UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: SEPTEMBER 30, 1996
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 0-22240
FIRST SOUTHEAST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 57-0979678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 N. MAIN STREET, ANDERSON, SOUTH CAROLINA 29621
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 224-3401
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK,
PAR VALUE $.01 PER SHARE 4,388,231 SHARES NOVEMBER 8, 1996
(Class) (Outstanding) (As of date)
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 and
September 30, 1996 1
Consolidated Statements of Income for the three months
ended September 30, 1995 and 1996 2
Consolidated Statements of Stockholders' Equity 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 1995 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 9
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
June 30, Sept. 30,
1996 1996
Assets
Cash and due from banks $ 3,865 $ 2,968
Interest-earning deposits 9,458 9,148
Investment securities:
Held to maturity (market value of $22,917 and $15,387) 23,674 16,081
Available for sale (cost of $27,218 and $27,105) 27,316 27,313
Loans receivable, net 238,337 245,404
Mortgage-backed securities:
Held to maturity (market value of $11,217 and $10,766) 11,508 10,952
Available for sale (cost of $6,155 and $5,881) 6,090 5,844
Office properties and equipment, net 4,381 4,322
Real estate 791 762
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,294 2,231
Other 1,447 1,620
Total assets $ 331,852 $ 329,336
Liabilities
Deposits $ 288,217 $ 279,712
Securities sold under agreements to repurchase 5,000 10,000
Other borrowed money - 1,300
Advance payments by borrowers for taxes and insurance 1,436 1,701
Accrued expenses and other liabilities 3,331 3,049
Income taxes payable 365 449
Total liabilities 298,349 296,211
Stockholders' Equity
Preferred stock ($.01 par value, 2,000,000 shares
authorized; none outstanding) - -
Common stock ($.01 par value, 8,000,000 shares authorized;
4,388,231 shares issued and outstanding) 44 44
Paid-in capital 19,137 19,137
Retained earnings, substantially restricted 14,300 13,830
Unrealized net loss on securities available for sale 22 114
Total stockholders' equity 33,503 33,125
Total liabilities and stockholders' equity $ 331,852 $ 329,336
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(unaudited)
(in thousands, except share data)
Three Months Ended
September 30,
1995 1996
Interest income:
Mortgage loans $ 3,937 $ 4,418
Mortgage-backed securities 281 289
Other loans 539 538
Investments 1,347 780
Deposits with other banks 315 184
Total interest income 6,419 6,209
Interest expense:
Deposits 3,587 3,505
Borrowings 35 147
Total interest expense 3,622 3,652
Net interest income 2,797 2,557
Provision for loan losses 45 45
Net interest income after provision for loan losses 2,752 2,512
Non-interest income:
Loan fees and servicing charges 147 199
Income from rental of real estate acquired
for development or rental 15 21
Other 82 90
Total non-interest income 244 310
Non-interest expenses:
Compensation and employee benefits 1,196 884
Occupancy expense 242 236
Deposit insurance premiums 157 1,963
Other 240 263
Total non-interest expenses 1,835 3,346
Income (loss) before income taxes 1,161 (524)
Income tax expense (benefit) 405 (230)
Net income (loss) $ 756 $ (294)
Weighted average common equivalent shares outstanding 3,974,636 4,388,231
Earnings (loss) per share $ 0.19 $ (0.07)
The accompanying notes are an integral part
of these consolidated financial statements.
- -2-
<PAGE>
<TABLE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(unaudited)
(in thousands, except share data)
Common Paid-in Retained Unrealized Treasury Unearned Compensation:
Stock Capital Earnings Gains(losses) Stock ESOP MRPs Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 43 $ 42,106 $ 32,772 $ (158) $(2,920) $ (2,662) $ (257) $ 68,924
Net income - - 939 - - - - 939
Cash dividends ($10.48 per share) - (23,738) (19,411) - - 185 - (42,964)
Unrealized gains on securities, net - - - 180 - - - 180
Issuance of common stock (61,831 shares) 1 617 - - - - - 618
Issuance of treasury stock (229,785 shares) - (622) - - 2,920 - - 2,298
Tax benefit of stock options exercised - 505 - - - - - 505
ESOP and MRPs compensation earned - 269 - - - 2,477 257 3,003
Balance at June 30, 1996 44 19,137 14,300 22 - - - 33,503
Net loss - - (294) - - - - (294)
Cash dividends ($0.04 per share) - - (176) - - - - (176)
Unrealized gains on securities, net - - - 92 - - - 92
Balance at September 30, 1996 $ 44 $ 19,137 $ 13,830 $ 114 $ - $ - $ - $ 33,125
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
September 30,
1995 1996
Net cash provided (used) by operating activities $ 144 $ (451)
Investing activities:
Net decrease in insured certificates of deposit 2,909 4,594
Purchase of investment securities held to maturity (3,000) -
Maturities of investment securities held to maturity 7,040 3,000
Purchase of investment securities available for sale - (5,000)
Maturities of investment securities available for sale - 5,113
Proceeds from sale of real estate 38 30
Origination of loans (14,654) (18,462)
Principal payments on loans 12,635 11,468
Purchase of loans (2,571) -
Principal payments on mortgage-backed securities 918 794
Purchase of office properties and equipment (20) (36)
Net cash used by investing activities 3,295 1,501
Financing activities:
Net increase (decrease) in deposits 4,098 (8,508)
Increase in securities sold under agreements to repurchase - 5,000
Increase in short-term borrowings - 1,300
Increase in advance payments by borrowers for taxes and
insurance 339 265
Increase in mortgage servicing payments (28) (138)
Proceeds from exercise of stock options 40 -
Cash dividend paid on common stock (461) (176)
Net cash provided (used) by financing activities 3,988 (2,257)
Increase (decrease) in cash and cash equivalents 7,427 (1,207)
Cash and cash equivalents at beginning of period 22,335 13,323
Cash and cash equivalents at end of period $ 29,762 $ 12,116
Noncash transactions:
Loan loss reserve charge-offs $ 28 38
The accompanying notes are an integral part of these
consolidated financial statements.
- -4-
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 and September 30, 1996
1. General. On October 7, 1993, First Southeast Financial Corporation (the
"Company"), a Delaware corporation, became the holding company for First Federal
Savings and Loan Association of Anderson (the "Association"). Both companies
are headquartered in Anderson, South Carolina. The Company is engaged primarily
in the business of directing, planning and coordinating the business activities
of the Association.
The unaudited consolidated financial statements of the Company included herein
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods presented. All
such adjustments are of a normal recurring nature. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
It is suggested that these consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
for the Company for the year ended June 30, 1996. The results of operations for
the three-month period ended September 30, 1996 are not indicative of the
results of operations for the entire fiscal year.
2. Investment Securities. The carrying and estimated market values of securities
are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
Held to maturity:
At June 30, 1996:
US Government and agency securities $17,995 $ 3 $ (760) $17,238
Insured certificates of deposit 5,679 - - 5,679
Total $23,674 $ 3 $ (760) $22,917
At September 30, 1996:
US Government and agency securities $14,996 $ - $ (694) $14,302
Insured certificates of deposit 1,085 - - 1,085
Total $16,081 $ - $ (694) $15,387
Available for sale:
At June 30, 1996:
US Government and agency securities $27,218 $ 110 $ (12) $27,316
At September 30, 1996:
US Government and agency securities $27,105 $ 210 $ (2) $27,313
- -5-
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General. The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations of the
Company. References to the "Company" include First Southeast Financial
Corporation and/or First Federal Savings and Loan Association of Anderson, as
appropriate.
Recent Developments. The Association is a member of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996 directing the FDIC to impose a special assessment on SAIF-
assessable deposits to recapitalize the SAIF. Included in the results of
operations for the quarter ended September 30, 1996, is a charge of $1.8 million
($1.1 net of taxes) for the Association's portion of the special assessment.
Additional legislation was signed into law during the quarter ended September
30, 1996 which contained a provision that repealed the percentage-of-taxable-
income method of accounting for thrift bad debts for tax years beginning after
December 31, 1995. This law requires the Association to account for bad debts
using the experience method. Under the new law, the change in accounting method
that eliminates the percentage method would trigger bad debt reserve recapture
for post-1987 excess reserves over a six-year period. At June 30, 1996 the
Association's post-1987 excess reserves amounted to $2 million, for which taxes
have been provided. The law contains a special provision postponing the first
payment of taxes for up to two years. Since the Association has provided for
the taxes on the excess reserves, the enactment of the law has had no impact on
the Company's financial condition or results of operations.
Financial Condition. The Company's total assets decreased by $2.5 million from
June 30, 1996 to September 30, 1996. A $7 million increase in loans receivable
was funded primarily from maturing investment securities. As of September 30,
1996, nonperforming loans amounted to $215,000, or 0.08% of total loans.
Results of Operations. The operating results of the Company depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investments, and interest expense
on interest-bearing liabilities, primarily deposits. The Company's net income
is also affected by the establishment of provisions for loan losses, the level
of its non-interest income and expenses and income tax provisions.
Comparison of Operating Results for the Three Months Ended September 30, 1995
and 1996
General. Net income decreased $1 million from $756,000 for the three months
ended September 30, 1995 to a loss of $294,000 for the same period in 1996. The
primary component of the decrease was the net charge to earnings for the $1.1
million FDIC special assessment as described above. Net income excluding the
effect of the special assessment increased by $67,000 from $756,000 for the
three months ended September 30, 1995 to $823,000 for the same period in 1996
primarily attributable to the net effect of larger decreases in both
compensation costs and interest income.
Interest Income. Interest income decreased by $210,000 from $6.4 million for
the three months ended September 30, 1995 to $6.2 million for the same period in
1996. This decrease was the net effect of increased interest earned on mortgage
loans which was offset by decreased interest on investments and interest-earning
deposits.
Interest on mortgage loans increased by $481,000 primarily as a result of
increased outstanding balances. The average net mortgage loans receivable
increased by $30 million from $188 million during the three months ended
September 30, 1995 to $218 million for the same period in 1996. However, the
average yield on mortgage loans decreased by 28 basis points from 8.39% for the
three months ended September 30, 1995 to 8.11% for the same period in 1996.
Interest on investments and interest-earning deposits decreased by $698,000
primarily as a result the loss of earnings in 1996 from the interest-earning
assets used to pay the Company's special $10 per share cash dividend in June
1996. In addition, funds from maturing investment securities were used to fund
the increase in mortgage loans outstanding.
- -6-
<PAGE>
Interest Expense. Interest expense increased a net of $30,000 for the three
months ended September 30, 1996 when compared to the same period in 1995.
Interest on deposits decreased by $82,000 as the average rate paid on deposits
decreased by 20 basis points from 5.12% to 4.92%. This decrease was partially
offset by the effect of a $5 million increase in the average deposit balance.
In addition, interest expense on borrowed funds increased by $112,000 due to the
increase in the average balance of borrowed funds from $1.6 million during the
three months ended September 30, 1995 to $8.5 million in 1996.
Provision for Loan Losses. The provision for loan losses remained unchanged at
$45,000. Provisions are made based on management's analysis of the various
factors which affect the loan portfolio and management's desire to maintain the
allowance at a level considered adequate to provide for potential losses. The
allowance for loan losses was $1.1 million at September 30, 1995 and $1.2
million at September 30, 1996, representing 211% and 577% of total nonperforming
loans, respectively.
Non-interest Expenses. Non-interest expenses increased by $1.5 million as a net
result of the $1.8 million FDIC special assessment and a net decrease in all
other non-interest expenses of $300,000. Compensation costs decreased by
$324,000 from 1995 due to the cost of the Company's stock based compensation
plans which were fully recognized by June 30, 1996. Charges to income during
the quarter ended September 30, 1995 were $196,000 for the employee stock
ownership plan ("ESOP") and $128,000 for the management recognition plans
("MRPs").
Liquidity and Capital Resources.
The Company's primary sources of funds are deposits and proceeds from principal
and interest payments on loans and investment securities. While maturities and
scheduled amortization of loans and investment securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The Company's primary investing activity is loan originations. During the three
months ended September 30, 1995 and 1996, the Company originated loans of $15
million and $18 million, respectively. Other investing activities during the
three months ended September 30, 1995 and 1996 included the purchases of
investment securities of $3 million and $5 million, respectively. These
activities were funded primarily from interest-earning deposits, from maturities
of other investment securities and from proceeds of securities sold under
agreements to repurchase.
The Company maintains liquidity levels adequate to fund loan commitments,
investment opportunities, deposit withdrawals and other financial commitments.
During the three months ended September 30, 1995 and 1996, the Company used
funds primarily for loan commitments and investment purchases. At September 30,
1996, the Company had $4 million of approved mortgage loan commitments, $9
million of undisbursed construction loans proceeds and $6 million of undisbursed
consumer line of credit commitments.
At September 30, 1996, there were no material commitments for capital
expenditures.
At September 30, 1996, savings certificates amounted to $224 million, or 77% of
the Company's total deposits, of which $53 million were scheduled to mature by
December 31, 1996. Historically, the Company has been able to retain a
significant amount of its deposits as they mature. Management of the Company
believes it has adequate resources to fund all loan commitments from savings
deposits and short- and long-term borrowings and that it can adjust the offering
rates of savings certificates to retain deposits in changing interest rate
environments.
The Office of Thrift Supervision ("OTS") requires a savings institution to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 5% of the average daily balance of its net
withdrawable deposits and short-term borrowings. In addition, short-term liquid
assets must constitute 1% of the sum of net withdrawable deposit accounts plus
short-term borrowings. The Company's average liquidity ratios were 37% and 13%
for the three-month periods ended September 30, 1995 and 1996, respectively. The
Company's actual short-term and total liquidity ratios were 24% and 36% at
September 30, 1995 and 9% and 11% at September 30, 1996, respectively. The
Company has consistently maintained liquidity levels in excess of regulatory
requirements as a strategy for asset and liability management.
- -7-
<PAGE>
OTS regulations require savings institutions to maintain minimum capital levels.
The following table presents the Association's regulatory levels relative to its
regulatory capital requirements at September 30, 1996:
Percent of
Amount Adjusted
(in thousands) Total Assets
Tangible capital $ 33,245 10.1%
Tangible capital requirement 4,939 1.5
Excess $ 28,306 8.6%
Core capital requirement $ 33,245 10.1%
Core capital requirement 9,879 3.0
Excess $ 23,366 7.1%
Risk-based capital $ 34,481 21.8%
Risk-based capital requirement 12,657 8.0
Excess $ 21,824 13.8%
Management has no knowledge of any trends, events or uncertainties that will
have or are reasonably likely to have material effects on the liquidity, capital
resources or operations of the Company. Further, except as discussed above
under "Recent Developments," management is not aware of any current
recommendations by the regulatory authorities which, if implemented, would have
such an effect.
- -8-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. From time to time, the Company is a party to legal
proceedings in the ordinary course of business wherein it enforces its security
interest in mortgage loans. The Company is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K. No current report 8-K was filed
during the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SOUTHEAST FINANCIAL CORPORATION
(Registrant)
Date: November 13, 1996 /s/ David C. Wakefield, III
David C. Wakefield, III
President and Chief Executive Officer
(Duly Authorized Representative)
Date: November 13, 1996 /s/ John L. Biediger
John L. Biediger
Executive Vice President and Treasurer
(Principal Accounting Officer)
- -9-
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 2968
<INT-BEARING-DEPOSITS> 9148
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33157
<INVESTMENTS-CARRYING> 27033
<INVESTMENTS-MARKET> 26153
<LOANS> 246654
<ALLOWANCE> 1241
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<SHORT-TERM> 11300
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0
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