UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from....................to .................
Commission file number 2-83157
SOUTHEASTERN BANKING CORPORATION
-------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1423423
---------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. BOX 455, 1010 NORTHWAY STREET, DARIEN, GEORGIA 31305
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 437-4141
-------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of October 31, 2000, 3,436,696 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding.
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $13,830,417 $14,016,035
Federal funds sold 1,610,000 2,800,000
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 15,440,417 16,816,035
Investment securities
Held-to-maturity (market value of approximately $27,098,000
and $27,476,000 at September 30, 2000 and December 31, 1999) 27,246,262 28,017,607
Available-for-sale, at market value 119,316,814 117,893,972
-------------------------------------------------------------------------------------------------------------------
Total investment securities 146,563,076 145,911,579
Loans, gross 174,812,678 167,644,071
Unearned income (905,370) (1,649,960)
Allowance for loan losses (3,578,743) (3,222,889)
-------------------------------------------------------------------------------------------------------------------
Loans, net 170,328,565 162,771,222
Premises and equipment, net 6,864,470 6,708,814
Intangible assets 1,143,241 1,286,284
Other assets 5,979,164 7,050,954
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $346,318,933 $340,544,888
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $53,496,723 $52,670,994
Interest-bearing deposits 235,703,909 237,613,267
-------------------------------------------------------------------------------------------------------------------
Total deposits 289,200,632 290,284,261
Federal funds purchased - 3,950,000
U. S. Treasury demand note 1,508,614 1,909,498
Federal Home Loan Bank advances 10,000,000 -
Other liabilities 3,150,185 3,248,193
-------------------------------------------------------------------------------------------------------------------
Total liabilities 303,859,431 299,391,952
-------------------------------------------------------------------------------------------------------------------
Common stock ($1.25 par value; 10,000,000 shares authorized; 3,580,797 shares
issued; 3,436,696 and 3,580,797 shares outstanding at September 30, 2000
and December 31, 1999) 4,475,996 4,475,996
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 40,804,828 38,159,815
Treasury stock, at cost (144,101 shares) (2,485,742) -
-------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 44,186,805 44,027,534
Accumulated other comprehensive income - unrealized
losses on available-for-sale securities, net of tax (1,727,303) (2,874,598)
-------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,459,502 41,152,936
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $346,318,933 $340,544,888
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
--------------------------------- ---------------------------------------
PERIOD ENDED SEPTEMBER 30, 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $4,669,491 $4,271,350 $13,607,130 $12,791,754
Federal funds sold 31,527 6,138 155,832 286,203
Investment securities
Taxable 1,894,650 1,908,500 5,711,257 5,413,073
Tax-exempt 310,289 327,143 935,142 944,025
---------------------------------------------------------------------------------------------------------------------------
Total interest income 6,905,957 6,513,131 20,409,361 19,435,055
---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,868,555 2,674,996 8,267,944 8,170,603
Federal funds purchased 15,506 21,550 51,705 24,755
U. S. Treasury demand note 13,725 10,820 42,685 26,450
Federal Home Loan Bank advances 165,727 - 282,258 -
---------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,063,513 2,707,366 8,644,592 8,221,808
---------------------------------------------------------------------------------------------------------------------------
Net interest income 3,842,444 3,805,765 11,764,769 11,213,247
PROVISION FOR LOAN LOSSES 300,000 300,000 900,000 900,000
---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 3,542,444 3,505,765 10,864,769 10,313,247
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 609,874 657,535 1,793,236 1,882,099
Investment securities gains, net - 3,738 6,844 3,738
Other operating income 239,514 207,354 738,400 702,104
---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 849,388 868,627 2,538,480 2,587,941
---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,549,199 1,466,825 4,634,214 4,348,178
Occupancy and equipment, net 513,110 454,851 1,479,251 1,333,389
Other operating expense 696,952 674,920 2,050,342 2,170,398
---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,759,261 2,596,596 8,163,807 7,851,965
---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,632,571 1,777,796 5,239,442 5,049,223
INCOME TAX EXPENSE 479,209 528,878 1,549,010 1,490,294
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $1,153,362 $1,248,918 $3,690,432 $3,558,929
---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER AVERAGE SHARE - BASIC $ 0.34 $ 0.35 $ 1.06 $ 0.99
===========================================================================================================================
Average common shares - basic 3,436,696 3,580,797 3,487,710 3,580,797
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME TOTAL
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $4,475,996 $1,391,723 $34,993,625 - $ 288,953 $41,150,297
Comprehensive income:
Net income - - 3,558,929 - - 3,558,929
Other comprehensive income, net
of tax effect of $1,166,213:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - (2,263,825) (2,263,825)
------------
Comprehensive income 1,295,104
------------
Cash dividends declared
($0.30 per share) - - (1,074,240) - - (1,074,240)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $4,475,996 $1,391,723 $37,478,314 - $(1,974,872) $41,371,161
=================================================================================================================================
BALANCE, DECEMBER 31, 1999 $4,475,996 $1,391,723 $38,159,815 - $(2,874,598) $41,152,936
Comprehensive income:
Net income - - 3,690,432 - - 3,690,432
Other comprehensive income, net
of tax effect of $591,031:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - 1,147,295 1,147,295
------------
Comprehensive income 4,837,727
------------
Cash dividends declared
($0.30 per share) - - (1,045,419) - - (1,045,419)
Acquisition of treasury stock - - - (2,485,742) - (2,485,742)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 $4,475,996 $1,391,723 $40,804,828 $ (2,485,742) $ (1,727,303) $42,459,502
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,690,432 $ 3,558,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900,000 900,000
Depreciation 629,970 639,716
Amortization and accretion, net 135,226 193,573
Investment securities gains, net (6,844) (3,738)
Net (gains) losses on sales of other real estate (102,600) 13,018
Changes in assets and liabilities:
(Increase) decrease in other assets (150,474) 216,513
Increase in other liabilities 167,057 311,407
-----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,262,767 5,829,418
-----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal collections and maturities of investment securities:
Held-to-maturity 2,613,400 1,085,000
Available-for-sale 5,577,301 47,825,386
Proceeds from sales of investment securities available-for-sale 2,996,719 1,001,562
Purchases of investment securities held-to-maturity (1,856,585) (6,011,457)
Purchases of investment securities available-for-sale (8,229,345) (64,357,623)
Net (increase) decrease in loans (8,145,455) 484,984
Proceeds from sales of other real estate 341,436 660,103
Capital expenditures, net (705,116) (607,935)
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,407,645) (19,919,980)
-----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (1,083,629) (2,141,586)
Net decrease in federal funds purchased (3,950,000) -
Net (decrease) increase in U. S. Treasury demand note (400,884) 1,763,537
Proceeds from Federal Home Loan Bank advances 10,000,000 -
Purchase of treasury stock (2,485,742) -
Dividends paid (1,310,485) (1,384,694)
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 769,260 (1,762,743)
-----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,375,618) (15,853,305)
Cash and cash equivalents at beginning of year 16,816,035 30,134,719
-----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $15,440,417 $14,281,414
=================================================================================================================
SUPPLEMENTAL DISCLOSURE
CASH PAID DURING THE PERIOD
Interest $8,769,653 $8,184,399
Income taxes $1,645,000 $1,622,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Real estate acquired through foreclosure $ 186,590 $1,251,801
Loans made in connection with sales of foreclosed real estate $ 498,477 $ 326,912
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING AND REPORTING POLICY FOR INTERIM PERIODS
The accompanying unaudited consolidated financial statements of
Southeastern Banking Corporation (the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. These statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the
opinion of management, all adjustments necessary for a fair
presentation have been made. These adjustments, consisting of normal,
recurring accruals, include estimates for various fringe benefit and
other transactions normally determined or settled at year-end.
Operating results for the quarter and nine months ended September 30,
2000 are not necessarily indicative of trends or results to be expected
for the year ended December 31, 2000. For further information, refer to
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999.
2. PENDING ACCOUNTING PRONOUNCEMENTS
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," effective for fiscal
years beginning after June 15, 2000. 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.
3. FEDERAL HOME LOAN BANK ADVANCES
During the first nine months of 2000, the Company drew two advances
totaling $10.0 million under its credit facility with the Federal Home
Loan Bank of Atlanta (FHLB). The first advance, which matures March 17,
2010, accrues interest at an effective rate of 6.00%, payable
quarterly. The $5.0 million advance is convertible into a three-month
Libor-based floating rate advance on or after March 17, 2001 at the
option of the FHLB. Proceeds from the advance were used to fund the
purchase of various U.S. Agency securities. The second $5.0 million
advance, which matures December 1, 2000, accrues interest at an
effective rate of 7.15%, payable monthly. Proceeds from the second
advance were used to meet general liquidity needs. Maximum borrowings
under this credit facility approximate 16% of the bank subsidiary's
total assets; at September 30, 2000, unused borrowings aggregated
approximately $45.3 million. Mortgage-backed securities with aggregate
carrying values of approximately $10.2 million were pledged to
collateralize current and future advances under this line of credit. No
amounts were drawn against this line at December 31, 1999.
4. TREASURY STOCK
In March 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in treasury stock. On April 7, 2000, the Company purchased
144,101 shares of its common stock from one
5
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
group of shareholders at a purchase price of $17.25 per share. The
purchase of the treasury stock decreased the Company's outstanding
common stock from 3,580,797 shares to 3,436,696 shares. The maximum
consideration available for additional treasury purchases, at prices
to be determined in the future, is $4,514,258. Any acquisition of
additional shares will be dictated by market conditions.
6
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Analysis should be read in conjunction with the 1999 Annual Report on Form
10-K and the consolidated financial statements & related notes on pages 1 - 6 of
this quarterly filing.
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation (the Company) is a financial services company
headquartered in Darien, Georgia. Prior to June 25, 1998, the Company had two
bank subsidiaries - Southeastern Bank (SEB) and Southeastern Bank of Florida
(SEBF). At the close of business on June 25, 1998, SEBF, with offices in
Callahan, Hilliard, and Yulee, merged with and into SEB. SEB, a state banking
association also headquartered in Darien, now operates fourteen full-service
banking offices in southeast Georgia and northeast Florida. Unless otherwise
indicated, the ensuing Analysis presumes that SEB and SEBF have operated as a
single entity for all periods presented and discussed.
Prior to January 16, 1998, SEB also had offices in Alachua, Gainesville, and
Jonesville, Florida. On January 16, 1998, SEB sold its three offices in central
Florida to First National Bank of Alachua. Cash, loans, and fixed assets sold by
SEB 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 has enabled the Company to concentrate its resources and strengthen
its presence in its northeast Florida and southeast Georgia markets. For
additional information regarding the sale of the Alachua offices, refer to the
disclosures provided under Results of Operations. SEB's assets approximated
$345,616,000 at September 30, 2000 versus $352,653,000 at June 30, 2000 and
$339,801,000 at year-end 1999.
Additionally, prior to mid-1998, the Company had no subsidiaries other than
commercial banks. In 1998, SBC Financial Services, Inc. (SBCF) was formed to
sell insurance and other financial products, initially to customers in Georgia.
SBCF recently began selling investment products in association with AXA
Advisors, LLC and expects to receive regulatory approval to sell insurance and
investment products in Florida prior to year-end 2000. The Company has invested
$100,000 in SBCF to-date and expects to make additional capital investments in
SBCF during its first few years of operations. As it develops, SBCF is expected
to supplement and grow existing noninterest income, thereby increasing the
Company's profitability and shareholder value. SBCF had a nominal impact on the
Company's financial condition and results of operations during the first nine
months of 2000.
FINANCIAL CONDITION
Consolidated assets approximated $346 million at September 30, 2000, up
$5,774,045 or 1.70% from year-end 1999 and up $8,541,835 or 2.53% from September
30, 1999. The growth in total assets since 1999 has ensued from growth in
non-deposit funding sources, particularly advances from the Federal Home Loan
Bank (FHLB). Additional details on the FHLB advances are provided in the
Liquidity section of this Analysis. During the year-ago period, total assets
declined $156,324 or 0.05%.
Investment Securities
On a carrying value basis, investment securities exceeded $146 million at
September 30, 2000. Purchases of securities during the nine month period
approximated $10,086,000, and redemptions, $11,181,000. Proceeds from a $5
million FHLB advance funded the majority of the net securities purchases during
the first nine months of 2000. Consistent with 1999 levels, securities comprised
46% of earning assets at September 30, 2000. No significant changes have
occurred in the investment
7
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
securities mix since 1999. The amortized cost and estimated fair value of
investment securities are delineated in the table below:
<TABLE>
<CAPTION>
====================================================================================================================
INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 2000 COST GAINS LOSSES VALUE
====================================================================================================================
(In thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $101,100 $ 98 $ 1,910 $99,288
Mortgage-backed securities 19,747 6 812 18,941
Equity securities 1,088 - - 1,088
--------------------------------------------------------------------------------------------------------------------
121,935 104 2,722 119,317
Held-to-maturity:
States and political subdivisions 27,246 288 436 27,098
--------------------------------------------------------------------------------------------------------------------
Total investment securities $149,181 $ 392 $ 3,158 $146,415
====================================================================================================================
</TABLE>
As shown, the market value of the securities portfolio remained approximately 2%
below the cost basis at September 30, 2000; refer to the Capital Adequacy
section of this Analysis for more details. The Company does not have a
concentration in the obligations of any issuer other than the U.S. Government
and its agencies.
Loans
Loans, net of unearned income, grew $7,913,197 or 4.77% at September 30, 2000
compared to year-end 1999. The net loans to deposits ratio aggregated 60.13% at
September 30, 2000 versus 60.29% at mid-year 2000, 57.18% at December 31, 1999,
and 55.86% a year ago. Growth in the real estate-construction and real
estate-mortgage portfolios fueled the 2000 improvement to-date. Since December
31, 1999, balances in the real estate-construction portfolio have effectively
tripled, growing $6,269,000 or 198.32%. Most of the loans in the real
estate-construction portfolio are preparatory to customers' attainment of
permanent financing or developer's sale and are, by nature, short-term and
somewhat cyclical; swings in these account balances are normal and to be
expected. Although the Company, like peer institutions of similar size,
originates permanent mortgages for new construction, it traditionally does not
hold or service long-term mortgage loans for its own portfolio. Rather,
permanent mortgages are typically brokered through a mortgage underwriter or
government agency. The Company receives mortgage origination fees for its
participation in these origination transactions; refer to the disclosures
provided under Results of Operations for more details. The real
estate-construction portfolio is expected to decline moderately during the
remainder of 2000 as various large land development loans originated in the
first and third quarters paydown. Reversing 1999 declines, real estate-mortgage
loans increased $1,236,000 or 2.07% at September 30, 2000 compared to December
31, 1999. During the fourth quarter, the Company plans to introduce a new home
equity product with minimal closing costs and other special features; the new
product is expected to further increase real estate-mortgage volume. Although
real estate-construction and real estate-mortgage loans grew, commercial loans
fell $192,000, and consumer loans, $144,000, year-to-date. Because of various
programs initiated to increase loan production, management is optimistic that
loan volumes throughout 2000 will, on average, continue to exceed 1999 levels.
The programs initiated to increase loan production emphasize utilization of
competitive pricing on loan products and development of additional loan
relationships, all without compromising portfolio quality. During the same
period last year, net loans declined $2,470,736 or 1.50%. A drop in commercial
loans outstanding was the chief factor in the 1999 results. Loans outstanding
are presented by type in the table on the next page.
8
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
====================================================================================================================
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
LOANS BY CATEGORY 2000 1999 1999
====================================================================================================================
(In thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural(1) $67,323 $67,515 $63,905
Real estate - construction 9,430 3,161 2,966
Real estate - mortgage(2) 60,892 59,656 60,373
Consumer, including credit cards 37,168 37,312 37,012
-------------------------------------------------------------------------------------------------------------------
Loans, gross 174,813 167,644 164,256
Unearned income 905 1,650 1,966
-------------------------------------------------------------------------------------------------------------------
Loans, net $173,908 $165,994 $162,290
===================================================================================================================
</TABLE>
(1)Includes obligations of states and political subdivisions.
(2)Typically have final maturities of 15 years or less.
The Company had no concentration of loans to borrowers engaged in any single
industry that exceeded 10% of total loans for any of the periods presented.
Although the Company's loan portfolio is diversified, significant portions of
its loans are collateralized by real estate. At September 30, 2000 and December
31, 1999, gross loans secured by real estate approximated $112,965,000 and
$103,170,000. As required by policy, real estate loans are collateralized based
on certain loan-to-appraised value ratios. A geographic concentration in loans
arises given the Company's operations within a regional area of southeast
Georgia and northeast Florida. Commitments to extend credit and standby letters
of credit approximated $20,949,000 at September 30, 2000; because a substantial
amount of these contracts expire without being drawn upon, total contractual
amounts do not represent future credit exposure or liquidity requirements.
UNEARNED INCOME
Primarily reflecting accounting changes made to comply with new tax legislation,
unearned income declined considerably at September 30, 2000 versus the other
periods presented. Specifically, effective January 1999, the IRS prohibits the
use of any method other than the constant, or level, yield method in computing
interest income on short-term consumer loans. Although interest income on most
loans has been recognized using the level yield method, interest income on
certain loans was recognized using the sum-of-the-months digit method. In
general, the posting of loans under the sum-of-the-months digit method created
unearned interest balances and accelerated interest income recognition. As no
new loans will be booked under the sum-of-the-months digit method and, further,
as pre-1999 loans mature or are otherwise redeemed, the interest portion of the
unearned balance is expected to wane. Additionally, the change in timing of
interest recognition on certain short-term consumer loans is projected to lower
interest income by approximately $55,000 in fiscal 2000 as compared to 1999; in
1999, the change in interest recognition lowered interest income by an estimated
$135,000. More details on the Company's accounting and reporting policies on
loans and related income are contained in the footnotes accompanying the 1999
10-K filing.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, restructured loans, and
foreclosed real estate balances. Overall, nonperforming assets aggregated
$1,590,000, or less than 0.46% of total assets, at September 30, 2000.
Nonperforming loans, the largest component of nonperforming assets, approximated
$1,224,000 at September 30, 2000, up $182,000 or 17.47% from December 31, 1999
and up 7.65% from September 30, 2000. As a percent of net loans, nonperforming
loans totaled 0.70% at September 30, 2000, up 7 basis points from year-end 1999
but virtually unchanged from September 30, 1999. The 2000
9
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
increase in nonperforming loans resulted predominantly from the placement of
certain real estate-mortgage loans on nonaccrual status since the preceding
year-end. Adjusted for the portion of nonaccrual loans wholly or partially
guaranteed by the U.S. Small Business Administration, nonperforming loan
balances would have been $37,000, $44,000, and $48,000 lower for the three
periods presented. More than 91%, or $1,123,000, of nonperforming loan balances
at September 30, 2000 pertained to six separate borrowers; further segregated,
$852,000 or 70% of total balances pertained to three borrowers and 29% to a solo
borrower. The allowance for loan losses approximated 2.92X the nonperforming
loans balance at September 30, 2000 versus 2.85X a year ago. Foreclosed real
estate balances declined $492,000 or 57.34% since year-end 1999 to $366,000 at
September 30, 2000. Approximately one-half of foreclosed real estate balances at
September 30 were derived from funding originally extended to two separate
borrowers; more significantly, 33% of total balances applied to merely one
borrower. Foreclosed real estate balances remained concentrated in residential
real estate at September 30, 2000. Loans past due 90 or more days approximated
$1,378,000 at September 30, 2000, down moderately from 1999 levels. Loans to
four separate customers comprised 14% of loans past due 90 plus days at
September 30, 2000; management is unaware of any other material concentrations
within these past due balances. Details on a certain group of loans that
composed the majority of the fluctuations in nonperforming asset balances last
year are provided in later sections of this Analysis. The table below provides
further information about nonperforming assets and loans past due 90 days or
more:
<TABLE>
<CAPTION>
====================================================================================================================
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
NONPERFORMING ASSETS 2000 1999 1999
====================================================================================================================
<S> <C> <C> <C>
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural $ 444 $ 492 $ 514
Real estate - construction - - 67
Real estate - mortgage 409 175 143
Consumer, including credit cards 21 18 51
-------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 874 685 775
Restructured loans(1) 350 357 362
-------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,224 1,042 1,137
Foreclosed real estate(2) 366 858 909
-------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,590 $1,900 $2,046
====================================================================================================================
Accruing loans past due 90 days or more $1,378 $1,467 $1,435
===================================================================================================================
</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.
SIGNIFICANT PROBLEM LOANS. Subsequent to September 30, 2000, a single loan
totaling approximately $2,677,000 was placed on nonaccrual status due to the
borrower's commencement of Chapter 11 bankruptcy proceedings. This loan, secured
by a first lien on income-producing commercial real estate, was not
substantially past due, and its impairment could not be reasonably measured at
September 30, 2000. After review of the property securing the loan, management
has concluded, in accordance with Company policy, that no charge-off on this
loan is warranted at the present time: 1) The last independent appraisal prior
to the bankruptcy filing documented a market value significantly in excess of
the principal balance of the loan, and the Company has a first lien; 2) the
property remains operational and well-kept; and 3) management of the property
continues to expend funds to maintain/upgrade the property to the extent
possible under present circumstances. Until furtherance of the bankruptcy
proceedings, which could take months, loss on the loan, if any, cannot be
reasonably estimated. In the
10
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
interim, pending receipt of additional documentation on the bankruptcy filing, a
new third party appraisal on the collateral will be ordered. Management
considers the allowance for loan losses adequate to handle any loss which may
subsequently arise from this credit without necessitating an upward revision of
the 2000 and 2001 budgeted loan loss provisions of $1,200,000. Management is
unaware of any other large, significant potential problem loans at September 30,
2000 that should be included in the table above or otherwise discussed.
Prior to September 30, 1999, a group of loans, primarily real estate, with
principal balances approximating $1,295,000 were recognized as significantly
impaired. During 1999, these problem loans were charged-off in excess of
$500,000 to their estimated net realizable values. The real estate collateral
underlying the balance, or $758,000, of these loans was acquired by foreclosure
and classified as other real estate; by August 31, 2000, all of the acquired
properties had been sold to third parties. This group of loans accounted for the
majority of the fluctuations in nonperforming asset balances during 1999 and, to
a lesser extent, in 2000 as well. Management has diligently pursued remedies
under law in seeking to recover the charge-offs on these loans but deems any
material recovery unlikely.
Policy Note. Loans classified as nonaccrual have been placed in nonperforming,
or impaired, status because the borrower's ability to make future principal
and/or interest payments has become uncertain. The Company considers a loan to
be nonaccrual with the occurrence of any one of the following events: a)
interest or principal has been in default 90 days or more, unless the loan is
well-secured and in the process of collection; b) collection of recorded
interest or principal is not anticipated; or c) the income on the loan is
recognized using the cash versus accrual basis of accounting due to
deterioration in the financial condition of the borrower. Smaller balance
consumer loans are generally not subject to the above-referenced guidelines and
are normally placed on nonaccrual status or else charged-off when payments have
been in default 90 days or more. Nonaccrual loans are reduced to the lower of
the principal balance of the loan or the market value of the underlying real
estate or other collateral. Any impairment in the principal balance is charged
against the allowance for loan losses. Accrued interest on any loan switched to
nonaccrual status is reversed. Interest income on nonaccrual loans, if
subsequently recognized, is recorded on a cash basis. No interest is
subsequently recognized on nonaccrual (or former nonaccrual) loans until all
principal has been collected. Loans are classified as restructured when either
interest or principal has been reduced or deferred because of deterioration in
the borrower's financial position. Foreclosed real estate represents real
property acquired by foreclosure or directly by title or deed transfer in
settlement of debt. Provisions for subsequent devaluations of foreclosed real
estate are charged to operations, while costs associated with improving the
properties are generally capitalized.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. As a percent of net loans, the allowance totaled
2.06% at September 30, 2000, up 12 basis points from year-end 1999. Net
charge-offs totaled $544,147, down significantly, or $516,716, from 1999's
$1,060,863, which was up $568,014 from September 30, 1998. Approximately 51% of
the high charge-offs at September 30, 1999 were attributable to the problem
loans discussed earlier. Long-term strategies implemented by management to
reduce and minimize charge-off levels include: a) a revised loan grading system,
b) periodic external loan review, c) formation of a full-time collection
department, and d) managerial and staff changes at various locations. Management
is optimistic that charge-off volumes in 2000 will remain substantially below
1999 levels. The quarterly and six month provision from income totaled $300,000
and $900,000 at September 30, 2000, unchanged from the year-earlier period.
Activity in the allowance is presented in the table on the next page.
11
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
===================================================================================================================
ALLOWANCE FOR LOAN LOSSES
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 1998
===================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,223 $ 3,407 $ 3,705
Provision for loan losses 900 900 930
Charge-offs:
Commercial, financial, and agricultural 120 470 203
Real estate - construction - 351 -
Real estate - mortgage 154 96 82
Consumer, including credit cards 588 671 525
-------------------------------------------------------------------------------------------------------------------
Total charge-offs 862 1,588 810
-------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 23 210 71
Real estate - construction - - -
Real estate - mortgage 18 26 8
Consumer, including credit cards 277 291 238
-------------------------------------------------------------------------------------------------------------------
Total recoveries 318 527 317
-------------------------------------------------------------------------------------------------------------------
Net charge-offs 544 1,061 493
-------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at September 30 $ 3,579 $ 3,246 $ 4,142
===================================================================================================================
Net loans outstanding(1) at September 30 $173,908 $162,290 $166,493
===================================================================================================================
Average net loans outstanding(1) at September 30 $172,546 $162,954 $165,512
===================================================================================================================
Ratios:
Allowance to net loans 2.06% 2.00% 2.49%
===================================================================================================================
Net charge-offs to average loans (annualized) 0.42% 0.87% 0.40%
===================================================================================================================
Provision to average loans (annualized) 0.70% 0.74% 0.75%
===================================================================================================================
</TABLE>
(1)Net of unearned income
Management believes the allowance was adequate at September 30, 2000 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 has budgeted
a loan loss provision of $300,000 for the fourth quarter of 2000.
Other Assets
Capital expenditures exceeded $705,000 during the first nine months of 2000.
Final payments on the check imaging, internet banking, and voice banking systems
comprised the bulk of the 2000 expenditures to-date. Additional funds were
expended on the purchase of new vehicles for the bank fleet and the installation
of new drive-in units and ATMs at various locations. As projected, the total
cost of the check imaging system, including the down payment made in mid-1999,
approximated $700,000. The managerial decision to purchase the check imaging
system was predicated on the following known benefits:
(diamond) Customer Service. The imaging system supplements and otherwise
enhances existing customer service by providing, on paper or
electronic device, compact statements and other
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
documents that are easier to read, store, and reconcile than
existing alternatives. The system also facilitates faster
retrieval of documents for customer research. Both commercial and
consumer customers benefit.
(diamond) LowerOverhead. The imaging system reduces certain overhead costs
inherent in document processing, including postage, proof
maintenance, supplies, and personnel expense.
(diamond) Competitive Edge. The imaging system provides an additional
marketing tool for promoting SEB services.
The imaging system was fully operational by February 29, 2000.
The remaining costs relative to the internet, or PC, and voice banking systems
aggregated approximately $30,000. Like the imaging system, the internet and
voice banking systems augment existing customer service and provide competitive
advantages in promoting and selling SEB services. With the voice banking system,
customers can access account balance and other information with one quick phone
call, 24 hours a day, 7 days a week. The internet banking system available
through the Company's website at www.southeasternbank.com serves as an
alternative delivery channel for many bank services: Customers can monitor
accounts on-line, transfer funds, e-mail customer service representatives, and
pay bills, all at customer convenience. Commercial customers, particularly those
with large transactional volumes, can further utilize the bill paying, direct
deposit, and ACH capabilities of the internet banking system as part of cash, or
treasury, management. Implementation of both the internet and voice banking
systems was completed during the first quarter.
The Company had no material plans or commitments for capital expenditures as of
September 30, 2000. The computer expenditures made in 2000 and other periods
referenced were not made because of, and do not constitute costs of, the Year
2000. For particulars on the Company's transition to the Year 2000 and costs
adhering to same, refer to the Year 2000 section of this Analysis.
Adjusted for the net reductions in foreclosed real estate previously mentioned,
other assets fell $580,093 or 9.37% at September 30, 2000 compared to year-end
1999. A decline in the deferred tax effects of investment securities designated
as available-for-sale was the prime factor in the year-to-date results. The
decline in intangible assets was attributable to regular amortization. Deposit
base premiums and goodwill compose the intangible assets balance.
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 payments and maturities, including
both principal and interest, of the loan and investment securities portfolios.
At September 30, 2000, loans(1) and investment securities with carrying values
exceeding $56 million and $9 million 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, on both a short- and long-term basis, to
local and regional funding sources.
Funding sources primarily comprise customer-based core deposits but also include
borrowed funds and cash flows from operations. Customer-based core deposits, the
Company's largest and most cost-effective source of funding, comprised 82% of
the funding base at September 30, 2000 compared to 83% at year-end 1999.
Borrowed funds, which variously encompass U.S. Treasury demand notes, federal
13
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
funds purchased, and FHLB advances, totaled $11,508,614 at September 30, 2000
versus $5,859,498 at December 31, 1999. More specifically, the maximum amount of
U.S. Treasury demand notes available to the Company at September 30, 2000
totaled $3,000,000, of which $1,508,614 was outstanding and $1,491,386 undrawn.
Unused borrowings under unsecured federal funds lines of credit from other
banks, each with varying terms and expiration dates, totaled $24,000,000.
Additionally, under a credit facility with the FHLB, the Company can borrow up
to 16% of SEB's total assets; at September 30, 2000, unused borrowings
approximated $45.3 million. Refer to the subsection entitled FHLB Advances for
details on the Company's outstanding balance with the FHLB. Cash flows from
operations also constitute a significant source of liquidity. Net cash from
operations derives primarily from net income adjusted for noncash items such as
depreciation and amortization, accretion, and the provision for loan losses.
Management believes the Company has the funding capacity, from operating
activities or otherwise, to meet its financial commitments in 2000, including
any commitments for capital expenditures described in the Other Assets section
of this Analysis. Refer to the Capital Adequacy section of this Analysis for
details on treasury stock purchases and intercompany dividend policy.
(1) No cash flow assumptions other than final contractual maturities have been
made for installment loans. Nonaccrual loans are excluded.
Deposits
Deposits declined $1,083,629 or 0.37% since year-end 1999. Noninterest-bearing
deposits grew $825,729 or 1.57%, while interest-bearing deposits fell $1,909,358
or 0.80%. Noninterest-bearing deposits comprised 18.50%, and interest-bearing
deposits, 81.50%, of total deposits at September 30, 2000. The distribution of
interest-bearing balances at September 30, 2000 and certain comparable
quarter-end dates is shown in the table below:
<TABLE>
<CAPTION>
======================================================================================================================
SEPTEMBER 30, 2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
======================================================================================================================
PERCENT PERCENT PERCENT
DEPOSITS BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits(1) $45,568 19.33% $45,569 19.18% $40,926 17.15%
Savings 74,798 31.73% 72,348 30.45% 74,715 31.31%
Time certificates < $100,000 71,764 30.45% 75,251 31.67% 76,428 32.03%
Time certificates >= $100,000 43,574 18.49% 44,445 18.70% 46,563 19.51%
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $235,704 100.00% $237,613 100.00% $238,632 100.00%
======================================================================================================================
</TABLE>
(1)NOW and money market accounts.
The composition of average deposits and the fluctuations therein at September 30
for each of the last three years is shown in the Average Balances table included
in the Operations section of this Analysis.
FHLB Advances
During the first nine months of 2000, the Company drew two advances totaling
$10.0 million under its credit facility with the FHLB. The first advance, which
matures March 17, 2010, accrues interest at an effective rate of 6.00%, payable
quarterly. The $5.0 million advance is convertible into a three-month
Libor-based floating rate on or after March 17, 2001 at the option of the FHLB.
Proceeds from the advance were used to fund the purchase of various U.S. Agency
securities. The second $5.0 million advance, which matures December 1, 2000,
accrues interest at an effective interest rate of 7.15%, payable monthly.
Proceeds from the second advance were used to meet general liquidity needs.
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Mortgage-backed securities with aggregate carrying values of approximately $10.2
million were pledged to collateralize current and future advances under this
line of credit. No amounts were drawn against this line at December 31, 1999.
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 September 30, 2000:
<TABLE>
<CAPTION>
====================================================================================================================
REPRICING WITHIN
-------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
SEPTEMBER 30, 2000 MONTHS MONTHS YEARS YEARS TOTAL
====================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Securities(1) $ 1,155 $ 9,860 $ 99,194 $37,884 $148,093
Loans, gross(2) 52,871 26,699 66,683 27,686 173,939
--------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 54,026 36,559 165,877 65,570 322,032
--------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 143,927 66,410 25,341 26 235,704
U.S. Treasury demand note 1,509 - - - 1,509
Federal Home Loan Bank advances 5,000 - 5,000 10,000
--------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive liabilities 150,436 66,410 25,341 5,026 247,213
--------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(96,410) $ (29,851) $140,536 $60,544 $ 74,819
====================================================================================================================
CUMULATIVE GAP $(96,410) $(126,261) $ 14,275 $74,819
====================================================================================================================
Ratio of cumulative gap to total rate
sensitive assets (29.94)% (39.21)% 4.43% 23.23%
====================================================================================================================
Ratio of cumulative rate sensitive assets
to rate sensitive liabilities 35.91% 41.77% 105.89% 130.26%
====================================================================================================================
Cumulative gap at December 31, 1999 $(99,992) $(142,141) $ 3,459 $75,466
====================================================================================================================
Cumulative gap at September 30, 1999 $(89,333) $(143,474) $ (776) $74,185
====================================================================================================================
</TABLE>
(1)Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for mortgage-backed
securities is based on expected average lives which may be different from the
contractual terms. Equity securities are excluded.
(2)No cash flow assumptions other than final contractual maturities have been
made for installment loans with fixed rates. Nonaccrual loans are excluded.
(3)NOW, money market, and savings account balances are included in the 0-3
months repricing category.
As shown in the table above, the Company's gap position remained negative
through the short-term repricing intervals at September 30, 2000, totaling
$(96,410) at three months and $(126,261) through
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
one-year. 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 one-year gap position is significantly impacted
by the classification of all interest-bearing demand and savings deposits as
immediately rate sensitive. Excluding traditionally nonvolatile NOW and savings
balances from the gap calculation, the cumulative gap at September 30, 2000
totaled $1,465 at three months and $(28,386) at twelve months. As discussed in
earlier sections of this Analysis, loans outstanding jumped an appreciative
$7,913,197 or 4.77% since year-end 1999. Management is optimistic that
continuing growth in loans outstanding, particularly variable rate loans tied to
prime or a similar index, will likewise improve the gap position. In prior
periods, declines in loans had necessitated placement of substantial funds in
alternative interest-earning assets, principally investment 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.
(1,2)See notes 1 and 2 on 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 shareholders' 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. The
Company did not have any unrealized gains on equity securities includible in the
risk-based capital calculations for any of the periods presented. The Company is
committed to maintaining its well-capitalized status.
Due to the purchase of treasury stock, capital ratios declined at September 30,
2000 compared to 1999. Capital amounts and ratios for the most recent periods
are presented in the table on the next page.
16
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
===================================================================================================================
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
CAPITAL RATIOS(1) 2000 1999 1999
===================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C>
Tier 1 capital:
Realized shareholders' equity $44,187 $44,028 $43,346
Intangible assets and other adjustments (1,166) (1,309) (1,343)
-------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 43,021 42,719 42,003
-------------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,370 2,278 2,237
Allowable long-term debt - - -
-------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 2,370 2,278 2,237
-------------------------------------------------------------------------------------------------------------------
Total risk-based capital $45,391 $44,997 $44,240
===================================================================================================================
Risk-weighted assets $188,364 $181,326 $177,940
===================================================================================================================
Risk-based ratios:
Tier 1 capital 22.84% 23.56% 23.61%
===================================================================================================================
Total risk-based capital 24.10% 24.82% 24.86%
===================================================================================================================
Tier 1 leverage ratio 12.33% 12.57% 12.42%
===================================================================================================================
Realized shareholders' equity to assets 12.70% 12.82% 12.76%
===================================================================================================================
</TABLE>
(1)The Company is not subject to the market risk capital guidelines promulgated
by the regulatory authorities; these guidelines created Tier 3 capital.
On a per share basis, realized book value grew $0.24 since the second quarter,
or $0.75 year-to-date, to $12.86 at September 30, 2000. Dividends declared
totaled $0.30 year-to-date at September 30, 2000, unchanged from 1999 but up
substantially, or 50%, from 1998. For specifics on the Company's dividend
policy, refer to the subsection immediately following. Accumulated other
comprehensive income, which measures net fluctuations in the fair values of
investment securities, improved an appreciable $1,147,295 at September 30, 2000
compared to year-end 1999. Movement in interest rates remained the overriding
factor in the fair value results. The Financial Condition section of this
Analysis contains further details on investment securities and associated fair
values.
In March 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in treasury stock. On April 7, 2000, the Company purchased 144,101
shares of its common stock from one group of shareholders at a purchase price of
$17.25 per share. The purchase of the treasury stock decreased the Company's
outstanding common stock from 3,580,797 shares to 3,436,696 shares. The maximum
consideration available for additional treasury purchases, at prices to be
determined in the future, is $4,514,258. Any acquisition of additional shares
will be dictated by market conditions. In accordance with generally accepted
accounting principles, 1999 and other prior period amounts have not been
restated to reflect the treasury stock purchase.
Refer to the Other Assets and Liquidity sections of this Analysis for details on
planned capital expenditures.
Dividend Policy
The Parent Company is a legal entity separate and distinct from its
subsidiaries, and its revenues and liquidity position depend primarily on the
payment of dividends from its subsidiaries. State banking regulations limit the
amount of dividends SEB may pay without prior approval of the regulatory
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
agencies. Year-to-date, SEB has paid $3,346,500 in dividends to the Company. A
$1,500,000 special dividend approved by the regulators helped the Company fund
the initial treasury stock purchase described in the preceding section. The
additional $1,846,500 payout represented 75% of the $2,462,000 in regular cash
dividends available to the Company in 2000 without prior regulatory approval.
The Company uses regular dividends paid by SEB in order to pay quarterly
dividends to its own shareholders. Management anticipates that the Company will
continue to pay cash dividends on a recurring basis.
RESULTS OF OPERATIONS
Net income for the 2000 third quarter totaled $1,153,362, down $95,556 or 7.65%
from 1999 which was virtually unchanged from the 1998 third quarter. On a per
share basis, quarterly earnings totaled $0.34 at September 30, 2000 versus $0.35
at both September 30, 1999 and 1998. Year-do-date, net income grew $131,503 or
3.70% to exceed $3.69 million at September 30, 2000 from $3.56 million in 1999.
Likewise, per share income for the nine month period improved $0.07 to $1.06 at
September 30, 2000 from $0.99 in 1999. As further discussed in the next
subsection of this Analysis, the year-to-date earnings improvement at September
30, 2000 was attributable to a 4.92% rise in net interest income. Nine month
earnings increased $492,911 or 16.08% in 1999 when compared to the same period
in 1998. The most significant factor affecting 1999-1998 comparative results was
the $457,823 nonrecurring after-tax loss associated with the sale of the central
Florida locations in January 1998. The effects of the Alachua divestiture on the
Company's results of operations, including the nonrecurring tax effects, were
anticipated by management and represented a long-term strategic move to enable
the Company to focus on the creation of more profitable operations within its
southeast Georgia and northeast Florida markets.
Net Interest Income
Net interest income for the 2000 third quarter increased less than 1%, or
$36,679, from the same period in 1999. Year-to-date, net interest income grew
$551,522 or 4.92%. Similarly, the net interest margin and net interest spread
grew to 5.02% and 3.89%, respectively, from 4.93% and 3.81% a year ago. Interest
earnings on loans and investment securities improved $815,376 and $289,301 over
nine month results in 1999 while earnings on federal funds sold fell $130,371.
Overall improvements in average asset balances precipitated the year-to-date
results, because asset yields increased only marginally from 1999. Interest
expense on deposits and other borrowed funds increased $422,784 or 5.14% during
the first nine months of 2000 compared to 1999. The majority, or 67%, of the
increased interest expense was attributable to FHLB advances; refer to the
Liquidity section of this Analysis for more details. Cost of funds increased 8
basis points from 1999 levels, totaling 4.65% at September 30, 2000 versus 4.57%
at September 30, 1999. Given the rising rate environment currently propelled by
the Federal Reserve, management expects costs of funds and corresponding
interest expense to continue increasing during the remainder of 2000 as deposits
and other funds reprice at higher levels. During the first nine months of 1999
compared to 1998, net interest income declined $127,184 or 1.12%. A drop in
average balances and yields on commercial loans produced most of the 1999
decline. Cash flows from declines in loans and other sources in 1999 were placed
in investment securities which yield, on average, considerably less than loans
of the same duration.
The intense competition for loans and deposits continues in 2000 and shows no
sign of abating. The high number of new and existing financial institutions in
the Company's market areas essentially guarantees downward pressure on net
interest spreads and margins as all participants struggle to amass and grow
market share. Volume of assets and deposits will become even more important as
margins decline. Strategies implemented by management to increase average loans
outstanding include utilization of more
18
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
competitive pricing on loan products and development of additional loan
relationships, all without compromising portfolio quality. Management's
strategy for deposits is to reduce costs of funds and employ alternative
sources of financing when feasible. Comparative details about average balances,
income/expense, and average yields earned and rates paid on interest-earning
assets and liabilities at September 30 for each of the last three years are
provided in the table on the next page.
Noninterest Income and Expense
Noninterest income declined $49,461 or 1.91% year-to-date at September 30, 2000
compared to 1999. An $88,863 drop in service charges on deposit accounts was the
principal factor in the nine month results. The other operating portion of
noninterest income climbed 5.17% or $36,296 to exceed $738,000 year-to-date. By
type and amount, the chief components of other operating income at September 30,
2000 were mortgage origination fees, $135,941; commissions on the sale of credit
life insurance (generated by SEB), $163,320; safe deposit box rentals, $65,423;
and income on sale of check products, $46,990. Combined, these four income items
comprised 55.75% of other operating income year-to-date. Salaries and employee
benefits rose an additional $82,374 during the third quarter, or $286,036 during
the nine month period, to $4,634,214 year-to-date at September 30, 2000 compared
to 1999. The vast majority, or 84%, of employee expenses remained concentrated
in salaries and other direct compensation, including related payroll taxes, at
September 30, 2000. Profit-sharing accruals and other fringe benefits
represented the remaining 7% and 9% of employee expenses. The division of
employee expenses between compensation, profit-sharing, and other fringe
benefits remained consistent with historical norms at September 30, 2000 and
1999. When compared to the same period in the prior year, net occupancy and
equipment expense increased 10.94% or $145,862 year-to-date at September 30,
2000 and 4.27% at September 30, 1999. The increase in both periods derived
largely from higher computer costs, including depreciation expense associated
with the new check imaging, internet banking, and voice banking systems. Other
operating expenses fell 5.53% or $120,056 at September 30, 2000 compared to
1999. A net improvement on sales of foreclosed real estate was the main element
in the 2000 results. Other operating expenses grew $90,905 or 4.37% at September
30, 1999 compared to 1998. Besides marketing and supplies expense, which in 2000
approximated $239,000 and $207,000, no individual component of other operating
expenses aggregated or exceeded 10% of the total at September 30, 2000 or 1999.
YEAR 2000
Information technology products and equipment were expected to experience
miscalculations, malfunctions, or disruptions when attempting to process
information containing dates subsequent to December 31, 1999, if not
successfully remediated. These potential problems were collectively referred to
as the "Year 2000" problem. Over the past several years, the Company developed
and implemented a plan to address the anticipated impacts of the Year 2000
problem on its data processing systems, non-information technology systems, and
related infrastructure. The Company surveyed selected third parties, including
major loan customers, vendors, and suppliers, to determine the status of their
Year 2000 compliance programs. Additionally, the Company prepared contingency
plans outlining procedures to be implemented if the Company or significant third
parties experienced disruptions to critical business activities as a result of
the Year 2000 problem.
The Company successfully completed its transition to the Year 2000 with no
impact on the Company's results of operations or financial condition other than
the cost of the project. In addition, the Company is unaware of any significant
third party relationships which were negatively impacted by their lack of Year
2000 readiness. However, given the many elements and potential consequences
associated with Year
19
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------- ---------------------------- ---------------------------
2000 1999 1998
--------------------------- ---------------------------- ---------------------------
AVERAGE BALANCES(6) AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
NINE MONTHS ENDED SEPTEMBER 30, BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
--------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net(1,2,4) $172,546 $13,697 10.58% $162,954 $12,829 10.50% $165,512 $13,967 11.28%
Federal funds sold 3,505 156 5.93% 8,093 286 4.71% 13,623 556 5.46%
Taxable investment securities(3) 126,759 5,711 6.01% 121,724 5,413 5.93% 103,538 4,677 6.03%
Tax-exempt investment securities(3,4) 24,837 1,415 7.60% 24,560 1,427 7.75% 19,076 1,177 8.25%
--------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $327,647 $20,979 8.54% $317,331 $19,955 8.38% $301,749 $20,377 9.02%
--------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $ 46,479 $ 986 2.83% $ 43,804 $ 925 2.82% $ 39,742 $ 902 3.03%
Savings 76,280 2,407 4.21% 74,697 2,248 4.01% 72,762 2,514 4.62%
Time deposits 117,289 4,875 5.54% 120,205 4,998 5.54% 116,160 5,144 5.92%
Federal funds purchased 977 52 6.96% 622 25 5.36% - - -
U. S. Treasury demand note 940 43 6.10% 760 26 4.60% 971 40 5.45%
Federal Home Loan Bank advances 5,824 282 6.46% - - - - - -
--------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $247,789 $ 8,645 4.65% $240,088 $ 8,222 4.57% $229,635 $ 8,600 5.01%
--------------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $ 79,858 $ 77,243 $ 72,114
--------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.89% 3.81% 4.01%
--------------------------------------------------------------------------------------------------------------------------------
Net interest income $12,334 $11,733 $11,777
--------------------------------------------------------------------------------------------------------------------------------
Net interest margin 5.02% 4.93% 5.21%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Average loans are shown net of unearned income. Nonperforming loans are
included.
(2)Includes loan fees.
(3)Securities are presented on an amortized cost basis. Investment
securities with original maturities of three months or less are
included, as applicable.
(4)Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustment has been made for any state tax benefits.
(5)NOW and money market accounts.
(6)Averages presented generally represent average daily balances.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
2000 compliance, there can be no assurance that unforeseen circumstances may not
arise, or that the Company will not in the future identify equipment or systems
which are not Year 2000 compliant.
COSTS
Except for overhead costs associated with staff development & implementation of
its Year 2000 plan and replacement of one non-critical system at a cost of
approximately $5,000, the Company did not, in prior years incur, and has not in
2000 incurred, any significant costs related to the Year 2000 issue. The Company
began leasing new operating system hardware in 1998; the newly leased hardware
replaced a hardware system owned by the Company that was fully depreciated.
Because replacement of the operating system hardware was not accelerated due to
Year 2000 issues, the new lease amounts are not being disclosed as Year 2000
costs. The Company has not incurred any incremental Year 2000 costs in regards
to its main software system.
For further information regarding Year 2000 matters, refer to the disclosures
under Forward-Looking Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Company are discussed in Note 2
to the Consolidated Financial Statements and, further, in the 1999 Form 10-K
previously filed with the Securities and Exchange Commission.
Various other accounting proposals affecting the banking industry are pending
with the Financial Accounting Standards Board. Given the inherent uncertainty of
the proposal process, the Company cannot assess the impact of any such proposals
on its financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives have made, and may continue to make, various
written or oral forward-looking statements with respect to business and
financial matters, including statements contained in this report, filings with
the Securities and Exchange Commission, and reports to shareholders. Generally,
the words "believe," "expect," "intend," "estimate," "anticipate," "project,"
"will," "should," and similar expressions identify forward-looking statements.
All statements which address operating performance, events or developments that
we expect or anticipate will occur in the future, including statements related
to loan growth, deposit growth, per share growth, and statements expressing
general sentiment about future operating results and non-historical information,
are forward-looking statements within the meaning of the Act. The
forward-looking statements are and will be based on management's then current
views and assumptions regarding future events and operating performance. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements in light of new information or future events.
Certain factors that could affect financial performance or cause actual results
to vary significantly from estimates contained in or underlying forward-looking
statements include:
(diamond) Interest rate fluctuations and other market conditions.
(diamond) Strength of the consumer and commercial credit sectors as well as
real estate markets.
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
(diamond) Changes in laws and regulations, including changes in accounting
standards, monetary policies, and taxation requirements (including
tax rate changes, new tax laws, and revised tax law
interpretations).
(diamond) Competitive pricing and other pressures on loans and deposits and
the Company's ability to maintain market shares in its trade
areas.
(diamond) Unforeseen circumstances affecting Year 2000 compliance by the
Company and its vendors, suppliers, and loan customers.
(diamond) The outcome of litigation which depends on judicial
interpretations of law and findings of juries.
(diamond) Other risks and uncertainties as detailed from time to time in
Company filings with the Securities and Exchange Commission.
The foregoing list of factors is not exclusive. This Analysis should be read in
conjunction with the consolidated financial statements and related notes.
22
<PAGE>
SOUTHEASTERN BANKING CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
(Not Applicable)
Item 2. CHANGES IN SECURITIES
(Not Applicable)
Item 3. DEFAULTS UPON SENIOR SECURITIES
(Not Applicable)
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Not Applicable)
Item 5. OTHER INFORMATION
(Not Applicable)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------------ ---------------------------------------------------
Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
Exhibit 99 Report of Independent Certified Public Accountants
(b) Reports on Form 8-K - None
23
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(Registrant)
By: /s/ S. MICHAEL LITTLE
-----------------------------------------------
S. Michael Little, Executive Vice President
By: /s/ ALYSON GRAY
-----------------------------------------------
Alyson Gray, Vice President
Date: November 14, 2000
24
