The
Southeastern
Thrift
and Bank
Fund, Inc.
ANNUAL REPORT
December 31, 1996
DIRECTORS
Victor L. Andrews
Franklin C. Golden
Robert G. Freedman
Fred G. Steingraber
Donald R. Tomlin
H. Hall Ware III
OFFICERS
Victor L. Andrews
Chairman
Franklin C. Golden
President
James B. Little
Treasurer
James K. Schmidt
Vice President
Renaldo Pascual
Secretary
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN, TRANSFER AGENT,
DISTRIBUTION DISBURSING AGENT
AND REGISTRAR
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
LEGAL COUNSEL
Kilpatrick & Cody
1100 Peachtree Street
Atlanta, Georgia 30349-4530
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110-1617
Listed: NASDAQ Symbol: STBF
John Hancock Closed-End Funds:
1-800-843-0090
A 1 1/4" x 1" photo of Dr. Victor L. Andrews, Chairman of the Board of
Directors, flush right, next to second paragraph.
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
To the amazement of many, the stock market posted another record-setting
year in 1996, advancing to all-time highs. As they were in 1995,
financial stocks -- including banks -- were among 1996's leaders as the
slow growth, low inflation and fairly stable interest-rate environment
continued. We are pleased to report that The Southeastern Thrift and
Bank Fund, Inc. participated strongly for a second straight year in the
market's advances. For the 12 months ending December 31, 1996, the Fund
posted a total return of 25.06% at net asset value, a level a little
higher than the S&P 500-Index and much higher than was recorded for the
smaller stocks in the Russell 2000 Index for the same period.
After such a run-up, it's only prudent to temper expectations going
forward. Trees don't grow to the sky, and bull markets don't go on
unabated. That said, however, there are a number of reasons why we
remain as optimistic as ever about the prospects for bank and thrift
stocks in 1997. Not the least of them is the fact that banks right now
have some of the strongest fundamentals -- balance sheet strength, loan
losses, dividend and earnings growth -- that we've seen in the last 30
years. Lower insurance premiums have also been a help. Even so, bank and
thrift stocks remain inexpensive when compared to the overall market,
making them even more attractive. Another plus has been the regulatory
environment, which continues to be favorable, as portfolio manager Jim
Schmidt details in his commentary on the following pages.
At the end of 1996, the Board of Directors decided to retain the Fund's
net long-term capital gains in excess of capital losses for the year
ended December 31, 1996. The Fund pays capital gains taxes on these
long-term net capital gains. As it has for the last several years, the
Board made its decision based on its belief that the Fund continues to
have the ability to earn outstanding returns on this reinvested capital.
The Board plans to continue its active consideration of this policy.
Very truly yours on behalf of the Directors and Officers of the Fund.
/S/ Victor L. Andrews
Dr. Victor L. Andrews, Chairman of the Board of Directors
BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGER
The Southeastern
Thrift and Bank Fund, Inc.
Bank stocks lead the pack in 1996 market advance
The year ending December 31, 1996 was a good one for the equity market
as a whole and an even better one for bank stocks. For the year, The
Southeastern Thrift and Bank Fund, Inc. produced a total return of
25.06% at net asset value. This performance compares favorably to the
22.95% total return for the Standard & Poor's 500-Stock Index, although
it lags the 28.01% total return for the average open-end financial
services fund, according to Lipper Analytical Services.
Investors have come to embrace an economic outlook of slow growth, low
inflation and stable interest rates. This is an ideal environment for
banks because they are able to achieve moderate growth in loans and
earnings without taking undue risks. If the economy were growing more
rapidly, earnings would be temporarily inflated but the stage would be
set for an eventual economic slowdown or recession that would cause a
dramatic increase in loan losses. Banks do not earn enough money during
an economic boom to make up for what they lose during a bust. Slow,
plodding growth of 2-3%, year after year, is what we hope for as bank
investors.
In 1996, small- and mid-sized bank and thrift stocks, on which the Fund
concentrates, enjoyed good returns, but failed to keep up with shares of
superregional and money center banks. The smaller banks lagged in part
because there were fewer mergers than we expected in 1996. On the other
hand, fundamental investors were rewarded because earnings turned out to
be even stronger than we anticipated. Our holdings reported average
earnings per share gains of about 15% over 1995 results. We think there
will be a resurgence of merger activity in 1997 as the feasibility of
many acquisitions has improved. That's because the larger banks that we
consider to be the primary buyers saw their stock prices increase more
than those banks that we consider takeover targets. As a result, in most
cases it is easier for a large bank to pay a premium for a smaller one
without realizing earnings dilution. We continue to see plenty of solid,
long-term investment value in the smaller stocks the Fund holds. Their
favorable fundamentals, inexpensive valuations and takeover value all
bode well for these stocks.
A 2 1/4" x 3 1/2" photo of fund portfolio management team at bottom
left. Caption reads: "James K. Schmidt (seated) and Fund management team
members Patricia Ouimet and (Standing l-r) James Boyd, Thomas Finucane,
Gerard Cronin."
"...1996
proved to be
an excellent
year for bank
earnings."
Chart with the heading "Top Five Common Stock Holdings" at top of left
hand column. Within the chart there are five listings: 1) Union Planters
Corp. 5.4%; 2) First Union Corp. 5.2%; 3) Southtrust Corp. 4.9%; 4)
Southern National Corp. 4.8%; 5) NationsBank Corp. 3.0%. Footnote at
bottom reads "As a percentage of net assets at December 31, 1996."
"...bank
stocks
are 33%
cheaper
than the
overall stock
market."
The positive earnings beat goes on...
As we mentioned above, 1996 proved to be an excellent year for bank
earnings. Several components of the earnings equation were slightly
better than we had predicted -- loan growth, credit losses, and non-
interest revenues. In addition, many banks have continued aggressive
share repurchase programs, thereby shrinking the denominator in the
earnings-per-share calculation. In 1997, we are looking for earnings to
advance by another 10%. Based on this estimate, banks are selling for an
average of 12 times earnings. This compares to nearly 18 times 1997
earnings for the S&P 500 and means that the bank stocks are 33% cheaper
than the overall stock market.
Table entitled "Scorecard" at bottom of left hand column. The header for
the left column is "Investment"; the header for the right column is
"Recent performance ... and what's behind the numbers. The first listing
is Roosevelt Financial followed by an up arrow and the phrase "Missouri
thrift agrees to merger with Mercantile." The second listing is South
Street Financial followed by an up arrow and the phrase "Market applauds
this thrift's conversion." The third listing is Security First Network
Bank followed by a down arrow and the phrase "Soft market for technology
IPOs." Footnote below reads: "See "Schedule of Investments." Investment
holdings are subject to change."
Stock repurchases
Stock repurchases deserve a special mention here because of their
extraordinary importance to bank investors. A string of very profitable
years has left the banking industry with very strong capital ratios.
This is both a blessing and a curse because while high levels of equity
contribute to safety and soundness, it is difficult for a bank to earn a
satisfactory return on equity unless it is fully leveraged. Leverage is
traditionally accomplished by aggressively booking additional loans.
This could lead to imprudent lending standards, which would eventually
culminate in drastically increased loan charge-offs. Fortunately, we
think that many of those bank executives who retained their jobs after
the lending debacle in 1989-91 were chastened by the experience and are
opting now to reduce their equity ratios by using capital to buy back
stock. This not only increases earnings per share, as noted previously,
but prevents the higher-risk lending we might otherwise be witnessing at
this point in the economic cycle. The acceptance of share buybacks as a
leverage strategy is an extremely positive development, and it is one we
stress in our meetings with management.
Consolidation continues
During the year, five of the Fund's holdings announced their intention
to be acquired. Although 1996 has been similar to 1995 in terms of the
number of merger announcements, the size of the transactions has
declined noticeably. The drought in large bank acquisitions was broken
on August 30, when NationsBank and Boatmen's Bancshares (a St. Louis-
based bank with about $40 billion in assets) announced that they were
merging. This deal was significant for a number of reasons: It marked
the return to the merger wars of a predator bank that had sat out the
frenzy of 1995; it set very high pricing standards when measured by the
price-to-book or price-earnings ratios; and it reinforced the use of
purchase (rather than pooling) accounting for major acquisitions. The
issue of accounting treatment is important because the "purchase" method
allows an acquiring bank to continue the stock buyback programs that we
like so much. While purchase accounting has historically been frowned on
by many bank investors, it has gained credibility now that it has been
employed successfully this year by two of the nations biggest banks,
Wells Fargo and NationsBank. We think merger activity will accelerate
over the next year, although perhaps not to the extreme levels of 1995.
Over time, consolidation will be instrumental in the banking industry's
achievement of greater efficiency and ability to make technological
investments. Even if we were to never own another bank that got taken
over, we would still be big fans of bank consolidation.
Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended December 31,
1996." The chart is scaled in increments of 10% from bottom to top, with
30% at the top and 0% at the bottom. Within the chart, there are two
solid bars. The first represents the 25.06% total return for The
Southeastern Thrift and Bank Fund, Inc. The second represents the 28.01%
total return for the average open-end financial services fund. Footnote
below reads: "The total return for The Southeastern Thrift and Bank
Fund, Inc. is at net asset value with all distributions reinvested. The
average open-end financial services fund is tracked by Lipper Analytical
Services."
Dateline: Washington, D.C.
Since our last communication, several legal and regulatory issues have
been resolved in a favorable manner. On July 1, the Supreme Court
affirmed a lower court ruling that one of our holdings, Glendale
Federal, had suffered from a breach of contract when Congress changed
the accounting rules for Supervisory Goodwill in 1989. We own several
savings and loans that have similar claims in other "goodwill" suits.
The stock market was intensely interested in these stocks for a few days
immediately preceding and following the Supreme Court ruling, but we
feel these stocks are somewhat overlooked now as the headlines have
faded.
More recently, as part of the Omnibus Budget Reconciliation Bill,
Congress and the President enacted legislation to recapitalize the
Savings Association Insurance Fund. In return for a one-time assessment
this year, the savings and loan industry will see its FDIC premiums cut
dramatically in 1997 to levels comparable to those of the banks. Most of
the Fund's thrift holdings accrued these charges in the third quarter of
1996 and will see a 3-5% earnings pick up in 1997 from the lower
premiums. With this legislation, the road has been paved for a merging
of the bank and savings association insurance funds and eventually for a
single banking charter. This will make it much more common for
commercial banks to merge with thrifts.
"...several
legal and
regulatory
issues have
been
resolved in
a favorable
manner."
And finally, the banks' struggle for expanded powers rages on. Although
repeal of Glass-Steagall was nixed by Congress for 1996, the Federal
Reserve recently authorized banks to receive a larger portion of their
business from underwriting stocks and bonds. Previously capped at 10%,
the banks are now allowed to derive 25% of revenue from the securities
business. These changes have an immediate impact primarily on money
center banks, but some of the Fund's larger superregionals could acquire
a regional brokerage firm under the new guidelines. We are not
particularly excited about the possibility of banks making an effort to
be major players in the brokerage industry. Most of the banks we own are
culturally ill-equipped to succeed in the securities business and risk
cannibalizing profitable banking customers in the process. The biggest
beneficiaries of a movement by banks into the brokerage business would
be shareholders of regional brokerage firms that would become
acquisition targets.
"...the
Fund has
continued to
increase its
finance
company
holdings..."
Portfolio composition and outlook
Our basic investment concept does not vary much. We buy undervalued
regional banks and thrifts primarily in the Southeast that have solid
earnings fundamentals and are likely to be in the path of industry
consolidation. At year end, the Fund's assets were split as follows: 72%
banks, 22% thrifts, 4% non-bank financials and 2% cash.
Over the past three years, many of the Fund's smaller bank and thrift
holdings have been acquired for stock by a few large superregionals. As
such, our holdings in NationsBank and First Union now comprise a higher
proportion of the Fund's assets. As the market allows, we have reduced
our positions in these and other larger-capitalization names and have
invested the proceeds elsewhere. One area of focus has consistently been
the conversion of many previously mutual savings and loans to stock
ownership. These recent conversions are the least expensive of all
financial institutions as many trade under their book value. Almost of
all these companies have buyback programs in effect or planned and these
repurchases increase their book value per share. In several cases during
1996, we sold shares into the buyback programs at prices greater than
20% higher than the conversion price and repositioned into other, more
recently converted thrifts. Eventually, we expect many of the converted
thrifts to be acquired by commercial banks. In addition, the Fund has
continued to increase its finance company holdings, adding such names as
Delta Financial, a sub-prime mortgage lender, and Willis Lease Finance,
a commercial finance firm.
Overall, we feel that the basic investment strategy that we have been
employing for the Fund will continue to work in the future. Bank stocks
remain inexpensive, the economy is cooperating, and there are many years
of industry consolidation to look forward to. We would change our mind
about the attractiveness of bank equity investments only if these
driving forces were to evaporate. And we don't think that's going to
happen any time soon.
This commentary reflects the views of the portfolio manager through the
end of the Fund's period discussed in this report. Of course, the
manager's views are subject to change as market and other conditions
warrant.
Sector investing is subject to different, and sometimes greater, risks
than the market as a whole.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
The Southeastern Thrift and Bank Fund, Inc.
The Statement of Assets and Liabilities is the Fund's balance
sheet and shows the value of what the Fund owns, is due and
owes on December 31, 1996. You'll also find the net asset
value per share as of that date.
Statement of Assets and Liabilities
December 31,1996
- -----------------------------------------------------------------
<S> <C>
Assets:
Investments at value -- Notes A & C:
Common stocks (cost -- $30,353,863) $ 67,769,546
Preferred stocks (cost -- $904,000) 1,045,875
Short-term investments (cost -- $26,507) 26,507
Joint repurchase agreement (cost -- $3,084,000) 3,084,000
-------------
71,925,928
Cash 2,385
Dividends and interest receivable 195,336
-------------
Total Assets 72,123,649
- -----------------------------------------------------------------
Liabilities:
Federal income tax payable -- Note A 1,918,367
Dividend payable 118,017
Payable to John Hancock Advisers, Inc. -- Note B 35,942
Accounts payable and accrued expenses 71,010
-------------
Total Liabilities 2,143,336
- -----------------------------------------------------------------
Net Assets:
Capital paid-in 32,397,863
Net unrealized appreciation of investments 37,557,558
Undistributed net investment income 24,892
-------------
Net Assets $ 69,980,313
=================================================================
Net Asset Value Per Share:
(based on 3,984,966 shares outstanding -- 50 million
shares authorized with $0.001 per share par value) $ 17.56
=================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
The Statement of Operations summarizes the Fund's investment income
earned and expenses incurred in operating the Fund. It also shows
net gains for the period stated.
Statement of Operations
Year ended December 31,1996
- -----------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (including $30,967 received
from affiliated issuers) $ 1,690,379
Interest 135,184
-------------
1,825,563
-------------
Expenses:
Investment advisory fee - Note B 406,189
Administration fee - Note B 93,736
Directors' fee 65,276
Custodian fee 39,770
Legal fees 38,364
Auditing fee 32,300
Miscellaneous 16,132
Printing 10,749
Transfer agent fee 6,274
-------------
Total Expenses 708,790
- -----------------------------------------------------------------
Net Investment Income 1,116,773
- -----------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold
(net of Federal income taxes of $1,918,367 on
long term capital gains retained) - Note A 4,043,580
Change in net unrealized appreciation/depreciation
of investments 9,095,550
-------------
Net Realized and Unrealized
Gain on Investments 13,139,130
- -----------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $14,255,903
=================================================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
------------ ------------
<S> <C> <C> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income $ 872,309 $ 1,116,773
Net realized gain on investments sold 2,872,899 4,043,580
Change in net unrealized appreciation/depreciation
of investments 15,128,944 9,095,550
------------ ------------
Net Increase in Net Assets Resulting from Operations 18,874,152 14,255,903
------------ ------------
Distributions to Shareholders:
Dividends from net investment income ($0.2189
and $0.2740 per share, respectively) (872,309) (1,091,881)
Distributions from capital gains ($0.0633
and $0.1207 per share, respectively) (252,208) (480,985)
------------ ------------
Total Distributions to Shareholders (1,124,517) (1,572,866)
------------ ------------
Net Assets:
Beginning of period 39,547,641 57,297,276
------------ ------------
End of period (including undistributed
net investment income of none
and $24,892, respectively) $ 57,297,276 $ 69,980,313
============ ============
Analysis of Common Share Activity:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996
---------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ------------ ------------
Shares outstanding, beginning of period 1,992,483 $ 26,214,577 3,984,966 $ 28,835,268
Reclassification of net long-term capital
gains (net of Federal income taxes of
$1,411,141 and $1,918,367,
respectively) - Note A -- 2,620,691 -- 3,562,595
Shares issued in stock split - Note A 1,992,483 -- -- --
--------- ------------ --------- ------------
Shares outstanding, end of period 3,984,966 $ 28,835,268 3,984,966 $ 32,397,863
========= ============ ========= ============
The Statement of Changes in Net Assets shows how the value of the Fund's net assets has changed since the
end of the previous period. The difference reflects earnings less expenses, any investment gains and losses
and distributions paid to shareholders.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
Selected data for each share of common stock outstanding throughout the period indicated, investment
returns, key ratios and supplemental data are listed as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
FISCAL
YEAR ENDED JUNE 30, PERIOD ENDED YEAR ENDED YEAR ENDED
---------------------------------- DEC. 31, DEC. 31, DEC. 31,
1992(a) 1993(a) 1994(a) 1994(a)(b) 1995(a) 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $3.860 $6.430 $9.040 $10.830 $9.930 $14.38
------- ------- ------- ------- ------- -------
Net Investment Income 0.050 0.055 0.105 0.075 0.219 0.280
Net Realized and Unrealized Gain (Loss) on Investments 2.580 2.555 2.232(c) (0.670)(c) 4.513(c) 3.295(c)
------- ------- ------- ------- ------- -------
Total from Investment Operations 2.630 2.610 2.337 (0.595) 4.732 3.575
------- ------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.050) -- (0.103) (0.130) (0.219) (0.274)
Distributions from Net Realized Gain on
Investments Sold -- -- (0.444) (0.175) (0.063) (0.121)
Distributions from Paid-in Capital (0.010) -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions (0.060) -- (0.547) (0.305) (0.282) (0.395)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $6.430 $9.040 $10.830 $9.930 $14.380 $17.560
======= ======= ======= ======= ======= =======
Per Share Market Value, End of Period $5.500 $7.875 $10.625 $9.625 $13.750 $16.375
Total Investment Return at Market Value 78.15% 43.18% 42.98% (6.53%) 45.66% 21.96%
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $25,623 $36,024 $43,145 $39,548 $57,297 $69,980
Ratio of Expenses to Average Net Assets 2.17% 1.69% 1.46% 1.46%(e) 1.31% 1.13%
Ratio of Net Investment Income to Average Net Assets 1.06% 0.71% 1.01% 1.35%(e) 1.73% 1.79%
Portfolio Turnover Rate 42% 42% 23% 7% 14% 13%
Average Brokerage Commission Rate (d) N/A N/A N/A N/A N/A $0.07
(a) All per share amounts and net asset values have been restated to reflect the 2 for 1 stock
split effective November 30, 1995.
(b) Effective October 24, 1994, the fiscal period end changed from June 30 to December 31.
(c) Net of Federal Income taxes of $0.48 for December 31, 1996, $0.35 for December 31, 1995,
$0.215 for December 31, 1994 and $0.260 for June 30, 1994 on net long-term capital gains
retained by the Fund.
(d) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(e) On an annualized basis.
The Financial Highlights summarizes the impact of the following factors on a single share
for the period indicated: net investment income, dividends and gains (losses) of the Fund.
It shows how the Fund's net asset value for a share has changed since the end of the previous
period. It also shows the total investment return for each period based on the market value
of fund shares. Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
December 31, 1996
- -----------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the Fund on
December 31, 1996. It's divided into three main categories: common stocks, preferred
stocks and short-term investments. The stocks are further broken down by location. Under
each location is a list of the stocks owned by the Fund.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------------------------------------- ---------------- ------------
<S> <C> <C>
COMMON STOCKS
Banks, Savings and Loans - Southeastern (by state)
Alabama (14.85%)
Colonial BancGroup, Inc. 49,278 $1,971,120
Compass Bancshares, Inc. 26,500 1,053,375
First Southern Bancshares 51,917 635,983
Peoples Banctrust Co., Inc. 22,000 682,000
Regions Financial Corp. 30,400 1,571,300
Security Federal Bancorp., Inc. * + 33,600 571,200
Southern Banc Co., Inc. 34,900 458,062
Southtrust Corp. 98,930 3,450,184
-------------
10,393,224
-------------
Florida (4.77%)
American Bancshares, Inc.* 40,000 315,000
BankUnited Financial Corp. (Class A) * 20,000 200,000
Barnett Banks, Inc. 20,000 822,500
Commercial Bankshares, Inc. 21,000 309,750
Community Savings, FA 26,666 546,653
Fidelity Federal Savings Bank of Florida 550 9,763
First Palm Beach Bancorp. 15,000 354,375
Seacoast Banking Corp.
of Florida (Class A) 30,000 781,875
-------------
3,339,916
-------------
Georgia (5.56%)
ABC Bancorp. 10,000 168,750
CCF Holding Co. 30,700 460,500
Central & Southern Holdings Co. 68,600 806,050
Eagle Bancshares, Inc. 60,000 930,000
First Liberty Financial Corp. 43,650 802,069
Flag Financial Corp. 67,500 725,625
-------------
3,892,994
-------------
Louisiana (3.05%)
ISB Financial Corp. 25,000 450,000
Teche Holding Co. 25,000 359,375
Whitney Holding Corp. 37,500 1,326,562
-------------
2,135,937
-------------
Mississippi (3.92%)
BancorpSouth, Inc. 22,700 629,925
Hancock Holding Co. 19,665 796,432
Peoples Holding Company (The) 15,600 592,800
Trustmark Corp. 28,500 726,750
-------------
2,745,907
-------------
North Carolina (26.39%)
CCB Financial Corp. 30,007 2,047,978
Centura Banks, Inc. 42,837 1,911,601
First Citizens BancShares, Inc. (Class A) 16,556 1,274,812
First Savings Bancorp., Inc. 9,910 185,813
First Union Corp. 49,161 3,637,914
Green Street Financial Corp. 9,690 150,195
Haywood Bancshares, Inc. 53,400 984,562
LSB Bancshares, Inc. 33,202 647,439
Mutual Community Savings Bank * 17,070 196,305
NationsBank Corp. 21,350 2,086,963
Piedmont Bancorp., Inc. 20,000 210,000
Rowan Bankcorp, Inc. * 20,000 345,000
South Street Financial Corp. * 40,000 560,000
Southern National Corp. 93,935 3,405,144
Stone Street Bancorp., Inc. 40,000 820,000
-------------
18,463,726
-------------
South Carolina (5.71%)
American Federal Bank - FSB 50,000 943,750
Carolina First Corp. 18,828 364,793
First Financial Holdings, Inc. 25,000 562,500
PALFED, Inc. 94,960 1,329,440
Plantation Financial Corp. 20,000 200,000
United Carolina Bancshares, Inc. 15,000 592,500
-------------
3,992,983
-------------
Tennessee (8.98%)
First American Corp. 13,279 765,202
First Tennessee National Corp. 47,240 1,771,500
Union Planters Corp. 96,079 3,747,081
-------------
6,283,783
-------------
Virginia (5.21%)
Commonwealth Bankshares, Inc.* 21,200 222,600
F & M National Corp. 25,625 547,734
FFVA Financial Corp. 26,000 533,000
Mainstreet Bankgroup, Inc. 50,000 950,000
Marathon Financial Corp. 10,000 51,250
Premier Bankshares Corp. 40,000 950,000
Salem Bank & Trust 21,630 302,820
Security Bank Corp. * 10,000 91,250
-------------
3,648,654
-------------
TOTAL BANKS, SAVINGS AND
LOANS -- SOUTHEASTERN 78.44% 54,897,124
------- -------------
Banks and Thrifts - Other Regions (14.86%)
American National Bancorp., Inc. (MD) 87,300 1,058,513
Banc One Corp. (OH) 16,988 730,484
Boatmen's Bancshares, Inc. (MO) 16,800 1,083,600
CB Bancshares, Inc. (HI) 11,477 335,702
Cullen / Frost Bankers., Inc. (TX) 30,000 997,500
Equitable Federal Savings Bank* (MD) 17,000 480,250
First Commercial Corp. (AR) 32,910 1,221,784
First of America Bank Corp. (MI) 11,263 677,188
Mercantile Bancorp. (MO) 17,910 920,126
North Central Bancshares, Inc. (IA) 20,000 271,250
Pocahontas Federal Savings
& Loan Assn. (AR) 5,000 87,500
Provident Bancorp., Inc. (OH) 30,000 1,020,000
Riggs National Corp. (DC) 15,000 258,750
Simmons First National Corp.
(Class A) (AR) 30,000 810,000
Summit Bancshares, Inc. (TX) 12,000 274,500
Texas Regional Bancshares,
Inc. (Class A) (TX) 5,000 170,000
-------------
TOTAL BANKS AND
THRIFTS - OTHER REGIONS 14.86% 10,397,147
------- -------------
Other (3.54%)
Affinity Technology Group * 6,000 39,000
BA Merchant Services Inc. (Class A) * 39,200 700,700
Delta Financial Corp.* 9,000 162,000
Matrix Capital Corp.* 10,000 158,750
National Processing, Inc.* 15,700 251,200
Security First Network Bank * 1,500 15,375
Sirrom Capital Corp. 8,000 294,000
Ugly Duckling Corp.* 1,500 29,250
Union Acceptance Corp. (Class A) * 10,000 177,500
Willis Lease Finance Corp.* 20,000 257,500
Wilshire Financial Services Group, Inc.* 24,000 390,000
-------------
2,475,275
-------------
TOTAL COMMON STOCKS
(Cost $30,353,863) 96.84% 67,769,546
------- -------------
PREFERRED STOCKS
Republic Security Financial Corp.,
Ser C 7.00%, (Florida) 10,000 112,500
Roosevelt Financial Group, Inc.,
Ser F 6.50%, (Missouri) 12,000 933,375
-------------
TOTAL PREFERRED STOCKS
(Cost $904,000) 1.50% 1,045,875
------- -------------
<CAPTION>
INTEREST PAR VALUE MARKET
RATE (000 OMITTED) VALUE
---------- ------------- -------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Cash Equivalents
Deposits in Mutual Banks $27 $26,507
-------------
Joint Repurchase Agreement
Investment in a joint
repurchase agreement
transaction with
Lehman Brothers, Inc.
Dated 12-31-96, due
01-02-97 (secured by
U.S. Treasury Bonds
8.750% thru 13.250%
due 11-15-08 thru
11-15-18, and U. S.
Treasury Note 6.250%
due 6-30-98) -- Note A 6.70% 3,084 3,084,000
-------------
TOTAL SHORT TERM INVESTMENTS 4.44% 3,110,507
------- -------------
TOTAL INVESTMENTS 102.78% $71,925,928
======= =============
* Non-income producing security.
+ Denotes an affiliated company in which the Fund has ownership of at least 5% of the
voting securities (See Note E of the Notes to Financial Statements).
The percentage shown for each investment category is the total value of that category
as a percentage of the net assets of the fund.
See notes to financial statements.
</TABLE>
NOTES TO
FINANCIAL STATEMENTS
The Southeastern Thrift and Bank Fund, Inc.
NOTE A --
The Southeastern Thrift and Bank Fund, Inc. (the "Fund") is a
diversified closed-end management investment company registered under
the Investment Company Act of 1940. The Fund's primary investment
objective is long-term capital appreciation. Its secondary investment
objective is current income.
ACCOUNTING POLICIES
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Investments in listed securities are valued at
the last sales price on the exchange on which such securities are
primarily traded. Listed securities for which no sales are reported and
securities traded in the over-the-counter market are valued at the
average of the most recent bid and asked prices. Investment securities
for which no current market quotations are available are valued at fair
market value as determined in good faith under the direction of the
Fund's Board of Directors. Short-term investments which mature in less
than 61 days when acquired by the Fund are valued at amortized cost.
Short-term investments which mature in more than 60 days are valued at
current market value until the sixtieth day prior to maturity at which
time they are valued at amortized cost.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other
registered investment companies having a management contract with John
Hancock Advisers, Inc. (the "Adviser"), a wholly-owned subsidiary of The
Berkeley Financial Group, may participate in a joint repurchase
agreement. Aggregate cash balances are invested in one or more
repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank
receives delivery of the underlying securities for the joint account on
the Fund's behalf. The Adviser is responsible for ensuring that the
agreement is fully collateralized at all times.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions
are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded using the specific lot basis. Dividend
income is recorded on the ex-dividend date and interest income,
including, where applicable, amortization of discount on short-term
investments, is recorded on the accrual basis.
DISTRIBUTIONS TO SHAREHOLDERS Net investment income and capital gains
distributions are generally distributed annually and are recorded on the
ex-dividend date. Such distributions are determined in conformity with
income tax regulations. Due to permanent book/tax differences in
accounting for certain transactions, this has the potential for treating
certain distributions as return of capital as opposed to distributions
of net investment income or realized capital gains. The Fund has
adjusted for the cumulative effect of such permanent book/tax
differences through December 31, 1996, which has no effect on the Fund's
net assets, net investment income or net realized gains.
The Fund has the option and has chosen to retain and pay the applicable
Federal income tax on $5,480,962 and $4,031,832 of its net long-term
capital gains for the fiscal years ended December 31,1996 and December
31, 1995, respectively.
FEDERAL INCOME TAXES The Fund qualifies as a "regulated investment
company" by complying with the applicable provisions of the Internal
Revenue Code and will not be subject to Federal income tax on taxable
income which is distributed to shareholders.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses of the Fund. Actual results
could differ from these estimates.
NOTE B --
INVESTMENT ADVISORY AND
ADMINISTRATION FEES AND
TRANSACTIONS WITH AFFILIATES
The Adviser is the Fund's investment adviser and administrator in
accordance with the agreements described below.
The Fund operates under an investment advisory agreement which calls for
the Adviser to furnish office space, furnishings and equipment and to
provide the services of persons to manage the investment and
reinvestment of the Fund's assets and to continuously review, supervise
and administer the Fund's investment program. In return, the Fund has
agreed to pay the Adviser a monthly advisory fee at an annual rate of
0.65% of the Fund's average net assets, or a flat annual fee of $50,000,
whichever is higher. In addition, if total Fund expenses exceed 2% of
the Fund's average net assets in any one year, the Fund may require the
Adviser to reimburse the Fund for such excess, subject to a minimum fee
of $50,000.
The Fund has also entered into an administration agreement with the
Adviser pursuant to which the Adviser provides certain administrative
services required by the Fund. In return, the Fund has agreed to pay a
monthly administration fee at an annual rate of 0.15% of the Fund's
average net assets, or a flat annual fee of $22,000, whichever is
higher.
The Fund does not pay remuneration to its officers nor to any director
who may be employed by an affiliate of the Fund. Certain officers of the
Fund are officers of the Adviser.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations
of the U.S. government and its agencies and short-term securities,
during the period ended December 31, 1996, aggregated $8,250,402 and
$12,072,332, respectively. There were no purchases or sales of
obligations of the U.S. government and its agencies during the period
ended December 31, 1996.
The cost of investments owned at December 31,1996 (excluding deposits in
mutual savings banks) for Federal income tax purposes was $34,341,863.
Gross unrealized appreciation and depreciation of investments aggregated
$37,619,283 and $61,725, respectively, resulting in net unrealized
appreciation of $37,557,558.
NOTE D --
SHARES REPURCHASED AND TENDER OFFERS
The Fund from time-to-time may, but is not required to, make open market
repurchases of its shares in order to attempt to reduce or eliminate the
amount of any market value discount or to increase the net asset value
of its shares, or both. In addition, the Board currently intends each
quarter during periods when the Fund's shares are trading at a discount
from the net asset value to consider the making of tender offers. The
Board may at any time, however, decide that the Fund should not make
share repurchases or tender offers.
NOTE E --
TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS
Affiliated issuers, as defined by the Investment Company Act of 1940,
are those in which the Fund's holdings of an issuer represents 5% or
more of the outstanding voting securities of the issuer. A summary of
the Fund's transactions in the securities of these issuers during the
period ended December 31, 1996 is set forth below.
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
BEGINNING --------------------------------- ENDING
SHARE SHARE SHARE SHARE REALIZED DIVIDEND ENDING
AMOUNT AMOUNT COST AMOUNT COST AMOUNT GAIN INCOME VALUE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security
Federal
Bancorp.,
Inc. 33,600 -- $ -- -- $ -- 33,600 $ -- $20,160 $571,200
Valley
Federal
Savings
Bank 18,011 -- -- 18,011 *314,066 -- -- 10,807 --
-----------------
$30,967 $571,200
=================
*The disposition was a merger.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Southeastern Thrift and Bank Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of The Southeastern Thrift and
Bank Fund, Inc. (the "Fund") as of December 31, 1996, the related
statement of operations for the year then ended, the statement of
changes in net assets for the years ended December 31, 1996 and
1995, and the financial highlights for the fiscal years ended December
31, 1996, 1995,and 1994 and for each of the years in the three-year
period ended June 30, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
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 and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31,1996 by correspondence
with the custodian. 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, such financial statements and financial highlights
present fairly, in all material respects, the financial position of the
Fund at December 31, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 7, 1997
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished
with respect to the distributions of the Portfolio during its fiscal
period ended December 31, 1996.
The Fund distributed to shareholders of record December 23, 1996 and
payable December 30, 1996 a short-term capital gains dividend of
$0.12070. This amount was reported on the 1996 U.S. Treasury Department
Form 1099-DIV. With respect to the Fund's ordinary taxable income for
the fiscal period ended December 31, 1996, 100.0% qualifies for the
dividends received deduction available to corporations.
Shareholders will receive a 1996 U.S. Treasury Department Form 1099-DIV
in January of 1997. This will reflect the total of all distributions
which are taxable for the calendar year 1996.
The Fund has chosen to retain (and pay federal corporate income tax on)
a portion of net long-term capital gains for its fiscal period ended
December 31, 1996.
Within 60 days of the Fund's fiscal year end, the Fund will mail to its
shareholders of record on December 31, 1996 a designation, on Internal
Revenue Service (IRS) Form 2439, of that portion of the undistributed
capital gains for the year to be included in a shareholder's 1996
taxable income as long-term capital gains ($1.37543 per share), and will
show their portion of the tax paid by the Fund on these gains ($0.48140
per share), which may be credited against any federal income tax due.
These gains will not be reported to shareholders on Form 1099-DIV, the
form on which the Fund would ordinarily report income taxable to a
shareholder.
To reflect the Fund's retention of capital gains and payment of the
related tax and their pass through to shareholders as described above,
shareholders are entitled to increase the adjusted tax basis of their
shares ($0.89403 per share) in the Fund as provided in Internal Revenue
Code (IRC) section 852(b)(3).
Trustees for Individual Retirement Accounts (IRAs) and organizations
which are exempt from federal income tax under IRC section 501(a) (and
to which IRC section 511 does not apply) should claim a refund by filing
Form 990-T with the IRS. Record owners who are not the actual owners
(nominees) will also be required to report the amounts shown on Form
2439 to the actual owners within 90 days of the Fund's fiscal year (on
or before March 31, 1997) and the IRS in the manner required by the
instructions of Form 2439. A trustee or custodian of an IRA should not
send a copy of Form 2439 to the owner of the IRA.
State tax consequences may differ from those described above and may
vary from state to state. Therefore, shareholders should consult their
state tax advisers for specific information regarding their particular
situations. Non-resident aliens may also have different tax consequences
and should consult their tax adviser.
REPURCHASE AGREEMENTS
A repurchase agreement is a contract under which the Fund would acquire
a security for a relatively short period (usually not more than 7 days)
subject to the obligation of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's
cost plus interest). The Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and with "primary
dealers" in U.S. Government securities. The Adviser will continuously
monitor the creditworthiness of the parties with whom the Fund enters
into repurchase agreements.
Repurchase transactions must be fully collateralized at all times, but
they involve some credit risk to the Fund if the other party defaults on
its obligations and the Fund is delayed or prevented from liquidating
the collateral. The Fund has established a procedure providing that the
securities serving as collateral for each repurchase agreement must be
delivered to the Fund's custodian either physically or in book-entry
form and that the collateral must be marked to market daily to ensure
that each repurchase agreement is fully collateralized at all times. In
the event of bankruptcy or other default by a seller on a repurchase
agreement, the Fund could experience delays in liquidating the
underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the
period while the Fund seeks to enforce its rights thereto, possible
subnormal levels of income and lack of access to income during this
period, and expense of enforcing its rights.
DIVIDEND REINVESTMENT PLAN
The Fund offers its registered stockholders an automatic Dividend
Reinvestment Plan (the "Plan") which enables each participating
stockholder to have all dividends (indicates income dividends and/ or
capital gains distributions) payable in cash reinvested by the Plan
Agent in shares of the Fund's Common Stock. However, stockholders may
elect not to enter into, or may terminate at any time without penalty,
their participation in the Plan by notifying State Street Bank and Trust
Company (the "Plan Agent") in writing. Stockholders who do not
participate will receive all dividends in cash.
In the case of stockholders such as banks, brokers or nominees who hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of record ownership of shares. These
record stockholders will receive dividends under the Plan on behalf of
participating beneficial owners and cash on behalf of non-participating
beneficial owners. These record holders will then credit the beneficial
owners' accounts with the appropriate stock or cash distribution.
Whenever the market price of the Fund's stock equals or exceeds net
asset value per share, participating stockholders will be issued stock
valued at the greater of (I) net asset value per share or (ii) 95% of
the market price. If the net asset value per share of the Fund's stock
exceeds the market price per share on the record date, the Plan Agent
shall make open market purchases of the Fund's stock for each
participating stockholder's account. These purchases may begin no sooner
than five business days prior to the payment date for the dividend and
will end up to thirty days after the payment date. If shares cannot be
purchased within thirty days after the payment date the balance of
shares will be purchased form the Fund at the average price of shares
purchased on the open market. Each participating stockholder will be
charged a pro rata share of brokerage commissions on all open market
purchases.
The shares issued to participating stockholders, including fractional
shares, will be held by the Plan Agent in the name of the stockholder.
The Plan Agent will confirm each acquisition made for the account of the
participating stockholder as soon as practicable after the payment date
of the distribution.
The reinvestment of dividends does not in any way relieve participating
stockholders of any Federal, state or local income tax which may be due
with respect to each dividend. Dividends reinvested in shares will be
treated on your Federal income tax return as though you had received a
dividend in cash in an amount equal to the fair market value of the
shares received, as determined by the prices for shares of the Fund on
the NASDAQ National Market System as of the dividend payment date.
Distributions from the Fund's long-term capital gains will be taxable to
you as long-term capital gains. The confirmation referred to above will
contain all the information you will require for determining the cost
basis of shares acquired and should be retained for that purpose. At
year end, each account will be supplied with detailed information
necessary to determine total tax liability for the calendar year.
Additional information may be obtained from the Customer Service
Department, The Southeastern Thrift and Bank Fund, Inc., 101 Huntington
Avenue, Boston, Massachusetts 02199-7603; (800) 225-5291.
The Southeastern Thrift and Bank Fund, Inc.
[THIS PAGE INTENTIONALLY LEFT BLANK]
The Southeastern Thrift and Bank Fund, Inc.
[THIS PAGE INTENTIONALLY LEFT BLANK]
The Southeastern Thrift and Bank Fund, Inc.
[THIS PAGE INTENTIONALLY LEFT BLANK]
A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the
page. A box sectioned in quadrants with a triangle in upper left, a
circle in upper right, a cube in lower left and a diamond in lower
right. A tag line below reads: "A Global Investment Management Firm."
101 Huntington Avenue, Boston, MA 02199-7603
Bulk Rate
U.S. Postage
PAID
S. Hackensack, NJ
Permit No. 750
A recycled logo in lower left hand corner with the caption " Printed on
Recycled Paper." PT00A 12/96
2/97
</TABLE>
