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: DECEMBER 31, 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 FEBRUARY 12, 1997
(Class) (Outstanding) (As of date)
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FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
DECEMBER 31, 1996
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1996 1
Consolidated Statements of Income for the three months
and six months ended December 31, 1995 and 1996 2
Consolidated Statements of Stockholders' Equity 3
Consolidated Statements of Cash Flows for the six
months ended December 31, 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 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(unaudited)
(in thousands, except share data)
June 30, Dec. 31,
1996 1996
Assets
Cash and due from banks $ 3,865 $ 3,869
Interest-earning deposits 9,458 2,630
Investment securities:
Held to maturity (market value of $22,917 and $14,938) 23,674 15,392
Available for sale (cost of $27,218 and $22,107) 27,316 22,379
Loans receivable, net 238,337 254,640
Mortgage-backed securities:
Held to maturity (market value of $11,217 and $10,434) 11,508 10,552
Available for sale (cost of $6,155 and $5,577) 6,090 5,564
Office properties and equipment, net 4,381 4,234
Real estate 791 902
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,294 2,180
Other 1,447 980
Total assets $ 331,852 $ 326,013
Liabilities
Deposits $ 288,217 $ 278,121
Securities sold under agreements to repurchase 5,000 10,000
Other borrowed money - 1,610
Advance payments by borrowers for taxes and insurance 1,436 657
Accrued expenses and other liabilities 3,331 1,385
Income taxes payable 365 479
Total liabilities 298,349 292,252
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 14,409
Unrealized net gain on securities available for sale 22 171
Total stockholders' equity 33,503 33,761
Total liabilities and stockholders' equity $ 331,852 $ 326,013
The accompanying notes are an integral part of these
consolidated financial statements.
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<TABLE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(unaudited) (in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
1995 1996
Interest income: 1995 1996
<S> <C> <C> <C> <C>
Mortgage loans $ 4,039 $ 4,458 $ 7,976 $ 8,876
Mortgage-backed securities 280 279 561 568
Other loans 530 589 1,069 1,127
Investments 1,182 713 2,529 1,493
Deposits with other banks 423 83 738 267
Total interest income 6,454 6,122 12,873 12,331
Interest expense:
Deposits 3,606 3,359 7,193 6,864
Borrowings 35 201 70 348
Total interest expense 3,641 3,560 7,263 7,212
Net interest income 2,813 2,562 5,610 5,119
Provision for loan losses 45 45 90 90
Net interest income after provision for loan losses 2,768 2,517 5,520 5,029
Non-interest income:
Loan fees and servicing charges 150 201 297 400
Income from rental of real estate acquired
for development or rental 20 22 35 43
Other 74 71 156 161
Total non-interest income 244 294 488 604
Non-interest expenses:
Compensation and employee benefits 1,237 906 2,433 1,790
Occupancy expense 238 230 480 466
Deposit insurance premiums 160 119 317 2,082
Other 306 282 546 545
Total non-interest expenses 1,941 1,537 3,776 4,883
Income before income taxes 1,071 1,274 2,232 750
Income tax expense 344 476 749 246
Net income $ 727 $ 798 $ 1,483 $ 504
Weighted average common equivalent shares outstanding 3,990,906 4,388,231 3,982,771 4,388,231
Earnings per share $ 0.18 $ 0.18 $ 0.37 $ 0.11
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<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 income - - 504 - - - - 504
Cash dividends ($0.09 per share) - - (395) - - - - (395)
Unrealized gains on securities, net - - - 149 - - - 149
Balance at December 31, 1996 $ 44 $ 19,137 $ 14,409 $ 171 $ - $ - $ - $ 33,761
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)
Six Months Ended
December 31,
1995 1996
Net cash provided (used) by operating activities $ 1,485 $ (732)
Investing activities:
Net decrease in insured certificates of deposit 3,210 5,283
Purchase of investment securities held to maturity (8,405) -
Maturities of investment securities held to maturity 13,423 3,000
Purchase of investment securities available for sale - (5,000)
Maturities of investment securities available for sale - 10,113
Proceeds from sale of real estate 38 30
Origination of loans (29,474) (35,645)
Principal payments on loans 23,299 21,030
Purchase of loans (3,149) (1,550)
Purchase of mortgage-backed securities (2,260) -
Principal payments on mortgage-backed securities 1,896 1,464
Purchase of office properties and equipment (24) (40)
Net cash used by investing activities (1,446) (1,315)
Financing activities:
Net increase (decrease) in deposits 1,326 (10,101)
Increase in securities sold under agreements to repurchase - 5,000
Increase in short-term borrowings - 1,610
Decrease in advance payments by borrowers for taxes and
insurance (384) (779)
Increase in mortgage servicing payments (56) (112)
Proceeds from exercise of stock options 40 -
Cash dividend paid on common stock (922) (395)
Net cash provided (used) by financing activities 4 (4,777)
Increase (decrease) in cash and cash equivalents 43 (6,824)
Cash and cash equivalents at beginning of period 22,335 13,323
Cash and cash equivalents at end of period $ 22,378 $ 6,499
Noncash transactions:
Real estate acquired in satisfaction of mortgage loans $ 93 $ 149
Assets acquired in satisfaction of consumer loans, net 11 -
Loan loss reserve charge-offs 38 44
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 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 unaudited 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 and six-month periods ended December 31, 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 December 31, 1996:
US Government and agency securities $14,996 $ - $ (454) $14,542
Insured certificates of deposit 396 - - 396
Total $15,392 $ - $ (454) $14,938
Available for sale:
At June 30, 1996:
US Government and agency securities $27,218 $ 110 $ (12) $27,316
At December 31, 1996:
US Government and agency securities $22,107 $ 273 $ (1) $22,379
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<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, was a charge of $1.8
million ($1.1 net of taxes) for the Association's portion of the special
assessment.
Financial Condition. The Company's total assets decreased by $5.8 million from
June 30, 1996 to December 31, 1996. A $16 million increase in loans receivable
was funded primarily from maturing investment securities. As of December 31,
1996, nonperforming loans amounted to $182,000, or 0.07% 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 December 31, 1995 and
1996
General. Net income increased by $71,000 from $727,000 for the three months
ended December 31, 1995 to $798,000 for the same period in 1996. This increase
was primarily attributable to a decrease in compensation costs which was
partially offset by a decrease in net interest income.
Net Interest Income. Net interest income decreased by $251,000 from $2.8
million during the three months ended December 31, 1995 to $2.6 million for the
same period in 1996 as a result of decreased interest income which was partially
offset by reduced interest expense.
Interest Income. Interest income decreased by $332,000 from $6.5 million during
the three months ended December 31, 1995 to $6.1 million for the same period in
1996. This decrease was the net effect of decreased interest on investments and
interest-earning deposits which was partially offset by increased interest
earned on mortgage loans.
Interest on mortgage loans increased by $419,000 primarily as a result of
increased outstanding balances. The average net mortgage loans receivable
increased by $33 million from $192 million during the three months ended
December 31, 1995 to $225 million for the same period in 1996. However, the
average yield on mortgage loans decreased by 48 basis points from 8.41% for the
three months ended December 31, 1995 to 7.93% for the same period in 1996.
- -6-
<PAGE>
Interest on investments and interest-earning deposits decreased by $809,000
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.
Interest Expense. Interest expense decreased a net of $81,000 for the three
months ended December 31, 1996 when compared to the same period in 1995.
Interest on deposits decreased by $247,000 as the average rate paid on deposits
decreased by 32 basis points from 5.16% to 4.84%. In addition, the average
deposit balance decreased by $2 million. These decreases were partially offset
by $166,000 of additional interest cost due to an increased average balance of
borrowed funds from $1.6 million during the three months ended December 31, 1995
to $11.5 million for the same period in 1996. The additional borrowings were
used to fund the acquisition of investments.
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 December 31, 1995 and $1.3 million
at December 31, 1996, representing 299% and 699% of total nonperforming loans,
respectively.
Non-interest Expenses. Non-interest expenses decreased by $404,000 primarily
due to reduced compensation costs in 1996 when compared to 1995. Compensation
costs decreased by $331,000 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 December 31, 1995 were $197,000 for the
employee stock ownership plan ("ESOP") and $128,000 for the management
recognition plans ("MRPs").
Comparison of Operating Results for the Six Months Ended December 31, 1995 and
1996
General. Net income decreased $979,000 from $1.5 million for the six months
ended December 31, 1995 to $504,000 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 $138,000
from $1.5 million for the six months ended December 31, 1995 to $1.6 million for
the same period in 1996. This increase was primarily attributable to a decrease
in compensation costs which was partially offset by a decrease in net interest
income.
Net Interest Income. Net interest income decreased by $491,000 from $5.6
million during the six months ended December 31, 1995 to $5.1 million for the
same period in 1996 as a result of decreased interest income which was partially
offset by reduced interest expense.
Interest Income. Interest income decreased by $542,000 from $12.9 million
during the six months ended December 31, 1995 to $12.3 million for the same
period in 1996. This decrease was the net effect of decreased interest on
investments and interest-earning deposits which was partially offset by
increased interest earned on mortgage loans .
- -7-
<PAGE>
Interest on mortgage loans increased by $900,000 primarily as a result of
increased outstanding balances. The average net mortgage loans receivable
increased by $31 million from $190 million during the six months ended December
31, 1995 to $221 million for the same period in 1996. However, the average
yield on mortgage loans decreased by 38 basis points from 8.40% for the six
months ended December 31, 1995 to 8.02% for the same period in 1996.
Interest on investments and interest-earning deposits decreased by $1.5 million
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.
Interest Expense. Interest expense decreased a net of $51,000 for the six
months ended December 31, 1996 when compared to the same period in 1995.
Interest on deposits decreased by $329,000 as the average rate paid on deposits
decreased by 26 basis points from 5.14% to 4.88%. This decreases was partially
offset by $278,000 of additional interest cost due to an increased average
balance of borrowed funds from $1.6 million during the six months ended December
31, 1995 to $10 million for the same period in 1996. The additional borrowings
were used to fund the acquisition of investments securities.
Non-interest Expenses. Non-interest expenses increased by $1.1 million as a net
result of the $1.8 million FDIC special assessment which was partially offset by
reduced compensation costs in 1996 when compared to 1995. Compensation costs
decreased by $643,000 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 six months ended December 31, 1995 were $393,000 for the ESOP
and $257,000 for the 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 six
months ended December 31, 1995 and 1996, the Company originated loans of $29
million and $36 million, respectively. Other investing activities during the
six months ended December 31, 1995 and 1996 included the purchases of
investment securities of $8 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 six months ended December 31, 1995 and 1996, the Company used funds
primarily for loan commitments and investment purchases. At December 31, 1996,
the Company had $2 million of approved mortgage loan commitments, $7 million of
undisbursed construction loans proceeds and $7 million of undisbursed consumer
line of credit commitments.
At December 31, 1996, there were no material commitments for capital
expenditures.
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<PAGE>
At December 31, 1996, savings certificates amounted to $216 million, or 78% of
the Company's total deposits, of which $59 million were scheduled to mature by
March 31, 1997. 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 35% and 11%
for the six-month periods ended December 31, 1995 and 1996, respectively. The
Company's actual short-term and total liquidity ratios were 23% and 32% at
December 31, 1995 and 7% and 8% at December 31, 1996, respectively. The Company
has consistently maintained liquidity levels in excess of regulatory
requirements as a strategy for asset and liability management.
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 December 31, 1996:
Percent of
Amount Adjusted
(in thousands) Total Assets
Tangible capital $ 34,102 10.4%
Tangible capital requirement 4,904 1.5
Excess $ 29,198 8.9%
Core capital requirement $ 34,102 10.4%
Core capital requirement 9,807 3.0
Excess $ 24,295 7.4%
Risk-based capital $ 35,366 21.8%
Risk-based capital requirement 12,975 8.0
Excess $ 22,391 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, management is not aware of any
current recommendations by the regulatory authorities which, if implemented,
would have such an effect.
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<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. Exhibit 27 Financial Data Schedule.
No current report 8-K was filed during the quarter ended December 31, 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: February 13, 1997 /s/ David C. Wakefield, III
David C. Wakefield, III
President and Chief Executive Officer
(Duly Authorized Representative)
Date: February 13, 1997 /s/ John L. Biediger
John L. Biediger
Executive Vice President and Treasurer
(Principal Accounting Officer)
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<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 3869
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<INVESTMENTS-HELD-FOR-SALE> 27943
<INVESTMENTS-CARRYING> 25944
<INVESTMENTS-MARKET> 25372
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<ALLOWANCE> 1272
<TOTAL-ASSETS> 326013
<DEPOSITS> 278121
<SHORT-TERM> 11610
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