SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 437-4141
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 3, 2000, 3,580,797 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding. The aggregate market value of the
common equity held by nonaffiliates of the Registrant on such date was
approximately $33,786,408 (based on a per share price of $14.25 which is based
on over-the-counter trades executed by principal market-makers).
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990 are incorporated by reference in Part IV, Item 14.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 11, 2000, are incorporated by reference in
Part III.
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PART I
ITEM 1. BUSINESS.
1. HISTORY AND ORGANIZATION. Southeastern Banking Corporation (the Company) and
its wholly-owned subsidiaries, Southeastern Bank and SBC Financial Services,
Inc., provide a full array of financial services to meet the needs of
individual, corporate, and government customers in southeast Georgia and
northeast Florida. The Company's corporate offices are located at 1010 Northway
Street, Darien, Georgia.
The Company was formed in 1980 to serve as the parent holding company of its
then sole subsidiary bank, The Citizens Bank, Folkston, Georgia, which later
changed its name to Southeastern Bank (SEB). In 1983, the Company acquired The
Darien Bank, Darien, Georgia. Since 1983, the Company has acquired three
additional financial institutions in the southeast Georgia market. These
acquisitions were consummated by merging the acquired bank with SEB; the
acquired banks were subsequently converted to branches of SEB. In this manner,
the Company acquired The Camden County State Bank, Woodbine, Georgia, in 1984;
the Jeff Davis Bank, Hazlehurst, Georgia, in 1986; and the Nicholls State Bank,
Nicholls, Georgia, in 1988. In 1990, SEB merged with and into The Darien Bank,
with The Darien Bank being the surviving bank in the merger operating under its
1888 Charter. Immediately, The Darien Bank changed its name to "Southeastern
Bank." SEB is a state banking association incorporated under the laws of the
State of Georgia.
In 1991, the Company acquired the Folkston, St. Marys, and Douglas, Georgia,
offices of First Georgia Savings Bank, a savings bank in Brunswick, Georgia.
Offices located in St. Marys and Douglas are now operating as branches of SEB,
but the First Georgia office in Folkston was closed and merged into the existing
Folkston branch. In 1993, the Company acquired the Folkston and St. Marys
offices of Bank South, N.A., Atlanta, Georgia. Both of the acquired offices were
closed and merged into existing offices of the Company.
On October 14, 1994, the Company acquired 100% of the outstanding common stock
of United Citizens Bank of Alachua County, Alachua, Florida under the name
Southeastern Bank of Florida (SEBF). The aggregate consideration paid by the
Company pursuant to the transaction was approximately $5,139,000, payable in
cash to the shareholders of Alachua. On February 15, 1996, the Company acquired
the Callahan, Hilliard, and Yulee offices of Compass Bank in northeast Florida's
Nassau County; the Company received approximately $22,982,000 in assets and
assumed approximately $23,709,000 in deposit and other liabilities.
Geographically, Nassau County borders Camden and Charlton Counties in southeast
Georgia where the Company has other offices.
On January 16, 1998, SEBF sold its three offices in central Florida to First
National Bank of Alachua. Cash, loans, and fixed assets sold on January 16
aggregated approximately $32,159,000; deposits and other liabilities divested
totaled $33,646,000. The sale of these locations has enabled the Company to
concentrate its resources and strengthen its presence in its northeast Florida
and southeast Georgia markets. At the close of business on June 25, 1998, SEBF
merged with and into SEB. The merger of the two bank subsidiaries has reduced
the duplicative overhead costs associated with two separate entities. For
additional information regarding the branch sale and the SEBF-SEB merger, see
Notes 1 and 2 to the Consolidated Financial Statements.
SBC Financial Services, Inc. (SBCF) was formed in 1998 to sell insurance and
annuity products to the public. The Company has invested $100,000 in SBCF
to-date and expects to make additional capital
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investments in its new subsidiary during its first few years of operation. As it
matures, SBCF is expected to supplement and grow existing fee income, thereby
increasing the Company's profitability and shareholder value. SBCF is currently
licensed to sell insurance in Georgia. The insurance subsidiary had minimal
impact on the Company's financial condition and results of operations in 1999
and 1998.
2. BUSINESS. SEB, the Company's commercial bank subsidiary, offers a wide range
of services to meet the financial needs of its customer base through its branch
and atm network in northeast Florida and southeast Georgia. SEB's primary
business comprises traditional deposit and credit services as well as official
check services, wire transfers, and safe deposit box rentals. Deposit services
offered include time certificates plus NOW, money market, savings, and
individual retirement accounts. Credit services include commercial and
installment loans, long-term mortgage originations, credit cards, and standby
letters of credit. Commercial loans are made primarily to fund real estate
construction and to meet the needs of customers engaged in the agriculture,
timber, seafood, and other industries. Installment loans are made for both
consumer and non-consumer purposes. At December 31, 1999, SEB operated fourteen
full-service banking offices with total assets exceeding $339 million. A list of
SEB offices is provided in Part I, Item 2. SBCF, the Company's insurance
subsidiary, provides insurance agent and brokerage services for general
insurance. In addition to fixed and indexed annuities, products offered include
life, health, auto, homeowner's, and business owner's insurance. As the
insurance program develops, SBCF plans to expand its product offerings.
The Federal Reserve Bank of Atlanta is the principal correspondent of the
Company's bank subsidiary. SEB also maintains accounts with other correspondent
banks in Georgia, Florida, and Alabama. SBCF sells insurance in conjunction with
two subagents, Community Bank Marketing and Palmer & Cay. In exchange for
providing marketing and other support, the subagents receive a varying
percentage of the commissions earned on insurance and annuity sales.
At December 31, 1999, the Company and its subsidiaries had 153 and 12 full and
part-time employees. Three of these employees are licensed to sell insurance to
customers in Georgia.
3. COMPETITION. The diversity of the Company's trade area results in varying
degrees of competition in each of its Georgia and Florida markets. With the
exception of Brantley County in Georgia, the Company has direct competition with
other commercial banks, savings and loan associations, and credit unions in each
market area. The Company currently competes directly with one federal credit
union but no commercial banks or savings and loan associations in Brantley
County.
Since mid-1998, intrastate branching restrictions in all of the Company's market
areas have been removed. The removal of intrastate branching restrictions has
given the Company opportunities for growth but also intensified competition as
other banks branch into the Company's markets.
The Company faces increasingly aggressive competition from other domestic
lending institutions and from numerous other providers of financial services.
The ability of nonbanking financial institutions to provide services previously
reserved for commercial banks has intensified competition. Because these
nonbanking financial institutions are not subject to the same regulatory
restrictions as banks and bank holding companies, they can often operate with
greater flexibility. Recent abolishment of certain restrictions between banks,
securities firms, and insurance companies will further intensify competition;
refer to the Supervision and Regulation section of this Item for more details.
4. SUPERVISION AND REGULATION. As a bank holding company, the Company is subject
to the supervision and regulation of the Board of Governors of the Federal
Reserve System (Federal Reserve). SEB, an insured state non-member bank
chartered by the Georgia Department of Banking and Finance (GDBF), is subject to
supervision and regulation by the GDBF and the Federal Deposit Insurance
2
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Corporation (FDIC). Various federal and state laws also regulate the operations
of SEB, requiring the maintenance of reserves against deposits, limiting the
nature of loans and interest that may be charged thereon, and restricting
investments and services offered. SEB's operations are also affected by numerous
consumer laws and regulations. In addition to the impact of regulation, the
Company is also significantly affected by the actions of the Federal Reserve as
it attempts to control the money supply and credit availability in order to
influence the economy. The Company's nonbank subsidiary is regulated and
supervised by applicable bank, insurance, and various other regulatory agencies.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, bank holding companies from any state may now acquire banks located in any
other state, subject to certain conditions, including concentration limits. In
addition, a bank may now establish branches across state lines by merging with a
bank in another state (unless applicable state law prohibits such interstate
mergers), provided certain conditions are met.
A number of obligations and restrictions imposed on bank holding companies and
their bank subsidiaries by federal law and regulatory policy are designed to
reduce potential loss exposure to bank depositors and to the FDIC insurance fund
in the event of actual or possible default. For example, under Federal Reserve
policy, the Company is expected to act as a source of financial strength to, and
commit resources to support, its bank subsidiary where it might refuse absent
such policy. The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
applicable institution is "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized," as those terms are defined under regulations issued by each
of the federal banking agencies. The Company and its bank subsidiary are
considered "well-capitalized" by their respective federal banking regulators.
The Company's capital position is delineated in Note 14 to the Consolidated
Financial Statements and in the Capital Adequacy section of Part II, Item 7.
There are various legal and regulatory limits on the amount of dividends and
other funds the bank subsidiary may pay or otherwise supply the Company.
Additionally, federal and state regulatory agencies have the authority to
prevent a bank or bank holding company from engaging in any activity that, in
the opinion of the agency, would constitute an unsafe or unsound practice.
FDIC regulations require that management report annually on its responsibility
for preparing financial statements, and establishing and maintaining an internal
control structure and procedure for financial reporting and compliance with
designated laws and regulations concerning safety and soundness.
On November 12, 1999, financial modernization legislation known as the
Gramm-Leach-Bliley Act (the Act) was signed into law. The Act creates a new type
of financial services company called a financial holding company. A bank holding
company which elects to become a financial holding company may engage in
expanded financial activities, including insurance and securities underwriting,
and may also acquire securities and insurance companies, subject in each case to
certain conditions. Securities firms and insurance companies may also choose to
establish or become financial holding companies and thereby acquire banks, also
subject to certain conditions. The abolishment of certain restrictions between
banks, securities firms, and insurance companies will provide both challenges
and opportunities to the Company. Major provisions of the Act become effective
March 11, 2000. The Company has no present intention to change its status from a
bank holding company to a financial holding company.
There have been a number of legislative and regulatory proposals that would have
an impact on the operation of bank holding companies and their subsidiaries. It
is impossible to predict whether or in
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what form these proposals may be adopted in the future and, if adopted, what
their effect will be on the Company.
ITEM 2. PROPERTIES.
COMPANY PROPERTY. The Company's executive offices are located in SEB's main
banking office at 1010 Northway Street, Darien, Georgia.
BANKING FACILITIES. Besides its main office in Darien, SEB has thirteen branch
offices in northeast Florida and southeast Georgia as shown in the table below:
<TABLE>
<CAPTION>
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BRANCH LOCATIONS
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<S> <C> <C> <C>
FLORIDA 1948 S. Kings Road 1376 E. State Road 200
Nassau County Nassau County
CALLAHAN, FLORIDA 32011 YULEE, FLORIDA 32097
7964 W. County Road 108
Nassau County
HILLIARD, FLORIDA 32046
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GEORGIA 620 S. Peterson Street Highway 40 East
Coffee County Camden County
DOUGLAS, GEORGIA 31533 KINGSLAND, GEORGIA 31548
Highway 17 110 Bacon Street
McIntosh County Brantley County
EULONIA, GEORGIA 31331 NAHUNTA, GEORGIA 31553
101 Love Street 910 Van Streat Highway
Charlton County Coffee County
FOLKSTON, GEORGIA 31537 NICHOLLS, GEORGIA 31554
14 Hinson Street 2512 Osborne Road
Jeff Davis County Camden County
HAZLEHURST, GEORGIA 31539 ST. MARYS, GEORGIA 31558
107 E. Main Street Bedell Avenue & Highway 17
Brantley County Camden County
HOBOKEN, GEORGIA 31542 WOODBINE, GEORGIA 31569
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</TABLE>
At December 31, 1999, the Company owned all of its banking facilities. See Note
6 to the Consolidated Financial Statements for further property information.
INSURANCE FACILITIES. SBCF leases office space from SEB at 1010 Northway Street,
Darien, Georgia.
4
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ITEM 3. LEGAL PROCEEDINGS.
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
[Remainder of this page intentionally left blank.]
5
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
In November 1996, a principal market-maker, and in late 1997, a second
market-maker,(1) began trading the Company's stock publicly over-the-counter
under the symbol "SEBC." The high and low sales prices for 1999, 1998, and 1997
are based on information being posted to electronic bulletin boards by the
market-makers, as applicable. These market prices may include dealer mark-up,
markdown, and/or commission.
The table below sets forth the high and low sales prices and the cash dividends
declared on the Company's common stock during the periods indicated:
<TABLE>
<CAPTION>
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SALES PRICE
MARKET SALES PRICE & -------------------------- DIVIDENDS
DIVIDENDS DECLARED QUARTER HIGH LOW DECLARED
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<S> <C> <C> <C> <C>
1999 4th 17 3/4 16 1/2 0.17
3rd 20 18 1/8 0.10
2nd 19 3/4 18 5/8 0.10
1st 20 18 1/4 0.10
1998 4th 21 17 1/2 0.18 2/3
3rd 21 1/2 21 0.06 2/3
2nd 24 18 1/2 0.06 2/3
1st 23 17 1/2 0.06 2/3
1997 4th 18 3/8 17 0.13
3rd 18 1/2 17 1/2 0.06 1/3
2nd 18 1/2 17 0.06 1/3
1st 18 1/2 17 0.06 1/3
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</TABLE>
(1) The second market-maker did not complete any trades until 1998.
The Company had approximately 450 shareholders of record at December 31, 1999.
The Company has paid regular cash dividends on a quarterly basis every year
since its inception. Additionally, in recent years, the Company has declared a
special dividend in the fourth quarter of each year. Management anticipates that
the Company will continue to pay regular and special cash dividends.
The Company is a legal entity separate and distinct from its subsidiaries, and
its revenues depend primarily on the payment of dividends from its subsidiaries.
State banking regulations limit the amount of dividends the Company's bank
subsidiary may pay without prior approval of the regulatory agencies. The amount
of cash dividends available from the bank subsidiary for payment in 2000 without
such prior approval is approximately $2,462,000.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Selected financial data for the last five years is provided in the table below:
<TABLE>
<CAPTION>
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FINANCIAL DATA 1999 1998 1997 1996 1995
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31:
Total assets $340,545 $337,933 $347,898 $335,826 $296,956
Loans, net of unearned income 165,994 164,761 186,823 183,739 165,385
Allowance for loan losses 3,223 3,407 3,705 3,735 3,532
Deposits 290,284 292,697 302,369 294,353 259,540
Long-term debt - - - 1,450 2,525
Realized stockholders' equity 44,028 40,861 37,854 34,277 30,558
- ---------------------------------------------------------------------------------------------------------------
FOR THE YEAR:
Net interest income $ 15,084 $ 15,217 $ 16,391 $ 15,636 $ 14,617
Provision for loan losses 1,200 1,230 1,715 1,475 1,200
Net income 4,849 4,393 4,722 4,805 4,287
Common dividends paid 1,743 1,182 1,122 1,062 1,003
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PER COMMON SHARE:
Basic earnings $ 1.35 $ 1.23 $ 1.32 $ 1.34 $ 1.20
Dividends declared 0.47 0.38 2/3 0.32 0.30 1/3 0.28 2/3
Book value 12.30 11.41 10.57 9.57 8.53
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FINANCIAL RATIOS:
Return on average assets 1.43% 1.35% 1.40% 1.49% 1.50%
Return on beginning equity 11.87 11.60 13.78 15.72 15.70
Tier 1 capital ratio 23.56 22.37 17.91 16.18 16.26
Total capital ratio 24.82 23.62 19.16 17.44 17.52
Tier 1 leverage ratio 12.57 11.78 10.31 9.42 9.67
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</TABLE>
The per share data has been restated to give retroactive effect to the
three-for-one stock split paid on August 9, 1996. The book value per share and
equity ratios exclude the effects of mark-to-market accounting for investment
securities.
Business Combinations and Divestitures
The financial data in the table above reflects the following acquisitions and
divestitures:
o On January 16, 1998, the Company sold its banking offices in Alachua,
Gainesville, and Jonesville, Florida. See Note 2 to the Consolidated
Financial Statements.
o On February 15, 1996, the Company acquired the Callahan, Hilliard, and
Yulee offices of Compass Bank in northeast Florida's Nassau County.
Geographically, Nassau County borders Charlton and Camden Counties in
southeast Georgia where SEB has other offices. The Company received
approximately $22,982,000 in assets and assumed approximately
$23,709,000 in deposits and other liabilities.
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation (the Company) is a financial services company
headquartered in Darien, Georgia. Prior to June 25, 1998, the Company had two
bank subsidiaries - Southeastern Bank (SEB) and Southeastern Bank of Florida
(SEBF). At the close of business on June 25, 1998, SEBF, with offices in
Callahan, Hilliard, and Yulee, merged with and into SEB. SEB, a state banking
association also headquartered in Darien, now operates fourteen full-service
banking offices in southeast Georgia and northeast Florida. Unless otherwise
indicated, the ensuing Analysis presumes that SEB and SEBF have operated as a
single entity for all periods presented and discussed.
Prior to January 16, 1998, SEB also had offices in Alachua, Gainesville, and
Jonesville, Florida. On January 16, 1998, SEB sold its three offices in central
Florida to First National Bank of Alachua. Cash, loans, and fixed assets sold by
SEB on January 16 aggregated approximately $32,159,000; deposits and other
liabilities divested totaled $33,646,000. The Company recognized a pretax gain
of $101,908 but after-tax loss of $457,823 on the sale of these branches. The
sale of these locations 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 $339,801,000 at year-end 1999 versus $337,327,000 at December 31,
1998 and $347,274,000 at December 31, 1997.
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 its new subsidiary
during its first few years of operation. As it develops, SBCF is expected to
supplement and grow existing noninterest income, thereby increasing the
Company's profitability and shareholder value. The insurance subsidiary had a
nominal impact on the Company's financial condition and results of operations in
1999 and 1998.
FINANCIAL CONDITION
Consolidated assets exceeded $340 million at year-end 1999, growing $2,611,556
or 0.77% since December 31, 1998. The increase in total assets at December 31,
1999 transpired largely from growth in short-term funding sources, including
federal funds purchased. Pertinent details on federal funds purchased and other
funding sources, on both a period-end and average basis, are provided in the
Liquidity section of this Analysis. Consistent with 1998 levels, earning assets
approximated 92% of total assets at December 31, 1999. During the year-earlier
period, total assets declined $9,964,501 or 2.86%. Virtually all of the 1998
decline in total assets was attributable to the Alachua divestiture; this
decline was offset, in part, by asset growth at the remaining SEB locations
during 1998.
Investment Securities
On a carrying value basis, investment securities approximated $146 million at
December 31, 1999, up $12,880,495 or 9.68% from December 31, 1998. Securities
comprised 46% of earning assets at year-end 1999 versus 42% and 35% at December
31, 1998 and 1997. The growth in investment securities since 1998 resulted from
the placement of funds available from other sources, including declines in other
8
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SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
earning assets, in the portfolio. No significant changes have occurred in the
investment securities mix at December 31, 1999. The amortized cost and estimated
fair value of investment securities are delineated in the table below:
<TABLE>
<CAPTION>
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INVESTMENT SECURITIES BY CATEGORY AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
==========================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and U.S.
Government agencies $ 98,408 $ 7 $ 3,264 $ 95,151
Mortgage-backed securities 22,753 9 1,107 21,655
Equity securities 1,088 -- -- 1,088
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122,249 16 4,371 117,894
Held-to-maturity:
States and political subdivisions 28,018 250 792 27,476
- ----------------------------------------------------------------------------------------------------------
Total investment securities $150,267 $ 266 $ 5,163 $145,370
==========================================================================================================
</TABLE>
As shown, the market value of the securities portfolio declined at December 31,
1999; refer to the Capital Adequacy section of this Analysis for more details.
The Company does not have a concentration in the obligations of any issuer other
than the U.S. Government and its agencies.
Loans
Loans, net of unearned income, grew $1,232,972 or 0.75% at year-end 1999
compared to 1998. The net loans to deposit ratio totaled 57.18% at year-end 1999
versus 56.29% and 61.79% at December 31, 1998 and 1997. The improvement in net
loan balances derived from unearned income, because gross loans declined
$400,286 or 0.24%. A $1,610,000 or 2.33% drop in commercial loans outstanding
was the predominant factor in the gross loans decline. Although year-to-year
commercial loan demand has slowed, commercial loan balances were at their
highest levels since March 31, 1999, reversing moderate declines during the
second and third quarters of 1999. Management has initiated various programs to
increase loan production and is optimistic that commercial loan volumes in 2000
will exceed 1999 levels. The programs emphasize utilization of competitive
pricing on loan products and development of additional loan relationships, all
without compromising portfolio quality. Growth in the real estate-construction
and consumer portfolios partially mitigated the year-to-year decline in the
commercial portfolio. Real estate-construction loans grew $843,000 or 36.37% at
December 31, 1999 compared to 1998. 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 consumer portfolio
grew an appreciable 2.04% or $746,000 since year-end 1998 and, more markedly,
9.14% or $3,125,000 since year-end 1997. Growth in the consumer portfolio is
especially welcome, because consumer loans remain the Company's highest yielding
interest-earning assets. During the year-earlier period, net loans declined
$22,061,720 or 11.81%. The
9
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SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
majority, or 79%, of the 1998 drop was attributable to the Alachua divestiture.
The remaining decline resulted from overall decreases in commercial loans
outstanding at other SEB locations. Loans outstanding are presented by type in
the table below:
<TABLE>
<CAPTION>
===================================================================================================
LOANS BY CATEGORY
DECEMBER 31, 1999 1998 1997
===================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial, and agricultural $ 67,515 $ 69,125 $ 92,587
Real estate - construction 3,161 2,318 4,029
Real estate - mortgage 59,656 60,035 59,652
Consumer, including credit cards 37,312 36,566 34,187
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Loans, gross 167,644 168,044 190,455
Unearned income 1,650 3,283 3,632
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Loans, net $165,994 $164,761 $186,823
===================================================================================================
</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 December 31, 1999 and 1998,
gross loans secured by real estate totaled approximately $103,170,000 and
$105,010,000. 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 $22.1 million at December 31, 1999; because a substantial
amount of these contracts expire without being drawn upon, total contractual
amounts do not represent future credit exposure or liquidity requirements.
UNEARNED INCOME
Primarily reflecting accounting changes made to comply with new tax legislation,
unearned income declined considerably at December 31, 1999 versus the other
periods presented. Specifically, effective January 1999, the IRS prohibits the
use of any method other than the constant, or level, yield method in computing
interest income on short-term consumer loans. Although interest income on most
loans has been recognized using the level yield method, interest income on
certain loans 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 lowered interest
income by an estimated $135,000 in fiscal 1999 as compared to prior years. More
details on the Company's accounting and reporting policies on loans and related
income are contained in the footnotes to the Consolidated Financial Statements.
NONPERFORMING ASSETS
Nonperforming loans, a central component of nonperforming assets, aggregated
approximately $1,042,000 at year-end 1999, down $204,000 or 16.37% from December
31, 1998. As a percent of net loans, nonperforming loans totaled 0.63% at
December 31, 1999 compared to 0.76% and 0.62% at
10
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 31, 1998 and 1997. The bulk, or 92%, of the decline in nonperforming
loans since 1998 was attributable to improvements in nonaccrual balances. No
reduction in nonaccrual balances has been made for the portion of such loans
wholly or partially guaranteed by the U.S. Small Business Administration. For
each of the last three years, such guarantees would have reduced nonaccrual
balances by $44,000, $84,000, and $68,000. More than 93%, or $972,000, of
nonperforming loan balances at year-end 1999 pertained to four separate
borrowers; further segregated, $850,000 or 87.45% of total balances pertained to
merely two borrowers and 51% to a solo borrower. After jumping $615,000 during
the first quarter, foreclosed real estate balances, another component of
nonperforming assets, fell $535,000 to $858,000 at December 31, 1999.
Approximately 74% of foreclosed real estate balances were derived from funding
originally extended to five borrowers; more significantly, $276,000 or 32.20% of
total balances applied to a single borrower. Foreclosed real estate balances
remained concentrated, overall, in residential real estate at year-end 1999.
Loans past due 90 days or more approximated $1,467,000 at December 31, 1999,
down moderately from year-end 1998 and 1997 levels. Loans to six separate
borrowers comprised 23.24% of loans past due 90 plus days at December 31, 1999;
management is unaware of any other material concentrations within these past due
balances. Details on a certain group of loans that composed the bulk of the
fluctuations in nonperforming asset balances during 1999 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>
====================================================================================
NONPERFORMING ASSETS
DECEMBER 31, 1999 1998 1997
====================================================================================
(IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Commercial, financial, and agricultural $ 492 $ 622 $ 675
Real estate - construction -- -- --
Real estate - mortgage 175 240 93
Consumer, including credit cards 18 10 7
- ------------------------------------------------------------------------------------
Total nonaccrual loans 685 872 775
Restructured loans(1) 357 374 389
- ------------------------------------------------------------------------------------
Total nonperforming loans 1,042 1,246 1,164
Foreclosed real estate(2) 858 778 722
- ------------------------------------------------------------------------------------
Total nonperforming assets $1,900 $2,024 $1,886
- ------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $1,467 $1,607 $1,767
====================================================================================
</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 all
periods presented except December 31, 1998. Subsequent to year-end 1998, a group
of loans, primarily real estate, with principal balances approximating
$1,295,000 were recognized as significantly impaired. These particular loans
were not substantially past due, and their impairment could not be reasonably
measured, at December 31, 1998. During 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 February
15, 2000, $506,000 or 67% 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, both upward and downward, in nonperforming asset balances during
1999.
11
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management is diligently pursuing remedies under law in seeking to recover
the charge-offs on these loans but deems any material recovery unlikely.
Although disturbingly high, the charge-offs recognized on these problem loans
did not result in an upward revision of the 1999 budgeted loan loss provision of
$1,200,000.
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 ratio
totaled 1.94% at year-end 1999, down 13 basis points from year-end 1998. The
decline in the allowance ratio resulted foremost from charge-off activity in
1999. Net charge-offs totaled $1,383,737, down $144,910 or 9.48% from 1998's
$1,528,647, which was down 12.36% or $215,607 from 1997. Approximately 36% of
the 1999 charge-offs were attributable to the problem loans discussed earlier.
Management remains discontented with the charge-off trends recognized the last
few years, including 1999, and has implemented several long-term strategies to
reduce charge-off levels, including: 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 decline from 1999 levels.
Changes to the allowance as a percent of total nonperforming loans were not
significant for the periods presented. The provision provided from income
aggregated $1,200,00 in 1999, down $30,000 or 2.44% from 1998. Activity in the
allowance is presented in the table on the following page.
12
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
===================================================================================================================
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997
===================================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,407 $ 3,705 $ 3,735
Provision for loan losses 1,200 1,230 1,715
Charge-offs:
Commercial, financial, and agricultural 496 829 1,187
Real estate - construction 351 -- --
Real estate - mortgage 213 330 202
Consumer, including credit cards 950 802 845
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs 2,010 1,961 2,234
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 258 117 99
Real estate - construction -- -- --
Real estate - mortgage 27 15 6
Consumer, including credit cards 341 301 384
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 626 433 489
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,384 1,528 1,745
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at December 31 $ 3,223 $ 3,407 $ 3,705
===================================================================================================================
Net loans outstanding(1) at December 31 $165,994 $164,761 $186,823
===================================================================================================================
Average net loans outstanding(1) at December 31 $163,124 $165,391 $186,174
===================================================================================================================
Ratios:
Allowance to net loans 1.94% 2.07% 1.98%
===================================================================================================================
Net charge-offs to average loans 0.85% 0.92% 0.94%
===================================================================================================================
Provision to average loans 0.74% 0.74% 0.92%
===================================================================================================================
</TABLE>
(1) Net of unearned income
Management believes the allowance was adequate at December 31, 1999 based on
conditions reasonably known to management; however, the allowance may increase
or decrease based on loan growth, changes in internally generated credit
ratings, changes in general economic conditions of the Company's trade areas,
changes in customer bankruptcy filings, or historical loan loss experience.
These factors are analyzed and reviewed on a continual basis to determine if any
changes to the provision for loan losses should be made. Management has budgeted
a loan loss provision of $1,200,000 in fiscal 2000.
Other Assets
Gross premises and equipment increased $777,800 during 1999. More than 87% of
the 1999 expenditures were computer-related; purchases included a loan platform
system, upgraded network/branch communication equipment, and down payments on
imaging, PC banking, and voice banking systems. The remaining costs associated
with the imaging system, payment of which is due at, or prior to, final
implementation, are expected to total $350,000. The managerial decision to
purchase the imaging system was predicated on the following known benefits:
o Customer Service. The imaging system will supplement and otherwise
enhance existing customer service by providing, on paper or electronic
device, compact statements and other documents that are easier to
read, store, and reconcile than existing alternatives. The system
13
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
will also facilitate faster retrieval of documents for customer
research. Both commercial and individual customers will benefit.
o Lower Overhead. The imaging system will reduce certain overhead costs
inherent in document processing, including postage, proof maintenance,
supplies, and personnel expense.
o Competitive Edge. The imaging system will provide an additional
marketing tool for promoting SEB services.
Implementation of the imaging system has occurred in phases, with partial
implementation in December 1999 and full implementation in February 2000.
The remaining costs relative to the PC, or internet, and voice banking systems
aggregate approximately $50,000. Like the imaging system, the PC and voice
banking systems will augment existing customer service and provide competitive
advantages in promoting and selling SEB services. With the voice banking system,
customers will be able to obtain certain account balance and other information
virtually anytime, anywhere by phone. The PC banking system will serve as an
alternative delivery channel for many bank services: Customers will be able to
open and monitor accounts on-line, e-mail customer service representatives, and
pay bills, all at customer convenience. Commercial customers, particularly those
with large transactional volumes, will be able to utilize the bill paying
capabilities of the PC banking system as part of cash, or treasury, management.
Implementation of both the internet and voice banking systems is planned prior
to March 31, 2000.
Other than the remaining amounts due on the imaging, PC, and voice banking
systems, the Company had no material plans or commitments for capital
expenditures as of December 31, 1999. The computer expenditures made in 1999
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-ago
period, gross premises and equipment declined $1,012,539 due to the sale of the
Alachua County locations; offsetting capital expenditures totaled $805,131.
Approximately 59%, or $475,000, of the 1998 expenditures pertained to the
construction of a new branch facility for SEB's Nicholls location.
Adjusted for the net additions to foreclosed real estate previously mentioned,
other assets grew approximately $1,640,000 or 36% year-to-date. An increase in
the deferred tax effects of mark-to-market accounting for investment securities
was the dominant factor in the 1999 results. A $54,000 drop in interest
receivables negated, marginally, the jump in deferred tax assets. Last year,
intangible assets declined due to the elimination of goodwill associated with
the Alachua offices. As shown in the Capital Adequacy section of this Analysis,
the elimination of the Alachua goodwill had a positive impact on the Company's
capital ratios.
LIQUIDITY
Liquidity is managed to ensure sufficient cash flow to satisfy demands for
credit, deposit withdrawals, and other corporate needs. The Company meets most
of its daily liquidity needs through the management of cash and federal funds
sold. Additional liquidity is provided by payments and maturities, including
both principal and interest, of the loan and investment securities portfolios.
At December 31, 1999, loans(1) and investment securities with carrying values
exceeding $47 million and $8 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
14
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 83% of
the funding base at December 31, 1999 versus 86% at December 31, 1998. Borrowed
funds, which variously encompass U.S. Treasury demand notes, federal funds
purchased, and Federal Home Loan Bank advances, totaled $5,859,498 at year-end
1999 compared to $816,053 at December 31, 1998. More specifically, the maximum
amount of U.S. Treasury demand notes available to the Company at December 31,
1999 totaled $3,000,000, of which $1,909,498 was outstanding and $1,090,502
undrawn. Unused borrowings under unsecured federal funds lines of credit from
other banks, each with varying terms and expiration dates, totaled $20,050,000.
Additionally, under a line of credit with the Federal Home Loan Bank of Atlanta,
the Company can borrow, in total or increments, up to 16% of SEB's total assets;
at December 31, 1999, maximum borrowings under this line approximated $54
million. No amounts were drawn against this line at December 31, 1999 or 1998.
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, the provision for loan losses, and
deferred taxes.
Management believes the Company has the funding capacity, from operating
activities or otherwise, to meet its financial commitments in 2000, including
commitments for capital expenditures as 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 declined $2,412,335 or 0.82% at December 31, 1999 compared to 1998.
Noninterest-bearing deposits fell $5,590,923 or 9.60%, while interest-bearing
deposits climbed $3,178,588 or 1.36%. Interest-bearing deposits comprised 81.86%
of total deposits at December 31, 1999, up 177 basis points from December 31,
1998. The distribution of interest-bearing balances at December 31, 1999, 1998,
and 1997 is shown in the table below:
<TABLE>
<CAPTION>
===========================================================================================================================
1999 1998 1997
------------------------------------------------------------------------------
DEPOSITS PERCENT PERCENT PERCENT
DECEMBER 31, BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
===========================================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits(1) $ 45,569 19.18% $ 43,617 18.61% $ 40,983 16.69%
Savings 72,348 30.45% 72,883 31.09% 77,645 31.62%
Time certificates < $100,000 75,251 31.67% 78,409 33.44% 85,059 34.64%
Time certificates >= $100,000 44,445 18.70% 39,526 16.86% 41,857 17.05%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $237,613 100.00% $234,435 100.00% $245,544 100.00%
===========================================================================================================================
</TABLE>
(1) NOW and money market accounts.
In 1998, the Alachua divestiture resulted in a deposit decline exceeding
$33,000,000; by year-end 1998, deposit growth in the remaining SEB locations had
mitigated approximately 71% of the divestiture decline. Since the introduction
of the SMARTSAVER account in March 1996, savings balances have constituted a
substantially higher percentage of interest-bearing balances than historical
norms,
15
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
particularly on an average basis. The composition of average deposits and the
fluctuations therein at December 31 for each of the last three years is shown in
the Average Balances table included in the Operations section of this Analysis.
INTEREST RATE AND MARKET RISK/INTEREST RATE SENSITIVITY
The normal course of business activity exposes the Company to interest rate
risk. Fluctuations in interest rates may result in changes in the fair market
value of the Company's financial instruments, cash flows, and net interest
income. The Company attempts to maintain a relatively neutral interest rate
sensitivity position by structuring the balance sheet so that repricing
opportunities exist for both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any time constitute interest rate sensitivity. An indicator of
interest rate sensitivity is the difference between interest rate sensitive
assets and interest rate sensitive liabilities; this difference is known as the
interest rate sensitivity gap.
The gap analysis below provides a snapshot of the Company's interest rate
sensitivity position at December 31, 1999:
<TABLE>
<CAPTION>
==========================================================================================================================
REPRICING WITHIN
---------------------------------------------------------
MORE
INTEREST RATE SENSITIVITY 0 - 3 4 - 12 ONE - FIVE THAN FIVE
DECEMBER 31, 1999 MONTHS MONTHS YEARS YEARS TOTAL
==========================================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Federal funds sold $ 2,800 $ 2,800
Securities(1) 3,389 $ 5,918 $ 99,720 $ 40,152 149,179
Loans, gross(2) 48,796 17,663 68,531 31,969 166,959
- --------------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 54,985 23,581 168,251 72,121 318,938
- --------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE LIABILITIES
Deposits(3) 149,118 65,730 22,651 114 237,613
Federal funds purchased 3,950 3,950
U.S. Treasury demand note 1,909 1,909
- --------------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 154,977 65,730 22,651 114 243,472
- --------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (99,992) $ (42,149) $ 145,600 $ 72,007 $ 75,466
==========================================================================================================================
CUMULATIVE GAP $ (99,992) $(142,141) $ 3,459 $ 75,466
==========================================================================================================================
Ratio of cumulative gap to total
rate sensitive assets (31.35)% (44.57)% 1.08% 23.66%
==========================================================================================================================
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 35.48% 35.60% 101.42% 131.00%
==========================================================================================================================
Cumulative gap at December 31, 1998 $ (75,213) $ (97,301) $ 15,058 $ 76,837
==========================================================================================================================
Cumulative gap at December 31, 1997 $ (57,546) $ (88,526) $ 14,367 $ 66,329
==========================================================================================================================
</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.
16
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As in the prior periods shown, the Company's cumulative gap position remained
negative in the short-term repricing intervals at December 31, 1999, totaling
$(99,992) at three months and $(142,141) through one year. Certain traditionally
nonvolatile NOW and savings balances are included in the cumulative gap
calculation; excluding these balances, the cumulative gap at December 31, 1999
totaled $(7,081) at three months and $(49,230) at twelve months. A negative gap
position indicates that the Company is liability sensitive, and, hence, its rate
sensitive liabilities will reprice faster than its rate sensitive assets. Cash
flows available from declines in gross loans, federal funds sold, and other
sources in 1999, and also, in 1998, were used to purchase investment securities,
principally securities with contractual maturities exceeding one year.
Management is committed to reversing the decline in loans outstanding that has
necessitated placement of substantial funds in alternative interest-earning
assets.
The gap analysis does not fully reflect the complexities of the Company's
interest rate sensitivity position and the impact of interest rate movements on
the Company's financial position, cash flows, and interest income. For example,
the gap analysis presumes that all loans(2) and securities(1) will perform
according to their contractual maturities when, in many cases, actual loan terms
are much shorter than the original terms and securities are subject to early
redemption. In addition, the repricing of various categories of assets and
liabilities is subject to competitive pressures, customer needs, and other
external factors. Although the Company monitors and adjusts its exposure to
interest rate risks within specific policy guidelines based on 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.
Due to the elimination of certain intangible assets, the sale of the Alachua
County locations in 1998 did not negatively impact the Company's capital ratios.
Capital ratios for the most recent periods are presented in the table on the
next page.
17
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
==========================================================================================================
CAPITAL RATIOS(1)
DECEMBER 31, 1999 1998 1997
==========================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 capital:
Realized stockholders' equity $ 44,028 $ 40,861 $ 37,854
Intangible assets and other adjustments (1,309) (1,486) (3,075)
- ----------------------------------------------------------------------------------------------------------
Total Tier 1 capital 42,719 39,375 34,779
- ----------------------------------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,278 2,216 2,444
Allowable long-term debt -- -- --
- ----------------------------------------------------------------------------------------------------------
Total Tier 2 capital 2,278 2,216 2,444
- ----------------------------------------------------------------------------------------------------------
Total risk-based capital $ 44,997 $ 41,591 $ 37,223
==========================================================================================================
Risk-weighted assets $ 181,326 $ 176,052 $ 194,224
==========================================================================================================
Risk-based ratios:
Tier 1 capital 23.56% 22.37% 17.91%
==========================================================================================================
Total risk-based capital 24.82% 23.62% 19.16%
==========================================================================================================
Tier 1 leverage ratio 12.57% 11.78% 10.31%
==========================================================================================================
Realized stockholders' equity to assets 12.82% 12.10% 10.88%
==========================================================================================================
</TABLE>
(1) The Company is not subject to the market risk capital guidelines recently
adopted by the regulatory authorities; these guidelines created Tier 3
capital.
Book value per share grew $0.89 or 7.80% during 1999 to $12.30 at year-end 1999.
Dividends declared rose $0.08 1/3 per share to $0.47 in 1999, up 21.55% 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, fell $3,163,551
since year-end 1998. Movement in interest rates remained the overriding factor
in the fair value results. Further details on investment securities and
associated fair values are contained in the Financial Condition section of this
Analysis.
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
agencies. In both 1999 and 1998, SEB paid approximately $2.2 million in
dividends to the Company without such prior approval. The amount of cash
dividends available from SEB for payment in 2000 without similar approval is
approximately $2,462,000. The Company uses dividends paid by SEB in order to pay
quarterly dividends to its own shareholders. Management anticipates that the
Company will continue to pay regular cash dividends.
18
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net income totaled $4,849,165 in 1999, up $456,567 or 10.39% from 1998, which
was down $329,297 or 6.97% from 1997. On a per share basis, net income grew to
$1.35 in 1999 from $1.23 and $1.32 in 1998 and 1997. Likewise, the return on
beginning equity increased 27 basis points to 11.87% in 1999 from 11.60% in
1998. The most significant factor affecting comparative results was a $457,823
nonrecurring after-tax loss on the sale of the central Florida locations in
1998. The effects of the Alachua divestiture on the Company's financial position
and 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. The return on average assets
for each of the last three years totaled 1.43%, 1.35%, and 1.40%. Factors
impacting noninterest income/expense and net interest income results are further
discussed in the next two subsections of this Analysis.
Net Interest Income
Net interest income declined $132,598 or 0.87% in 1999 compared to 1998.
Similarly, the net interest margin and net interest spread fell to 4.97% and
3.88%, respectively, from 5.19% and 4.00% in 1998. A continuing drop in average
balances and yields on commercial loans was the key element in the 1999 decline.
Cash flows from declines in loans and other sources in 1999, and also, in 1998,
were placed in investment securities which yield, on average, considerably less
than loans of the same duration. As noted in the Loan section of this Analysis,
recent tax legislation has necessitated changes in the way the Company
recognizes interest income on certain short-term consumer loans; the change in
income recognition has effectively lowered the yield on these consumer loans,
thereby reducing income results on a same loan basis. The decline in consumer
yields was largely mitigated by volume increases in consumer balances during
1999 compared to 1998.
The overall decline in interest earnings on assets which resulted from drops in
average balances, yields, or a combination thereof, was partially offset by a 42
basis point decrease in cost of funds. Management, through its Asset/Liability
Committee, has aggressively sought repricing opportunities for deposits,
particularly in certain Georgia markets. As discussed in prior filings, interest
margins and spreads will almost certainly continue to narrow as the Company
continues to face intense competition for loans and deposit dollars from other
banks and credit unions in virtually all its markets. Volume of assets and
deposits will become even more important as margins decline. Strategies
implemented by management to increase average loans outstanding include a)
utilization of more competitive pricing on loan products and b) development of
additional loan relationships, all without compromising portfolio quality.
Management's strategy for deposits is to reduce costs of funds and employ
alternative sources of financing when feasible. Because of the rising rate
environment currently propelled by the Federal Reserve, management expects cost
of funds and corresponding interest expense to increase in 2000. Net interest
income declined $1,174,412 or 7.16% in 1998 compared to 1997. Approximately 60%
of the 1998 decline was attributable to the sale of the Alachua offices. Most of
the remaining decline resulted from a substantial drop in average commercial
loans outstanding at other SEB locations. The table on the next page provides
comparative details about average balances, income/expense, and average yields
earned and rates paid on interest-earning assets and liabilities in 1999, 1998,
and 1997.
19
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
====================================================================================================================================
1999 1998 1997
-----------------------------------------------------------------------------------------
AVERAGE BALANCES(5) AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
YEAR ENDED DECEMBER 31, BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
====================================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $12,379 $11,859 $13,229
Interest-earning assets:
Loans, net(1), (2), (3) 163,124 $17,160 10.52% 165,391 $18,557 11.22% 186,174 $20,866 11.21%
Federal funds sold 6,813 325 4.77% 13,573 727 5.37% 15,571 842 5.42%
Taxable investment securities 122,786 7,289 5.96% 105,575 6,398 6.08% 89,508 5,552 6.22%
Tax-exempt investment securities(3) 24,880 1,923 7.73% 20,304 1,597 7.87% 19,107 1,668 8.73%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 317,603 26,697 8.42% 304,843 27,279 8.96% 310,360 28,928 9.33%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (3,197) (3,924) (3,727)
Premises and equipment, net 6,632 6,790 8,062
Intangible and other assets 7,214 6,680 8,610
Unrealized (losses) gains on
investment securities (1,512) 246 (401)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $339,119 $326,494 $336,133
====================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $54,438 $51,783 $53,005
Interest-bearing liabilities:
Interest-bearing demand deposits(4) 43,510 $ 1,218 2.80% 40,310 $ 1,208 3.00% 42,766 $ 1,237 2.89%
Savings 74,495 2,974 3.99% 73,330 3,313 4.52% 72,453 3,296 4.55%
Time deposits 120,523 6,641 5.51% 116,865 6,900 5.90% 126,295 7,284 5.77%
Federal funds purchased 553 30 5.35% -- --
U. S. Treasury demand note 828 39 4.75% 924 51 5.52% 1,269 66 5.20%
Note payable -- -- 553 41 7.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 239,909 10,902 4.54% 231,429 11,472 4.96% 243,336 11,924 4.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 3,154 3,667 3,834
Realized stockholders' equity 42,616 39,453 36,223
Unrealized (losses) gains on
investment securities, net of tax (998) 162 (265)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $339,119 $326,494 $336,133
====================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $77,694 $73,414 $67,024
====================================================================================================================================
INTEREST RATE SPREAD 3.88% 4.00% 4.43%
====================================================================================================================================
NET INTEREST INCOME $15,795 $15,807 $17,004
====================================================================================================================================
NET INTEREST MARGIN 4.97% 5.19% 5.48%
====================================================================================================================================
</TABLE>
(1) Average loans are shown net of unearned income. Nonperforming loans are
included.
(2) Interest income includes loan fees of approximately $895,00, $977,000, and
$1,074,000 in 1999, 1998 and 1997.
(3) Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. The
taxable-equivalent amounts included in the above table aggregated
approximately $711,000, and $591,000, and $613,00 in 1999, 1998 and 1997. No
adjustment has been made for any state tax benefits.
(4) NOW and money market accounts.
(5) Averages presented generally represent average daily balances.
20
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest Income and Expense
Excluding the pre-tax gain of $101,908 recognized on the sale of the Alachua
offices in 1998, noninterest income grew $142,274 or 4.28% in 1999 compared to
1998. An $85,194 or 3.47% improvement in service charges on deposit accounts and
a $47,238 or 5.39% increase in other operating income were the main elements in
the 1999 results. By type and amount, the chief components of other operating
income in 1999 were mortgage origination fees, $159,846; commissions on the sale
of credit life insurance (generated by SEB), $194,733; safe deposit box rentals,
$75,128; and income on sale of check products, $75,767. Combined, these four
income items comprised 54.77% of other operating income in 1999. Salaries and
employee benefits declined $53,019 in 1999. The vast majority, or 84.66%, of
employee expenses were vested in salaries and other direct compensation,
including related payroll taxes, in 1999. Profit-sharing accruals and other
fringe benefits composed the remaining 7.22% and 8.12% of employee expenses. The
division of employee expenses between compensation, profit-sharing, and other
fringe benefits remained consistent with historical norms in 1999. The 6.91% or
$119,110 increase in net occupancy and equipment expense since 1998 derived
almost exclusively from higher computer costs. The Company began leasing new
operating system hardware in the 1998 second quarter; the newly leased hardware
replaced a hardware system owned by the Company that was fully depreciated.
Because replacement of the operating system hardware was not accelerated due to
Year 2000 issues, the new lease amounts are not being disclosed as Year 2000
costs. Refer to the separate disclosures provided under Year 2000 for further
details. Other operating expenses increased $77,993 or 2.73% in 1999. A net loss
on sales of other real estate was the primary factor in the 1999 results. No
individual component of other operating expenses aggregated or exceeded 10% of
the total in 1999 or 1998. Omitting the pre-tax gain on the sale of the central
Florida locations, noninterest income declined $584,420 or 14.94% in 1998
compared to 1997. Likewise, noninterest expense fell $1,376,891 or 11.71%.
Except for increases in other operating income attributable to mortgage
origination fees, virtually all of the fluctuation in noninterest income and
expense during 1998 was due to the sale of the Alachua County branches and the
elimination of the corresponding income and expenses that accrued to those
locations.
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.
21
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 1999 or prior years incur, and
does not in 2000 expect to incur, 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
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. Adoption
of this statement did not have a significant impact on the Company's financial
condition or results of operations.
Effective January 1, 1998, the Company also adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
disclosure of segment information about services, geographic areas, and major
customers. The Company acts as an independent community financial services
provider and offers traditional banking and insurance services to individual,
commercial, and government customers. Because the Company views SEB as one
versus multiple segments for financial reporting purposes, no segmentation of
bank operations between services, types of customers, and market areas is
provided. Additionally, because SBCF did not have a significant impact on the
Company's financial condition or results of operations in 1999 or 1998, no
segment information is provided for the Company's insurance business at December
31, 1999 or 1998. Parent Company only financial information is provided in Note
13 to the Consolidated Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," 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.
22
<PAGE>
SOUTHEASTERN BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item commences on page 32. Selected Statistical Information
begins on page 24. Both the financial statements and statistical information
presented should be read in conjuction with the accompanying management
discussion of Southeastern Banking Corporation and subsidiaries.
23
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about average balances, income/expense, and
average yields earned and rates paid on interest-earning assets and
interest-bearing liabilities for each of the last three years. The table below
summarizes the changes in interest income and interest expense attributable to
volume and rates in 1999 and 1998.
<TABLE>
<CAPTION>
===============================================================================================================
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
INTEREST -----------------------------------------------------------------------
DIFFERENTIAL(1) VOLUME RATE NET VOLUME RATE NET
- -===============================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans(2,3) $ (252) $(1,145) $(1,397) $(2,332) $ 23 $(2,309)
Federal funds sold (329) (73) (402) (107) (8) (115)
Taxable investment securities 1,020 (129) 891 976 (130) 846
Tax-exempt investment securities(3) 353 (27) 326 100 (171) (71)
- ---------------------------------------------------------------------------------------------------------------
Total interest income 792 (1,374) (582) (1,363) (286) (1,649)
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits(4) 59 (49) 10 (73) 44 (29)
Savings 54 (393) (339) 40 (23) 17
Time deposits 229 (488) (259) (554) 170 (384)
Federal funds purchased(5) 30 -- 30 -- -- --
U. S. Treasury demand note (5) (7) (12) (19) 4 (15)
Note payable(5) -- -- -- (41) -- (41)
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 367 (937) (570) (647) 195 (452)
- ---------------------------------------------------------------------------------------------------------------
NET CHANGE IN NET INTEREST INCOME $ 425 $ (437) $ (12) $ (716) $ (481) $(1,197)
===============================================================================================================
</TABLE>
(1) Changes in net interest income are attributed to either changes in average
balances (volume change) or changes in average rates (rate change) for
earning assets and sources of funds on which interest is received or paid.
Volume change is calculated as change in volume times the previous rate
while rate change is change in rate times the previous volume. The
rate\volume change, change in rate times change in volume, is allocated
between volume change and rate change at the ratio each component bears to
the absolute value of their total.
(2) Includes loan fees. See the average balances table included in the
Operations section of Part II, Item 7 for more details.
(3) Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustments have been made for any state tax benefits or the nondeductible
portion of interest expense.
(4) NOW and money market accounts.
(5) The entire change in net interest income attributable to the Company's
borrowings under federal funds line of credit and early redemption of the
term loan have been allocated to the change in volume.
24
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
INVESTMENT SECURITIES
Investment securities available-for sale (carried at estimated fair value) and
held-to-maturity (carried at amortized cost) for each of the last three years
are presented in the table below. The maturity distribution of these securities
and their weighted average yields are presented in an additional table on the
next page.
<TABLE>
<CAPTION>
=======================================================================================================
INVESTMENT SECURITIES BY CATEGORY AMORTIZED FAIR UNREALIZED UNREALIZED
AT DECEMBER 31, COST VALUE GAINS LOSSES
=======================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U. S. Treasury and
U.S. Government agencies
1999 $ 98,408 $ 95,151 $ 7 $3,264
1998 86,656 87,115 483 24
1997 81,730 81,760 195 165
Mortgage-backed securities
1999 22,753 21,655 9 1,107
1998 21,171 21,150 33 54
1997 6,520 6,513 33 40
Equity securities
1999 1,088 1,088 - -
1998 893 893 - -
1997 1,050 1,050 - -
- -------------------------------------------------------------------------------------------------------
Total available-for-sale
1999 122,249 117,894 16 4,371
1998 108,720 109,158 516 78
1997 89,300 89,323 228 205
HELD-TO-MATURITY
States and political subdivisions
1999 28,018 27,476 250 792
1998 23,873 24,947 1,074 -
1997 19,349 20,158 818 9
- -------------------------------------------------------------------------------------------------------
Total investment securities
1999 $150,267 $145,370 $ 266 $5,163
1998 132,593 134,105 1,590 78
1997 108,649 109,481 1,046 214
=======================================================================================================
</TABLE>
25
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
The distribution of maturities and the weighted average yields of debt
securities at December 31, 1999 are shown in the table below:
<TABLE>
<CAPTION>
===========================================================================================================
MATURITY DISTRIBUTION
OF INVESTMENT SECURITIES 1 YEAR 1 - 5 5 - 10 AFTER 10
DECEMBER 31, 1999 OR LESS YEARS YEARS YEARS TOTAL
===========================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DISTRIBUTION OF MATURITIES
AMORTIZED COST:
U.S. Treasury and
U.S. Government agencies $ 5,494 $ 79,678 $12,996 $ 240 $ 98,408
Mortgage-backed securities(1) 266 14,399 8,088 - 22,753
States and political subdivisions 2,720 6,470 7,018 11,810 28,018
- ------------------------------------------------------------------------------------------------------------
Total debt securities $ 8,480 $100,547 $28,102 $12,050 $149,179
============================================================================================================
FAIR VALUE:
U.S. Treasury and
U.S. Government agencies $ 5,488 $77,226 $ 12,231 $ 206 $ 95,151
Mortgage-backed securities(1) 267 13,805 7,583 - 21,655
States and political subdivisions 2,723 6,474 7,046 11,233 27,476
- ------------------------------------------------------------------------------------------------------------
Total debt securities $ 8,478 $97,505 $ 26,860 $11,439 $144,282
============================================================================================================
WEIGHTED AVERAGE YIELD:
U.S. Treasury and
U.S. Government agencies 5.79% 5.88% 6.09% 5.00% 5.90%
Mortgage-backed securities(1) 6.39% 6.02% 6.15% -- 6.07%
States and political subdivisions(2) 7.88% 7.51% 7.95% 7.27% 7.55%
- ------------------------------------------------------------------------------------------------------------
Total debt securities 6.48% 6.00% 6.57% 7.22% 6.24%
============================================================================================================
</TABLE>
(1) Distribution of maturities for mortgage-backed securities is based on
expected average lives which may be different from the contractual terms.
(2) The weighted average yields for tax-exempt securities have been calculated
on a taxable-equivalent basis, using a federal income tax rule of 34%. No
adjustments have been made for any state tax benefits or the nondeductible
portion of interest expense pertaining to tax-exempt income.
The Company had no investments in the obligations of any state or municipality
which exceded 10% of stockholders' equity at December 31, 1999.
26
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
LOANS
Loans outstanding are presented by type below:
<TABLE>
<CAPTION>
================================================================================================================
LOANS BY CATEGORY
AT DECEMBER 31, 1999 1998 1997 1996 1995
================================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 67,515 $ 69,125 $ 92,587 $ 88,899 $ 76,453
Real estate - construction 3,161 2,318 4,029 3,416 6,260
Real estate - mortgage 59,656 60,035 59,652 59,515 53,509
Consumer, including credit cards 37,312 36,566 34,187 35,550 33,006
- ----------------------------------------------------------------------------------------------------------------
Loans, gross 167,644 168,044 190,455 187,380 169,228
Unearned income 1,650 3,283 3,632 3,641 3,843
- ----------------------------------------------------------------------------------------------------------------
Loans, net $165,994 $164,761 $186,823 $183,739 $165,385
================================================================================================================
</TABLE>
The amount of certain gross loans outstanding at December 31, 1999, based on
remaining contractual repayments of principal, are shown by maturity and
interest rate sensitivity in the table below:
<TABLE>
<CAPTION>
=====================================================================================================================
REMAINING MATURITIES OF SELECTED LOANS
------------------------------------------
LOAN MATURITY AND MORE
INTEREST RATE SENSITIVITY WITHIN ONE - FIVE THAN FIVE
DECEMBER 31, 1999 TOTAL ONE YEAR YEARS YEARS
=====================================================================================================================
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN MATURITY
Commercial, financial, and agricultural(1) $67,023 $21,924 $31,853 $13,246
Real estate - construction 3,161 2,344 380 437
- ---------------------------------------------------------------------------------------------------------------------
Total $70,184 $24,268 $32,233 $13,683
=====================================================================================================================
INTEREST RATE SENSITIVITY
Selected loans with:
Predetermined interest rates $21,694 $ 6,863
Floating or adjustable interest rates 10,539 6,820
- ---------------------------------------------------------------------------------------------------------------------
Total $32,233 $13,683
=====================================================================================================================
</TABLE>
(1) Excludes nonaccrual loans totaling approximately $492.
The above maturity schedule is not necessarily indicative of future prncipal
reductions since each loan is evaluated at maturity and, in many instances, is
renewed in part or in total.
27
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
NONPERFORMING ASSETS
Nonperforming assets for each of the last five years are presented in the table
below:
<TABLE>
<CAPTION>
==========================================================================================================
NONPERFORMING ASSETS
AT DECEMBER 31, 1999 1998 1997 1996 1995
==========================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 685 $ 872 $ 775 $ 686 $ 632
Restructured loans(1) 357 374 389 418 -
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,042 1,246 1,164 1,104 632
Foreclosed real estate(2) 858 778 722 726 1,393
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $1,900 $2,024 $1,886 $1,830 $2,025
==========================================================================================================
Accruing loans past due 90 days or more $1,467 $1,607 $1,767 $1,100 $1,245
==========================================================================================================
Ratios:
Nonperforming loans to net loans 0.63% 0.76% 0.62% 0.60% 0.38%
==========================================================================================================
Nonperforming assets to net loans
plus foreclosed real estate 1.14% 1.22% 1.01% 0.99% 1.21%
==========================================================================================================
</TABLE>
(1) Does not include restructured loans that yield a market rate.
(2) Includes only other real estate acquired through foreclosure or in
settlement of debts previously contracted.
The Company's nonperforming loans and assets for the three years ended December
31, 1999 are discussed and policies pertaining to same are delineated in the
Loan section of Part II, Item 7 (management discussion); accordingly, the
discussion below is limited to nonperforming asset levels at year-end 1996 and
1995 unless otherwise indicated:
a) Unrecognized income on nonaccrual and restructured loans totaled
approximately $114,000, $49,000, $143,000, $71,000 and 137,000 in 1999,
1998, 1997, 1996, and 1995.
b) All known potential problems loans were included in nonperforming loans at
December 31, 1995. Potential problem loans not included in nonperforming
loans at December 31, 1996 totaled approximatelY $1,400,000; subsequent to
year-end 1996, these potential problem loans were placed on nonaccrual
status and charged-off to their estimated collectible values.
c) The Company had no concentration of loans to borrowers engaged in any
single industry that exceed 10% of total loans at year-end 1996 and 1995.
28
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. The allowance may increase or decrease based on
loan growth, changes in internally generated credit ratings, changes in general
economic conditions of the Company's trade areas, changes in customer bankruptcy
filings, or historical loan loss experience. These factors are analyzed and
reviewed on a continual basis to determine if any changes to the provision for
loan losses should be made. Activity in the allowance for each of the last five
years is presented in the table below:
<TABLE>
<CAPTION>
===============================================================================================================
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
===============================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $ 3,407 $ 3,705 $ 3,735 $ 3,532 $ 3,257
Allowance of purchased bank
Provision for loan losses 1,200 1,230 1,715 1,475 1,200
Charge-offs:
Commercial, financial, and agricultural 496 829 1,187 996 752
Real estate - construction 351 - - - -
Real estate - mortgage 213 330 202 167 135
Consumer, including credit cards 950 802 845 791 589
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs 2,010 1,961 2,234 1,954 1,476
- ----------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 258 117 99 388 156
Real estate - construction - - - - -
Real estate - mortgage 27 15 6 16 34
Consumer, including credit cards 341 301 384 278 361
- ----------------------------------------------------------------------------------------------------------------
Total recoveries 626 433 489 682 551
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs 1,384 1,528 1,745 1,272 925
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses at December 31 $ 3,223 $ 3,407 $ 3,705 $ 3,735 $ 3,532
==================================================================================================================
Net loans outstanding(1) at December 31 $165,994 $164,761 $186,823 $183,739 $165,385
==================================================================================================================
Average loans outstanding at December 31 $163,124 $165,391 $186,174 $177,522 $160,679
==================================================================================================================
Ratios:
Allowance to net loans 1.94% 2.07% 1.98% 2.03% 2.14%
==================================================================================================================
Net charge-offs to average loans 0.85% 0.92% 0.94% 0.72% 0.58%
==================================================================================================================
Provision to average loans 0.74% 0.74% 0.92% 0.83% 0.75%
==================================================================================================================
Recoveries to total charge-offs 31.14% 22.08% 21.89% 34.90% 37.33%
==================================================================================================================
</TABLE>
(1) Net of unearned income.
See the table on the next page and the accompanying management discussion for
additional information on the allowance for loan losses.
29
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
The Company has allocated the allowance for loan losses according to the amount
deemed to be reasonably necesary to absorb potential losses within the loan
categories summarized in the table below:
<TABLE>
<CAPTION>
=========================================================================================================
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES
AT DECEMBER 31, 1999 1998 1997 1996 1995
=========================================================================================================
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOCATION OF ALLOWANCE
BY LOAN CATEGORY
Commercial, financial, and agricultural $1,286 $1,135 $1,132 $1,217 $1,236
Real estate - construction 117 - - - 71
Real estate - mortgage 651 861 368 589 353
Consumer, including credit cards 675 678 553 394 706
Unallocated 494 733 1,652 1,535 1,166
- ---------------------------------------------------------------------------------------------------------
Total $3,223 $3,407 $3,705 $3,735 $3,532
=========================================================================================================
ALLOCATION OF ALLOWANCE
AS A PERCENT OF TOTAL ALLOWANCE
Commercial, financial, and agricultural 40% 33% 30% 33% 35%
Real estate - construction 4% - - - 2%
Real estate - mortgage 20% 25% 10% 16% 10%
Consumer, including credit cards 21% 20% 15% 10% 20%
Unallocated 15% 22% 45% 41% 33%
- ---------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
=========================================================================================================
YEAR-END LOAN CATEGORIES AS
A PERCENT OF TOTAL LOANS
Commercial, financial, and agricultural 40% 41% 49% 47% 45%
Real estate - construction 2% 1% 2% 2% 4%
Real estate - mortgage 36% 36% 31% 32% 32%
Consumer, including credit cards 22% 22% 18% 19% 19%
- ---------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
=========================================================================================================
</TABLE>
30
<PAGE>
SOUTHEASTERN BANKING CORPORATION
SELECTED STATISTICAL INFORMATION
DEPOSITS
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about income/expense and rates paid on deposits
for the three most recent years. The composition of average deposits for these
same periods is shown below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BALANCES PERCENT OF TOTAL
COMPOSITION OF AVERAGE DEPOSITS --------------------------------- ----------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 54,438 $ 51,783 $ 53,005 18.58% 18.34% 18.00%
Interest-bearing demand deposits 43,510 40,310 42,766 14.85% 14.28% 14.52%
Savings 74,495 73,330 72,453 25.43% 25.98% 24.60%
Time deposits 120,523 116,865 126,295 41.14% 41.40% 42.88%
- -------------------------------------------------------------------------- ----------------------------------
Total $292,966 $282,288 $294,519 100.00% 100.00% 100.00%
==============================================================================================================
</TABLE>
The maturities of certificates of deposit totaling $100,000 or more at year-end
1999 are presented below:
<TABLE>
<CAPTION>
==============================================================================================================
MATURITIES OF CERTIFICATES
OF DEPOSIT OF $100,000 OR MORE CERTIFICATES
DECEMBER 31, 1999 OF DEPOSIT
==============================================================================================================
(IN THOUSANDS)
<S> <C>
Months to maturity:
3 or less $11,418
Over 3 through 6 11,291
Over 6 through 12 17,087
Over 12 4,649
- --------------------------------------------------------------------------------------------------------------
Total $44,445
==============================================================================================================
</TABLE>
SELECTED RATIOS FOR MEASUREMENT OF NET INCOME AND EQUITY
Selected ratios for the measurement of net income and equity are presented
below:
<TABLE>
<CAPTION>
==============================================================================================================
RETURN ON EQUITY AND ASSETS
YEAR ENDED DECEMBER 31,(1) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.43% 1.35% 1.40%
Return on average equity 11.38% 11.13% 13.04%
Dividend payout ratio 34.71% 31.53% 24.26%
Average equity to average assets ratio 12.53% 12.09% 10.77%
==============================================================================================================
</TABLE>
(1) These ratios exclude the effects of mark-to-market accounting for investment
securities.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders
Southeastern Banking Corporation
Darien, Georgia
We have audited the accompanying consolidated balance sheets of Southeastern
Banking Corporation and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated statements of income, stockholders' equity and cash flows of
Southeastern Banking Corporation and subsidiaries for the year ended December
31, 1997 were audited by Bricker & Melton, P.A., whose practice has been
combined with our Firm and whose report dated January 30, 1998 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Southeastern Banking Corporation and subsidiaries as of December 31, 1999 and
1998 and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
--------------------
BDO SEIDMAN, LLP
January 27, 2000
Atlanta, Georgia
32
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
===========================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks, including reserve requirements of approximately
$4,806,000 and $3,899,000 at December 31, 1999 and 1998 $ 14,016,035 $ 14,464,719
Federal funds sold 2,800,000 15,670,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 16,816,035 30,134,719
Investment securities
Held-to-maturity (market value of approximately $27,476,000 and
$24,948,000 at December 31, 1999 and 1998) 28,017,607 23,873,246
Available-for-sale, at market value 117,893,972 109,157,838
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 145,911,579 133,031,084
Loans, gross 167,644,071 168,044,357
Unearned income (1,649,960) (3,283,218)
Allowance for loan losses (3,222,889) (3,406,626)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net 162,771,222 161,354,513
Premises and equipment, net 6,708,814 6,603,948
Intangible assets 1,286,284 1,477,007
Other assets 7,050,954 5,332,061
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 340,544,888 $ 337,933,332
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 52,670,994 $ 58,261,917
Interest-bearing deposits 237,613,267 234,434,679
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 290,284,261 292,696,596
Federal funds purchased 3,950,000 --
U.S. Treasury demand note 1,909,498 816,053
Other liabilities 3,248,193 3,270,386
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 299,391,952 296,783,035
- ---------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 15 and 16)
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 38,159,815 34,993,625
- ---------------------------------------------------------------------------------------------------------------------------
Realized stockholders' equity 44,027,534 40,861,344
Accumulated other comprehensive income - unrealized (losses) gains on
investment securities, net of tax (2,874,598) 288,953
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,152,936 41,150,297
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,544,888 $ 337,933,332
===========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
33
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
==========================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 17,100,365 $ 18,503,237 $ 20,817,146
Federal funds sold 324,889 726,587 842,405
Investment securities
Taxable 7,288,849 6,398,453 5,551,514
Tax-exempt 1,271,925 1,059,488 1,104,117
- ----------------------------------------------------------------------------------------------------------
Total interest income 25,986,028 26,687,765 28,315,182
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 10,832,888 11,420,446 11,816,802
Federal funds purchased 29,578 -- --
U.S. Treasury demand note 39,345 50,504 65,814
Note payable to bank -- -- 41,339
- ----------------------------------------------------------------------------------------------------------
Total interest expense 10,901,811 11,470,950 11,923,955
- ----------------------------------------------------------------------------------------------------------
Net interest income 15,084,217 15,216,815 16,391,227
PROVISION FOR LOAN LOSSES 1,200,000 1,230,000 1,715,000
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,884,217 13,986,815 14,676,227
- ----------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 2,542,076 2,456,882 3,063,898
Gain on sale of branches before tax provision of
$559,731 -- 101,908 --
Investment securities gains (losses), net 3,738 (6,104) 51,176
Other operating income 922,965 875,727 795,851
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 3,468,779 3,428,413 3,910,925
- ----------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,747,257 5,800,276 6,327,730
Occupancy and equipment, net 1,843,734 1,724,624 2,085,659
Other operating expense 2,930,002 2,852,009 3,340,411
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense 10,520,993 10,376,909 11,753,800
- ----------------------------------------------------------------------------------------------------------
Income before income tax expense 6,832,003 7,038,319 6,833,352
INCOME TAX EXPENSE 1,982,838 2,645,721 2,111,457
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 4,849,165 $ 4,392,598 $ 4,721,895
==========================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 1.35 $ 1.23 $ 1.32
==========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
34
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 4,475,996 $ 1,391,723 $ 28,409,683 $ (273,775) $ 34,003,627
Comprehensive income:
Net income -- -- 4,721,895 -- 4,721,895
Other comprehensive income, net of
tax effect of $148,688:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- 288,633 288,633
------------
Comprehensive income 5,010,528
------------
Cash dividends declared
($.32 per share) -- -- (1,145,498) -- (1,145,498)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,475,996 1,391,723 31,986,080 14,858 37,868,657
Comprehensive income:
Net income -- -- 4,392,598 -- 4,392,598
Other comprehensive income, net of
tax effect of $141,200:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- 274,095 274,095
------------
Comprehensive income 4,666,693
------------
Cash dividends declared
($.38 2/3 per share) -- -- (1,385,053) -- (1,385,053)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 4,475,996 1,391,723 34,993,625 288,953 41,150,297
Comprehensive income:
Net income -- -- 4,849,165 -- 4,849,165
Other comprehensive income, net of
tax effect of $1,629,709:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- (3,163,551) (3,163,551)
------------
Comprehensive income 1,685,614
------------
Cash dividends declared
($.47 per share) -- -- (1,682,975) -- (1,682,975)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 4,475,996 $ 1,391,723 $ 38,159,815 $ (2,874,598) $ 41,152,936
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
35
<PAGE>
SOUTHEASTERN BANKING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
===============================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,849,165 $ 4,392,598 $ 4,721,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200,000 1,230,000 1,715,000
Depreciation 843,258 845,705 1,035,637
Amortization and accretion, net 249,835 204,500 290,042
Deferred income tax expense 49,101 76,345 30,352
Investment securities (gains) losses, net (3,738) 6,104 (51,176)
Net losses (gains) on sales of other real estate 44,013 (66,275) (77,817)
Gain on sale of branches before tax provision -- (101,908) --
Changes in assets and liabilities:
(Increase) decrease in other assets (77,500) 36,990 (175,293)
Increase (decrease) in other liabilities 37,606 (569,788) (352,847)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,191,740 6,054,271 7,135,793
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of investment securities:
Held-to-maturity 2,205,200 3,720,800 4,856,850
Available-for-sale 49,793,188 66,754,681 39,043,285
Proceeds from sales of investment securities:
Available-for-sale 1,001,562 4,992,122 32,299
Proceeds from sales of other real estate 761,018 572,752 627,669
Purchases of investment securities:
Held-to-maturity (6,371,457) (8,264,361) (1,881,214)
Available-for-sale (64,357,623) (91,161,927) (44,318,306)
Net (increase) decrease in loans (3,652,848) 2,534,445 (5,495,466)
Capital expenditures, net (777,800) (805,131) (179,487)
Net funds paid in sale of branches -- (13,589,236) --
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,398,760) (35,245,855) (7,314,370)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand, NOW, and savings
deposits (4,174,245) 16,512,145 6,902,338
Net increase in certificates of deposit 1,761,910 7,209,331 1,113,381
Net increase in federal funds purchased 3,950,000 -- --
Net increase (decrease) in U.S. Treasury demand note 1,093,445 (2,954,635) 1,970,322
Payments on note payable -- -- (1,450,000)
Cash dividends paid (1,742,774) (1,182,021) (1,121,506)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 888,336 19,584,820 7,414,535
- ---------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,318,684) (9,606,764) 7,235,958
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30,134,719 39,741,483 32,505,525
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,816,035 $ 30,134,719 $ 39,741,483
===============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
36
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
DESCRIPTION OF BUSINESS
Southeastern Banking Corporation and its subsidiaries, Southeastern Bank and SBC
Financial Services, Inc. (collectively, the Company), provide a full array of
financial services to meet the financial needs of individual, commercial, and
government customers in southeast Georgia and northeast Florida. The
consolidated financial statements include the accounts of Southeastern Banking
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
MERGER OF BANK SUBSIDIARIES
At the close of business on June 25, 1998, Southeastern Bank of Florida merged
with and into Southeastern Bank. The banking offices of Southeastern Bank of
Florida are now operating as branches of Southeastern Bank.
NEW SUBSIDIARY
SBC Financial Services, Inc. was formed in 1998 to provide insurance agent and
brokerage services for general insurance. An initial capital investment of
$50,000 was made by the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period, the
most significant of which pertain to the allowance for loan losses. Actual
results could vary from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been restated to conform with the current year
financial statement presentation.
CASH EQUIVALENTS
Cash equivalents include due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.
INVESTMENT SECURITIES
Investment securities are classified as held-to-maturity or available-for-sale.
Securities which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost.
Securities not classified as held-to-maturity are classified as
available-for-sale and are carried at market value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate component of
stockholders' equity until realized. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity. Gains and
losses on sales of investment securities are recognized based on the adjusted
costs of the specific securities at disposition.
37
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Interest income on loans is generally
recognized on a level-yield basis.
Loans are changed to nonaccrual status when the full timely collection of
principal or interest becomes doubtful or the loans become contractually past
due 90 days or more as to either principal or interest, unless the loans are
both well-secured and in the process of collection. Accrued interest on any loan
changed to nonaccrual status is reversed. Cash receipts on nonaccrual loans are
applied first to outstanding principal balances and secondly to interest.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is that amount considered adequate to
absorb potential losses in the loan portfolio based on management's evaluation
of the size and current risk characteristics of the portfolio. Such evaluations
consider the balance of impaired loans and prior loan loss experience as well as
the impact of current economic conditions. Management considers a loan to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. Specific provision
for loan losses is made for impaired loans based on a comparison of the recorded
carrying value of the loan to either the present value of the loan's expected
cash flow, the loan's estimated market price, or the estimated fair value of the
underlying collateral. Specific and general provisions for loan losses are also
made based on other considerations. Recognized losses are charged to the
allowance and subsequent recoveries are added. Although the Company believes it
has a sound basis for estimating the amount needed for the allowance for loan
losses, actual charge-offs are highly dependent upon future events and could
vary from these estimates.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are normally
capitalized and recognized as an adjustment to the yields on the related loans.
As the net amount of loan origination fees for the years ended December 31,
1999, 1998 and 1997 was not significant, no amounts have been capitalized or
deferred.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line and declining
balance methods over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to operations as incurred,
while betterments are capitalized.
INTANGIBLE ASSETS
Intangible assets consist of deposit base premiums and goodwill. The deposit
base premiums are being amortized using the straight-line method over estimated
useful lives ranging from 11 to 15 years. Goodwill is being amortized using the
straight-line method over periods of 20 years or less. Amortization of
intangibles totaled $190,723, $195,637 and $308,986 in 1999, 1998 and 1997,
respectively.
Long-lived assets, including certain fixed assets and intangibles, are evaluated
regularly for other-than-temporary impairment. If circumstances suggest that the
value of such assets may be impaired and a write-
38
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
down would be material, an assessment of recoverability is performed prior to
any write-down. Impairment on intangibles is evaluated at each balance sheet
date or whenever events or changes in circumstances indicate that the carrying
amount should be assessed. Impairment, if any, is recognized through a valuation
allowance with a corresponding charge recorded in the income statement. The
Company did not consider any of its intangible assets to be impaired at December
31, 1999 and 1998.
OTHER REAL ESTATE
Other real estate represents property acquired through foreclosure or in
settlement of loans and is recorded at the lower of cost or fair value less
estimated selling expenses. Other real estate also includes any property owned
that was formerly used as a branch facility. Provisions for subsequent
devaluation of other real estate are charged to operations, while costs
associated with improving the property are capitalized. Gains and losses on
sales of other real estate are recognized at disposition based on adjusted
carrying values.
INCOME TAXES
The Company files consolidated income tax returns where permissible. Income tax
expense (benefit) is allocated to each member of the consolidated group on the
basis of their respective taxable income or loss included in the consolidated
income tax returns. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Company originates financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the consolidated balance sheets. Commitments to extend
credit represent legally binding agreements to lend to a customer with fixed
expiration dates or other termination clauses. Since many commitments expire
without being funded, total commitment amounts do not necessarily represent
future liquidity requirements. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party.
The Company does not invest in off-balance sheet derivative financial
instruments such as swaps, options or forward contracts.
39
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIC EARNINGS PER COMMON SHARE
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each period. Shares outstanding totaled
3,580,797 for the years ended December 31, 1999, 1998 and 1997.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 establishes standards for the disclosure of
segment information about services, geographic areas, and major customers. The
Company acts as an independent community financial services provider and offers
traditional banking and insurance services to individual, commercial, and
government customers. Because the Company views Southeastern Bank as one versus
multiple segments for financial reporting purposes, no segmentation of bank
operations between services, types of customers, and market areas is provided.
Additionally, because SBC Financial Services, Inc. did not have a significant
impact on the Company's financial condition or results of operations in 1999 or
1998, no segment information is provided for the Company's insurance business at
December 31, 1999 or 1998. Parent Company only financial information is provided
in Note 13.
NEW ACCOUNTING PRONOUNCEMENTS
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
adoption of SFAS 130 did not have a significant impact on the Company's
financial condition or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," 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.
2. SALE OF BRANCHES
On January 16, 1998, the Company sold its three offices in Alachua County,
Florida, to First National Bank of Alachua. Cash, loans, and premises and
equipment with book values of approximately $32,159,000 were sold, and deposits
and other liabilities totaling approximately $33,646,000 were divested. The
premium paid to the Company totaled $1,487,461, resulting in a pretax gain of
approximately $101,908 for book purposes
40
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and $1,487,461 for tax purposes. The book tax provision on the sale aggregated
$559,731, resulting in an after-tax loss of $457,823.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of cash flow information and noncash investing
and financing activities follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
========================================================================================================
<S> <C> <C> <C>
CASH PAID DURING THE YEAR
Interest paid to depositors $10,842,589 $11,853,861 $11,960,277
Interest paid on note payable -- -- 41,631
Income taxes 2,042,000 2,810,050 1,936,500
NONCASH INVESTING AND FINANCING ACTIVITIES
Loans foreclosed $ 1,382,851 $ 1,116,633 $ 975,785
Loans made in connection with sales of foreclosed
real estate 346,712 567,166 308,243
Transfer of bank premises to other real estate -- 94,845 177,539
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
=============================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and U.S. Government
agencies $ 98,408,662 $ 7,208 $ 3,264,487 $ 95,151,383
Mortgage-backed securities 22,752,937 8,645 1,106,819 21,654,763
Equity securities 1,087,826 -- -- 1,087,826
- -------------------------------------------------------------------------------------------------------------
122,249,425 15,853 4,371,306 117,893,972
- -------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
States and political subdivisions 28,017,607 250,346 791,968 27,475,985
- -------------------------------------------------------------------------------------------------------------
28,017,607 250,346 791,968 27,475,985
- -------------------------------------------------------------------------------------------------------------
Total investment securities $150,267,032 $ 266,199 $ 5,163,274 $145,369,957
=============================================================================================================
</TABLE>
41
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
=============================================================================================================
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and U.S. Government
agencies $ 86,655,735 $ 483,091 $ 24,122 $ 87,114,704
Mortgage-backed securities 21,171,470 33,060 54,222 21,150,308
Equity securities 892,826 -- -- 892,826
- -------------------------------------------------------------------------------------------------------------
108,720,031 516,151 78,344 109,157,838
- -------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY
States and political subdivisions 23,873,246 1,074,366 29 24,947,583
- -------------------------------------------------------------------------------------------------------------
23,873,246 1,074,366 29 24,947,583
- -------------------------------------------------------------------------------------------------------------
Total investment securities $132,593,277 $ 1,590,517 $ 78,373 $134,105,421
=============================================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------ ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
=============================================================================================================
<S> <C> <C> <C> <C>
Due within one year $ 5,493,556 $ 5,488,135 $ 2,720,161 $ 2,723,044
Due after one year through five years 79,677,979 77,225,955 6,469,994 6,474,256
Due after five years through ten
years 12,997,127 12,230,893 7,017,447 7,045,845
Due after ten years 240,000 206,400 11,810,005 11,232,840
- -------------------------------------------------------------------------------------------------------------
98,408,662 95,151,383 28,017,607 27,475,985
Mortgage-backed securities 22,752,937 21,654,763 -- --
- -------------------------------------------------------------------------------------------------------------
$121,161,599 $116,806,146 $ 28,017,607 $ 27,475,985
=============================================================================================================
</TABLE>
Gross realized gains were $3,738, $15,393 and $51,176, and gross realized losses
were $0, $21,497 and $0 on sales and other redemptions of investment securities
in 1999, 1998 and 1997.
Investment securities with carrying values of approximately $65,253,000 and
$45,349,000, respectively, were pledged to secure public deposits and other
funds, including future advances from the Federal Home Loan Bank of Atlanta
(Note 9), at December 31, 1999 and 1998.
42
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS
The composition of the Company's loan portfolio is summarized as follows:
DECEMBER 31, 1999 1998
================================================================================
Commercial, financial and agricultural $ 67,515,094 $ 69,125,622
Real estate - construction 3,160,775 2,318,172
Real estate - mortgage 59,656,497 60,034,925
Consumer, including credit cards 37,311,705 36,565,638
- --------------------------------------------------------------------------------
Loans, gross $167,644,071 $168,044,357
================================================================================
Activity in the allowance for loan losses is summarized below:
1999 1998 1997
================================================================================
Balance at beginning of year $ 3,406,626 $ 3,705,273 $ 3,734,527
Provision for loan losses 1,200,000 1,230,000 1,715,000
Charge-offs (2,010,066) (1,961,155) (2,234,413)
Recoveries 626,329 432,508 490,159
- --------------------------------------------------------------------------------
Net charge-offs (1,383,737) (1,528,647) (1,744,254)
- --------------------------------------------------------------------------------
Balance at end of year $ 3,222,889 $ 3,406,626 $ 3,705,273
================================================================================
The Company's primary lending area is southeast Georgia and northeast Florida.
Although the Company's loan portfolio is diversified, a significant portion of
its loans are collateralized by real estate. Loans secured by real estate
aggregated approximately $103,170,000 and $105,010,000 at December 31, 1999 and
1998. Real estate loans are collateralized based on certain loan-to-appraised
value ratios.
Nonaccrual and restructured loans totaled approximately $1,042,000, $1,246,000
and $1,164,000 at December 31, 1999, 1998 and 1997, respectively. Unrecognized
interest income on such loans during the years ended December 31, 1999, 1998 and
1997 totaled approximately $114,000, $49,000 and $143,000.
In the normal course of business, the bank subsidiary has made loans at
prevailing interest rates and terms to directors, executive officers, and
principal shareholders of the Company and its subsidiaries, and to their
affiliates. The aggregate dollar amount of these loans, as defined, approximated
$2,978,000 at December 31, 1999 and $2,884,000 at December 31, 1998. During
1999, approximately $777,000 of such loans were made and $683,000 were repaid.
None of these loans have been restructured, nor were any related party loans
charged-off during 1999 and 1998.
43
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31, 1999 1998
================================================================================
Land $ 1,224,507 $ 1,224,507
Buildings 6,757,225 6,757,225
Furniture and equipment 5,285,036 4,507,236
- --------------------------------------------------------------------------------
13,266,768 12,488,968
Accumulated depreciation and amortization (6,557,954) (5,885,020)
- --------------------------------------------------------------------------------
Premises and equipment, net $ 6,708,814 $ 6,603,948
================================================================================
Depreciation and amortization of premises and equipment totaled $672,934,
$688,188 and $914,325 in 1999, 1998 and 1997, respectively.
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
DECEMBER 31, 1999 1998
================================================================================
Interest-bearing demand deposits $ 45,568,955 $ 43,616,992
Savings 72,347,620 72,882,905
Time certificates under $100,000 75,251,537 78,408,861
Time certificates $100,000 or more 44,445,155 39,525,921
- --------------------------------------------------------------------------------
Total interest-bearing deposits $237,613,267 $234,434,679
================================================================================
Interest expense on time certificates of $100,000 or more approximated
$2,381,000, $2,309,000 and $2,282,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The maturity distribution of the Company's time certificates over $100,000 was
as follows:
DECEMBER 31, 1999
================================================================================
Due in one year or less $ 39,795,917
Over one year through three years 4,071,548
Over three years 577,690
- --------------------------------------------------------------------------------
$ 44,445,155
================================================================================
44
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT-TERM BORROWINGS
The Company utilizes short-term borrowings as needed for liquidity purposes in
the form of U.S. Treasury demand notes and federal funds purchased. At December
31, 1999, the maximum amount of U.S. Treasury demand notes available to the
Company was $3,000,000, of which $1,909,498 was outstanding. Unsecured lines of
credit for federal funds purchased from third party banks totaled $24,000,000,
of which $3,950,000 was outstanding at December 31, 1999.
9. OTHER BORROWINGS
The Company has a line of credit from the Federal Home Loan Bank of Atlanta to
meet general liquidity and other needs. Under this line, the Company can borrow,
in total or increments, up to 16% of the bank subsidiary's total assets; at
December 31, 1999, maximum borrowings totaled approximately $54,400,000.
Mortgage-backed securities with aggregate carrying values of approximately
$11,043,000 were pledged to collateralize future advances under this line (Note
4). No amounts were drawn against this line at December 31, 1999 or 1998.
10. INCOME TAX EXPENSE
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
=================================================================================================
<S> <C> <C> <C>
FEDERAL
Current tax expense $1,836,977 $2,403,777 $1,949,777
Deferred tax expense 49,101 76,345 30,352
- -------------------------------------------------------------------------------------------------
1,886,078 2,480,122 1,980,129
STATE
Current tax expense 96,760 165,599 131,328
- -------------------------------------------------------------------------------------------------
$1,982,838 $2,645,721 $2,111,457
=================================================================================================
</TABLE>
The Company's provisions for income taxes differ from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. A reconciliation of this difference follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
=================================================================================================
<S> <C> <C> <C>
Taxes at federal statutory rate $ 2,322,881 $ 2,393,028 $ 2,323,339
Increase (decrease) resulting from:
Tax-exempt interest income, net (411,273) (341,074) (356,905)
State income taxes, net of federal benefit 63,863 109,295 86,676
Gain on sale of branches -- 471,088 --
Other, net 7,367 13,384 58,347
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 1,982,838 $ 2,645,721 $ 2,111,457
=================================================================================================
</TABLE>
45
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following schedule summarizes the temporary differences which comprised the
net deferred tax asset:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
=========================================================================================
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Allowance for loan losses $ 677,933 $ 740,789
Other real estate 93,360 92,885
Unrealized losses (gains) on investment securities
available-for-sale 1,480,855 (148,854)
Accretion of discounts on investment securities (24,046) (37,326)
Other 4,080 4,080
- -----------------------------------------------------------------------------------------
Net deferred tax asset $ 2,232,182 $ 651,574
=========================================================================================
</TABLE>
The Company has not recorded any valuation allowances for deferred tax assets.
11. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory profit-sharing plan which covers substantially
all employees. Under the terms of the plan, the Company's contributions are
discretionary but are not to exceed an amount determined by a formula provided
in the plan or the amount deductible for income tax purposes. Total
contributions expensed under this plan totaled $415,000, $375,000 and $330,000
for the years ended December 31, 1999, 1998 and 1997.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial instruments
are made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts shown.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS - For variable rate loans that reprice frequently and have no significant
change in credit risk, fair value approximates carrying value. The fair value of
all other loans is estimated by discounting the future cash
46
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flows using the current rate at which loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand and savings deposits is the
amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated using the rates currently offered for deposits of
similar remaining maturities. The estimate of fair value is not intended to
represent market value, deposit base premium or portfolio liquidation value.
SHORT-TERM BORROWINGS - The fair value of short-term borrowings is the amount
payable on demand at the reporting date.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - Because the Company
generally offers lending commitments and standby letters of credit to its
customers for only short periods of time and the rates underlying such
commitments therefore approximate market rates, the fair value of such
commitments and standby letters of credit is equal to the amount outstanding at
December 31, 1999 and 1998.
The following table presents the carrying values and estimated fair values of
the Company's financial instruments:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31, VALUE VALUE VALUE VALUE
======================================================================================================
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 16,816,035 $ 16,816,035 $ 30,134,719 $ 30,134,719
Investment securities 145,911,579 145,369,957 133,031,084 134,105,421
Loans, net 162,771,222 164,469,960 161,354,513 167,077,333
FINANCIAL LIABILITIES
Deposits $290,284,261 $290,021,753 $292,696,596 $290,544,410
Federal funds purchased 3,950,000 3,950,000 -- --
U.S. Treasury demand note 1,909,498 1,909,498 816,053 816,053
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Commitments to extend
credit $ 21,351,000 $ 14,434,000
Standby letters of credit 744,000 583,000
</TABLE>
47
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CONDENSED FINANCIAL INFORMATION OF SOUTHEASTERN BANKING CORPORATION
(PARENT COMPANY ONLY)
Parent Company only financial information is presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
==========================================================================================
<S> <C> <C>
ASSETS
Cash $ 1,352,904 $ 1,080,272
Investment in subsidiaries, at equity 39,691,034 40,148,538
Premises and equipment, net 74,499 84,534
Other assets 645,345 511,435
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 41,763,782 $ 41,824,779
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 610,846 $ 674,482
- ------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 4,475,996 4,475,996
Additional paid-in capital 1,391,723 1,391,723
Retained earnings 38,159,815 34,993,625
- ------------------------------------------------------------------------------------------
Realized stockholders' equity 44,027,534 40,861,344
Accumulated other comprehensive income - unrealized
(losses) gains on investment securities, net of tax (2,874,598) 288,953
- ------------------------------------------------------------------------------------------
Total stockholders' equity 41,152,936 41,150,297
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,763,782 $ 41,824,779
==========================================================================================
</TABLE>
48
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
=====================================================================================================
<S> <C> <C> <C>
INCOME
Dividends $ 2,232,000 $ 2,180,000 $ 2,320,000
Interest income 52,785 28,429 14,472
Equity in undistributed income of subsidiaries 2,656,047 2,271,776 2,494,719
- -----------------------------------------------------------------------------------------------------
Total income 4,940,832 4,480,205 4,829,191
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Interest expense -- -- 41,339
Occupancy and other expenses 88,608 92,098 90,668
- -----------------------------------------------------------------------------------------------------
Total expenses 88,608 92,098 132,007
- -----------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 4,852,224 4,388,107 4,697,184
INCOME TAX EXPENSE (BENEFIT) 3,059 (4,491) (24,711)
- -----------------------------------------------------------------------------------------------------
NET INCOME $ 4,849,165 $ 4,392,598 $ 4,721,895
=====================================================================================================
</TABLE>
49
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
==========================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,849,165 $ 4,392,598 $ 4,721,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (2,656,047) (2,271,776) (2,494,719)
Depreciation and amortization 59,322 59,322 59,322
Changes in assets and liabilities:
Decrease (increase) in other assets (183,197) 377 (2,638)
Decrease in other liabilities (3,837) (18,304) (23,314)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,065,406 2,162,217 2,260,546
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in subsidiaries (50,000) (50,000) --
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (50,000) (50,000) --
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments on note payable -- -- (1,450,000)
Cash dividends paid (1,742,774) (1,182,021) (1,121,506)
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,742,774) (1,182,021) (2,571,506)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 272,632 930,196 (310,960)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,080,272 150,076 461,036
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,352,904 $ 1,080,272 $ 150,076
==========================================================================================================
</TABLE>
50
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. REGULATORY REQUIREMENTS
The Company and its bank subsidiary are subject to various regulatory capital
requirements. Failure to meet adequate or minimum capital requirements can
initiate certain mandatory and additional discretionary actions by regulators
that could have a material effect on the Company's financial statements. The
Company and its bank subsidiary must meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to qualitative
judgments about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier 1 (primarily
stockholders' equity less intangible assets) and total (Tier 1, certain debt
instruments, and a portion of the allowance for loan losses) capital to
risk-weighted assets and a leverage ratio of Tier 1 capital to average quarterly
assets. As of December 31, 1999, the most recent notification from the Georgia
Department of Banking and Finance categorized the bank subsidiary as well
capitalized under the regulatory framework for prompt corrective action.
Management believes that the Company and its bank subsidiary meet all applicable
capital requirements as of December 31, 1999. Actual capital amounts and ratios
for 1999 and 1998 are presented in the following tables.
<TABLE>
<CAPTION>
REGULATORY
REGULATORY DEFINITION OF
DEFINITION OF ADEQUATELY
WELL CAPITALIZED CAPITALIZED ACTUAL
DECEMBER 31, 1999 (RATIO) (RATIO) (CAPITAL AMOUNT/RATIO)
===========================================================================================
<S> <C> <C> <C> <C>
TIER 1 CAPITAL RATIO
Consolidated 6.00% 4.00% $42,719,000 23.56%
Southeastern Bank 6.00% 4.00% 41,563,000 22.97%
TOTAL CAPITAL RATIO
Consolidated 10.00% 8.00% 44,997,000 24.82%
Southeastern Bank 10.00% 8.00% 43,837,000 24.23%
TIER 1 LEVERAGE RATIO
Consolidated 5.00% 4.00% 42,719,000 12.57%
Southeastern Bank 5.00% 4.00% 41,563,000 12.23%
</TABLE>
51
<PAGE>
SOUTHEASTERN BANKING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REGULATORY
REGULATORY DEFINITION OF
DEFINITION OF ADEQUATELY
WELL CAPITALIZED CAPITALIZED ACTUAL
DECEMBER 31, 1998 (RATIO) (RATIO) (CAPITAL AMOUNT/RATIO)
===========================================================================================
<S> <C> <C> <C> <C>
TIER 1 CAPITAL RATIO
Consolidated 6.00% 4.00% $39,375,000 22.37%
Southeastern Bank 6.00% 4.00% 38,742,000 22.03%
TOTAL CAPITAL RATIO
Consolidated 10.00% 8.00% 41,591,000 23.62%
Southeastern Bank 10.00% 8.00% 40,954,000 23.29%
TIER 1 LEVERAGE RATIO
Consolidated 5.00% 4.00% 39,375,000 11.78%
Southeastern Bank 5.00% 4.00% 38,742,000 11.60%
</TABLE>
State banking regulations limit the amount of dividends the bank subsidiary may
pay without prior approval. The amount of cash dividends available from the bank
subsidiary for payment in 2000 without such prior approval is approximately
$2,462,000.
15. COMMITMENTS
Commitments to extend credit totaled approximately $21,351,000 and $14,434,000
at December 31, 1999 and 1998. Standby letters of credit totaled approximately
$744,000 and $583,000 at December 31, 1999 and 1998, respectively. A substantial
amount of these contracts expire without being drawn upon. As a result, total
contractual amounts do not represent future credit exposure or liquidity
requirements.
16. CONTINGENCIES
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held April 11, 2000 (Proxy Statement).
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
SUPPLEMENTAL DISCLOSURE/COMPENSATION PURSUANT TO PLANS. The Company maintains an
Employee Profit-Sharing Plan (the Plan). The purpose of the Plan is to provide
employees with an opportunity to share in the profits generated by participating
subsidiaries. A participating employee's (the Participant) eligibility for
benefits is determined by his or her period of service. A Participant's period
of service begins on the commencement date of his employment and continues
through (i) periods of temporary illness; (ii) periods of temporary lay-off;
(iii) authorized leaves of absence; (iv) periods of termination of employment
lasting less than one year; and (v) certain periods of transfer to a member of
the controlled group of corporations of which the Company may become a part, as
defined by the Employee Retirement Income Security Act and regulations issued
thereunder.
Contributions are made each year in an amount determined by each participating
subsidiary's Board of Directors, subject to certain limitations regarding
earnings. No contributions by Participants are required or permitted.
Contributions are placed in a trust account, which is administered by a
corporate entity determined by the Company's Board of Directors.
Although records of the trust are maintained for each Participant's account for
accounting purposes, the assets of the trust are not segregated as to individual
Participant's accounts. The balances in a Participant's account are adjusted
annually to reflect contributions to the trust, income received from trust
assets, and any forfeitures which become available during the year.
A Participant's interest in his account vests 100% when his employment is
terminated (i) at or after the Participant attains the normal retirement age of
65; (ii) at or after the Participant attains age 59 1/2, has 10 years of
service, and early retirement is approved by the Board of Directors; or (iii)
due to disability. If termination is caused by a Participant's death, the
Participant's beneficiary becomes vested in the Participant's account as of the
date of the Participant's death. If a Participant's employment is terminated for
any reason other than those set out above, vesting in the Participant's account
is determined according to the schedule on the next page.
53
<PAGE>
==========================================================================
VESTED FORFEITED
YEARS OF SERVICE PERCENTAGES PERCENTAGES
==========================================================================
Less than 3 0% 100%
3 but less than 4 20 80
4 but less than 5 40 60
5 but less than 6 60 40
6 but less than 7 80 20
7 or more 100 0
==========================================================================
A Participant may choose to receive his benefits in a lump sum, in periodic
payments, or by the purchase of an annuity contract.
The Plan is administered solely by the Profit-Sharing Committee appointed by the
Board of Directors. A trustee appointed by the Company has the sole
responsibility to administer the trust assets. Both the Profit-Sharing Committee
and the trustee are considered fiduciaries of the Plan and have the
corresponding duties, obligations, and responsibilities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
[Remainder of this page intentionally left blank.]
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. and 2. - Financial Statements and Schedules
<TABLE>
<CAPTION>
============================================================================================
PAGE NUMBER
IN ANNUAL
INDEX TO FINANCIAL STATEMENTS & SCHEDULES REPORT
============================================================================================
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent auditors' report 32
Consolidated balance sheets at December 31, 1999 and 1998 33
Consolidated statements of income for each of
the three years ended December 31, 1999 34
Consolidated statements of stockholders' equity for each of
the three years ended December 31, 1999 35
Consolidated statements of cash flows for each of
the three years ended December 31, 1999 36
Notes to consolidated financial statements 37
============================================================================================
</TABLE>
(b) Reports on Form 8-K - NONE
(c) Index to Exhibits:
EXHIBIT TABLE PAGE
- ------------------------------------- ------------------------------
Articles of Incorporation and By-Laws Incorporated by reference from
Form 10-K filed for year ended
December 31, 1990.
Exhibit 22 Subsidiaries of Registrant 55
Exhibit 27 Financial Data Schedule
Submitted in electronic format only.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTHEASTERN BANKING CORPORATION
(REGISTRANT)
By: /s/ S. MICHAEL LITTLE
---------------------------------
S. MICHAEL LITTLE, VICE PRESIDENT
Date: March 14, 2000
56
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
================================================================================
DIRECTORS DATE
================================================================================
/s/ LESLIE H. BLAIR March 14, 2000
- --------------------------------------------
Leslie H. Blair
/s/ DAVID H. BLUESTEIN March 14, 2000
- --------------------------------------------
David H. Bluestein
/s/ GENE F. BRANNEN March 14, 2000
- --------------------------------------------
Gene F. Brannen
/s/ WILLIAM DOWNEY March 14, 2000
- --------------------------------------------
William Downey
/s/ ALYSON GRAY March 14, 2000
- --------------------------------------------
Alyson Gray
/s/ CORNELIUS P. HOLLAND, III March 14, 2000
- --------------------------------------------
Cornelius P. Holland, III
- ---------------------------------------------
Alva J. Hopkins, III
/s/ G. NORRIS JOHNSON March 14, 2000
- ---------------------------------------------
G. Norris Johnson
/s/ S. MICHAEL LITTLE March 14, 2000
- ---------------------------------------------
S. Michael Little
================================================================================
57
EXHIBIT 22.
Subsidiaries of the Company:
Southeastern Bank, Darien, Georgia
SBC Financial Services, Inc., Darien, Georgia
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,016
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,894
<INVESTMENTS-CARRYING> 28,018
<INVESTMENTS-MARKET> 27,476
<LOANS> 165,994
<ALLOWANCE> 3,223
<TOTAL-ASSETS> 340,545
<DEPOSITS> 290,284
<SHORT-TERM> 5,859
<LIABILITIES-OTHER> 3,248
<LONG-TERM> 0
0
0
<COMMON> 4,476
<OTHER-SE> 39,552
<TOTAL-LIABILITIES-AND-EQUITY> 340,545
<INTEREST-LOAN> 17,100
<INTEREST-INVEST> 8,561
<INTEREST-OTHER> 325
<INTEREST-TOTAL> 25,986
<INTEREST-DEPOSIT> 10,833
<INTEREST-EXPENSE> 10,902
<INTEREST-INCOME-NET> 15,084
<LOAN-LOSSES> 1,200
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 10,521
<INCOME-PRETAX> 6,832
<INCOME-PRE-EXTRAORDINARY> 4,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,849
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 4.97
<LOANS-NON> 685
<LOANS-PAST> 1,467
<LOANS-TROUBLED> 357
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,407
<CHARGE-OFFS> 2,010
<RECOVERIES> 626
<ALLOWANCE-CLOSE> 3,223
<ALLOWANCE-DOMESTIC> 2,729
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 494
</TABLE>
