- --------------------------------------------------------------------------------
The
Southeastern
Thrift
and Bank
Fund, Inc.
Annual Report
December 31, 1998
<PAGE>
-----------------------------------
DIRECTORS
Franklin C. Golden
Robert G. Freedman
Fred G. Steingraber
Donald R. Tomlin
H. Hall Ware III
OFFICERS
Franklin C. Golden
President
Robert E. Gramer
Treasurer
James K. Schmidt
Vice President
Reinaldo 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 30309-4530
INDEPENDENT AUDITORS
Deloitte & Touche llp
125 Summer Street
Boston, Massachusetts 02110-1617
Listed NASDAQ Symbol: STBF
For Shareholder Assistance
Refer to Page 17
-------------------------------------
===============================PRESIDENT'S MESSAGE==============================
DEAR FELLOW SHAREHOLDERS:
Nineteen ninety-eight was a dramatic year for the stock market, which
posted its record fourth year of double-digit gains. But the market experienced
major shocks along the way, buffeted by spreading global economic turmoil and
bolstered by three interest-rate cuts by the Federal Reserve Board.
After turning in a stellar performance in 1997, bank stocks lagged the
market in 1998, punished by concerns over their exposure to struggling emerging
markets and failing hedge funds. Even regional banks with no overseas
connections were dragged down. This phenomenon, combined with a dramatic lag by
small- and medium-sized stocks, caused the Fund to lose a bit of ground in 1998,
returning -5.23% at net asset value for the year. This result was in stark
contrast to 1997's amazing 65% net asset value return, which we had not expected
to duplicate.
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[A 1" x 1" photo of Franklin C. Golden, President, flush right next to second
paragraph.]
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Although we are disappointed with 1998's performance, we remain
optimistic about the Fund's prospects. Industry consolidation is still a very
real and enduring force, albeit one that is subject to the market's moves.
Furthermore, with interest rates low and the economy still growing, even if at a
slower pace, we look forward to a new year.
As we begin 1999, the dawning of a new millennium draws ever closer.
While people around the world get ready to celebrate, businesses remain focused
on making sure their computer programs will be able to recognize the Year 2000
(and not mistake it for 1900).
John Hancock Advisers, Inc., the Fund's investment adviser and
administrator, has been working to ensure that all of its systems are
millennium-bug free. The Adviser has created a company-wide program to evaluate
all computer applications and to modify or replace those that need to be
changed. It is also working with its outside suppliers and business partners to
make sure that their services will be Year 2000 compliant as well.
The Adviser has made Year 2000 compliance a top priority. Even with the
steps they are taking, there is some risk that these problems could disrupt the
Fund's operations or financial markets generally. John Hancock Advisers' Year
2000 team remains on the job making sure that the transition to the new
millennium happens as smoothly as possible. We, your Board of Directors, will
continue to monitor these events as the year progresses.
Very truly yours,
/s/Franklin C. Golden
- ---------------------
Franklin C. Golden, President of The Southeastern Thrift and Bank Fund, Inc.
2
<PAGE>
================================================================================
By James K. Schmidt, CFA, Portfolio Management Team Leader, and
Thomas Finucane and Thomas Goggins, Portfolio Managers
The Southeastern
Thrift and Bank Fund, Inc.
Bank stocks lag the market in a year of volatility
U.S. financial markets went on a wild ride in 1998. For the year ended December
31, 1998, the Standard & Poor's 500 Stock Index produced a total return of 29%,
including reinvested dividends. However, there was enormous volatility within
the year. After advancing by15% through July, the market hit a large pocket of
turbulence and lost all of this gain and then some through September. Overseas
traumas, a slowdown in the U.S. economy and questions about the ultimate driver
of stocks, corporate profits, all hit at once. After being one of the leaders
last year, banks and other financial stocks were particularly hard hit in the
summer sell-off, due to concerns over the potential impact on bank earnings of
the economic turmoil in the Far East and Russia. The decline in bank stocks was
indiscriminate, hurting many regional banks with no exposure to overseas
lending.
Late in the year, the market staged an amazing rebound as the result of
three interest-rate cuts by the Federal Reserve Board and generally favorable
earnings reports. In 1998, there was an extraordinary tendency for larger
companies to outperform smaller ones, as evidenced by the 2% decline in the
Russell 2000 Index -- a measure of small stock performance -- in the same year.
Performance review
In this environment, The Southeastern Thrift and Bank Fund, Inc. had a difficult
year. Indeed, after producing a remarkable return of 65% at net asset value in
1997, the Fund lost some ground during 1998. For the year ended December 31,
1998, the Fund posted a total return of -5.23% at net asset value. That compared
to the 6.92% return of the average open-end financial services fund, according
to Lipper Analytical Services, Inc.
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[A 3 1/2" x 2 1/2" photo at bottom right side of page of The Southeastern Thrift
and Bank Fund, Inc. Caption below reads "Fund management team members (l-r):
"Jay McKelvey, Tom Goggins and Tom Finucane. Seated (l-r): Lisa Welch, Jim
Schmidt and Patricia Ouimet."]
- --------------------------------------------------------------------------------
"Overseas traumas, a slowdown in the U.S. economy and questions about...
corporate profits..."
3
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
"The number of consolidation deals abated this year..."
- --------------------------------------------------------------------------------
[Table at top left hand column entitled "Top Five Common Stock Holdings." The
first listing is CCB Financial Corp. 5.0%, the second is BB&T Corp. 4.7%, the
third Regions Financial Corp. 4.5%, the SouthTrust Corp. 4.3% and the fifth
Centura Banks, Inc. 3.9%. A note below the table reads "As a percentage of net
assets on October 31, 1998."]
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In addition to overseas turmoil, the Fund was hampered by its
significant weighting in small- and mid-capitalization banks and thrifts. In
part, they suffered from the "small stock effect" (as exemplified by the Russell
2000 return discussed above), which has taken its toll among smaller issues in
almost all industries. Merger activity was also much less this year than last in
the group of banks that the Fund targets. Many regional bank stocks also took a
breather this year after advancing in late 1997 to what, in retrospect, seems to
have been an overvalued price level. The late summer sell-off brought them once
again to attractive levels of valuation.
- --------------------------------------------------------------------------------
[Table at bottom of left hand column entitled "Scorecard". The header for the
left column is "Investment" and the header for the right column is "Recent
Performance...and What's Behind the Numbers". The first listing is Premier
Bancshares followed by an up arrow with the phrase "Georgia supercommunity bank
bucks trend and soars." The second listing is Regions Financial Corp. followed
by a sideways arrow with the phrase "Market awaits outcome of several recent
mergers." The third listing is Colonial BancGroup followed by a down arrow with
the phrase "Company fails to manage rate risk at mortgage unit." A note below
the table reads "See `Schedule of Investments.' Investment holdings are subject
to change."]
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Consolidation ebbs and flows
During the year, five of the Fund's holdings announced mergers. The number of
consolidation deals abated this year, in line with the sell-off in bank stocks.
In times of market volatility, it is much harder for buyer and seller to set an
agreeable exchange ratio. We believe that the uncertainty created by
fluctuations in the market caused a postponement of several merger discussions.
Nevertheless, some of the Fund's important regional franchises were scooped up
in the second half of the year for hefty premiums, including Crestar Financial
Corp. (by SunTrust). Bank consolidation will wax and wane with the vagaries of
the market, but we continue to believe that the enduring reason for mergers -
excess capacity in the U.S. banking system - remains and will serve as a
catalyst for this process well into the 21st century.
Earnings in abundance at the regionals
Headlines in the fall were chock full of the travails of the large money-center
banks: lending miscues to hedge funds, trading losses in emerging markets and
revenue shortfalls in investment banking. Although these risks are not
insignificant to these banks, the companies do have other domestic engines to
power their earnings. Note that well under 5% of the Fund's net assets are
invested in companies with material overseas businesses. Despite the
machinations of the market, the earnings environment for most regional banks has
been steady. In third-quarter results, the median bank owned by the Fund posted
11% earnings growth over the third quarter of 1997 and 3% growth when compared
to the second quarter of 1998.
Investor interest in bank stocks in the fourth quarter of 1998 was
rekindled by recent cuts in interest rates by the Federal Reserve. While we
welcome the advance in share prices, we continue to believe that most investors
overestimate the impact of changes in interest rates on bank earnings. If
anything, we think net interest margins at most commercial banks will decline
somewhat if rates move lower because the rates paid on many of the savings
deposit products are already so paltry it will be difficult to move them still
lower. The savings and loans will fare a little better because the restoration
of some slope to the yield curve (the difference between short- and longer-term
interest rates) within the first year will improve the spreads on
adjustable-rate mortgages.
4
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
- --------------------------------------------------------------------------------
[Bar chart at top of left hand column with heading "Fund Performance". Under the
heading is a note that reads "For the year ended December 31, 1998." The chart
is scaled in increments of 2% with -6% at the bottom and 8% at the top. The
first bar represents the -5.23% Total return for The Southeastern Thrift and
Bank Fund, Inc. The second bar represents the 6.92% total return for Average
open-end financial services fund. A note below the chart 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, Inc."]
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In general, we think our holdings will show average earnings-per-share
gains of about 8% next year, as the positive impact of share buybacks will
mitigate some loss in net interest margins. This profit forecast reflects our
belief that the U.S. economy will continue to grow in 1999, albeit at a 1.5 % to
2% rate that would represent a noticeable slowdown from this year. Asset quality
remains as one of the bright spots in the earnings equation, as most of our
holdings report non-performing assets to be stable and amounting to less than 1%
of their balance sheets.
Although we do not anticipate a recession in 1999, we should not rule
out the possibility, as the impact of turmoil in the capital markets and the
deterioration of some of the emerging-market economies is difficult to quantify.
Fortunately, we feel that the banking industry is far better equipped to deal
with an economic downturn now as opposed to 1989, when the economy last swooned.
What hurt the banks in the last recession was their lending heavily against
inflated commercial real estate values. Recent bank loan growth has been
diversified across all sectors of their portfolios, backed more by sustainable
cash flows than by inflated collateral. More importantly, the levels of
profitability, capital and loss reserves are almost twice what they were in
1989, mitigating the impact of rising problem loans on bank earnings.
Importantly, consolidation has reduced the number of banks by over 30% since the
late 1980s. This has alleviated over-zealous competition and should lead to far
less stress on the system should trouble start brewing.
Fund composition and activity
Our focus remains on banks and thrifts in the Southeast with solid fundamentals
and selling at below-average valuation levels, although we have built positions
in other regions as well.
Throughout 1998, we pruned back positions in larger-capitalization
stocks which had run up and/or had become outsized positions in the Fund, such
as First Union and BB&T. As always, we also reduced our stake in banks whose
earnings fundamentals became suspect to us, including Union Planters and
Mercantile Bancorp. Proceeds from these sales became easier to deploy in the
third quarter when the decline in the prices of many banks and thrifts created
opportunities. Many mid-sized regional banks in the $10 billion to $30 billion
asset range were then selling at the same or lower price-earnings multiples as
the larger "superregional" banks that they may eventually be acquired by -- an
anomaly that had not occurred in several years. Interestingly, these banks tend
to have no credit exposure to emerging markets or to hedge funds, yet their
stock prices behaved as if they did. Names of this ilk in which the Fund
increased its positions include: First Tennessee National Corp., Centura Banks,
Cullen/Frost Bankers, Inc. and BancorpSouth.
"Asset quality remains as one of the bright spots in the earnings equation..."
5
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
"...the underperformance has created an oportunity."
A word about the Year 2000
The much-heralded Year 2000 (Y2K) issue stems from computer software using a
two-digit format, as opposed to four, to indicate the year. Without
modification, computers may not be able to interpret dates beyond 12/31/99,
resulting in miscalculations or other disruptive errors. Y2K readiness is a
serious issue for banks and thrifts, including those in our Fund, and it's one
factor we consider in our security analysis. In comparison to other sectors, we
believe financial institutions are well prepared to resolve the Y2K issue, as
bank regulators have required remediation efforts for the past two years.
A look ahead
While we are disappointed in the failure of stock prices of banks and thrifts to
perform as well as the market this year, we believe the underperformance has
created an opportunity. The relative price-earnings multiple between the banking
institutions and the S&P 500 is now 60%, below its long-term average of 70%,
even though we expect earnings growth for most banks to exceed that of the
market in 1999. We think the undervaluation is particularly pronounced in some
of the smaller banks, as the market has overwhelmingly favored large companies
over small in the last two years, regardless of the industry. Our investment
strategy is driven to a considerable extent by our expectation of substantial
consolidation among banks over the next decade. Although this activity slowed
this year, we believe that the trend toward fewer banks in the country is
solidly in place and inevitable. This should continue to work in the favor of
the Fund and its shareholders.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' 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, 1998. You'll
also find the net asset value per share as of that date.
Statement of Assets and Liabilities
December 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments at value - Notes A & C:
Common stocks (cost - $38,700,039) ......................... $95,245,305
Short-term investments (cost - $27,756) ..................... 27,756
Joint repurchase agreement (cost - $798,000) ................ 798,000
-----------
96,071,061
Cash .......................................................... 193
Receivable for investments sold ............................... 96,754
Interest receivable ........................................... 483
Dividends receivable .......................................... 244,115
-----------
Total Assets .......................... 96,412,606
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Liabilities:
Dividend payable .............................................. 525,039
Payable for investments purchased ............................. 200,031
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 59,459
Accounts payable and accrued expenses ......................... 60,369
-----------
Total Liabilities ...................... 844,898
-------------------------------------------------------
Net Assets:
Capital paid-in ............................................... 37,213,160
Accumulated net realized gain on investments .................. 1,728,903
Net unrealized appreciation of investments .................... 56,545,266
Undistributed net investment income ........................... 80,379
-----------
Net Assets ............................. $95,567,708
=======================================================
Net Asset Value Per Share:
(Based on 3,986,504 shares outstanding - 50 million
shares authorized with $0.001 per share par value) ........... $23.97
===============================================================================
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment Income:
Dividends ..................................................... $2,047,274
Interest ...................................................... 303,760
------------
2,351,034
------------
Expenses:
Investment advisory fee - Note B .............................. 695,945
Administration fee - Note B ................................... 160,602
Custodian fee ................................................. 50,248
Directors' fees ............................................... 47,874
Auditing fee .................................................. 33,650
Miscellaneous ................................................. 21,659
Legal fees .................................................... 11,801
Printing ...................................................... 11,012
Transfer agent fee ............................................ 9,377
------------
Total Expenses ......................... 1,042,168
-------------------------------------------------------
Net Investment Income .................. 1,308,866
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ......................... 9,550,161
Change in net unrealized appreciation/depreciation
of investments ............................................... (17,458,922)
------------
Net Realized and Unrealized
Loss on Investments .................... (7,908,761)
-------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations .............. ($6,599,895)
========================================================
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
The Southeastern Thrift and Bank Fund, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
----------- -----------
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .............................. $1,258,743 $1,308,866
Net realized gain on investments sold............... 4,881,075 9,550,161
Change in net unrealized appreciation/depreciation
of investments ..................................... 36,446,630 (17,458,922)
---------- -----------
Net Increase (Decrease) in Net Assets Resulting
from Operations.................................. 42,586,448 (6,599,895)
---------- -----------
Distributions to Shareholders:
Dividends from net investment income
($0.3100 and $0.3200 per share, respectively)....... (1,235,340) (1,275,681)
Distributions from capital gains ($0.0275 and
$1.9622 per share, respectively).................... (109,280) (7,822,359)
---------- ----------
Total Distributions to Shareholders............. (1,344,620) (9,098,040)
---------- ----------
From Common Share Transactions - Net:*............... 43,502 --
---------- ----------
Net Assets:
Beginning of period................................. 69,980,313 111,265,643
---------- -----------
End of period (including undistributed net
investment income of $48,295 and
$80,379, respectively)..............................$111,265,643 $95,567,708
============ ============
* Analysis of Common Share Transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1998
-------------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
----------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period............................. 3,984,966 $32,397,863 3,986,504 $37,213,160
Shares issued to shareholders in reinvestment of distributions...... 1,538 43,502 -- --
Reclassification of accumulated net realized gain on
investments - Note E............................................... -- 86 -- --
Reclassification of net long-term capital gains (net of
federal income taxes of $2,569,382 and none,
respectively) - Note A ............................................ -- 4,771,709 -- --
--------- ----------- --------- -----------
Shares outstanding, end of period.................................. 3,986,504 $37,213,160 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:
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<TABLE>
<CAPTION>
FISCAL
YEAR ENDED PERIOD ENDED
JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------------
1994(1) 1994(1,2) 1995(1) 1996 1997 1998
------- --------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period....................... $9.040 $10.830 $9.930 $14.380 $17.560 $27.910
------ ------- ------ ------- ------- -------
Net Investment Income...................................... 0.105 0.075 0.219 0.280 0.316 0.328
Net Realized and Unrealized Gain (Loss) on Investments..... 2.232(3) (0.670)(3) 4.513(3) 3.295(3) 10.372(3) (1.986)
------ ------- ------ ------- ------- -------
Total from Investment Operations....................... 2.337 (0.595) 4.732 3.575 10.688 (1.658)
------ ------- ------ ------- ------- -------
Less Distributions:
Dividends from Net Investment Income................... (0.103) (0.130) (0.219) (0.274) (0.310) (0.320)
Distributions from Net Realized Gain on
Investments Sold..................................... (0.444) (0.175) (0.063) (0.121) (0.028) (1.962)
------ ------ ------ ------ ------ ------
Total Distributions.................................... (0.547) (0.305) (0.282) (0.395) (0.338) (2.282)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period............................. $10.830 $9.930 $14.380 $17.560 $27.910 $23.970
======= ====== ======= ======= ======= =======
Per Share Market Value, End of Period...................... $10.625 $9.625 $13.750 $16.375 $30.250 $22.375
Total Investment Return at Market Value.................... 42.98% (6.53%)(4) 45.66% 21.96% 91.59% (18.37%)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)................... $43,145 $39,548 $57,297 $69,980 $111,266 $95,568
Ratio of Expenses to Average Net Assets.................... 1.46% 1.46%(5) 1.31% 1.13% 1.06% 0.97%
Ratio of Net Investment Income to Average Net Assets....... 1.01% 1.35%(5) 1.73% 1.79% 1.45% 1.22%
Portfolio Turnover Rate.................................... 23% 7% 14% 13% 16% 9%
</TABLE>
(1) All per share amounts and net asset values have been restated to reflect the
2-for-1 stock split effective November 30, 1995.
(2) Effective October 24, 1994, the fiscal period end changed from June 30 to
December 31.
(3) 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.
(4) Not annualized.
(5) Annualized.
The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, distributions 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, 1998
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Fund on December 31, 1998. It's divided into two main categories: common 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 (15.70%)
Colonial BancGroup, Inc. .................... 185,112 $2,221,344
Compass Bancshares, Inc. .................... 44,650 1,699,491
First Southern Bancshares.................... 50,917 716,020
Peoples Banctrust Co., Inc. ................. 44,000 935,000
Regions Financial Corp. ..................... 106,272 4,284,090
Security Federal Bancorp., Inc. ............. 33,600 604,800
Southern Banc Co., Inc. ..................... 32,900 396,856
SouthTrust Corp. ............................ 112,395 4,151,590
-----------
15,009,191
-----------
Florida (5.04%)
American Bancshares, Inc.*................... 44,000 379,500
BankUnited Financial Corp. (Class A) * ...... 14,000 112,000
Commercial Bankshares, Inc................... 25,908 595,884
Community Savings Bankshares, Inc. .......... 74,518 801,068
Gateway America Bank* (r).................... 100,000 400,000
Pointe Financial Corp.* ..................... 30,000 309,375
Republic Security Financial Corp............. 80,910 981,034
Seacoast Banking Corp. (Class A)............. 43,500 1,234,312
-----------
4,813,173
-----------
Georgia (7.68%)
ABC Bancorp. ................................ 17,500 220,938
CCF Holding Co. ............................. 32,770 479,261
Eagle Bancshares, Inc. ...................... 48,000 882,000
First Liberty Financial Corp. ............... 102,975 2,162,475
Flag Financial Corp. ........................ 101,250 1,164,375
Premier Bancshares, Inc...................... 92,900 2,432,819
-----------
7,341,868
-----------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Louisiana (2.64%)
ISB Financial Corp. ......................... 22,000 $486,750
Teche Holding Co. ........................... 25,000 384,375
Whitney Holding Corp. ....................... 44,000 1,650,000
-----------
2,521,125
-----------
Mississippi (4.89%)
BancorpSouth, Inc. .......................... 64,400 1,163,225
Hancock Holding Co. ......................... 19,665 894,757
Lamar Capital Corp. ........................ 38,500 385,000
People Holding Co. (The)..................... 23,400 756,113
Trustmark Corp. ............................. 65,000 1,470,625
-----------
4,669,720
-----------
North Carolina (24.08%)
BankAmerica Corp. ........................... 38,874 2,337,299
BB&T Corp. .................................. 110,120 4,439,212
CCB Financial Corp. ......................... 84,714 4,828,698
Centura Banks, Inc. ........................ 50,587 3,762,408
First Citizens BancShares, Inc. (Class A).... 17,556 1,580,040
First Savings Bancorp., Inc. ................ 9,910 220,498
First Union Corp............................. 37,822 2,300,050
FNB Financial Service Corp. ................. 21,250 355,938
Haywood Bancshares, Inc. .................... 53,400 834,375
LSB Bancshares, Inc. ....................... 37,752 726,726
Mutual Community Savings Bank* .............. 17,070 243,248
Piedmont Bancorp., Inc. ..................... 19,000 171,000
Rowan Bankcorp, Inc.* ...................... 15,000 330,000
South Street Financial Corp. ................ 40,000 315,000
Stone Street Bancorp., Inc................... 40,000 570,000
-----------
23,014,492
-----------
South Carolina (2.80%)
Carolina First Corp. ........................ 15,593 394,698
First Financial Holdings, Inc. .............. 103,500 1,966,500
Heritage Bancorp., Inc.* .................... 2,172 45,612
Plantation Financial Corp.................... 20,000 270,000
-----------
2,676,810
-----------
Tennessee (8.53%)
First American Corp. ........................ 74,358 3,299,636
First Tennessee National Corp. .............. 90,480 3,443,895
Union Planters Corp. ........................ 31,079 1,408,267
-----------
8,151,798
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
==============================FINANCIAL STATEMENTS==============================
The Southeastern Thrift and Bank Fund, Inc.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Virginia (9.13%)
Commonwealth Bankshares, Inc.*............... 24,269 $370,102
Community Bankshares, Inc. .................. 1,500 39,000
Crestar Financial Corp. ..................... 30,669 2,208,168
F & M National Corp. ....................... 22,625 677,336
First Virginia Banks, Inc. .................. 34,975 1,643,825
Guaranty Financial Corp. .................... 20,000 262,500
Heritage Bancorp., Inc. .................... 15,000 56,250
MainStreet BankGroup, Inc. .................. 50,600 2,349,737
Marathon Financial Corp. ................... 10,000 75,000
Rockingham Heritage Bank* .................. 28,000 336,000
Salem Bank & Trust ........................ 23,394 397,698
Security Bank Corp.* ........................ 11,000 173,250
Shore Financial Corp.*....................... 12,250 136,281
-----------
8,725,147
-----------
TOTAL BANKS, SAVINGS AND
LOANS - SOUTHEASTERN (80.49%) 76,923,324
--------- -----------
ISSUER, DESCRIPTION, STATE
- --------------------------
Banks and Thrifts - Other Regions (15.30%)
Associated Banc-Corp. (WI)................... 16,250 555,547
Banc One Corp. (OH).......................... 6,186 315,873
Bank of the Ozarks, Inc. (AR)................ 24,250 554,719
CB Bancshares, Inc. (HI)..................... 11,477 355,070
Century Bancshares, Inc.* (MD)............... 10,500 70,875
Cullen/Frost Bankers, Inc. (TX).............. 54,650 2,998,919
Equitable Federal Savings Bank* (MD)......... 34,000 709,750
Local Financial Corp.* (OK).................. 90,000 810,000
Mercantile Bancorp., Inc. (MO)............... 18,617 858,709
Mercantile Bankshares Corp. (MD)............. 34,500 1,328,250
National City Corp. (OH)..................... 2,750 199,375
North Central Bancshares, Inc. (IA).......... 19,500 329,063
One Valley Bancorp., Inc. (WV)............... 31,300 1,028,987
Prosperity Banchares, Inc. (TX).............. 31,250 386,719
Provident Financial Group, Inc. (OH)......... 22,500 849,375
Riggs National Corp. (DC).................... 11,500 234,313
SFC Acquisition Corp.* (AR) (r).............. 50,000 500,000
Simmons First National Corp.
(Class A) (AR)............................... 30,000 1,113,750
Summit Bancshares, Inc. (TX)................. 59,500 1,100,750
Texas Regional Bancshares, Inc.
(Class A) (TX)............................... 12,750 319,547
----------
TOTAL BANKS AND
THRIFTS - OTHER REGIONS (15.30%) 14,619,591
--------- ----------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Other (3.87%)
Household International, Inc. ............... 22,500 $891,562
Interstate/Johnson Lane, Inc. ............... 17,200 538,575
Raymond James Financial, Inc. ............... 101,225 2,138,378
Willis Lease Finance Corp.* ................. 8,500 133,875
----------
3,702,390
----------
TOTAL COMMON STOCKS
(Cost $38,700,039) (99.66%) 95,245,305
-------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
SHORT-TERM INVESTMENTS
Cash Equivalents
Deposits in Mutual Banks........ $28 27,756
--------
Joint Repurchase Agreement
Investment in a joint repurchase
agreement transaction with
SBC Warburg, Inc. -- Dated 12-31-98,
due 01-04-99 (Secured by U.S.
Treasury Bonds, 7.50% and 11.75%,
due 02-15-10 and 11-15-16)
- Note A ....................... 4.750% 798 798,000
--------
TOTAL SHORT-TERM INVESTMENTS (0.87%) 825,756
-------- --------
TOTAL INVESTMENTS (100.53%) 96,071,061
--------- ----------
OTHER ASSETS AND LIABILITIES, NET (0.53%) (503,353)
--------- -----------
TOTAL NET ASSETS (100.00%) $95,567,708
========= ===========
* Non-income producing security.
(r) The securities listed below are direct placement securities and are
restricted as to resale. The Fund has limited rights to registration
under the Securities Act of 1933 with respect to restricted securities
(not including Rule 144A securities). In certain circumstances the Fund
may bear a portion of the cost of such registrations; otherwise, such
costs would be borne by the issuer. Additional information on each
restricted security is as follows:
MARKET
VALUE AS A MARKET
PERCENTAGE VALUE
ACQUISITION ACQUISITION OF FUND'S AS OF
DATE COST NET ASSETS DECEMBER 31, 1998
---- ---- ---------- -----------------
Gateway America Bank 05-11-98 $100,000 0.42% $400,000
SFC Acquisition Corp. 03-30-98 500,000 0.52 500,000
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.
Effective June 1,1998, the Fund determines the net asset value of the
shares each business day.
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,
Inc., 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, 1998, 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 of its net long-term capital gains of the fiscal period
ended December 31, 1997.
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.
12
<PAGE>
========================NOTES TO FINANCIAL STATEMENTS===========================
The Southeastern Thrift and Bank Fund, Inc.
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, 1998, aggregated $8,885,385 and $15,729,284, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended December 31, 1998.
The cost of investments owned at December 31, 1998 (including deposits
in mutual savings banks) for federal income tax purposes was $39,525,795. Gross
unrealized appreciation and depreciation of investments aggregated $57,372,058
and $826,792, respectively, resulting in net unrealized appreciation of
$56,545,266.
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 - RECLASSIFICATION OF CAPITAL ACCOUNTS
During the period ended December 31, 1998, the Fund has reclassified amounts to
reflect an increase in accumulated net realized gain on investments of $1,101
and a decrease in net investment income of $1,101. This represents the amount
necessary to report these balances on a tax basis, excluding certain temporary
differences, as of December 31, 1998. 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 in the financial highlights excludes these
adjustments.
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, 1998 is set forth below.
<TABLE>
<CAPTION>
BEGINNING ACQUISITIONS DISPOSITIONS 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 $604,800(1)
(1) As of December 31, 1998, no longer an affiliated issuer.
</TABLE>
14
<PAGE>
================================================================================
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, 1998, the related statement of operations for the
year then ended, the statements of changes in net assets for the years ended
December 31, 1998 and 1997, and the financial highlights for the each of the
four years ended December 31, 1998, for the six-month period ended December 31,
1994 and for the year 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, 1998 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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, 1998, 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 5, 1999
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,
1998.
100% of the distributions qualify for the dividends received deduction
available to corporations.
The Fund has designated distributions to shareholders of $7,513,445 as
a capital gain dividend.
Shareholders will be mailed a 1998 U.S. Treasury Department Form
1099-DIV in January 1999. This will reflect the total of all distributions which
are taxable for calendar year 1998.
15
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
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 seven 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. 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).
16
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
YEAR 2000 COMPLIANCE
The Adviser and the Fund's service providers are taking steps to address any
year 2000-related computer problems. However, there is some risk that these
problems could disrupt the issuers in which the Fund invests, the Fund's
operations or financial markets generally.
SHAREHOLDER COMMUNICATION AND ASSISTANCE
If you have any questions concerning The Southeastern Thrift and Bank Fund,
Inc., we will be pleased to assist you. If you hold shares in your own name and
not with a brokerage firm, please address all notices, correspondence, questions
or other communications regarding the Fund to the transfer agent at:
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
Telephone: (800) 426-5523
If your shares are held with a brokerage firm, you should contact that firm,
bank or other nominee for assistance.
17
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
18
<PAGE>
================================================================================
The Southeastern Thrift and Bank Fund, Inc.
19
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS ------------------
A Global Investment Management Firm Bulk Rate
U.S. Postage
101 HUNTINGTON AVENUE, BOSTON, MA 02199-7603 PAID
1-800-843-0090 S. Hackensack, NJ
Permit No. 750
------------------
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