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, 1997
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 13, 1997
(Class) (Outstanding) (As of date)
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and
September 30, 1997 1
Consolidated Statements of Income for the three months
ended September 30, 1996 and 1997 2
Consolidated Statements of Stockholders' Equity 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 1996 and 1997 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,
1997 1997
Assets
Cash and due from banks $ 3,274 $ 5,081
Interest-earning deposits 10,377 8,762
Investment securities:
Held to maturity (market value of $15,730 and $15,921) 16,092 16,092
Available for sale (cost of $21,089 and $20,415) 21,268 20,971
Loans receivable, net 272,401 275,343
Mortgage-backed securities:
Held to maturity (market value of $9,338 and $8,627) 9,392 8,663
Available for sale (cost of $4,960 and $4,597) 4,960 4,628
Office properties and equipment, net 4,282 4,468
Real estate 751 748
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,342 2,230
Other 700 361
Total assets $ 348,530 $ 350,038
Liabilities
Deposits $ 284,783 $ 284,854
Securities sold under agreements to repurchase 15,000 15,000
Federal Home Loan Bank Advances 10,000 10,000
Advance payments by borrowers for taxes and insurance 1,387 1,732
Accrued expenses and other liabilities 1,488 1,132
Income taxes payable 826 1,342
Total liabilities 313,484 314,060
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 15,747 16,410
Unrealized net gains on securities available for sale 118 387
Total stockholders' equity 35,046 35,978
Total liabilities and stockholders' equity $ 348,530 $ 350,038
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(unaudited)
(in thousands, except share data)
Three Months Ended
September 30,
1996 1997
Interest income:
Mortgage loans $ 4,418 $ 4,839
Mortgage-backed securities 289 232
Other loans 538 704
Investments 780 665
Deposits with other banks 184 157
Total interest income 6,209 6,597
Interest expense:
Deposits 3,505 3,474
Borrowings 147 390
Total interest expense 3,652 3,864
Net interest income 2,557 2,733
Provision for loan losses 45 45
Net interest income after provision for loan losses 2,512 2,688
Non-interest income:
Fees and servicing charges 199 209
Income from rental of real estate acquired
for development or rental 21 20
Other 90 74
Total non-interest income 310 303
Non-interest expenses:
Compensation and employee benefits 884 929
Occupancy expense 236 234
Deposit insurance premiums 1,963 44
Other 263 302
Total non-interest expenses 3,346 1,509
Income (loss) before income taxes (524) 1,482
Income tax expense (benefit) (230) 556
Net income (loss) $ (294) $ 926
Weighted average common equivalent shares outstanding 4,388,231 4,388,231
Earnings (loss) per share $ (0.07) $ 0.21
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(unaudited)
(in thousands, except share data)
Common Paid-in Retained Unreal.
Stock Capital Earnings Gain Total
Balance at June 30, 1996 $ 44 $19,137 $14,300 $ 22 $33,503
Net income - - 2,325 - 2,325
Cash dividends ($0.20 per share) - - (878) - (878)
Unrealized gains on securities, net - - - 96 96
Balance at June 30, 1997 44 19,137 15,747 118 35,046
Net income - - 926 - 926
Cash dividends ($0.06 per share) - - (263) - (263)
Unrealized gains on securities, net - - - 269 269
Balance at September 30, 1997 $ 44 $ 19,137 $16,410 $ 387 $35,978
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
September 30,
1996 1997
Net cash provided (used) by operating activities $ (451) $ 1,389
Investing activities:
Net decrease in insured certificates of deposit 4,594 -
Maturities of investment securities held to maturity 3,000 -
Purchase of investment securities available for sale (5,000) (325)
Maturities of investment securities available for sale 5,113 1,000
Proceeds from sale of real estate 30 -
Origination of loans (18,462) (17,427)
Principal payments on loans 11,468 14,665
Principal payments on mortgage-backed securities 794 1,063
Purchase of office properties and equipment (36) (275)
Net cash provided (used) by investing activities 1,501 (1,299)
Financing activities:
Net increase (decrease) in deposits (8,508) 73
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 265 344
Increase in mortgage servicing payments (138) (52)
Cash dividend paid on common stock (176) (263)
Net cash provided (used) by financing activities (2,257) 102
Increase (decrease) in cash and cash equivalents (1,207) 192
Cash and cash equivalents at beginning of period 13,323 13,651
Cash and cash equivalents at end of period $ 12,116 $ 13,843
Noncash transactions:
Assets acquired in satisfaction of consumer loans, net $ - $ 6
Loan loss reserve charge-offs 38 42
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, 1997 and September 30, 1997
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, 1997. The results of
operations for the three-month period ended September 30, 1997 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, 1997:
US Government and agency securities $15,992 $ - $ (362) $15,630
Insured certificates of deposit 100 - - 100
Total $16,092 $ - $ (362) $15,730
At September 30, 1997:
US Government and agency securities $15,992 $ 7 $ (178) $15,821
Insured certificates of deposit 100 - - 100
Total $16,092 $ 7 $ (178) $15,921
Available for sale:
At June 30, 1997:
US Government and agency securities $21,089 $ 179 $ - $21,268
At September 30, 1997:
US Government and agency securities $20,090 $ 251 $ - $20,341
Other securities 325 305 - 630
Total $20,415 $ 556 $ - $20,971
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.
On July 1, 1997, the Company entered into a reorganization agreement with
Carolina First Corporation ("CFC") whereby the Company would be merged with and
into CFC. A special meeting of the Company's shareholders has been called for
November 18, 1997 for the purpose of approving the merger agreement. According
to the merger agreement, the Company's shareholders will receive CFC common
stock in exchange for their First Southeast shares.
Financial Condition. The Company's total assets increased by $1.5 million from
June 30, 1997 to September 30, 1997. A $3 million increase in loans receivable
was funded primarily from maturing investment securities and from interest-
earning deposits. As of September 30, 1997, nonperforming loans amounted to
$837,000, or 0.29% 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, 1996
and 1997
General. Net income for the three months ended September 30, 1997 was $926,000
compared to a net loss of $294,000 for the same period in 1996. The net loss in
1996 resulted from the recognition of a $1.8 million ($1.1 million, net of
taxes) charge to earnings for the FDIC special assessment to recapitalize the
SAIF insurance fund. Excluding the effect of the FDIC charge, the Company's net
income for the three months ended September 30, 1996 would have been $823,000.
Net income excluding the effect of the FDIC charge increased by $103,000 or 13%
from 1996 primarily as a result of a $176,000 increase in net interest income.
Net Interest Income. Net interest income increased by $176,000 from $2.5
million during the three months ended September 30, 1996 to $2.7 million for the
same period in 1997 as a result of an increase in interest income which was
partially offset by an increase in interest expense.
Interest Income. Interest income increased by $388,000 from $6.2 million during
the three months ended September 30, 1996 to $6.6 million for the same period in
1997. This increase was the net effect of increased interest earned on mortgage
and other loans which was partially offset by decreased interest on investments
and interest-earning deposits.
Interest on mortgage loans increased by $421,000 primarily as a result of
increased outstanding balances. The average net mortgage loans receivable
increased by $26 million from $218 million during the three months ended
6
<PAGE>
September 30, 1996 to $244 million for the same period in 1997. However, the
average yield on mortgage loans decreased by 18 basis points from 8.11% for the
three months ended September 30, 1996 to 7.93% for the same period in 1997.
Interest on other loans increased by $166,000 primarily as a result of increased
outstanding balances. The average other loans receivable increased by $6
million from $25 million during the three months ended September 30, 1996 to $31
million for the same period in 1997. In addition, the average yield on other
loans increased by 34 basis points from 8.77% for the three months ended
September 30, 1996 to 9.11% for the same period in 1997.
Interest on investments and interest-earning deposits decreased by $142,000 as
funds from maturing investment securities were used to fund the increase in
loans outstanding.
Interest Expense. Total interest expense increased a net of $212,000 for the
three months ended September 30, 1997 when compared to the same period in 1996.
This increase was primarily attributable to the $243,000 of increase in interest
cost due to the increased average balance of borrowed funds from $8.5 million
during the three months ended September 30, 1996 to $25 million for the same
period in 1997. The additional borrowings were used to fund the acquisition of
investment securities.
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 $1.2 million at September 30, 1996 and $1.4
million at September 30, 1997, representing 577% and 166% of total nonperforming
loans, respectively.
Non-interest Expenses. Non-interest expenses, excluding the effect of the $1.8
million FDIC special assessment, decreased by a net of $37,000 primarily due to
the reduced deposit insurance premium expense in 1997 when compared to 1996.
Expenses for the Company's deposit insurance premiums decreased by $119,000 from
$163,000 for the three months ended September 30, 1996 to $44,000for the same
period in 1997 due to the revised SAIF premium schedule.
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, 1996 and 1997, the Company originated loans of $18
million and $17 million, respectively. Other investing activities during the
three months ended September 30, 1996 and 1997 included the purchases of
investment securities of $5 million and $325,000, 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, 1996 and 1997, the Company used
funds primarily for loan commitments and investment purchases. At September 30,
7
<PAGE>
1997, the Company had $2 million of approved mortgage loan commitments, $6
million of undisbursed construction loans proceeds and $8 million of undisbursed
consumer line of credit commitments.
At September 30, 1997, there were no material commitments for capital
expenditures.
At September 30, 1997, savings certificates amounted to $215 million, or 75% of
the Company's total deposits, of which $66 million were scheduled to mature by
December 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 13% and 8%
for the three-month periods ended September 30, 1996 and 1997, respectively. The
Company's actual short-term and total liquidity ratios were 9% and 11% at
September 30, 1996 and 7% and 8% at September 30, 1997, 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 September 30, 1997:
Percent of
Amount Adjusted
(in thousands) Total Assets
Tangible capital $ 34,322 9.8%
Tangible capital requirement 5,254 1.5
Excess $ 29,068 8.3%
Core capital requirement $ 34,322 9.8%
Core capital requirement 10,508 3.0
Excess $ 23,814 6.8%
Risk-based capital $ 35,707 20.3%
Risk-based capital requirement 14,067 8.0
Excess $ 21,640 12.3%
At September 30, 1997, the Association was categorized as "well capitalized"
under the Prompt Corrective Action regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991. To retain in
this rating, the Association must maintain core and risk-based capital ratios of
at least 5% and 10%.
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.
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. Exhibit 27 Financial Data Schedule.
No current report 8-K was filed during the quarter ended September 30, 1997.
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, 1997 /s/ David C. Wakefield, III
David C. Wakefield, III
President and Chief Executive Officer
(Duly Authorized Representative)
Date: November 13, 1997 /s/ John L. Biediger
John L. Biediger
Executive Vice President and Treasurer
(Principal Accounting Officer)
9
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