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 MARCH 31, 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.)
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 April 30, 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)
MARCH 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $14,792,063 $14,016,035
Federal funds sold 2,780,000 2,800,000
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 17,572,063 16,816,035
Investment securities
Held-to-maturity (market value of approximately $26,561,000
and $27,476,000 at March 31, 2000 and December 31, 1999) 27,055,448 28,017,607
Available-for-sale, at market value 123,504,797 117,893,972
- -------------------------------------------------------------------------------------------------------------------
Total investment securities 150,560,245 145,911,579
Loans, gross 174,856,154 167,644,071
Unearned income (1,381,364) (1,649,960)
Allowance for loan losses (3,421,928) (3,222,889)
- -------------------------------------------------------------------------------------------------------------------
Loans, net 170,052,862 162,771,222
Premises and equipment, net 7,216,674 6,708,814
Intangible assets 1,238,603 1,286,284
Other assets 6,304,524 7,050,954
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $352,944,971 $340,544,888
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $57,002,727 $52,670,994
Interest-bearing deposits 245,208,146 237,613,267
- -------------------------------------------------------------------------------------------------------------------
Total deposits 302,210,873 290,284,261
Federal funds purchased - 3,950,000
U. S. Treasury demand note 744,344 1,909,498
Federal Home Loan Bank advances 5,000,000 -
Other liabilities 2,958,799 3,248,193
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 310,914,016 299,391,952
- -------------------------------------------------------------------------------------------------------------------
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 39,069,294 38,159,815
- -------------------------------------------------------------------------------------------------------------------
Realized stockholders' equity 44,937,013 44,027,534
Accumulated other comprehensive income - unrealized
losses on available-for-sale securities, net of tax (2,906,058) (2,874,598)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 42,030,955 41,152,936
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $352,944,971 $340,544,888
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
1
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $4,334,499 $4,275,575
Federal funds sold 104,406 195,412
Investment securities
Taxable 1,878,592 1,663,388
Tax-exempt 314,532 303,839
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 6,632,029 6,438,214
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,673,704 2,760,477
Federal funds purchased 1,002 -
U. S. Treasury demand note 13,242 7,774
Federal Home Loan Bank advances 12,333 -
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 2,700,281 2,768,251
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 3,931,748 3,669,963
PROVISION FOR LOAN LOSSES 300,000 300,000
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,631,748 3,369,963
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 586,548 582,320
Investment securities gains, net 6,900 -
Other operating income 249,174 251,912
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 842,622 834,232
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,529,912 1,441,500
Occupancy and equipment, net 469,278 446,210
Other operating expense 667,746 753,320
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,666,936 2,641,030
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,807,434 1,563,165
INCOME TAX EXPENSE 539,876 458,489
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $1,267,558 $1,104,676
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $ 0.35 $ 0.31
- ----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
2
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $4,475,996 $1,391,723 $34,993,625 $ 288,953 $41,150,297
Comprehensive income:
Net income - - 1,104,676 - 1,104,676
Other comprehensive income, net
of tax effect of $207,694:
Change in unrealized gains
(losses) on available-for-sale
securities - - - (403,171) (403,171)
-------------------
Comprehensive income 701,505
-------------------
Cash dividends declared
($0.10 per share) - - (358,079) - (358,079)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 $4,475,996 $1,391,723 $35,740,222 $ (114,218) $41,493,723
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $4,475,996 $1,391,723 $38,159,815 $(2,874,598) $41,152,936
Comprehensive income:
Net income - - 1,267,558 - 1,267,558
Other comprehensive income, net
of tax effect of $16,207:
Change in unrealized gains
(losses) on available-for-sale
securities - - - (31,460) (31,460)
-------------------
Comprehensive income 1,236,098
-------------------
Cash dividends declared
($0.10 per share) - - (358,079) - (358,079)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 $4,475,996 $1,391,723 $39,069,294 $ (2,906,058) $42,030,955
- ------------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,267,558 $ 1,104,676
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 300,000
Depreciation 214,670 233,134
Amortization and accretion, net 50,919 69,269
Investment securities gains, net (6,900) -
Net gains on sales of other real estate (94,402) (4,544)
Changes in assets and liabilities:
Decrease in other assets 504,221 489,604
(Decrease) increase in other liabilities (38,738) 114,732
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,197,328 2,306,871
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Principal collections and maturities of investment securities:
Held-to-maturity 1,771,400 730,000
Available-for-sale 1,835,044 25,306,892
Proceeds from sales of other real estate 231,086 88,058
Purchases of investment securities held-to-maturity (809,134) (2,277,733)
Purchases of investment securities available-for-sale (7,489,980) (39,429,787)
Net (increase) decrease in loans (7,503,577) 414,543
Capital expenditures, net (678,862) (103,648)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,644,023) (15,271,675)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 11,926,612 611,575
Net decrease in federal funds purchased (3,950,000) -
Net decrease in U. S. Treasury demand note (1,165,154) (87,722)
Proceeds from Federal Home Loan Bank advances 5,000,000 -
Cash dividends paid (608,735) (668,535)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,202,723 (144,682)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 756,028 (13,109,486)
Cash and cash equivalents at beginning of year 16,816,035 30,134,719
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $17,572,063 $17,025,233
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
CASH PAID DURING THE PERIOD
Interest paid to depositors $ 2,770,916 $ 2,675,907
- -----------------------------------------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES
Real estate acquired through foreclosure $ 151,394 804,448
- -----------------------------------------------------------------------------------------------------------------
Loans made in connection with sales of foreclosed real estate $ 229,458 94,550
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING AND REPORTING POLICY FOR INTERIM PERIODS
Th0e 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 ended March 31, 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. LONG-TERM DEBT
On March 17, 2000, the Company drew $5.0 million under its credit
facility with the Federal Home Loan Bank of Atlanta (FHLB). The $5.0
million advance, which will mature March 17, 2010, accrues interest at
an effective rate of 6.00%, payable quarterly. The 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. Maximum borrowings under this credit facility approximate
16% of the bank subsidiary's total assets; at March 31, 2000, unused
borrowings aggregated approximately $51.4 million. Mortgage-backed
securities with aggregate carrying values of approximately $10.7
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. Subsequent to March 31, 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.
5
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 totaled
approximately $352,452,000 at March 31, 2000 versus $339,801,000 at year-end
1999 and $338,054,000 at March 31, 1999.
Additionally, prior to mid-1998, the Company had no subsidiaries other than
commercial banks. In 1998, the Company formed an insurance subsidiary, SBC
Financial Services, Inc. (SBCF), to sell insurance and annuity products,
initially to customers in Georgia. The Company has invested $100,000 in SBCF
to-date and expects to make additional capital investments in SBCF during its
first few years of operation. As it develops, SBCF is expected to supplement and
grow existing noninterest income, thereby increasing the Company's profitability
and shareholder value. The insurance subsidiary had a nominal impact on the
Company's financial condition and results of operations during the first quarter
of 2000.
FINANCIAL CONDITION
Consolidated assets approximated $353 million at March 31, 2000, up $12,400,083
or 3.64% since year-end 1999 and up $14,340,085 or 4.24% since March 31, 1999.
The growth in total assets since March 31, 1999 has ensued from growth in
deposits and other funding sources, including a $5 million advance from the
Federal Home Loan Bank (FHLB). Additional details on deposits and the FHLB
advance are provided in the Liquidity section of this Analysis. During the
year-earlier period, total assets increased a mere $671,554 or 0.20%.
Investment Securities
On a carrying value basis, investment securities grew $4,648,666 or 3.19% since
year-end 1999. Proceeds from a $5 million FHLB advance funded the majority of
the net securities purchases during the first quarter of 2000. Consistent with
1999 levels, securities represented 46% of earning assets at March
7
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
31, 2000. No significant changes have occurred in the investment 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
MARCH 31, 2000 COST GAINS LOSSES VALUE
====================================================================================================================
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $104,910 $ 4 $ 3,161 $101,753
Mortgage-backed securities 21,911 5 1,252 20,664
Equity securities 1,088 - - 1,088
- --------------------------------------------------------------------------------------------------------------------
127,909 9 4,413 123,505
Held-to-maturity:
States and political subdivisions 27,055 213 707 26,561
- --------------------------------------------------------------------------------------------------------------------
Total investment securities $154,964 $ 222 $ 5,120 $150,066
====================================================================================================================
</TABLE>
As shown, the market value of the securities portfolio declined at March 31,
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 $7,480,679 or 4.51% since year-end 1999 to
exceed $173 million at March 31, 2000. Appreciatively, quarter-end loans at
March 31, 2000 comprised the largest quarter-end balance in over two years. As a
percent of deposits, net loans aggregated 57.40% at March 31, 2000 versus 57.18%
at year-end 1999 and 55.60% a year ago. Growth in the commercial and real
estate-construction portfolios fueled the 2000 improvement year-to-date.
Reversing 1999 declines, gross commercial loans increased $3,808,000 or 5.64% at
March 31, 2000 compared to December 31, 1999. The majority, or 68%, of the
improvement in the commercial portfolio was attributable to growth in nonfarm
real estate loans. Management has initiated various programs to increase loan
production and is optimistic that commercial loan volumes throughout 2000 will,
on average, continue to exceed 1999 levels. 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. Real estate-construction loans grew a considerable $5,073,000 or
160.49% at March 31, 2000 compared to December 31, 1999. 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 quarter
paydown. Although commercial and real estate-construction loans grew, consumer
loans fell $1,743,000 or 4.67% year-to-date. A softening of consumer demand in
the Company's trade areas was the prime element in the year-to-date results.
8
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumer loans remain the Company's highest-yielding interest-earning assets,
and the Company is committed to reversing the decline in this portfolio. During
the same period last year, net loans declined $1,681,986 or 1.02%. A drop in
commercial loans outstanding was the predominant factor in the 1999 results.
Loans outstanding are presented by type in the table below:
<TABLE>
<CAPTION>
===================================================================================================================
MARCH 31, December 31, March 31,
LOANS BY CATEGORY 2000 1999 1999
===================================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial, and agricultural $71,323 $67,515 $68,402
Real estate - construction 8,234 3,161 1,715
Real estate - mortgage 59,730 59,656 59,722
Consumer, including credit cards 35,569 37,312 36,182
- -------------------------------------------------------------------------------------------------------------------
Loans, gross 174,856 167,644 166,021
Unearned income 1,381 1,650 2,942
- -------------------------------------------------------------------------------------------------------------------
Loans, net $173,475 $165,994 $163,079
===================================================================================================================
</TABLE>
The Company had no concentration of loans to borrowers engaged in any single
industry that exceeded 10% of total loans for any of the periods presented.
Although the Company's loan portfolio is diversified, significant portions of
its loans are collateralized by real estate. At March 31, 2000 and December 31,
1999, gross loans secured by real estate approximated $110,881,000 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 $21,375,000 and $543,000 at March 31, 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 March 31, 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 loans, a central component of nonperforming assets, declined
$106,000 or 10.17% at March 31, 2000 compared to year-end 1999 and more
markedly, $403,000 or 30.10% since March 31,
9
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
1999. As a percent of net loans, nonperforming loans totaled 0.54% at March 31,
2000, effectively dropping 9 basis points from year-end 1999 and 28 basis points
from 0.82% a year earlier. More than 95% of the three month and year-to-year
improvements in nonperforming loans were attributable to reductions in
nonaccrual balances. Nonaccrual balances have not been adjusted for the portion
of such loans wholly or partially guaranteed by the U.S. Small Business
Administration. For the three periods presented, such guarantees would have
reduced nonaccrual balances by $41,000, $44,000, and $84,000. At March 31, 2000,
96% of nonperforming loan balances, including restructured balances, pertained
to five separate borrowers; more significantly, $648,000 or 69% of nonperforming
balances pertained to merely two borrowers and 38% to a single borrower.
Foreclosed real estate balances, another component of nonperforming assets,
declined $254,000 or 29.60% to $604,000 at March 31, 2000. Approximately 71% of
foreclosed real estate balances at March 31, 2000 were derived from funding
originally extended to four separate borrowers; further segregated, 53% of total
balances applied to two borrowers. Foreclosed real estate balances remained
concentrated, overall, in residential real estate at March 31, 2000. Of loans
past due 90 plus days, 35% pertained to eight customers; management is unaware
of any other material concentrations within these past due balances. Details on
a certain group of loans which comprised 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>
===================================================================================================================
MARCH 31, December 31, March 31,
NONPERFORMING ASSETS 2000 1999 1999
===================================================================================================================
(IN THOUSANDS)
Nonaccrual loans:
<S> <C> <C> <C>
Commercial, financial, and agricultural $ 463 $ 492 $ 605
Real estate - construction - - 156
Real estate - mortgage 104 175 200
Consumer, including credit cards 13 18 9
- -------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 580 685 970
Restructured loans(1) 356 357 369
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 936 1,042 1,339
Foreclosed real estate(2) 604 858 1,393
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,540 $1,900 $2,732
===================================================================================================================
Accruing loans past due 90 days or more $1,855 $1,467 $2,119
===================================================================================================================
</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.
All known potential problem loans were included in nonperforming loans for the
three periods presented.
SIGNIFICANT PROBLEM LOANS. Prior to March 31, 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; through April 30, 2000,
$694,000 or 92% of the acquired properties had been sold to third parties. No
material losses, if any, are expected on the sale of the remaining other real
estate parcels. 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
10
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. The allowance to net loans ratio totaled 1.97% at
March 31, 2000 versus 1.94% at year-end 1999 and 1.93% a year ago. Net
charge-offs totaled $100,961, down significantly, or $456,586, from 1999's
$557,547, which was up $414,618 from March 31, 1998. Approximately 80% of the
high charge-offs at March 31, 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. Changes to the allowance as a percent of total nonperforming loans
were not significant for the periods presented. The quarterly provision from
income totaled $300,000 at March 31, 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
THREE MONTHS ENDED MARCH 31, 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 300 300 315
Charge-offs:
Commercial, financial, and agricultural 34 268 41
Real estate - construction - 263 -
Real estate - mortgage 25 12 24
Consumer, including credit cards 192 220 204
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs 251 763 269
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 13 43 34
Real estate - construction - - -
Real estate - mortgage 15 1 3
Consumer, including credit cards 122 161 89
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 150 205 126
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 101 558 143
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at March 31 $ 3,422 $ 3,149 $ 3,877
- -------------------------------------------------------------------------------------------------------------------
Net loans outstanding(1) at March 31 $173,475 $163,079 $163,062
- -------------------------------------------------------------------------------------------------------------------
Average net loans outstanding(1) at March 31 $166,406 $164,000 $170,608
- -------------------------------------------------------------------------------------------------------------------
Ratios:
Allowance to net loans 1.97% 1.93% 2.38%
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans (annualized) 0.24% 1.36% 0.34%
- -------------------------------------------------------------------------------------------------------------------
Provision to average loans (annualized) 0.72% 0.73% 0.74%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of unearned income
Management believes the allowance was adequate at March 31, 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 $900,000 for the remainder of 2000.
Other Assets
Capital expenditures exceeded $678,000 during the first three 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. As projected, the
total cost of the check imaging system, including the down payment made in 1999,
approximated $700,000. The managerial decision to purchase the check imaging
system was predicated on the following known benefits:
o Customer Service. The imaging system supplements and otherwise
enhances existing customer service by providing, on paper or
electronic device, compact statements and other documents that are
easier to read, store, and reconcile than existing alternatives. The
system
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
also facilitates faster retrieval of documents for customer research.
Both commercial and consumer customers benefit.
o Lower Overhead. The imaging system reduces certain overhead costs
inherent in document processing, including postage, proof maintenance,
supplies, and personnel expense.
o 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 open and
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 prior to March 31, 2000.
The Company had no material plans or commitments for capital expenditures as of
March 31, 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. During the
year-earlier period, gross premises and equipment increased $103,648.
Adjusted for the net reductions in foreclosed real estate previously mentioned,
other assets fell $492,757 or 7.96% at March 31, 2000 compared to year-end 1999.
A decline in accrued interest receivables on investment securities was the
principal factor in the year-to-date results. Variations in interest payment
cycles produced most of the interest receivables decline. 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 March 31, 2000, loans(1) and investment securities with carrying values
exceeding $50 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-
13
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
effective source of funding, comprised 85% of the funding base at March 31, 2000
compared to 83% at year-end 1999. Borrowed funds, which variously encompass U.S.
Treasury demand notes, federal funds purchased, and FHLB advances, totaled
$5,744,344 at March 31, 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 March 31, 2000 totaled $3,000,000, of which $744,344 was outstanding
and $2,255,656 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 March 31, 2000, unused borrowings
approximated $51.4 million. Refer to the subsection entitled Long-Term Debt 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 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 exceeded $302 million at March 31, 2000, increasing $11,926,612 or
4.11% since December 31, 1999. Noninterest-bearing deposits grew $4,331,733 or
8.22%, while interest-bearing deposits climbed $7,594,879 or 3.20%.
Noninterest-bearing deposits comprised 18.86%, and interest-bearing deposits,
81.14%, of total deposits at March 31, 2000. The distribution of
interest-bearing balances at March 31, 2000 and certain comparable quarter-end
dates is shown in the table below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000 December 31, 1999 March 31, 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) $46,755 19.07% $45,569 19.18% $44,682 18.58%
Savings 79,854 32.57% 72,348 30.45% 76,009 31.62%
Time certificates < $100,000 72,620 29.61% 75,251 31.67% 78,323 32.58%
Time certificates >= $100,000 45,979 18.75% 44,445 18.70% 41,410 17.22%
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $245,208 100.00% $237,613 100.00% $240,424 100.00%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) NOW and money market accounts.
The composition of average deposits and the fluctuations therein at March 31 for
each of the last three years is shown in the Average Balances table included in
the Operations section of this Analysis.
Long-Term Debt
On March 17, 2000, the Company drew $5,000,000 under its credit facility with
the FHLB. The $5,000,000 advance, which will mature March 17, 2010, accrues
interest at an effective rate of 6.00%, payable quarterly. The 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
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
purchase of various U.S. Agency securities. Mortgage-backed securities
with aggregate carrying values of approximately $10.7 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 March 31, 2000:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
REPRICING WITHIN
-------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
MARCH 31, 2000 MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Federal funds sold $ 2,780 - - - $ 2,780
Securities(1) 2,553 $ 8,191 $101,768 $41,364 153,876
Loans, gross(2) 52,889 21,398 68,499 31,491 174,277
- --------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 58,222 29,589 170,267 72,855 330,933
- --------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 154,349 67,611 23,199 49 245,208
U.S. Treasury demand note 744 - - - 744
Federal Home Loan Bank advances - - - 5,000 5,000
- --------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 155,093 67,611 23,199 5,049 250,952
- --------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(96,871) $(38,022) $147,068 $67,806 $79,981
- --------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP $(96,871) $(134,893) $12,175 $79,981
- --------------------------------------------------------------------------------------------------------------------
Ratio of cumulative gap to total
rate sensitive assets (29.27)% (40.76)% 3.68% 24.17%
- --------------------------------------------------------------------------------------------------------------------
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 37.54% 39.43% 104.95% 131.87%
- --------------------------------------------------------------------------------------------------------------------
Cumulative gap at December 31, 1999 $(99,992) $(142,141) $ 3,459 $75,466
- --------------------------------------------------------------------------------------------------------------------
Cumulative gap at March 31, 1999 $(86,193) $(119,882) $ 8,172 $75,795
- --------------------------------------------------------------------------------------------------------------------
</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.
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As shown in the table above, the Company's gap position improved at March 31,
2000 compared to December 31, 1999 but remained negative through the short-term
repricing intervals, totaling $(96,871) at three months and $(134,893) through
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. Excluding traditionally nonvolatile NOW and savings
balances from the gap calculation, the cumulative gap at March 31, 2000 totaled
$4,498 at three months and $(33,524) at twelve months. As discussed in earlier
sections of this Analysis, loans outstanding jumped an appreciative $7,480,679
or 4.51% since year-end 1999, comprising the largest quarter-end balance since
the Alachua divestiture. 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. Prior to March 31, 2000, 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 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. 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.
Capital 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>
- --------------------------------------------------------- ------------------ ------------------ -------------------
MARCH 31, December 31, March 31,
CAPITAL RATIOS(1) 2000 1999 1999
- --------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tier 1 capital:
Realized stockholders' equity $44,937 $44,028 $41,608
Intangible assets and other adjustments (1,261) (1,309) (1,429)
- --------------------------------------------------------- ------------------ ------------------ -------------------
Total Tier 1 capital 43,676 42,719 40,179
- --------------------------------------------------------- ------------------ ------------------ -------------------
Tier 2 capital:
Portion of allowance for loan losses 2,376 2,278 2,206
Allowable long-term debt - - -
- --------------------------------------------------------- ------------------ ------------------ -------------------
Total Tier 2 capital 2,376 2,278 2,206
- --------------------------------------------------------- ------------------ ------------------ -------------------
Total risk-based capital $46,052 $44,997 $42,385
- --------------------------------------------------------- ------------------ ------------------ -------------------
Risk-weighted assets $189,073 $181,326 $175,576
- --------------------------------------------------------- ------------------ ------------------ -------------------
Risk-based ratios:
Tier 1 capital 23.10% 23.56% 22.88%
- --------------------------------------------------------- ------------------ ------------------ -------------------
Total risk-based capital 24.36% 24.82% 24.14%
- --------------------------------------------------------- ------------------ ------------------ -------------------
Tier 1 leverage ratio 12.62% 12.57% 11.92%
- --------------------------------------------------------- ------------------ ------------------ -------------------
Realized stockholders' equity to assets 12.63% 12.82% 12.29%
- --------------------------------------------------------- ------------------ ------------------ -------------------
(1) The Company is not subject to the market risk capital guidelines promulgated
by the regulatory authorities; these guidelines created Tier 3 capital.
</TABLE>
On a per share basis, realized book value rose 2.03% during the three month
period to $12.55 at March 31, 2000. Dividends declared totaled $0.10
year-to-date at March 31, 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, declined
$31,460 at March 31, 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. Subsequent to March 31, 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, 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
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
regulations limit the amount of dividends SEB may pay without prior approval of
the regulatory agencies. Year-to-date, SEB has paid $2,115,500 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 $615,500 payout represented 25% 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 grew $162,882 or 14.74% to $1,267,558 at March 31, 2000 from
$1,104,676 in 1999. Similarly, per share earnings for the quarterly period
improved $0.04 to $0.35 at March 31, 2000 from $0.31 in 1999. The return on
beginning equity increased to 11.52% from 10.81% a year ago and 7.17% in 1998.
As further discussed in the next subsection of this Analysis, virtually all of
the first quarter earnings improvement at March 31, 2000 was attributable to a
7.13% rise in net interest income. First quarter earnings increased $426,330 or
62.85% in 1999 when compared to the same period in 1998. The most significant
factor affecting 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 increased $261,785 or 7.13% during the first three months of
2000 compared to 1999. Likewise, the net interest margin and net interest spread
grew to 5.07% and 3.97%, respectively, from 4.85% and 3.74% in 1999. Interest
earnings on loans and investment securities improved $58,924 and $225,897 over
same period results in 1999 while earnings on federal funds sold fell $91,006.
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 fell $67,970 or 2.46% during the
first quarter of 2000 compared to 1999. The 19 basis point drop in cost of funds
resulted from reductions in deposit rates at March 31, 2000 versus 1999.
Management, through its Asset/Liability Committee, has aggressively sought
repricing opportunities for deposits, particularly in certain Georgia markets.
Given the rising rate environment currently propelled by the Federal Reserve,
management expects costs of funds and corresponding interest expense to increase
during the remainder of 2000. The Company incurred interest expense on FHLB
advances for the first time during the first quarter of 2000; refer to the
Liquidity section of this Analysis for more details. During the first three
months of 1999 compared to 1998, net interest income declined $130,833 or 3.44%.
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.
18
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 March 31 for each of the last three
years are provided in the table on the next page.
Noninterest Income and Expense
Noninterest income grew a negligible 1.01%, or $8,390, at March 31, 2000
compared to 1999. A $6,900 gain on investment securities was the major factor in
the first quarter results. The other operating portion of noninterest income
aggregated $249,174 during the first quarter of 2000. By type and amount, the
chief components of other operating income at March 31, 2000 were mortgage
origination fees, $24,915; commissions on the sale of credit life insurance
(generated by SEB), $54,571; safe deposit box rentals, $43,659; and income on
sale of check products, $13,744. Together, these four income items comprised
54.94% of other operating income year-to-date. Salaries and employee benefits
increased 6.13% or $88,412 to $1,529,912 at March 31, 2000 compared to 1999. The
vast majority, or 84%, of employee expenses were concentrated in salaries and
other direct compensation, including related payroll taxes, at March 31, 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 March 31, 2000 and 1999. When compared to the same period in
the prior year, net occupancy and equipment expense increased 5.17% or $23,068
year-to-date at March 31, 2000 and 3.83% at March 31, 1999. The increase in both
periods derived primarily from higher computer costs, including depreciation
expense associated with the new check imaging, internet banking, and voice
banking systems. Other operating expenses fell 11.36% or $85,574 year-to-date at
March 31, 2000. A net improvement on sales of foreclosed real estate was the
principal element in the 2000 results. Other operating expenses declined a
moderate 2.79% or $21,610 at March 31, 1999 compared to 1998. Besides marketing
and supplies expense, no individual component of other operating expenses
aggregated or exceeded 10% of the total at March 31, 2000 or 1999.
19
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS
EARNED AND RATES PAID
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------- --------------------------- -----------------------------
AVERAGE BALANCES(6) AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
THREE MONTHS ENDED MARCH 31, BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ------------------------------------- --------- -------- ------ -------- ------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans, net(1,2,4) $166,406 $ 4,356 10.47% $164,000 $ 4,287 10.46% $170,608 $ 4,754 11.15%
Federal funds sold 7,273 104 5.72% 16,816 195 4.64% 19,419 262 5.39%
Taxable investment securities(3) 125,807 1,879 5.98% 111,871 1,663 5.95% 87,671 1,337 6.10%
Tax-exempt investment
securities(3,4) 25,036 476 7.61% 23,399 459 7.85% 17,743 373 8.42%
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
Total interest-earning assets $324,522 $ 6,815 8.40% $316,086 $ 6,604 8.36% $295,441 $ 6,726 9.11%
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits(5) $47,854 $ 335 2.80% $46,973 $ 336 2.86% $39,031 $ 289 2.96%
Savings 75,827 743 3.92% 74,194 764 4.12% 71,800 815 4.54%
Time deposits 118,642 1,596 5.38% 118,201 1,660 5.62% 114,213 1,661 5.82%
Federal funds purchased 95 1 5.91% - - - - - -
U. S. Treasury demand note 711 13 6.42% 497 8 6.26% 966 17 6.84%
Federal Home Loan Bank advances 824 12 6.00% - - - - - -
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
Total interest-bearing
liabilities $243,953 $ 2,700 4.43% $239,865 $ 2,768 4.62% $226,010 $ 2,782 4.92%
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
Excess of interest-earning assets
over interest-bearing
liabilities $80,569 $76,221 $69,431
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
INTEREST RATE SPREAD 3.97% 3.74% 4.19%
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
NET INTEREST INCOME $ 4,115 $ 3,836 $ 3,944
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
NET INTEREST MARGIN 5.07% 4.85% 5.34%
- ------------------------------------- --------- -------- ------- --------- -------- --------- ---------- --------- ---------
(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.
</TABLE>
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
RECENT 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 provision 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.
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:
o Interest rate fluctuations and other market conditions.
o Strength of the consumer and commercial credit sectors as well as real
estate markets.
o Changes in laws and regulations, including changes in accounting
standards, monetary policies, and taxation requirements (including tax
rate changes, new tax laws, and revised tax law interpretations).
o Competitive pricing and other pressures on loans and deposits and the
Company's ability to maintain market shares in its trade areas.
o Unforeseen circumstances affecting Year 2000 compliance by the Company
and its vendors, suppliers, and loan customers.
o The outcome of litigation which depends on judicial interpretations of
law and findings of juries.
22
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
o Other risks and uncertainties as detailed from time to time in Company
filings with the Securities and Exchange Commission.
The foregoing list of factors is not exclusive. This Analysis should be read in
conjunction with the consolidated financial statements and related notes.
23
<PAGE>
SOUTHEASTERN BANKING CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(NOT APPLICABLE)
ITEM 2. CHANGES IN SECURITIES
(NOT APPLICABLE)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(NOT APPLICABLE)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders (the Meeting) of the
Company was held on April 11, 2000. At the Meeting, the
following individuals were elected directors: Leslie H. Blair,
David H. Bluestein, Gene F. Brannen, William Downey, Alyson
Gray, Cornelius P. Holland, III, Alva J. Hopkins, III, G.
Norris Johnson, and S. Michael Little. Votes for all nominees
totaled 2,533,583, and votes withheld totaled 51. No votes
were cast against any of the nominees.
The shareholders also approved setting the number of Directors
at 12, with 3 to be vacant until the elected Board deems it in
the Company's best interest to fill same. Votes for this
proposal were 2,506,846; against, 20,885; and abstained, 5,903
shares. The shareholders further approved the appointment of
independent auditors by the Audit Committee. Votes approving
the appointment totaled 2,531,465; against, 1,986; and
abstained, 183.
ITEM 5. OTHER INFORMATION
(NOT APPLICABLE)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits:
Exhibit Table Page
------------------- --------
Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
Exhibit 99 Accountants Report
(b) Reports on Form 8-K - NONE
24
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(REGISTRANT)
By: /s/ S. MICHAEL LITTLE
-----------------------------------
S. MICHAEL LITTLE, VICE PRESIDENT
Date: May 14, 2000
------------
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 14,792
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,780
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,505
<INVESTMENTS-CARRYING> 27,055
<INVESTMENTS-MARKET> 26,561
<LOANS> 173,475
<ALLOWANCE> 3,422
<TOTAL-ASSETS> 352,945
<DEPOSITS> 302,211
<SHORT-TERM> 744
<LIABILITIES-OTHER> 2,959
<LONG-TERM> 5,000
4,476
0
<COMMON> 0
<OTHER-SE> 37,555
<TOTAL-LIABILITIES-AND-EQUITY> 352,945
<INTEREST-LOAN> 4,334
<INTEREST-INVEST> 2,193
<INTEREST-OTHER> 104
<INTEREST-TOTAL> 6,632
<INTEREST-DEPOSIT> 2,674
<INTEREST-EXPENSE> 2,700
<INTEREST-INCOME-NET> 3,932
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 2,667
<INCOME-PRETAX> 1,807
<INCOME-PRE-EXTRAORDINARY> 1,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,268
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 5.07
<LOANS-NON> 580
<LOANS-PAST> 1,855
<LOANS-TROUBLED> 356
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,223
<CHARGE-OFFS> 251
<RECOVERIES> 150
<ALLOWANCE-CLOSE> 3,422
<ALLOWANCE-DOMESTIC> 2,679
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 743
</TABLE>
[BDO SEIDMAN, LLP LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Audit Committee of the
Board of Directors of
Southeastern Banking Corporation
We have reviewed the accompanying consolidated financial statements of
Southeastern Banking Corporation and subsidiaries as of March 31, 2000, and for
the three-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
May 10, 2000
