================================================================================
The
Southeastern
Thrift
and Bank
Fund, Inc.
ANNUAL REPORT
December 31, 1997
<PAGE>
================================================================================
DIRECTORS
FRANKLIN C. GOLDEN
ROBERT G. FREEDMAN
FRED G. STEINGRABER
DONALD R. TOMLIN
H. HALL WARE III
OFFICERS
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 & STOCKTON LLP
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
===============================PRESIDENT'S MESSAGE=============================
DEAR FELLOW SHAREHOLDERS:
The stock market broke another record in 1997, producing over 20% returns for an
unheard-of third straight year. Financial stocks, including banks, were among
the market's leaders, reflecting the ideal environment of moderate growth,
mostly stable interest rates and benign inflation. We are pleased to report that
The Southeastern Thrift and Bank Fund, Inc. prospered during the year, posting a
total return at net asset value of 64.84%. This result was well in excess of
both the broader stock market and the financial sector.
As portfolio manager Jim Schmidt discusses on the following pages, all
signs (economic, regulatory and industry-specific) remain favorable for bank
stocks. We continue to hold this belief even after factoring in the financial
tumult in Asia with its potential to keep markets more volatile and temper
growth. We are also reassured by having John Hancock's seasoned financial team
at the Fund's management helm. They have guided the Fund with a steady hand
since 1991. The results, as long-term shareholders know, have been exceptional,
with returns at net asset value of more than 30% annually for the last five
years. We are very appreciative of their hard work and remain confident in their
ability to effectively handle any challenges that may lie ahead.
At the end of 1997, 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, 1997. 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.
In August 1997, the Board of Directors of The Southeastern Thrift and Bank
Fund, Inc. (STBF), accepted the resignation of Dr. Victor L. Andrews as Director
of the Fund. Dr. Andrews resigned in order to concentrate on his other
interests. The Directors are grateful to Dr. Andrews for his many years of
service to the Fund's shareholders.
Very truly yours,
/s/ Franklin C. Golden
FRANKLIN C. GOLDEN, PRESIDENT OF THE SOUTHEASTERN THRIFT AND BANK FUND, INC.
[A 1 1/4" x 1" photo of Franklin C. Golden, President of the Southeastern Thrift
and Bank Fund, flush right, next to second paragraph.]
2
<PAGE>
================================================================================
BY JAMES K. SCHMIDT, CFA, PORTFOLIO MANAGER
The Southeastern Thrift and Bank Fund, Inc.
Stock market advances strongly;
bank stocks are among the leaders
The last 12 months were rewarding for stock investors, albeit occasionally
nerve-wracking. The markets brought their 1996 winning streak into the beginning
of 1997, but saw their progress slowed by inflationary concerns and rising
interest rates in March and April. After a mild sell-off, stocks resumed their
upward trajectories in the spring and summer, amid a benign economic expansion
that drove corporate earnings higher and eased inflationary concerns. Then in
the last two months of the year, trepidation over the slowdown in Asia spooked
investors. Despite recent softness, the Standard & Poor's 500 Stock Index, a
commonly used gauge for the broader stock market, returned 33.36% during 1997,
including reinvested dividends.
Over the same period, financial stocks outperformed the broader market.
After early lethargy caused by rising interest rates in the spring, bank stocks
rose smartly due to record earnings and merger activity. For the year ended
December 31, 1997, The Southeastern Thrift and Bank Fund, Inc. posted a total
return of 64.84% at net asset value. That result surpassed the 45.23% return of
the average open-end financial services fund, according to Lipper Analytical
Services, Inc.
Earnings trends positive again
We had expected strong earnings from the banking industry in 1997, and the
results have been even better than anticipated. The favorable vari-
"...financial stocks outperformed the broader market."
[A 2" x 3 1/2" photo of fund portfolio management team at bottom left. Caption
reads: "Jim Schmidt (standing) and Fund management team members
(l - r): Jay McKelvey, Tom Finucane and Patricia Ouimet."]
3
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
[Chart with the heading "Price/Earnings Ratio Differential" at top of left hand
column. Under the heading is the footnote "Small and Superregional Banks."
Within the chart there are two groups of two solid bars. The left bar in each
group is dark and the right bar in each group is light. Along the left side are
numbers scaled in increments of 5x, with 0x at the bottom and 20x at the top.
The first set of two bars has August 1995 written under it. The first bar, which
is shaded dark, represents 11.10x. The second, which is shaded light, represents
8.60x. The second set of two bars has September 1997 written under it. The first
bar, which is solid, represents 16.80x. The second represents 16.00x. Under the
chart is a code to the graph. It has a dark square, showing that the dark shaded
bars represent Small Bank Median, a light square showing that the light shaded
bars represent Superregional Bank Median, and an x showing that the x next to
all of the numbers = price/earnings multiple.]
"...the [earnings] results have been even better than anticipated."
ance resulted from commercial loan growth that was a few percentage points
higher than we had forecast, coupled with very low levels of problem loans. The
economy has been ideal for running a bank -- moderate growth, quarter after
quarter. Importantly, the strength of the economy has reached all regions of the
country, so bank investors are not faced with credit "land mines" exploding due
to localized economic difficulties. This contrasts with the situation during the
last prolonged expansion of the 1980s when, in the midst of a generally
ebullient economy, regional recessions crept through the farm states, the energy
states, and the real estate boom states sequentially.
Improved efficiency ratios (non-interest expense divided by revenues) have
also contributed to earnings gains. The style in the industry has become to use
healthy profits to fund share buyback programs, rather than adding additional
overhead. We think stock repurchases are excellent, shareholder-friendly uses of
excess capital. On average we think that the earnings per share of our banks
will grow 10% in 1998.
The consolidation beat goes on
During the year, nine of the Fund's holdings were taken over, topping the five
mergers that occurred in the portfolio during 1996. The recent rash of merger
activity got going at the end of August with the announcement of NationsBank's
acquisition of Barnett Banks. This deal was noteworthy because of the size of
the target (Barnett's assets exceed $40 billion) and the ground-breaking pricing
of the transaction (over five times tangible book value). As lofty as the price
was, we believe that it was justifiable because the transaction is non-dilutive
to the earnings of NationsBank. The key to the transaction is the 50% or greater
expense savings that can be achieved by eliminating redundancies in the
organizations. The arithmetic of this merger illustrates an interesting point --
that the largest regional banks find acquisitions to be affordable, even though
deals are being struck at higher prices than ever before. This is because, while
the absolute level of price-earnings and price-book ratios is high, the relative
ratios between target bank and acquiring bank are much narrower than usual.
Thus, the number of shares that would have to be issued in a merger has declined
even as the stated price has gotten higher. As the chart on this page shows, the
price-earnings multiples
[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 Deposit
Guaranty Corp. followed by an up arrow and the phrase "Its sale may engender
additional activity in Mississippi." The second listing is First Financial
Holdings followed by an up arrow and the phrase "Strong fundamentals." The third
listing is Bank of The Ozarks followed by an up arrow and the phrase "IPO
greeted warmly." Footnote below reads: "See "Schedule of Investments."
Investment holdings are subject to change."]
4
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
[Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) CCB Financial Corp. 4.9%; 2) Southtrust Corp.
4.8%; 3) BB&T Corp. 4.3%; 4) Union Planters Corp. 3.7%; 5) Centura Banks, Inc.
3.1%. A footnote below reads: "As a percentage of net assets on December 31,
1997."]
that superregional banks are selling for in 1997 are significantly closer to the
median multiple of a smaller bank than was the case in mid-1995. As long as the
larger banks have this strong currency to offer in trade, expect the wave of
mergers to continue into 1998 and beyond.
Troubles in the Far East
Economic bliss in the United States contrasts with some of the difficulties the
economies and currencies of fast-growing Pacific Rim nations have experienced
recently. These problems have been lurking in the background all year and leaped
onto the front pages when the Asian markets swooned and their currencies came
under attack. The direct exposure of the Fund's holdings to emerging markets is
negligible, yet the impact this crisis will have on the U.S. financial system
cannot yet be determined.
One major repercussion of the Asian turmoil has been a decline in domestic
interest rates as global investors have sought out the safe haven of
longer-maturity U.S. Treasuries. The effect on U.S. rates has been what is
termed a "flattening" of the yield curve, or the differential between short- and
long-term interest rates. Normally, this curve is positively sloped as in 1996
and early 1997, when the yield spread between short Treasury bills and the
30-year Treasury bond was well over one percentage point. Recently, the spread
has halved, as short-term yields have been stable and longer-dated bonds have
advanced in price, reducing their yield and resulting in the "flat" curve. We're
watching to see what, if any, impact a flatter yield curve will have on the
interest margins of the Fund's savings and loans. As we have mentioned before,
bank margins are not as sensitive to interest rates as the market would appear
to believe, but S&L spreads are more heavily impacted by rate movements.
Portfolio strategy and tactics
We are using the same basic strategy that we spelled out when we started
managing the Fund in 1992. We seek relatively underfollowed, inexpensive
regional banks and thrift stocks that have solid earnings fundamentals and which
may be in the path of consolidation. Although we own banks of all sizes, we have
found that since national interstate banking went into effect in September 1995,
progressively larger banks have become merger targets. Most of the largest
holdings in the Fund are regional banks with $10 billion to $30 billion in
assets, such as Union Planters and BB&T Corp. These companies would once have
been considered immune from takeovers, but are now in a size category that has
proven to be very attractive to acquisition-hungry superregional banks.
Among the smaller institutions, we continue to hold many savings and loans
that have converted from mutual to public ownership within the last several
years. These tend to be inexpensive stocks with abundant capital. We also have
added to positions in some of the smaller com-
"During the year, nine of the Fund's holdings were taken over..."
5
<PAGE>
The Southeastern Thrift and Bank Fund, Inc.
================================================================================
"Our outlook for bank stocks remains positive."
FUND PERFORMANCE
For the year ended December 31, 1997
[Bar chart omitted. Represented instead by the following table.]
The Southeastern Thrift
and Bank Fund, Inc. ........ 64.84%
Average open-end financial
services fund .............. 45.23%
Total returns for The Southeastern Thrift and Bank Fund, Inc. are at net asset
value with all distributions reinvested. The average open-end financial services
fund is tracked by Lipper Analytical Services, Inc.
mercial banks in the Southeast. We think that economic conditions in the region
remain better than in the nation as a whole, and that additional consolidation
activity is still ahead of us. Finally, the Fund's holdings in non-bank
financials increased over the year to include brokerage and finance-company
stocks. In 1998, we will selectively add to the finance names; at current
prices, the brokerage stocks are approaching full value absent takeover. That
said, we expect the trend of regional brokerage acquisitions by commercial banks
to continue and our holdings may benefit either directly or indirectly.
Outlook
Our outlook for bank stocks remains positive. The key factors that have caused
the stocks to perform well this year are still in place: earnings growth, merger
activity, and a backdrop of low inflation. The recent turmoil in Asian markets
could keep markets more volatile in the short term, as investors try to
determine the potential effects of slowing Asian economies on the U.S. In our
view, the slowdown we anticipate in some of these countries will have only a
moderate impact on the domestic economy. If anything, we were worried that
domestic growth was too rapid to be sustained. A slight slowdown, therefore,
could further reduce the need for interest-rate hikes and keep the economy on
the moderate growth path that we, as bank investors, love.
- --------------------------------------------------------------------------------
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.
6
<PAGE>
============================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, 1997. You'll
also find the net asset value per share as of that date.
Statement of Assets and Liabilities
December 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Notes A & C:
Common stocks (cost - $36,151,782).............. $110,090,970
Preferred stocks (cost - $100,000)............... 165,000
Short-term investments (cost - $26,334) ......... 26,334
Joint repurchase agreement (cost - $3,470,000) .. 3,470,000
------------
113,752,304
Cash.............................................. 137
Interest receivable............................... 1,006
Dividends receivable.............................. 250,243
------------
Total Assets.................... 114,003,690
----------------------------------------------
Liabilities:
Federal income tax payable - Note A.... 2,569,382
Payable to John Hancock Advisers, Inc.
and affiliates - Note B............... 99,955
Accounts payable and accrued expenses.. 68,710
------------
Total Liabilities.... 2,738,047
----------------------------------------------
Net Assets:
Capital paid-in................................... 37,213,160
Net unrealized appreciation of investments ....... 74,004,188
Undistributed net investment income............... 48,295
------------
Net Assets...................... $111,265,643
==============================================
Net Asset Value Per Share:
(based on 3,986,504 shares outstanding -
50 million shares authorized with $0.001
per share par value) ............................. $27.91
================================================================
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, 1997
- --------------------------------------------------------------------------------
Investment Income:
Dividends
(including $20,160 received from
affiliated issuers) .............................. $2,037,729
Interest.......................................... 137,110
-----------
2,174,839
-----------
Expenses:
Investment advisory fee - Note B............... 563,772
Administration fee - Note B.................... 130,101
Directors' fee................................. 68,895
Custodian fee.................................. 44,339
Legal fees..................................... 42,259
Auditing fee................................... 31,250
Printing....................................... 13,690
Miscellaneous.................................. 12,907
Transfer agent fee............................. 8,883
-----------
Total Expenses.................. 916,096
---------------------------------------------
Net Investment Income .......... 1,258,743
---------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold (net of federal
income taxes of $2,569,382 on long-term capital
gains retained) - Note A ........................ 4,881,075
Change in net unrealized appreciation/
depreciation of investments.................... 36,446,630
-----------
Net Realized and Unrealized
Gain on Investments ............ 41,327,705
---------------------------------------------
Net Increase in Net Assets
Resulting from Operations ...... $42,586,448
=============================================
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
===========================FINANCIAL STATEMENTS=================================
The Southeastern Thrift and Bank Fund, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Increase in Net Assets:
From Operations:
Net investment income .............................................................. $1,116,773 $1,258,743
Net realized gain on investments sold .............................................. 4,043,580 4,881,075
Change in net unrealized appreciation/depreciation of investments .................. 9,095,550 36,446,630
------------ -------------
Net Increase in Net Assets Resulting from Operations ............................. 14,255,903 42,586,448
------------ -------------
Distributions to Shareholders:
Dividends from net investment income ($0.2740 and $0.3100 per share, respectively) . (1,091,881) (1,235,340)
Distributions from capital gains ($0.1207 and $0.0275 per share, respectively) ..... (480,985) (109,280)
------------ -------------
Total Distributions to Shareholders .............................................. (1,572,866) (1,344,620)
------------ -------------
From Fund Share Transactions - Net: ................................................... -- 43,502
------------ -------------
Net Assets:
Beginning of period ................................................................ 57,297,276 69,980,313
------------ -------------
End of period (including undistributed net investment income of $24,892
and $48,295, respectively) ....................................................... $69,980,313 $111,265,643
=========== ============
Analysis of Common Share Activity:
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period .................................... 3,984,966 $28,835,268 3,984,966 $32,397,863
Shares issued to shareholders in reinvestment of distributions ............. -- -- 1,538 43,502
Reclassification of accumulated net realized gain on investments - Note D .. -- -- -- 86
Reclassification of net long-term capital gains (net of federal income taxes
of $1,918,367 and $2,569,382, respectively) - Note A ..................... -- 3,562,595 -- 4,771,709
--------- ----------- --------- -----------
Shares outstanding, end of period .......................................... 3,984,966 $32,397,863 3,986,504 $37,213,160
========= =========== ========= ===========
</TABLE>
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.
8
<PAGE>
===========================FINANCIAL STATEMENTS=================================
The Southeastern Thrift and Bank Fund, Inc.
Financial Highlights
Selected data for each share of common stock outstanding throughout each period
indicated, investment returns, key ratios and supplemental data are listed as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED PERIOD ENDED
JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------- ---------------------------------
1993(a) 1994(a) 1994(a, b) 1995(a) 1996 1997
------ ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period ................. $6.430 $9.040 $10.830 $9.930 $14.380 $17.560
------ ------- ------- ------- ------- -------
Net Investment Income ................................ 0.055 0.105 0.075 0.219 0.280 0.316
Net Realized and Unrealized Gain (Loss)
on Investments ..................................... 2.555 2.232(c) (0.670)(c) 4.513(c) 3.295(c) 10.372(c)
------ ------- ------- ------- ------- -------
Total from Investment Operations ................... 2.610 2.337 (0.595) 4.732 3.575 10.688
------ ------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ............... -- (0.103) (0.130) (0.219) (0.274) (0.310)
Distributions from Net Realized Gain on
Investments Sold ................................. -- (0.444) (0.175) (0.063) (0.121) (0.028)
------ ------- ------- ------- ------- -------
Total Distributions ................................ -- (0.547) (0.305) (0.282) (0.395) (0.338)
------ ------- ------- ------- ------- -------
Net Asset Value, End of Period ....................... $9.040 $10.830 $9.930 $14.380 $17.560 $27.910
====== ======= ======= ======= ======= =======
Per Share Market Value, End of Period ................ $7.875 $10.625 $9.625 $13.750 $16.375 $30.250
Total Investment Return at Market Value .............. 43.18% 42.98% (6.53%) 45.66% 21.96% 91.59%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............. $36,024 $43,145 $39,548 $57,297 $69,980 $111,266
Ratio of Expenses to Average Net Assets .............. 1.69% 1.46% 1.46%(e) 1.31% 1.13% 1.06%
Ratio of Net Investment Income to Average Net Assets . 0.71% 1.01% 1.35%(e) 1.73% 1.79% 1.45%
Portfolio Turnover Rate .............................. 42% 23% 7% 14% 13% 16%
Average Brokerage Commission Rate(d) ................. N/A N/A N/A N/A $0.0700 $0.0700
</TABLE>
(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 $0.26 for June 30, 1994, $0.215 for
December 31, 1994, $0.35 for December 31, 1995, $0.48 for December 31,
1996 and $0.64 for December 31, 1997 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 each 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.
9
<PAGE>
===========================FINANCIAL STATEMENTS=================================
The Southeastern Thrift and Bank Fund, Inc.
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Fund on December 31, 1997. 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
- ------------------- ---------------- -----
COMMON STOCKS
Banks, Savings and Loans - Southeastern
(by state)
Alabama (15.05%)
Colonial BancGroup, Inc. ............................. 98,556 $3,394,022
Compass Bancshares, Inc. ............................. 40,750 1,782,812
First Southern Bancshares ............................ 51,917 785,245
Peoples Banctrust Co., Inc. .......................... 44,000 1,485,000
Regions Financial Corp. .............................. 66,800 2,818,125
Security Federal
Bancorp., Inc. *+ ................................. 33,600 571,200
Southern Banc Co., Inc. .............................. 32,900 579,863
Southtrust Corp. ..................................... 83,930 5,324,309
-----------
16,740,576
-----------
Florida (5.51%)
American Bancshares, Inc.* ........................... 43,500 554,625
BankUnited Financial Corp.
(Class A) * ....................................... 20,000 308,125
Barnett Banks, Inc. .................................. 20,000 1,437,500
Commercial Bankshares, Inc. .......................... 24,675 598,369
Community Savings
Bankshares, Inc. .................................. 26,666 943,310
First Palm Beach Bancorp ............................. 15,000 646,875
Seacoast Banking Corp. (Class A) ..................... 42,500 1,636,250
-----------
6,125,054
-----------
Georgia (7.39%)
ABC Bancorp .......................................... 17,500 345,625
CCF Holding Co. ...................................... 33,770 679,621
Community First Banking Co. .......................... 8,700 382,800
Eagle Bancshares, Inc. ............................... 60,000 1,320,000
First Liberty Financial Corp. ........................ 68,650 2,196,800
Flag Financial Corp. ................................. 67,500 1,451,250
Premier Bancshares, Inc. ............................. 68,600 1,843,625
-----------
8,219,721
-----------
Louisiana (3.38%)
ISB Financial Corp. .................................. 25,000 $746,875
Teche Holding Co. .................................... 25,000 568,750
Whitney Holding Corp. ................................ 43,000 2,451,000
-----------
3,766,625
-----------
Mississippi (6.59%)
BancorpSouth, Inc. ................................... 30,200 1,426,950
Deposit Guaranty Corp. ............................... 40,000 2,275,000
Hancock Holding Co. .................................. 20,665 1,250,233
People Holding Co. (The) ............................. 15,600 834,600
Trustmark Corp. ...................................... 33,500 1,549,375
-----------
7,336,158
-----------
North Carolina (23.02%)
BB&T Corp. ........................................... 75,460 4,834,156
CCB Financial Corp. .................................. 50,707 5,451,002
Centura Banks, Inc. .................................. 50,337 3,473,253
First Citizens BancShares, Inc. (Class A) ............ 17,556 1,826,373
First Savings Bancorp., Inc. ......................... 9,910 252,705
First Union Corp. .................................... 53,322 2,732,752
Green Street Financial Corp. ......................... 9,690 176,843
Haywood Bancshares, Inc. ............................. 53,400 1,208,175
LSB Bancshares, Inc. ................................. 33,202 863,252
Mutual Community Savings Bank ........................ 17,070 194,171
NationsBank Corp. .................................... 39,624 2,409,635
Piedmont Bancorp., Inc. .............................. 20,000 217,500
Rowan Bankcorp, Inc. * ............................... 15,000 292,500
South Street Financial Corp. ......................... 40,000 760,000
Stone Street Bancorp, Inc. ........................... 41,500 920,781
-----------
25,613,098
-----------
South Carolina (5.45%)
Carolina First Corp. ................................. 22,593 485,750
First Financial Holdings, Inc. ....................... 47,000 2,496,875
PALFED, Inc. ......................................... 94,960 2,836,930
Plantation Financial Corp. ........................... 20,000 250,000
-----------
6,069,555
-----------
Tennessee (7.69%)
First American Corp. ................................. 26,558 1,321,260
First Tennessee National Corp. ....................... 46,240 3,086,520
Union Planters Corp. ................................. 61,079 4,149,555
-----------
8,557,335
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
===========================FINANCIAL STATEMENTS=================================
The Southeastern Thrift and Bank Fund, Inc.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Virginia (7.42%)
Commonwealth Bankshares, Inc.* ........................ 22,472 $331,462
Community Bankshares Inc. ............................. 1,500 41,625
Crestar Financial Corp. ............................... 28,669 1,634,133
F & M National Corp. .................................. 26,625 913,570
FFVA Financial Corp. .................................. 26,000 1,017,250
First Virginia Banks, Inc. ............................ 32,700 1,690,181
Guaranty Financial Corp. .............................. 20,000 292,500
MainStreet BankGroup, Inc. ............................ 54,600 1,521,975
Marathon Financial Corp. .............................. 10,000 96,250
Salem Bank & Trust .................................... 22,495 427,405
Security Bank Corp.* .................................. 11,000 147,125
Shore Bank* ........................................... 10,000 142,500
----------
8,255,976
----------
TOTAL BANKS, SAVINGS AND
LOANS - SOUTHEASTERN ........................ (81.50%) 90,684,098
------ ----------
Banks and Thrifts - Other Regions (12.83%)
Banc One Corp.(OH) .................................... 16,988 922,661
Bank of The Ozarks, Inc.(AR) .......................... 18,000 459,000
CB Bancshares, Inc.(HI) ............................... 11,477 502,119
Century Bancshares, Inc. * (MD) ....................... 10,000 106,250
Cullen / Frost Bankers., Inc.(TX) ..................... 42,000 2,548,875
Equitable Federal Savings Bank*(MD) ................... 17,000 901,000
First of America Bank Corp.(MI) ....................... 9,394 724,512
Local Financial Corp. * (DE) (R) ...................... 70,000 813,750
Mercantile Bancorp., Inc.(MO) ........................ 38,617 2,374,946
North Central Bancshares, Inc.(IA) .................... 20,000 397,500
Provident Financial Group, Inc.(OH) ................... 27,000 1,309,500
Riggs National Corp.(DC) .............................. 15,000 403,125
Simmons First National Corp.
(Class A)(AR) ....................................... 30,000 1,293,750
Summit Bancshares, Inc.(TX) ........................... 58,000 1,218,000
Texas Regional Bancshares, Inc.
(Class A)(TX) ....................................... 9,750 297,375
----------
TOTAL BANKS AND
THRIFTS - OTHER REGIONS ........................ (12.83%) 14,272,363
------ ----------
Other (4.62%)
HomeSide, Inc.* ....................................... 12,000 330,750
Household International, Inc. ......................... 10,500 1,339,406
Interstate/Johnson Lane, Inc. ......................... 22,000 583,000
Raymond James Financial, Inc. ......................... 62,150 2,466,578
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Other (continued)
Sirrom Capital Corp. .................................. 4,600 $239,775
Willis Lease Finance Corp.* ........................... 10,000 175,000
----------
5,134,509
----------
TOTAL COMMON STOCKS
(Cost $36,151,782) ........................ (98.95%) 110,090,970
------- -----------
PREFERRED STOCK
Republic Security Financial Corp.
Ser C 7.00%, (Florida) .............................. 10,000 165,000
-----------
TOTAL PREFERRED STOCK
(Cost $100,000) ........................ (0.15%) 165,000
------ -----------
INTEREST PAR VALUE
RATE (000s OMITTED)
----- --------------
SHORT-TERM INVESTMENTS
Cash Equivalents
Deposits in Mutual Banks ............. $26 26,334
-----------
Joint Repurchase Agreement
Investment in a joint repurchase
agreement transaction with
HSBC Securities, Inc. -
Dated 12-31-97, Due 01-02-98
(Secured by U.S. Treasury
Bonds, 11.25% due 02-15-15
and 9.25% due 02-15-16) -
Note A................................ 6.60% 3,470 3,470,000
-----------
TOTAL SHORT TERM INVESTMENTS (3.14%) 3,496,334
------- -----------
TOTAL INVESTMENTS (102.24%) 113,752,304
------- -----------
OTHER ASSETS AND LIABILITIES, NET (2.24%) (2,486,661)
------- -----------
TOTAL NET ASSETS (100.00%) $111,265,643
======= ============
* Non-income producing security.
(R) These Securities are exempt from registration under Rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration.
Rule 144A securities amounted to $813,750 as of December 31, 1997. See
Note A of the Notes to Financial Statements for valuation policy.
+ Denotes an affiliated company in which the Fund has ownership of at least
5% of the voting securities (See Note F 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.
11
<PAGE>
=========================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 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 distributions are generally
distributed semiannually and capital gains distributions are generally
distributed annually. Both 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, 1997, 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 $7,341,091 and $5,480,962 of its net long-term capital
gains for the fiscal periods ended December 31, 1997 and December 31, 1996,
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
12
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
The Southeastern Thrift and Bank Fund, Inc.
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 year
ended December 31, 1997, aggregated $13,336,797 and $15,793,335, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended December 31, 1997.
The cost of investments owned at December 31,1997 (excluding deposits in
mutual savings banks) for Federal income tax purposes was $39,721,782. Gross
unrealized appreciation and depreciation of investments aggregated $74,004,188
and none, respectively, resulting in net unrealized appreciation of $74,004,188.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the period ended December 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of $86 and an
increase in capital paid-in of $86. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of December 31, 1997. In addition, pursuant to Internal Revenue Code Section
852(b)(3)(D), the Fund has reclassified $4,771,709 from accumulated net realized
gain on investments to capital paid-in. This amount represents the retained
long-term capital gains. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to certain differences in
the computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
NOTE E -
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.
13
<PAGE>
=========================NOTES TO FINANCIAL STATEMENTS==========================
The Southeastern Thrift and Bank Fund, Inc.
NOTE F -
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 year ended December
31, 1997 is set forth below.
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITIONS
--------------------------------
BEGINNING ENDING
SHARE SHARE SHARE SHARE REALIZED DIVIDEND ENDING
AFFILIATE AMOUNT AMOUNT COST AMOUNT COST AMOUNT GAIN (LOSS) INCOME VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal
Bancorp., Inc. 33,600 -- $ -- -- $ -- 33,600 $ -- $20,160 $571,200
14
<PAGE>
</TABLE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
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, 1997, the related statement of operations
for the year then ended, the statement of changes in net assets for the years
ended December 31, 1997 and 1996, and the financial highlights for the fiscal
years ended December 31, 1997, 1996, 1995, and 1994 and for each of the years in
the two-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, 1997 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, 1997, 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 6, 1998
15
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1997.
The Fund distributed to shareholders of record date December 23, 1997 and
payable December 30, 1997 a short-term capital gain dividend of $0.02746. This
amount was reported on the 1997 U.S. Treasury Department Form 1099-DIV. With
respect to the Fund's ordinary taxable income for the fiscal period ended
December 31, 1997, 100% qualified for the dividends received deduction available
to corporations.
Shareholders will receive a 1997 U.S. Treasury Department Form 1099-DIV in
January of 1998. This will reflect the tax character of all distributions for
the calendar year 1997.
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,
1997.
Within 60 days of the Fund's fiscal year end, the Fund will mail to its
shareholders of record on December 31, 1997 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 1997 taxable income as long-term
capital gains ($1.84149 per share, of which $0.93509 per share is a 28% gain and
$0.90640 per share is a 20% gain), and will show their portion of the tax paid
by the Fund on these gains ($0.64452 per share), which may be credited against
any federal income tax due. These gains will not be reported 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
($1.19697 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, 1998) 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.
16
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
INVESTMENT OBJECTIVE AND POLICY
The Fund's primary investment objective is long-term capital appreciation. Its
secondary investment objective is current income.
On January 26, 1998, the Directors of the Fund voted to eliminate
non-fundamental investment restrictions against: (a) investing more than 5% of
the value of its total assets in marketable warrants to purchase common stock;
(b) investing more than 5% of the Fund's total assets in securities of any
issuer which, together with its predecessors, has been in continuous operation
for less than three years; and (c) purchasing or retaining the securities of any
issuer if those officers or directors of the Fund or officers or directors of
the Investment Adviser who each own beneficially more than 1/2 of 1% of the
securities of that issuer together own more than 5% of the securities of such
issuer. The elimination of these restrictions is effective March 1, 1998.
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 (including 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
recordholders 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 from 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.
17
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
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.
All correspondence or additional information concerning the plan should be
directed to the Plan Agent, State Street Bank and Trust Company, P.O. Box 8209,
Boston, Massachusetts 02266-8209 (telephone 1-800-426-5523).
18
<PAGE>
====================================NOTES=======================================
The Southeastern Thrift and Bank Fund, Inc.
19
<PAGE>
================================================================================
------------------
Bulk Rate
U.S. Postage
PAID
S. Hackensack, NJ
[LOGO] John Hancock Funds Permit No. 750
A Global Investment Management Firm ------------------
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603
1-800-843-0090
INTERNET: www.jhancock.com/funds
PT00A 12/97
2/98
