loans 0.74% 0.92% 0.83% 0.75% 0.86%
======== ======== ======== ======== ========
Recoveries to total charge-offs 22.08% 21.89% 34.90% 37.33% 39.26%
======== ======== ======== ======== ========
</TABLE>
(1) Net of unearned income.
See the table on the next page and the accompanying management discussion for
additional information on the allowance for loan losses.
26
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
The Company has allocated the allowance for loan losses according to the amount
deemed to be reasonable necessary to absorb potential losses within the loan
categories summarized in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES
AT DECEMBER 31, 1998 1997 1996 1995 1994
- --------------------------------------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOCATION OF ALLOWANCE
BY LOAN CATEGORY
Commercial, financial, and agricultural $1,135 $1,132 $1,217 $1,236 $1,377
Real estate - construction 71 56
Real estate - mortgage 861 368 589 353 842
Consumer, including credit cards 678 553 394 706 982
Unallocated (1) 733 1,652 1,535 1,166 --
------ ------ ------ ------ ------
Total $3,407 $3,705 $3,735 $3,532 $3,257
====== ====== ====== ====== ======
ALLOCATION OF ALLOWANCE
AS A PERCENT OF TOTAL ALLOWANCE
Commercial, financial, and agricultural 33% 30% 33% 35% 42%
Real estate - construction 2% 2%
Real estate - mortgage 25% 10% 16% 10% 26%
Consumer, including credit cards 20% 15% 10% 20% 30%
Unallocated (1) 22% 45% 41% 33%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
YEAR-END LOAN CATEGORIES AS
A PERCENT OF TOTAL LOANS
Commercial, financial, and agricultural 41% 49% 47% 45% 43%
Real estate - construction 1% 2% 2% 4% 4%
Real estate - mortgage 36% 31% 32% 32% 33%
Consumer, including credit cards 22% 18% 19% 19% 20%
------ ------ ------ ------ ------
Total 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
</TABLE>
(1) In 1994 and prior years, management allocated the allowance for loan losses
based on historical net charge-offs and year-end loan types. No portion of
the allowance was shown as unallocated.
27
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
DEPOSITS
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about income/expense and rates paid on deposits
for the three most recent years. The composition of average deposits for these
same periods is shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
COMPOSITION OF AVERAGE DEPOSITS ----------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 51,783 $ 53,005 $ 51,594 18.34% 18.00% 18.15%
Interest-bearing demand deposits 40,310 42,766 48,247 14.28% 14.52% 16.97%
Savings 73,330 72,453 53,342 25.98% 24.60% 18.77%
Time deposits 116,865 126,295 131,048 41.40% 42.88% 46.11%
- ---------------------------------------------------------------------------------------------------
Total $282,288 $294,519 $284,231 100.00% 100.00% 100.00%
===================================================================================================
The maturities of certificates of deposit totaling $100,000 or more at year-end
1998 are presented below:
- ----------------------------------------------------------------------------------------------------
MATURITIES OF CERTIFICATES
OF DEPOSIT OF $100,000 OR MORE CERTIFICATES
DECEMBER 31, 1998 OF DEPOSIT
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Months to maturity:
3 or less $ 9,637
Over 3 through 6 8,936
Over 6 through 12 9,849
Over 12 11,104
- ----------------------------------------------------------------------------------------------------
Total $39,526
====================================================================================================
SELECTED RATIOS FOR MEASUREMENT OF NET INCOME AND EQUITY
Selected ratios for the measurment of net income and equity are presented below:
- ----------------------------------------------------------------------------------------------------
RETURN ON EQUITY AND ASSETS
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Return on average assets(2) 1.35% 1.40% 1.49%
Return on average equity(2) 11.13% 13.04% 14.73%
Dividend payout ratio(1) 31.53% 24.26% 22.60%
Average equity to average assets ratio(2) 12.09% 10.77% 10.09%
===================================================================================================
</TABLE>
(1) The dividend payout ratio has been restated to give retroactive effect to
the stock split paid on August 9, 1996.
(2) These ratios exclude the effects of mark-to market accounting for
investment securities.
28
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Shareholders
Southeastern Banking Corporation
Darien, Georgia
We have audited the accompanying consolidated balance sheet of Southeastern
Banking Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Southeastern Banking Corporation and subsidiaries as of
December 31, 1997 and for the years ended December 31, 1997 and 1996, were
audited by Bricker & Melton, P.A., whose practice has been combined with our
Firm and whose report dated January 30, 1998 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Southeastern Banking Corporation and subsidiaries as of December 31, 1998 and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
January 29, 1999
Duluth, Georgia
29
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- ----------- ------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks, including reserve requirements of approximately
$3,899,000 and $3,218,000 at December 31, 1998 and 1997 $ 14,464,719 $ 21,376,483
Federal funds sold 15,670,000 18,365,000
------------- -------------
Cash and cash equivalents 30,134,719 39,741,483
Investment securities
Held-to-maturity (market value of approximately $24,948,000 and
$20,158,000 at December 31, 1998 and 1997) 23,873,246 19,348,874
Available-for-sale, at market value 109,157,838 89,323,195
------------- -------------
Total investment securities 133,031,084 108,672,069
Loans, gross 168,044,357 190,455,167
Unearned income (3,283,218) (3,632,308)
Allowance for loan losses (3,406,626) (3,705,273)
------------- -------------
Loans, net 161,354,513 183,117,586
Premises and equipment, net 6,603,948 7,594,389
Intangible assets 1,477,007 3,058,197
Other assets 5,332,061 5,714,109
------------- -------------
TOTAL ASSETS $ 337,933,332 $ 347,897,833
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 58,261,917 $ 56,824,279
Interest-bearing deposits 234,434,679 245,544,420
------------- -------------
Total deposits 292,696,596 302,368,699
U.S. Treasury demand note 816,053 3,770,688
Other liabilities 3,270,386 3,889,789
------------- -------------
Total liabilities 296,783,035 310,029,176
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)
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 34,993,625 31,986,080
------------- -------------
Realized stockholders' equity 40,861,344 37,853,799
Accumulated other comprehensive income - unrealized gains on
investment securities, net of tax 288,953 14,858
------------- -------------
Total stockholders' equity 41,150,297 37,868,657
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 337,933,332 $ 347,897,833
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 18,503,237 $ 20,817,146 $ 20,027,039
Federal funds sold 726,587 842,405 508,209
Investment securities
Taxable 6,398,453 5,551,514 5,392,546
Tax-exempt 1,059,488 1,104,117 1,295,962
------------ ------------ ------------
Total interest income 26,687,765 28,315,182 27,223,756
------------ ------------ ------------
INTEREST EXPENSE
Deposits 11,420,446 11,816,802 11,397,599
U.S. Treasury demand note 50,504 65,814 56,208
Note payable to bank -- 41,339 133,450
------------ ------------ ------------
Total interest expense 11,470,950 11,923,955 11,587,257
------------ ------------ ------------
Net interest income 15,216,815 16,391,227 15,636,499
PROVISION FOR LOAN LOSSES 1,230,000 1,715,000 1,475,000
------------ ------------ ------------
Net interest income after provision for loan losses 13,986,815 14,676,227 14,161,499
------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 2,456,882 3,063,898 3,203,335
Gain on sale of branches before tax provision of $559,731 101,908 -- --
Investment securities (losses) gains, net (6,104) 51,176 (8,649)
Other operating income 930,890 760,598 910,825
------------ ------------ ------------
Total noninterest income 3,483,576 3,875,672 4,105,511
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,800,276 6,327,730 6,239,681
Occupancy and equipment, net 1,724,624 2,085,659 2,064,660
Other operating expense 2,907,172 3,305,158 3,060,827
------------ ------------ ------------
Total noninterest expense 10,432,072 11,718,547 11,365,168
------------ ------------ ------------
Income before income tax expense 7,038,319 6,833,352 6,901,842
INCOME TAX EXPENSE 2,645,721 2,111,457 2,096,615
------------ ------------ ------------
NET INCOME $ 4,392,598 $ 4,721,895 $ 4,805,227
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 1.23 $ 1.32 $ 1.34
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $1,491,998 $4,375,721 $24,690,512 $ 213,895 $30,772,126
Comprehensive income:
Net income -- -- 4,805,227 -- 4,805,227
Other comprehensive income, net
of tax effect of $251,223:
Change in unrealized gains
(losses) on
available-for-sale
securities -- -- -- (487,670) (487,670)
-----------
Comprehensive income 4,317,557
-----------
Declaration of three-for-one stock
split 2,983,998 (2,983,998) -- -- -
Cash dividends declared
($.30 1/3 per share) -- -- (1,086,056) -- (1,086,056)
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1996 4,475,996 1,391,723 28,409,683 (273,775) 34,003,627
Comprehensive income:
Net income -- -- 4,721,895 -- 4,721,895
Other comprehensive income, net
of tax effect of $148,688:
Change in unrealized gains
(losses) on
available-for-sale
securities -- -- -- 288,633 288,633
-----------
Comprehensive income 5,010,528
-----------
Cash dividends declared
($.32 per share) -- -- (1,145,498) -- (1,145,498)
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997 4,475,996 1,391,723 31,986,080 14,858 37,868,657
Comprehensive income:
Net income -- -- 4,392,598 -- 4,392,598
Other comprehensive income, net
of tax effect of $141,200:
Change in unrealized gains
(losses) on
available-for-sale
securities -- -- -- 274,095 274,095
------------
Comprehensive income 4,666,693
------------
Cash dividends declared
($.38 2/3 per share) -- -- (1,385,053) -- (1,385,053)
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1998 $4,475,996 $1,391,723 $34,993,625 $ 288,953 $41,150,297
========== ========== =========== ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,392,598 $ 4,721,895 $ 4,805,227
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,230,000 1,715,000 1,475,000
Depreciation 845,705 1,035,637 993,040
Amortization and accretion, net 204,500 290,042 319,237
Deferred income tax expense (benefit) 76,345 30,352 (82,587)
Investment securities losses (gains), net 6,104 (51,176) 8,649
Net gains on sales of other real estate (66,275) (77,817) (145,653)
Gain on sale of branches before tax provision (101,908) -- --
Changes in assets and liabilities:
Decrease (increase) in other assets 36,990 (175,293) (333,087)
(Decrease) increase in other liabilities (569,788) (352,847) 391,095
------------ ------------ ------------
Net cash provided by operating activities 6,054,271 7,135,793 7,430,921
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Held-to-maturity 3,720,800 4,856,850 3,493,600
Available-for-sale 66,754,681 39,043,285 29,181,620
Proceeds from sales of investment securities:
Available-for-sale 4,992,122 32,299 6,377,250
Proceeds from sales of other real estate 572,752 627,669 379,476
Purchases of investment securities:
Held-to-maturity (8,264,361) (1,881,214) (2,651,768)
Available-for-sale (91,161,927) (44,318,306) (48,911,828)
Net decrease (increase) in loans 2,534,445 (5,495,466) (17,235,619)
Additions to premises and equipment, net (805,131) (179,487) (895,467)
Net funds received in purchase of branches -- -- 19,497,817
Net funds paid in sale of branches (13,589,236) -- --
------------ ------------ ------------
Net cash used in investing activities (35,245,855) (7,314,370) (10,764,919)
============ ============ ============
FINANCING ACTIVITIES
Net increase in demand, NOW, and savings deposits 16,512,145 6,902,338 21,859,755
Net increase (decrease) in certificates of deposit 7,209,331 1,113,381 (10,522,856)
Net (decrease) increase in U.S. Treasury demand note (2,954,635) 1,970,322 1,352,312
Payments on note payable -- (1,450,000) (1,075,000)
Cash dividends paid (1,182,021) (1,121,506) (1,062,303)
------------ ------------ ------------
Net cash provided by financing activities 19,584,820 7,414,535 10,551,908
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,606,764) 7,235,958 7,217,910
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 39,741,483 32,505,525 25,287,615
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,134,719 $ 39,741,483 $ 32,505,525
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation and its subsidiaries, Southeastern Bank and SBC
Financial Services, Inc. (collectively, the Company), provide a full array of
financial services to meet the financial needs of individual, commercial, and
government customers in southeast Georgia and northeast Florida. The
consolidated financial statements include the accounts of Southeastern Banking
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
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.
NEW SUBSIDIARY
SBC Financial Services, Inc. was formed in 1998 to provide insurance agent and
brokerage services for general insurance. An initial capital investment of
$50,000 was made by the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period, the
most significant of which pertain to the allowance for loan losses. Actual
results could vary from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform with the current year
financial statement presentation.
CASH EQUIVALENTS
Cash equivalents include due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.
INVESTMENT SECURITIES
Investment securities are classified as held-to-maturity or available-for-sale.
Securities which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost.
Securities not classified as held-to-maturity are classified as
available-for-sale and are carried at market value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate component of
stockholders' equity until realized. Premiums and discounts are recognized in
interest income
34
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using the interest method over the period to maturity. Gains and
losses on sales of investment securities are recognized based on the adjusted
costs of the specific securities at disposition.
LOANS
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Interest income on loans is generally
recognized on a level-yield basis. Interest income on loans which are made on a
discount basis is recognized using the sum-of-the-months-digits method which
does not differ materially from the level-yield basis.
Loans are changed to nonaccrual status when the full timely collection of
principal or interest becomes doubtful or the loans become contractually past
due 90 days or more as to either principal or interest, unless the loans are
both well-secured and in the process of collection. Accrued interest on any loan
changed to nonaccrual status is reversed. Cash receipts on nonaccrual loans are
applied first to outstanding principal balances and secondly to interest.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is that amount considered adequate to
absorb potential losses in the loan portfolio based on management's evaluation
of the size and current risk characteristics of the portfolio. Such evaluations
consider the balance of impaired loans and prior loan loss experience as well as
the impact of current economic conditions. Management considers a loan to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. Specific provision
for loan losses is made for impaired loans based on a comparison of the recorded
carrying value of the loan to either the present value of the loan's expected
cash flow, the loan's estimated market price, or the estimated fair value of the
underlying collateral. Specific and general provisions for loan losses are also
made based on other considerations. Recognized losses are charged to the
allowance and subsequent recoveries are added. Although the Company believes it
has a sound basis for estimating the amount needed for the allowance for loan
losses, actual charge-offs are highly dependent upon future events and could
vary from these estimates.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are normally
capitalized and recognized as an adjustment to the yields on the related loans.
As the net amount of loan origination fees for the years ended December 31,
1998, 1997 and 1996 was not significant, no amounts have been capitalized or
deferred.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line and declining
balance methods over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to operations as incurred,
while betterments are capitalized.
35
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Intangible assets consist of deposit base premiums and goodwill. The deposit
base premiums are being amortized using the straight-line method over estimated
useful lives ranging from 11 to 15 years. Goodwill is being amortized using the
straight-line method over periods of 20 years or less. Amortization of
intangibles totaled $195,637, $308,986 and $307,508 in 1998, 1997 and 1996,
respectively.
Long-lived assets, including certain fixed assets and intangibles, are evaluated
regularly for other-than-temporary impairment. If circumstances suggest that the
value of such assets may be impaired and a write-down would be material, an
assessment of recoverability is performed prior to any write-down. Impairment on
intangibles is evaluated at each balance sheet date or whenever events or
changes in circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement. The Company did not
consider any of its intangible assets to be impaired at December 31, 1998 and
1997.
OTHER REAL ESTATE
Other real estate represents property acquired through foreclosure or in
settlement of loans and is recorded at the lower of cost or fair value less
estimated selling expenses. Other real estate also includes any property owned
that was formerly used as a branch facility. Provisions for subsequent
devaluation of other real estate are charged to operations, while costs
associated with improving the property are capitalized. Gains and losses on
sales of other real estate are recognized at disposition based on adjusted
carrying values.
INCOME TAXES
The Company files consolidated income tax returns where permissible. Income tax
expense (benefit) is allocated to each member of the consolidated group on the
basis of their respective taxable income or loss included in the consolidated
income tax returns. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Company originates financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the consolidated balance sheets. Commitments to extend
credit represent legally binding agreements to lend to a customer with fixed
expiration dates or other termination clauses. Since many commitments expire
without being funded, total commitment amounts do not necessarily represent
future liquidity requirements. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party.
The Company does not invest in off-balance sheet derivative financial
instruments such as swaps, options or forward contracts.
36
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIC EARNINGS PER COMMON SHARE
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each year. (See Note 14.)
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128
establishes accounting standards for computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common
stock. This statement is effective for financial statements issued for periods
ending after December 15, 1997. Adoption of this statement had no impact on the
Company's reported earnings per share.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 establishes standards for the disclosure of
segment information about services, geographic areas, and major customers. The
Company acts as an independent community financial services provider and offers
traditional banking and insurance services to individual, commercial, and
government customers. Because the Company views Southeastern Bank as one versus
multiple segments for financial reporting purposes, no segmentation of bank
operations between services, types of customers, and market areas is provided.
Additionally, because SBC Financial Services, Inc. did not have a significant
impact on the Company's financial condition or results of operations in 1998, no
segment information is provided for the Company's insurance business at December
31, 1998. Parent Company only financial information is provided in Note 13.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by Statement of
Financial Accounting Standards No. 127 (SFAS 127), "Deferral of the Effective
Date of FASB Statement No. 125." After financial assets have been transferred,
SFAS 125 requires recognition of the financial and servicing assets controlled
and liabilities incurred, removal of financial assets when control has been
surrendered, and removal of liabilities when they have been extinguished. SFAS
125 applies to transfers and servicing of financial assets and extinguishment of
liabilities that occurred after December 31, 1996. Adoption of this statement
did not have a significant impact on the Company's financial condition or
results of operations.
37
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORTING COMPREHENSIVE INCOME
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. The
adoption of SFAS 130 did not have a significant impact on the Company's
financial condition or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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.
2. SALE OF BRANCHES
On January 16, 1998, the Company sold its three offices in Alachua County,
Florida, to First National Bank of Alachua. Cash, loans, and premises and
equipment with book values of approximately $32,159,000 were sold, and deposits
and other liabilities totaling approximately $33,646,000 were divested. The
premium paid to the Company totaled $1,487,461, resulting in a pretax gain of
approximately $101,908 for book purposes and $1,487,461 for tax purposes. The
book tax provision on the sale aggregated $559,731, resulting in an after-tax
loss of $457,823.
3. ACQUISITIONS
On February 15, 1996, the Company acquired three branches of Compass Bank. The
Company received cash, loans and property and equipment with fair values of
approximately $22,982,000, while assuming deposits of approximately $23,476,000.
The excess of liabilities assumed over net assets acquired was recorded as a
deposit premium which is being amortized over a period of 15 years.
38
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of cash flow information and noncash investing
and financing activities follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
CASH PAID DURING THE YEAR
Interest paid to depositors $11,853,861 $11,960,277 $11,112,960
Interest paid on note payable -- 41,631 133,684
Income taxes 2,810,050 1,936,500 2,306,698
NONCASH INVESTING AND FINANCING ACTIVITIES
Loans foreclosed $ 1,116,633 $ 975,785 $ 592,746
Loans made in connection with sales of foreclosed real
estate 567,166 308,243 881,125
Transfer of bank premises to other real estate 94,845 177,539 --
</TABLE>
5. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and U.S.
Government agencies $ 86,655,735 $ 483,091 $ 24,122 $ 87,114,704
Mortgage-backed securities 21,171,470 33,060 54,222 21,150,308
Equity securities 892,826 -- -- 892,826
------------ ------------ ------------ ------------
108,720,031 516,151 78,344 109,157,838
------------ ------------ ------------ ------------
HELD-TO-MATURITY
States and political subdivisions 23,873,246 1,074,366 29 24,947,583
------------ ------------ ------------ ------------
23,873,246 1,074,366 29 24,947,583
------------ ------------ ------------ ------------
Total investment securities $132,593,277 $ 1,590,517 $ 78,373 $134,105,421
============ ============ ============ ============
</TABLE>
39
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and U.S.
Government agencies $ 81,730,258 $ 195,294 $ (165,737) $ 81,759,815
Mortgage-backed securities 6,519,999 33,201 (40,246) 6,512,954
Equity securities 1,050,426 -- -- 1,050,426
------------ ------------ ------------ ------------
89,300,683 228,495 (205,983) 89,323,195
------------ ------------ ------------ ------------
HELD-TO-MATURITY
States and political subdivisions 19,348,874 818,825 (9,484) 20,158,215
------------ ------------ ------------ ------------
19,348,874 818,825 (9,484) 20,158,215
------------ ------------ ------------ ------------
Total investment securities $108,649,557 $ 1,047,320 $ (215,467) $109,481,410
============ ============ ============ ============
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due within one year $ 12,009,860 $ 12,077,710 $ 1,452,182 $ 1,467,776
Due after one year through five years 66,155,812 66,511,298 7,328,247 7,570,428
Due after five years through ten
years 8,250,063 8,299,196 6,106,405 6,498,259
Due after ten years 240,000 226,500 8,986,412 9,411,120
------------ ------------ ------------ ------------
86,655,735 87,114,704 23,873,246 24,947,583
Mortgage-backed securities 21,171,470 21,150,308 -- --
------------ ------------ ------------ ------------
$107,827,205 $108,265,012 $ 23,873,246 $ 24,947,583
============ ============ ============ ============
</TABLE>
Gross realized gains were $15,393, $51,176 and $15,040, and gross realized
losses were $21,497, $0 and $23,689 on sales and other redemptions of investment
securities in 1998, 1997 and 1996.
Investment securities with aggregate carrying values of approximately
$45,349,000 and $40,502,000 at December 31, 1998 and 1997, respectively, were
pledged to secure public deposits and for other purposes as required by law.
40
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS
The composition of the Company's loan portfolio is summarized as follows:
DECEMBER 31, 1998 1997
- ----------- ------------ ------------
Commercial, financial and agricultural $ 69,125,622 $ 92,587,219
Real estate - construction 2,318,172 4,029,280
Real estate - mortgage 60,034,925 59,652,183
Consumer, including credit cards 36,565,638 34,186,485
------------ ------------
Loans, gross $168,044,357 $190,455,167
============ ============
Activity in the allowance for loan losses is summarized below:
1998 1997 1996
----------- ----------- -----------
Balance at beginning of year $ 3,705,273 $ 3,734,527 $ 3,531,872
Provision for loan losses 1,230,000 1,715,000 1,475,000
Charge-offs (1,961,155) (2,234,413) (1,953,517)
Recoveries 432,508 490,159 681,172
----------- ----------- -----------
Net charge-offs (1,528,647) (1,744,254) (1,272,345)
----------- ----------- -----------
Balance at end of year $ 3,406,626 $ 3,705,273 $ 3,734,527
=========== =========== ===========
The Company's primary lending area is southeast Georgia and northeast Florida.
Although the Company's loan portfolio is diversified, a significant portion of
its loans are collateralized by real estate. Loans secured by real estate
aggregated approximately $105,009,694 and $125,460,000 at December 31, 1998 and
1997. Real estate loans are collateralized based on certain loan-to-appraised
value ratios.
Nonaccrual and restructured loans totaled approximately $1,246,000, $1,164,000
and $1,206,000 at December 31, 1998, 1997 and 1996, respectively. Unrecognized
interest income on such loans during the years ended December 31, 1998, 1997 and
1996 totaled approximately $49,000, $143,000 and $71,000.
In the normal course of business, the Company's subsidiaries have made loans at
prevailing interest rates and terms to directors, executive officers, and
principal shareholders of the Company and its subsidiaries, and to their
affiliates. The aggregate dollar amount of these loans approximated $861,000 at
December 31, 1998 and $1,783,000 at December 31, 1997. During 1998,
approximately $292,000 of such loans were made and repayments totaled $297,000.
Due to the sale of the Alachua County offices, related party loans totaling
approximately $917,000 were sold in 1998. None of these loans have been
restructured, nor were any related party loans charged-off during 1998 and 1997.
41
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31, 1998 1997
- ----------- ------------- -------------
Land $ 1,224,507 $ 1,328,507
Buildings and leasehold improvements 6,757,225 7,233,675
Furniture and equipment 4,507,236 5,190,590
Construction-in-progress -- 39,897
------------- -------------
12,488,968 13,792,669
Accumulated depreciation and amortization (5,885,020) (6,198,280)
------------- -------------
Premises and equipment, net $ 6,603,948 $ 7,594,389
============= =============
Depreciation and amortization of premises and equipment totaled $688,188,
$914,325 and $855,513 in 1998, 1997 and 1996, respectively.
8. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
DECEMBER 31, 1998 1997
- ----------- ------------- -------------
Interest-bearing demand deposits $ 43,616,992 $ 40,983,272
Savings 72,882,905 77,645,170
Time certificates under $100,000 78,408,861 85,059,264
Time certificates $100,000 or more 39,525,921 41,856,714
------------- -------------
Total interest-bearing deposits $ 234,434,679 $ 245,544,420
============= =============
Interest expense on time certificates of $100,000 or more approximated
$2,309,000, $2,282,000 and $2,202,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
The maturity distribution of the Company's time certificates was as follows:
DECEMBER 31, 1998
- ------------ -------------
Due in one year or less $ 84,624,163
Over one year through three years 27,985,369
Over three years 5,325,250
-------------
$ 117,934,782
=============
42
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM BORROWINGS
The Company utilizes short-term borrowings as needed for liquidity purposes in
the form of U.S. Treasury demand notes and federal funds purchased. The interest
rate on U.S. Treasury demand notes at December 31, 1998 was 4.12%. At December
31, 1998, unsecured lines of credit for federal funds purchased from third party
banks totaled $11,000,000. The Company had no amounts outstanding under these
lines at December 31, 1998 and 1997.
10. INCOME TAX EXPENSE
<TABLE>
<CAPTION>
The components of income tax expense were as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------- ----------- ----------- -----------
<S> <C> <C> <C>
FEDERAL
Current tax expense $ 2,403,777 $ 1,949,777 $ 2,028,633
Deferred tax expense (benefit) 76,345 30,352 (82,587)
----------- ----------- -----------
2,480,122 1,980,129 1,946,046
STATE
Current tax expense 165,599 131,328 150,569
----------- ----------- -----------
$ 2,645,721 $ 2,111,457 $ 2,096,615
=========== =========== ===========
</TABLE>
The Company's provisions for income taxes differ from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. A reconciliation of this difference follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Taxes at federal statutory rate $ 2,393,028 $ 2,323,339 $ 2,346,626
Increase (decrease) resulting from:
Tax-exempt interest income, net (341,074) (356,905) (405,855)
State income taxes, net of federal benefit 109,295 86,676 99,376
Gain on sale of branches 471,088 -- --
Other, net 13,384 58,347 56,468
----------- ----------- -----------
Total income tax expense $ 2,645,721 $ 2,111,457 $ 2,096,615
=========== =========== ===========
</TABLE>
43
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule summarizes the temporary differences which comprised the
net deferred tax asset:
DECEMBER 31, 1998 1997
- ------------ --------- ---------
DEFERRED TAX ASSETS (LIABILITIES)
Allowance for loan losses $ 740,789 $ 830,011
Other real estate 92,885 80,510
Unrealized gains on investment securities
available-for-sale (148,854) (7,654)
Accretion of discounts on investment securities (37,326) (67,748)
Other 4,080 34,000
--------- ---------
Net deferred tax asset $ 651,574 $ 869,119
========= =========
The Company has not recorded any valuation allowances for deferred tax assets.
11. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory profit sharing plan which covers substantially
all employees. Under the terms of the plan, the Company's contributions are
discretionary but are not to exceed an amount determined by a formula provided
in the plan or the amount deductible for income tax purposes. Total
contributions expensed under this plan totaled $375,000, $330,000 and $320,000
for the years ended December 31, 1998, 1997 and 1996.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial instruments
are made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts shown.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
44
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS - For variable rate loans that reprice frequently and have no significant
change in credit risk, fair value approximates carrying value. The fair value of
all other loans is estimated by discounting the future cash flows using the
current rate at which loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand and savings deposits is the
amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated using the rates currently offered for deposits of
similar remaining maturities. The estimate of fair value is not intended to
represent market value, deposit base premium or portfolio liquidation value.
U.S. TREASURY DEMAND NOTE - The fair value of the U.S. Treasury demand note is
the amount payable on demand at the reporting date.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - Because the Company
generally offers lending commitments and standby letters of credit to its
customers for only short periods of time and the rates underlying such
commitments therefore approximate market rates, the fair value of such
commitments and standby letters of credit is equal to the amount outstanding at
December 31, 1998 and 1997.
The following table presents the carrying values and estimated fair values of
the Company's financial instruments:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31, VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 30,134,719 $ 30,134,719 $ 39,741,483 $ 39,741,483
Investment securities 133,031,084 134,105,421 108,672,069 109,481,410
Loans, net 161,354,513 167,077,333 183,117,586 185,747,039
FINANCIAL LIABILITIES
Deposits $292,696,596 $290,544,410 $302,368,699 $301,306,031
U.S. Treasury demand note 816,053 816,053 3,770,688 3,770,688
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Commitments to extend credit $ 14,434,000 $ 19,468,000
Standby letters of credit 583,000 1,372,000
</TABLE>
45
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CONDENSED FINANCIAL INFORMATION OF SOUTHEASTERN BANKING CORPORATION
(PARENT COMPANY ONLY)
Parent Company only financial information is presented below:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 1997
- ------------ ----------- -----------
<S> <C> <C>
ASSETS
Cash $ 1,080,272 $ 150,076
Investment in subsidiaries, at equity 40,148,538 37,552,667
Premises and equipment, net 84,534 94,568
Other assets 511,435 561,100
----------- -----------
TOTAL ASSETS $41,824,779 $38,358,411
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 674,482 $ 489,754
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 4,475,996 4,475,996
Additional paid-in capital 1,391,723 1,391,723
Retained earnings 34,993,625 31,986,080
----------- -----------
Realized stockholders' equity 40,861,344 37,853,799
Accumulated other comprehensive income - unrealized gains on
investment securities, net of tax 288,953 14,858
----------- -----------
Total stockholders' equity 41,150,297 37,868,657
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $41,824,779 $38,358,411
=========== ===========
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Dividends $2,180,000 $2,320,000 $2,200,000
Interest income 28,429 14,472 23,215
Equity in undistributed income of
subsidiaries 2,271,776 2,494,719 2,772,991
Other income -- -- 3,475
---------- ---------- ----------
Total income 4,480,205 4,829,191 4,999,681
---------- ---------- ----------
OPERATING EXPENSES
Interest expense -- 41,339 133,450
Occupancy and other expenses 92,098 90,668 129,972
---------- ---------- ----------
Total expenses 92,098 132,007 263,422
---------- ---------- ----------
Income before income tax benefit 4,388,107 4,697,184 4,736,259
INCOME TAX BENEFIT 4,491 24,711 68,968
---------- ---------- ----------
NET INCOME $4,392,598 $4,721,895 $4,805,227
========== ========== ==========
</TABLE>
47
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,392,598 $ 4,721,895 $ 4,805,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (2,271,776) (2,494,719) (2,772,991)
Depreciation and amortization 59,322 59,322 59,322
Deferred income tax expense -- -- 2,380
Net gains on sales of real estate held for resale -- -- (3,475)
Changes in assets and liabilities:
Decrease (increase) in other assets 377 (2,638) 158,276
Decrease in other liabilities (18,304) (23,314) (19,081)
----------- ----------- -----------
Net cash provided by operating activities 2,162,217 2,260,546 2,229,658
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of investment securities:
Available-for-sale -- -- (826)
Investment in subsidiaries (50,000) -- (1,500,000)
Proceeds from sales of real estate held for resale -- -- 56,475
----------- ----------- -----------
Net cash used in investing activities (50,000) -- (1,444,351)
----------- ----------- -----------
FINANCING ACTIVITIES
Payments on note payable -- (1,450,000) (1,075,000)
Cash dividends paid (1,182,021) (1,121,506) (1,062,303)
----------- ----------- -----------
Net cash used in financing activities (1,182,021) (2,571,506) (2,137,303)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 930,196 (310,960) (1,351,996)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 150,076 461,036 1,813,032
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,080,272 $ 150,076 $ 461,036
=========== =========== ===========
</TABLE>
48
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCKHOLDERS' EQUITY
On August 9, 1996, the Company paid a three-for-one stock split to stockholders
of record at the close of business on July 26, 1996. The issuance of the stock
split increased the Company's outstanding common stock from 1,193,599 shares to
3,580,797 shares. All per share amounts were restated to reflect the stock
split.
15. REGULATORY REQUIREMENTS
The Company and its bank subsidiary are subject to various regulatory capital
requirements. Failure to meet adequate or minimum capital requirements can
initiate certain mandatory and additional discretionary actions by regulators
that could have a material effect on the Company's financial statements. The
Company and its bank subsidiary must meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to qualitative
judgments about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier 1 (primarily
stockholders' equity less intangible assets) and total (Tier 1, certain debt
instruments, and a portion of the allowance for loan losses) capital to
risk-weighted assets and a leverage ratio of Tier 1 capital to average quarterly
assets. As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the bank subsidiary as well
capitalized under the regulatory framework for prompt corrective action.
Management believes that the Company and its bank subsidiary meet all applicable
capital requirements as of December 31, 1998. Actual capital amounts and ratios
for 1998 and 1997 are presented in the tables on the next page.
49
<PAGE>
<TABLE>
<CAPTION>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGULATORY
REGULATORY DEFINITION OF
DEFINITION OF ADEQUATELY
WELL CAPITALIZED CAPITALIZED ACTUAL
DECEMBER 31, 1998 (RATIO) (RATIO) (CAPITAL AMOUNT/RATIO)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TIER 1 CAPITAL RATIO
Consolidated 6.00% 4.00% $39,375,000 22.37%
Southeastern Bank 6.00% 4.00% 38,742,000 22.03%
TOTAL CAPITAL RATIO
Consolidated 10.00% 8.00% 41,591,000 23.62%
Southeastern Bank 10.00% 8.00% 40,954,000 23.29%
TIER 1 LEVERAGE RATIO
Consolidated 5.00% 4.00% 39,375,000 11.78%
Southeastern Bank 5.00% 4.00% 38,742,000 11.60%
REGULATORY
REGULATORY DEFINITION OF
DEFINITION OF ADEQUATELY
WELL CAPITALIZED CAPITALIZED ACTUAL
DECEMBER 31, 1997 (RATIO) (RATIO) (CAPITAL AMOUNT/RATIO)
--------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL RATIO
Consolidated 6.00% 4.00% $34,779,000 17.91%
Southeastern Bank 6.00% 4.00% 29,451,000 18.93%
Southeastern Bank of Florida 6.00% 4.00% 5,465,000 14.16%
TOTAL CAPITAL RATIO
Consolidated 10.00% 8.00% 37,223,000 19.16%
Southeastern Bank 10.00% 8.00% 31,412,000 20.19%
Southeastern Bank of Florida 10.00% 8.00% 5,896,000 15.28%
TIER 1 LEVERAGE RATIO
Consolidated 5.00% 3.00% 34,779,000 10.31%
Southeastern Bank 5.00% 3.00% 29,451,000 11.15%
Southeastern Bank of Florida 5.00% 3.00% 5,465,000 7.35%
</TABLE>
State banking regulations limit the amount of dividends the bank subsidiary may
pay without prior approval. The amount of cash dividends available from the bank
subsidiary for payment in 1999 without such prior approval is approximately
$2,233,000.
50
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS
Commitments to extend credit totaled approximately $14,434,000 and $19,468,000
at December 31, 1998 and 1997. Standby letters of credit totaled approximately
$583,000 and $1,372,000 at December 31, 1998 and 1997, respectively. A
substantial amount of these contracts expire without being drawn upon. As a
result, total contractual amounts do not represent future credit exposure or
liquidity requirements.
17. CONTINGENCIES
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS. The following table lists the names, ages, and principal occupations
of the Company's directors:
- --------------------------------------------------------------------------------
YEAR ELECTED
NAME AND PRINCIPAL OCCUPATION AGE DIRECTOR (7),(8),(9)
- --------------------------------------------------------------------------------
1. LESLIE H. BLAIR (2),(3),(4) 58 1978
VICE PRESIDENT, GOWEN TIMBER COMPANY
2. DAVID H. BLUESTEIN (2),(3),(4),(6) 57 1984
PRESIDENT, BLUESTEIN'S SUPERMARKET, INC.
3. GENE F. BRANNEN(1) (2),(3),(4) 64 1984
PRESIDENT, BRANNEN SEAFOOD COMPANY, INC.
4. WILLIAM DOWNEY (1),(3) 65 1976
REALTOR, GOLDEN ISLES REALTY
TREASURER OF THE COMPANY
5. ALYSON GRAY (2),(3) 31 1999
ASSISTANT SECRETARY OF THE COMPANY
CONTROLLER, SOUTHEASTERN BANK
6. CORNELIUS P. HOLLAND, III (1),(3),(4),(6) 43 1997
PRESIDENT OF THE COMPANY
CHAIRMAN, SEB
7. ALVA J. HOPKINS, III (1),(3),(5) 46 1978
ATTORNEY-AT-LAW
PRESIDENT, TOLEDO MANUFACTURING COMPANY
8. G. NORRIS JOHNSON (3),(5) 63 1979
PRESIDENT, JOHNSON BROTHERS, INC.
52
<PAGE>
- --------------------------------------------------------------------------------
YEAR ELECTED
NAME AND PRINCIPAL OCCUPATION, CONTINUED AGE DIRECTOR (7),(8),(9)
- --------------------------------------------------------------------------------
9. S. MICHAEL LITTLE (1),(2),(3),(4),(6) 50 1973
VICE PRESIDENT OF THE COMPANY
PRESIDENT, SEB
PRESIDENT, SBCF
10. E. B. STAPLETON, JR. 81 1964
RETIRED, STAPLETON INSURANCE AGENCY
ASSISTANT SECRETARY OF THE COMPANY
- ------------
(1) Member of Executive Committee of the Company.
(2) Member of Profit-Sharing Committee of the Company.
(3) Director of SEB.
(4) Member of Executive Committee of SEB.
(5) Member of Audit Committee of SEB.
(6) Director of SBCF.
(7) Alyson Gray was elected a member of the Board of Directors by the Board at
its meeting on March 9, 1999.
(8) Date of election, if prior to incorporation of the Company, is date first
elected a director of SEB.
(9) Except for a one-year break in service, E. B. Stapleton, Jr. has served
continuously as an elected or appointed Board member since the Company's
inception. Mr. Stapleton serves as an emeritus director of Southeastern Bank
and as a member of its Audit Committee.
Except for Mr. Holland, all of the directors have been engaged in their
respective principal occupation and have been associated with their respective
employers for the last five years; Mr. Holland was previously employed by a
regional bank based in Birmingham, Alabama for fourteen years. Unless otherwise
noted, all directors have served continuously since their first election.
EXECUTIVE OFFICERS. Executive officers are elected annually by the Board of
Directors. The following table sets forth the name of each executive officer of
the Company and its subsidiaries and the principal positions and offices he
holds with the Company. Unless otherwise indicated, each of these officers has
served as an executive officer of the Company or its subsidiaries for at least
five years.
- --------------------------------------------------------------------------------
NAME INFORMATION ABOUT EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
CORNELIUS P. HOLLAND, III President of the Company and Chairman of
the Board of SEB. From April 7, 1997 -
December 9, 1997, Mr. Holland was Vice
Chairman of SEB. From 1983 - April 1997,
Mr. Holland held various positions at
Compass Bank, Birmingham, Alabama, most
recently Senior Vice President/Manager,
Metropolitan Commercial Banking.
S. MICHAEL LITTLE Vice President of the Company. Mr. Little
is also President of both SEB and SBCF.
Mr. Little also served as Chairman of SEBF
prior to its merger with SEB in June 1998.
W. DANIEL BURKHALTER Senior Vice President of SEB. In addition
to his position at SEB, Mr. Burkhalter
served as President of SEBF prior to its
merger with SEB. Mr. Burkhalter is 45.
- --------------------------------------------------------------------------------
53
<PAGE>
None of the directors or executive officers have been involved in legal
proceedings relating to the Bankruptcy Act, criminal proceedings, or securities
law violations. There are no family relationships among the current directors or
executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
Because executive officers are compensated by the respective subsidiaries, the
Company paid no salaries or fees to any officer during 1998. The following table
sets forth the compensation of executive officers of the Company's subsidiaries
whose annual compensation exceeded $100,000 in 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
NAME OF PRINCIPAL ---------------------------- ALL OTHER
EXECUTIVE OFFICER POSITION YEAR SALARY BONUS COMPENSATION (2),(3),(4)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cornelius P. Holland, III President of 1998 $183,000.00 $15,250.00 $18,822.16
the Company(1) 1997 127,199.13 ---------- 2,421.92
S. Michael Little Vice President of 1998 $150,000.00 $12,500.00 $19,298.28
the Company 1997 137,792.00 11,482.64 15,631.78
1996 133,000.00 53,083.34 15,604.93
W. Daniel Burkhalter Senior Vice 1998 $98,952.00 $ 8,246.00 $13,877.08
President of 1997 98,952.00 7,250.00 14,102.32
Southeastern Bank 1996 95,946.42 44,000.00 13,290.52
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Holland became an executive officer of the Company on April 7, 1997.
(2) The Company's subsidiaries maintain a qualified profit-sharing plan which
covers officers and other employees who have completed one calendar year of
service. A participant's interest vests 20% each year, beginning after the
third year of service, with 100% vesting at the end of the seventh year. The
amount in this column includes the profit-sharing contribution amount set
aside for these executive officers: In 1998, the total contribution for
these officers approximated $40,000.00. In 1998, the total contribution for
all participants was $375,000.00.
(3) The Company provides group medical and life insurance for officers and
employees. Additionally, all of these executive officers are entitled to a
$100,000 executive life insurance policy. The premium amount for these
policies is included in this total.
(4) This compensation amount does not include the value of any personal benefit
that might be derived from the use of an automobile.
COMPENSATION PURSUANT TO PLANS. The Company maintains an Employee Profit-Sharing
Plan (the Plan). The purpose of the Plan is to provide employees with an
opportunity to share in the profits generated by participating subsidiaries. A
participating employee's (the Participant) eligibility for benefits is
determined by his or her period of service. A Participant's period of service
begins on the commencement date of his employment and continues through (i)
periods of temporary illness; (ii) periods of temporary lay-off; (iii)
authorized leaves of absence; (iv) periods of termination of employment lasting
less than one year; and (v) certain periods of transfer to a member of the
controlled group of corporations of which the Company may become a part, as
defined by the Employee Retirement Income Security Act and regulations issued
thereunder.
Contributions are made each year in an amount determined by each participating
subsidiary's Board of Directors, subject to certain limitations regarding
earnings. No contributions by Participants are required or permitted.
Contributions are placed in a trust account, which is administered by a
corporate entity determined by the Company's Board of Directors.
54
<PAGE>
Although records of the trust are maintained for each Participant's account for
accounting purposes, the assets of the trust are not segregated as to individual
Participant's accounts. The balances in a Participant's account are adjusted
annually to reflect contributions to the trust, income received from trust
assets, and any forfeitures which become available during the year.
A Participant's interest in his account vests 100% when his employment is
terminated (i) at or after the Participant attains the normal retirement age of
65; (ii) at or after the Participant attains age 59 1/2, has 10 years of
service, and early retirement is approved by the Board of Directors; or (iii)
due to disability. If termination is caused by a Participant's death, the
Participant's beneficiary becomes vested in the Participant's account as of the
date of the Participant's death. If a Participant's employment is terminated for
any reason other than those set out above, vesting in the Participant's account
is determined according to the following schedule:
- --------------------------------------------------------------------------------
VESTED FORFEITED
YEARS OF SERVICE PERCENTAGES PERCENTAGES
- --------------------------------------------------------------------------------
Less than 3 0% 100%
3 but less than 4 20 80
4 but less than 5 40 60
5 but less than 6 60 40
6 but less than 7 80 20
7 or more 100 0
- --------------------------------------------------------------------------------
A Participant may choose to receive his benefits in a lump sum, in periodic
payments, or by the purchase of an annuity contract.
The Plan is administered solely by the Profit-Sharing Committee appointed by the
Board of Directors. A trustee appointed by the Company has the sole
responsibility to administer the trust assets. Both the Profit-Sharing Committee
and the trustee are considered fiduciaries of the Plan and have the
corresponding duties, obligations, and responsibilities.
BOARD COMPENSATION. Each director of the Company who is not an employee is paid
a director's fee of $500.00 per meeting. Additionally, each non-employee
director of SEB is paid a director's fee of $450.00 per month, and, if on the
Executive Committee, an additional $400.00 per month. Audit Committee members
are paid $150.00 for each meeting attended. Non-employee directors of SBCF are
paid $100.00 per meeting attended.
STOCK OPTIONS, WARRANTS, OR RIGHTS. The Company and its subsidiaries have not
issued and do not have outstanding any options, warrants, or rights.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below lists the beneficial ownership of the Company's only outstanding
class of securities, common stock, $1.25 par value, by (i) the Company's
directors and certain executive officers and by all directors and executive
officers as a group (11 persons), and by (ii) persons who may be considered
55
<PAGE>
beneficial owners of more than 5% of the Company's outstanding common stock as
of February 26, 1999:
- -------------------------------------------------------------------------------
SHARES PERCENT OF
NAME OF BENEFICIALLY SHARES
SECURITY OWNERSHIP BENEFICIAL OWNER OWNED(1) OUTSTANDING
- -------------------------------------------------------------------------------
Leslie H. Blair 8,340 *
David H. Bluestein 13,146 *
Gene F. Brannen 24,849 *
William Downey 186,642 5.21%
Alyson Gray 815,878 22.78
Cornelius P. Holland, III 1,000 *
Alva J. Hopkins, III 34,398 *
G. Norris Johnson 8,500 *
S. Michael Little 101,233 2.83
E. B. Stapleton, Jr. 60,595 1.69
W. Daniel Burkhalter 16,602 *
- -------------------------------------------------------------------------------
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP 1,271,183 35.50%
- -------------------------------------------------------------------------------
* Beneficially owned less than 1% of the outstanding shares of Company common
stock.
(1) Except as otherwise indicated, each director possessed sole voting and
investment power with respect to all shares set forth opposite his or her
name. The number of shares as to which each person has shared powers is as
follows: Leslie H. Blair - 3,000 shares; Gene F. Brannen - 19,296; William
Downey - 29,700; Alyson Gray - 2,613; Alva J. Hopkins, III - 1,980; S.
Michael Little - 12,112; E. B. Stapleton, Jr. - 15,784; and W. Daniel
Burkhalter - 300.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, the Company's subsidiaries engaged in customary banking
transactions and had outstanding loans to directors, executive officers,
principal shareholders, and their affiliates. Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features. Additionally, in the ordinary course of business, the Company buys
goods and services from directors who are not employees. These purchases were
not significant during 1998. See Note 6 to the consolidated financial
statements.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. - Financial Statements and Schedules
- --------------------------------------------------------------------------------
PAGE NUMBER
IN ANNUAL
INDEX TO FINANCIAL STATEMENTS & SCHEDULES REPORT
- --------------------------------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
Independent auditors' report 29
Consolidated balance sheets at December 31, 1998 and 1997 30
Consolidated statements of income for each of
the three years ended December 31, 1998 31
Consolidated statements of stockholders' equity for each of
the three years ended December 31, 1998 32
Consolidated statements of cash flows for each of
the three years ended December 31, 1998 33
Notes to consolidated financial statements 34
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K - NONE
(c) Index to Exhibits:
EXHIBIT TABLE PAGE
- ------------------------------------- ------------------------------
Articles of Incorporation and By-Laws Incorporated by reference from
Form 10-K filed for year ended
December 31, 1990.
Exhibit 22 Subsidiaries of the Company
Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
57
<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: MARCH 9, 1999
58
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
- --------------------------------------------------------------------------------
DIRECTORS DATE
- --------------------------------------------------------------------------------
/s/ LESLIE H. BLAIR March 9, 1999
- --------------------------------
LESLIE H. BLAIR
/s/ DAVID H. BLUESTEIN March 9, 1999
- --------------------------------
DAVID H. BLUESTEIN
/s/ GENE F. BRANNEN March 9, 1999
- --------------------------------
GENE F. BRANNEN
/s/ WILLIAM DOWNEY March 9, 1999
- --------------------------------
WILLIAM DOWNEY
/s/ CORNELIUS P. HOLLAND, III March 9, 1999
- --------------------------------
CORNELIUS P. HOLLAND, III
/s/ ALVA J. HOPKINS, III March 9, 1999
- --------------------------------
ALVA J. HOPKINS, III
/s/ G. NORRIS JOHNSON March 9, 1999
- --------------------------------
G. NORRIS JOHNSON
/s/ S. MICHAEL LITTLE March 9, 1999
- --------------------------------
S. MICHAEL LITTLE
/s/ E. B. STAPLETON, JR. March 9, 1999
- --------------------------------
E. B. STAPLETON, JR.
- --------------------------------------------------------------------------------
59
<PAGE>
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
22 Subsidiaries of the Company
27 Financial Data Schedule
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
Southeastern Bank, Darien, Georgia
SBC Financial Services, Inc., Darien, Georgia
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,465
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,670
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,158
<INVESTMENTS-CARRYING> 23,873
<INVESTMENTS-MARKET> 24,948
<LOANS> 164,761
<ALLOWANCE> 3,407
<TOTAL-ASSETS> 337,933
<DEPOSITS> 292,697
<SHORT-TERM> 816
<LIABILITIES-OTHER> 3,270
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 36,674
<TOTAL-LIABILITIES-AND-EQUITY> 337,933
<INTEREST-LOAN> 18,503
<INTEREST-INVEST> 7,458
<INTEREST-OTHER> 727
<INTEREST-TOTAL> 26,688
<INTEREST-DEPOSIT> 11,420
<INTEREST-EXPENSE> 11,471
<INTEREST-INCOME-NET> 15,217
<LOAN-LOSSES> 1,230
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 10,432
<INCOME-PRETAX> 7,038
<INCOME-PRE-EXTRAORDINARY> 4,393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,393
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 5.19
<LOANS-NON> 872
<LOANS-PAST> 1,607
<LOANS-TROUBLED> 374
<LOANS-PROBLEM> 1,295
<ALLOWANCE-OPEN> 3,705
<CHARGE-OFFS> 1,961
<RECOVERIES> 433
<ALLOWANCE-CLOSE> 3,407
<ALLOWANCE-DOMESTIC> 2,674
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 733
</TABLE>
