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 quarterly period ended June 30, 2001
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 2-83157
SOUTHEASTERN BANKING CORPORATION
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1423423
--------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. BOX 455, 1010 NORTHWAY STREET, DARIEN, GEORGIA 31305
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 437-4141
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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.
YES [X] NO [___]
As of July 31, 2001, 3,393,063 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding.
Southeastern Banking Corporation
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2001 2000
------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 16,342,529 $ 15,852,283
Federal funds sold 19,719,000 3,210,000
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 36,061,529 19,062,283
Investment securities
Held-to-maturity (market value of approximately $30,783,000
and $26,941,000 at June 30, 2001 and December 31, 2000) 30,163,887 26,679,250
Available-for-sale, at market value 117,241,391 118,375,887
------------------------------------------------------------------------------------------------------------------
Total investment securities 147,405,278 145,055,137
Loans, gross 163,963,604 174,555,359
Unearned income (592,721) (752,940)
Allowance for loan losses (2,882,476) (3,159,165)
------------------------------------------------------------------------------------------------------------------
Loans, net 160,488,407 170,643,254
Premises and equipment, net 6,536,946 6,723,135
Intangible assets 1,000,198 1,095,560
Other assets 8,289,959 6,999,183
------------------------------------------------------------------------------------------------------------------
Total Assets $359,782,317 $349,578,552
==================================================================================================================
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing deposits $ 56,210,956 $ 55,125,661
Interest-bearing deposits 247,721,952 240,610,650
------------------------------------------------------------------------------------------------------------------
Total deposits 303,932,908 295,736,311
U. S. Treasury demand note 1,957,511 1,001,957
Federal Home Loan Bank advances 5,000,000 5,000,000
Other liabilities 3,105,904 3,500,109
------------------------------------------------------------------------------------------------------------------
Total liabilities 313,996,323 305,238,377
------------------------------------------------------------------------------------------------------------------
Common stock ($1.25 par value; 10,000,000 shares authorized;
3,580,797 shares issued; 3,393,063 and 3,436,696 shares
outstanding at June 30, 2001 and December 31, 2000) 4,475,996 4,475,996
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 42,600,172 41,327,784
Treasury stock, at cost (187,734 and 144,101 shares at June 30,
2001 and December 31, 2000) (3,136,450) (2,485,742)
------------------------------------------------------------------------------------------------------------------
Realized shareholders' equity 45,331,441 44,709,761
Accumulated other comprehensive income - unrealized
gains (losses) on available-for-sale securities, net of tax 454,553 (369,586)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 45,785,994 44,340,175
------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $359,782,317 $349,578,552
==================================================================================================================
See accompanying notes to consolidated financial statements.
1
Southeastern Banking Corporation
Consolidated Statements of Income
(Unaudited)
Quarter Six Months
------------------------------- -----------------------------
Period Ended June 30, 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Interest income
Loans, including fees $4,150,589 $4,603,140 $ 8,469,798 $ 8,937,639
Federal funds sold 308,139 19,703 628,251 123,973
Investment securities
Taxable 1,817,743 1,912,336 3,591,764 3,771,374
Tax-exempt 325,196 310,321 631,049 624,853
Other assets 22,978 25,875 42,315 45,565
-------------------------------------------------------------------------------------------------------------------------------
Total interest income 6,624,645 6,871,375 13,363,177 13,503,404
-------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 2,849,289 2,725,685 5,785,802 5,399,389
Federal funds purchased - 35,197 - 36,199
U. S. Treasury demand note 7,928 15,718 18,293 28,960
Federal Home Loan Bank advances 74,822 104,198 148,822 116,531
-------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,932,039 2,880,798 5,952,917 5,581,079
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,692,606 3,990,577 7,410,260 7,922,325
Provision for loan losses 300,000 300,000 600,000 600,000
-------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,392,606 3,690,577 6,810,260 7,322,325
-------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges on deposit accounts 579,416 596,814 1,162,104 1,183,362
Investment securities gains, net - (56) - 6,844
Other operating income 250,641 249,712 542,025 498,886
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 830,057 846,470 1,704,129 1,689,092
-------------------------------------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits 1,545,720 1,555,103 3,113,525 3,085,015
Occupancy and equipment, net 496,566 496,863 1,025,297 966,141
Other operating expense 776,138 685,644 1,541,149 1,353,390
-------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,818,424 2,737,610 5,679,971 5,404,546
-------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,404,239 1,799,437 2,834,418 3,606,871
Income tax expense 396,071 529,925 814,346 1,069,801
-------------------------------------------------------------------------------------------------------------------------------
Net income $1,008,168 $1,269,512 $ 2,020,072 $ 2,537,070
===============================================================================================================================
Net income per average share - basic $ 0.29 $ 0.37 $ 0.59 $ 0.72
===============================================================================================================================
Average common shares - basic 3,399,030 3,446,197 3,406,394 3,513,497
See accompanying notes to consolidated financial statements.
2
Southeastern Banking Corporation
Consolidated Statements of Shareholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $4,475,996 $1,391,723 $38,159,815 - $(2,874,598) $41,152,936
Comprehensive income:
Net income - - 2,537,070 - - 2,537,070
Other comprehensive income, net
of tax effect of $423:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - 822 822
-----------
Comprehensive income 2,537,892
-----------
Cash dividends declared
($0.20 per share) (701,749) (701,749)
Purchase of treasury stock - - - (2,485,742) - (2,485,742)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $4,475,996 $1,391,723 $39,995,136 (2,485,742) $(2,873,776) $40,503,337
===================================================================================================================================
Balance, December 31, 2000 $4,475,996 $1,391,723 $41,327,784 $(2,485,742) $ (369,586) $44,340,175
Comprehensive income:
Net income - - 2,020,072 - - 2,020,072
Other comprehensive income, net
of tax effect of $424,556:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - 824,139 824,139
-----------
Comprehensive income 2,844,211
-----------
Cash dividends declared
($0.22 per share) - - (747,684) - - (747,684)
Purchase of treasury stock - - - (650,708) - (650,708)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $4,475,996 $1,391,723 $42,600,172 $(3,136,450) $ 454,553 $45,785,994
===================================================================================================================================
See accompanying notes to consolidated financial statements.
3
Southeastern Banking Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 2,020,072 $ 2,537,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600,000 600,000
Depreciation 384,461 358,843
Amortization and accretion, net (103,893) 92,655
Investment securities gains, net - (6,844)
Net losses (gains) on other real estate 66,648 (23,400)
Changes in assets and liabilities:
Decrease (increase) in other assets 393,718 (499,152)
Decrease in other liabilities (45,736) (95,120)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,315,270 2,964,052
-------------------------------------------------------------------------------------------------------------------------
Investing activities
Principal collections and maturities of investment securities:
Held-to-maturity 966,300 1,951,400
Available-for-sale 64,051,788 3,452,881
Proceeds from sales of investment securities available-for-sale - 2,996,719
Purchases of investment securities held-to-maturity (4,466,838) (1,396,354)
Purchases of investment securities available-for-sale (61,453,442) (8,229,345)
Net decrease (increase) in loans 7,303,407 (12,928,054)
Proceeds from sales of other real estate 75,743 290,129
Capital expenditures, net (198,272) (653,464)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6,278,686 (14,516,088)
-------------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase in deposits 8,196,597 6,309,232
Net decrease in federal funds purchased - (3,065,000)
Net increase in U. S. Treasury demand note 955,554 588,365
Proceeds from Federal Home Loan Bank advances - 10,000,000
Purchase of treasury stock (650,708) (2,485,742)
Dividends paid (1,096,153) (966,815)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,405,290 10,380,040
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,999,246 (1,171,996)
Cash and cash equivalents at beginning of year 19,062,283 16,816,035
-------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $ 36,061,529 $ 15,644,039
=========================================================================================================================
Supplemental disclosure
Cash paid during the period
Interest $ 6,015,867 $ 5,703,441
Income taxes $ 770,000 $ 1,130,000
Noncash investing and financing activities
Real estate acquired through foreclosure $ 2,283,941 $ 67,720
Loans made in connection with sales of foreclosed real estate $ 32,500 $ 246,030
See accompanying notes to consolidated financial statements.
4
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting and Reporting Policy for Interim Periods
The accompanying unaudited consolidated financial statements of
Southeastern Banking Corporation (the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information. These statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the opinion
of management, all adjustments necessary for a fair presentation have been
made. These adjustments, consisting of normal, recurring accruals, include
estimates for various fringe benefits and other transactions normally
determined or settled at year-end. Operating results for the quarter and
six months ended June 30, 2001 are not necessarily indicative of trends or
results to be expected for the year ended December 31, 2001. For further
information, refer to the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
2. Reclassifications
Certain prior year amounts have been restated to conform with the current
year financial statement presentation.
3. Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination, and SFAS No. 142
addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination whether acquired individually or
with a group of other assets. These standards require all future business
combinations to be accounted for using the purchase method of accounting.
Goodwill will no longer be amortized but instead will be subject to
impairment tests at least annually. The Company is required to adopt SFAS
No. 141 and 142 on a prospective basis as of January 1, 2002; however,
certain provisions of these new Standards may also apply to any
acquisitions concluded subsequent to June 30, 2001. As a result of
implementing these new Standards, it is expected that the amortization of
goodwill will cease as of December 31, 2001. The adoption of SFAS No. 141
and SFAS No. 142 is not expected to have a material effect on the Company's
financial position, results of operations, and cash flows in 2002 and
subsequent years.
5
Southeastern Banking Corporation
Management's Discussion and Analysis
This Analysis should be read in conjunction with the 2000 Annual Report on Form
10-K and consolidated financial statements & related notes on pages 1-5 of
this quarterly filing.
Description of Business
Southeastern Banking Corporation (the Company), with assets of $360 million, is
a financial services company with operations in southeast Georgia and northeast
Florida. Southeastern Bank, the Company's principal subsidiary, offers a full
line of commercial and retail services to meet the financial needs of its
customer base through its fourteen branch locations and atm network. Services
offered include traditional deposit and credit services, long-term mortgage
originations, and credit cards. Southeastern Bank also offers 24-hour delivery
channels including internet and telephone banking. The Company's insurance
subsidiary, SBC Financial Services, Inc. (SBCF), provides insurance agent and
investment brokerage services with an emphasis on financial planning. In
addition to traditional insurance, products offered include fixed and indexed
annuities, mutual funds, retirement plans, and long-term care policies. SBCF
had a nominal impact on the Company's financial condition and results of
operations at June 30, 2001 and 2000.
Financial Condition
Consolidated assets totaled $359,782,317 at mid-year 2001, up $10,203,765 or
2.92% from year-end 2000 and up $6,414,617 or 1.82% from June 30, 2000. Federal
funds sold was the predominant factor in the 2001 results, increasing
$16,509,000. A $10,431,536 reduction in loan balances and an $8,196,597
increase in deposits, particularly interest-bearing balances, precipitated the
majority of the growth in federal funds sold. Although the mix of earning
assets shifted at June 30, 2001 versus year-end 2000, earning assets continued
to approximate, overall, 92% of total assets. During the year-earlier period,
total assets grew 3.77% or $12,822,812. The asset growth in 2000 was funded by
increases in deposits and other borrowings, including advances from the Federal
Home Loan Bank (FHLB). Additional details on deposits and other funding sources
are provided in the Liquidity section of this Analysis.
Investment Securities
On a carrying value basis, investment securities increased $2,350,141 or 1.62%
since December 31, 2000. Purchases of securities during the six-month period
approximated $65,920,000, and redemptions, $65,018,000. The high volume of
securities transactions was attributable to various issuers' exercise of call
options as a result of interest rate reductions during the first half of 2001.
The effective repricing of securities at lower rates impacts current and future
earnings results; refer to the Interest Rate and Market Risk/Interest Rate
Sensitivity and Operations sections of this Analysis for more details. To
reduce its exposure to Agency securities with call features, the Company
increased its holdings of mortgage-backed securities, corporates, and municipals
to 25%, 5%, and 21% of the portfolio at June 30, 2001 from 13%, 0%, and 18% at
December 31, 2000. Consistent with 2000 levels, securities continued to
aggregate 45% of earning assets at June 30, 2001. The amortized cost and
estimated fair value of investment securities are delineated in the table on the
next page.
6
Southeastern Banking Corporation
Management's Discussion and Analysis
===========================================================================================================
Investment Securities by Category Amortized Unrealized Unrealized Fair
June 30, 2001 Cost Gains Losses Value
===========================================================================================================
(In thousands)
Available-for-sale:
U. S. Government agencies $ 71,548 $ 816 $ 34 $ 72,330
Mortgage-backed securities 37,333 80 124 37,289
Corporates 7,670 22 70 7,622
-----------------------------------------------------------------------------------------------------------
116,551 918 228 117,241
Held-to-maturity:
States and political subdivisions 30,164 716 97 30,783
-----------------------------------------------------------------------------------------------------------
Total investment securities $146,715 $1,634 $325 $148,024
===========================================================================================================
As shown, the market value of the securities portfolio exceeded the cost basis
at June 30, 2001, an improvement from 2000 levels; refer to the Capital Adequacy
section of this Analysis for more details on investment securities and related
fair value. The Company does not have a concentration in the obligations of any
issuer other than the U.S. Government and its agencies.
Loans
Loans, net of unearned income, declined 6.00% or $10,431,536 at mid-year 2001
compared to December 31, 2000. A $10,590,000 drop in commercial loans
outstanding was the chief factor in the six month decline. The decline in
commercial loans outstanding resulted from multiple factors, including normal
pay-offs and the foreclosure of a material nonaccrual loan as discussed in later
sections of this Analysis. Basically all sectors of the commercial portfolio
registered declines year-to-date: Nonfarm real estate loans fell $5,863,000;
agricultural loans, $2,901,000; other commercial/industrial loans, $529,000; and
governmental loans, $1,297,000. Consumer loans declined $3,215,000 or 9.09%
during the first half of 2001 compared to year-end 2001. A softening of
consumer demand in the Company's trade areas was the chief element in the 2001
results. Consumer loans remain the Company's highest-yielding interest-earning
asset, and the Company is committed to reversing the decline in this portfolio.
Balances in the real estate-construction portfolio also declined, dropping
14.40% or $1,116,000 since December 31, 2000. Most of the loans in the real
estate-construction portfolio are preparatory to customers' attainment of
permanent financing or developer's sale and are, by nature, short-term and
somewhat cyclical; swings in these account balances are normal and to be
expected. Although the Company, like peer institutions of similar size,
originates permanent mortgages for new construction, it traditionally does not
hold or service long-term mortgage loans for its own portfolio. Rather,
permanent mortgages are typically brokered through a mortgage underwriter or
government agency. The Company receives mortgage origination fees for its
participation in these origination transactions; refer to the disclosures
provided under Results of Operations for more details. Although balances in the
commercial, consumer, and real estate-construction portfolios fell, real estate-
mortgage balances increased an appreciative $3,852,000 since the first quarter
or $4,330,000 year-to-date.
Despite overall declines in loan balances during the first half of 2001,
management is optimistic that loan volumes will increase during the remainder of
2001. Strategies implemented by management to increase loan production include
utilization of more competitive pricing on loan products, development of
additional loan relationships, and purchase of loan participations from
correspondent banks, all without compromising portfolio quality. During the
same period in 2000, net loans grew $12,808,591 or 7.72%. Growth in the
commercial and real estate-construction portfolios fueled the 2000 results.
Loans outstanding are presented by type in the table on the next page.
7
Southeastern Banking Corporation
Management's Discussion and Analysis
===========================================================================================================
June 30, December 31, June 30,
Loans by Category 2001 2000 2000
===========================================================================================================
(In thousands)
Commercial, financial, and agricultural/1/ $ 59,585 $ 70,175 $ 75,305
Real estate - construction 6,634 7,750 6,561
Real estate - mortgage/2/ 65,587 61,257 61,461
Consumer, including credit cards 32,158 35,373 36,555
----------------------------------------------------------------------------------------------------------
Loans, gross 163,964 174,555 179,882
Unearned income 593 753 1,079
----------------------------------------------------------------------------------------------------------
Loans, net $163,371 $173,802 $178,803
==========================================================================================================
/1/Includes obligations of states and political subdivisions.
/2/Typically have final maturities of 15 years or less.
The Company had no concentration of loans to borrowers engaged in any single
industry that exceeded 10% of total loans for any of the periods presented.
Although the Company's loan portfolio is diversified, significant portions of
its loans are collateralized by real estate. At June 30, 2001 and December 31,
2000, gross loans secured by real estate aggregated $108,765,000 and
$113,570,000. As required by policy, real estate loans are collateralized based
on certain loan-to-appraised value ratios. A geographic concentration in loans
arises given the Company's operations within a regional area of southeast
Georgia and northeast Florida. Commitments to extend credit and standby letters
of credit approximated $19,938,000 at mid-year 2001; because a substantial
amount of these contracts expire without being drawn upon, total contractual
amounts do not represent future credit exposure or liquidity requirements.
Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans, and
foreclosed real estate balances. Overall, nonperforming assets approximated
$3,787,000, or 1.05% of total assets, at June 30, 2001 versus $3,842,000 or
1.10% at December 31, 2000. Nonperforming loans were down approximately
$2,178,000 or 63.22% and foreclosed real estate, up $2,123,000, at June 30,
2001. The fluctuation in nonperforming loans and foreclosed real estate
balances year-to-date resulted predominantly from the movement of a single
commercial real estate loan on nonaccrual status to foreclosed real estate.
Specifically, foreclosed real estate balances at mid-year 2001 included
$1,975,000 pertaining to an impaired real estate loan. This loan, secured by a
first lien on income-producing commercial real estate, was charged-off by
$400,000 in December 2000 and prior to foreclosure in February 2001, an
additional $300,000. Impairment of the loan was based on the fair value of the
underlying collateral, less estimated selling expenses, as determined by a third
party appraisal. Subsequent to June 30, 2001, this property was sold to a third
party; net proceeds on the sale approximated $2,025,000. To maintain and
maximize collateral value, the Company engaged an operating company with
expertise in managing commercial properties to handle day-to-day operations as
management focused on marketing the property to potential buyers. Operating
costs associated with managing the property approximated $140,000 through the
closing date. Pending furtherance of various legal proceedings, management is
optimistic that various costs associated with the property may ultimately be
recovered.
During the first half of 2001, a single credit with principal balances
aggregating $615,000 was placed on nonaccrual status. This credit, secured by
timber and farmlands with accompanying tobacco and peanut allotments, was not
substantially past due, and its impairment could not be reasonably measured
prior to 2001. Due to a loan-to-appraised value ratio of less than 55%, no
loss, other than possibly foregone
8
Southeastern Banking Corporation
Management's Discussion and Analysis
interest, is expected on these loans. Foreclosure of the real estate collateral
was interrupted by bankruptcy proceedings and is expected to remain stalled
until at least the fourth quarter. Exclusive of the two credits discussed in the
preceding paragraphs, the allowance for loan losses approximated 4.42X the
nonperforming loans balance at June 30, 2001 versus 2.76X at December 31, 2000
and 3.89X a year ago. Management is unaware of any other material developments
in nonperforming assets or large, significant potential problem loans at June
30, 2001 that should be presented or otherwise discussed.
Loans past due 90 plus days totaled $1,415,000, or less than 1% of net loans, at
June 30, 2001. The table below provides further information about nonperforming
assets and loans past due 90 days or more:
===========================================================================================================
June 30, December 31, June 30,
Nonperforming Assets 2001 2000 2000
===========================================================================================================
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural $ 862 $2,894 $ 454
Real estate - construction - - -
Real estate - mortgage 81 189 90
Consumer, including credit cards 5 21 8
----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 948 3,104 552
Restructured loans/1/ 319 341 354
----------------------------------------------------------------------------------------------------------
Total nonperforming loans 1,267 3,445 906
Foreclosed real estate/2/ 2,520 397 548
----------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,787 $3,842 $1,454
----------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $1,415 $1,191 $1,719
==========================================================================================================
/1/Does not include restructured loans that yield a market rate.
/2/Includes only other real estate acquired through foreclosure or in settlement
of debts previously contracted.
Policy Note. Loans classified as nonaccrual have been placed in nonperforming,
or impaired, status because the borrower's ability to make future principal
and/or interest payments has become uncertain. The Company considers a loan to
be nonaccrual with the occurrence of any one of the following events: a)
interest or principal has been in default 90 days or more, unless the loan is
well-secured and in the process of collection; b) collection of recorded
interest or principal is not anticipated; or c) the income on the loan is
recognized using the cash versus accrual basis of accounting due to
deterioration in the financial condition of the borrower. Smaller balance
consumer loans are generally not subject to the above-referenced guidelines and
are normally placed on nonaccrual status or else charged-off when payments have
been in default 90 days or more. Nonaccrual loans are reduced to the lower of
the principal balance of the loan or the market value of the underlying real
estate or other collateral net of selling costs. Any impairment in the principal
balance is charged against the allowance for loan losses. Accrued interest on
any loan switched to nonaccrual status is reversed. Interest income on
nonaccrual loans, if subsequently recognized, is recorded on a cash basis. No
interest is subsequently recognized on nonaccrual (or former nonaccrual) loans
until all principal has been collected. Loans are classified as restructured
when either interest or principal has been reduced or deferred because of
deterioration in the borrower's financial position. Foreclosed real estate
represents real property acquired by foreclosure or directly by title or deed
transfer in settlement of debt. Provisions for subsequent devaluations of
foreclosed real estate are charged to operations, while costs associated with
improving the properties are generally capitalized.
9
Southeastern Banking Corporation
Management's Discussion and Analysis
Refer to the footnotes accompanying the consolidated financial statements for
more details on the Company's accounting and reporting policies on impaired
loans and other real estate.
Allowance for Loan Losses
The Company maintains an allowance for loan losses available to absorb potential
losses in the loan portfolio. As a percent of net loans, the allowance declined
6 basis points to 1.76% at mid-year 2001 from 1.82% at year-end 2000. Net
charge-offs totaled $878,000, up considerably, or $580,000, from 2000's
$298,000, which was down $548,000 from 1999. Approximately 34%, or $300,000, of
2001 charge-offs year-to-date were attributable to the large nonperforming loan
foreclosed in the first quarter. Long-term strategies implemented by management
to reduce and minimize charge-off levels include: a) a revised loan grading
system, b) periodic external loan review, c) formation of a full-time collection
department, and d) managerial and staff changes at various locations. The
quarterly and six month provision from income totaled $300,000 and $600,000 at
June 30, 2001, unchanged from the year-earlier period. Activity in the
allowance is presented in the table below:
===========================================================================================================
Allowance for Loan Losses
Six Months Ended June 30, 2001 2000 1999
===========================================================================================================
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,160 $ 3,223 $ 3,407
Provision for loan losses 600 600 600
Charge-offs:
Commercial, financial, and agricultural 564 88 393
Real estate - construction - - 335
Real estate - mortgage 91 55 95
Consumer, including credit cards 405 415 456
-----------------------------------------------------------------------------------------------------------
Total charge-offs 1,060 558 1,279
-----------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 17 18 204
Real estate - construction - - -
Real estate - mortgage 5 18 18
Consumer, including credit cards 160 224 211
-----------------------------------------------------------------------------------------------------------
Total recoveries 182 260 433
-----------------------------------------------------------------------------------------------------------
Net charge-offs 878 298 846
-----------------------------------------------------------------------------------------------------------
Allowance for loan losses at June 30 $ 2,882 $ 3,525 $ 3,161
===========================================================================================================
Net loans outstanding/1/ at June 30 $163,371 $178,803 $162,651
===========================================================================================================
Average net loans outstanding/1/ at June 30 $165,507 $171,359 $163,422
===========================================================================================================
Ratios:
Allowance to net loans 1.76% 1.97% 1.94%
===========================================================================================================
Net charge-offs to average loans 1.06% 0.35% 1.04%
===========================================================================================================
Provision to average loans 0.73% 0.70% 0.73%
===========================================================================================================
/1/Net of unearned income
Management believes the allowance was adequate at June 30, 2001 based on
conditions reasonably known to management; however, the allowance may increase
or decrease based on loan growth, changes in internally generated credit
ratings, changes in general economic conditions of the Company's trade areas,
changes in customer bankruptcy filings, or historical loan loss experience.
These factors are
10
Southeastern Banking Corporation
Management's Discussion and Analysis
analyzed and reviewed on a continual basis to determine if any changes to the
provision for loan losses should be made. Consistent with 2000 and 1999 levels,
management has budgeted a loan loss provision of $1,200,000 in fiscal 2001.
Other Commitments
Other than the pending purchase of various computer equipment approximating
$150,000, the Company had no material plans or commitments for capital
expenditures as of June 30, 2001.
Liquidity
Liquidity is managed to ensure sufficient cash flow to satisfy demands for
credit, deposit withdrawals, and other corporate needs. The Company meets most
of its daily liquidity needs through the management of cash and federal funds
sold. Additional liquidity is provided by payments and maturities, including
both principal and interest, of the loan and investment securities portfolios.
At June 30, 2001, loans(1) and investment securities with carrying values
exceeding $63 million and $15 million were scheduled to mature in one year or
less. The investment portfolio has also been structured to meet liquidity needs
prior to asset maturity when necessary. The Company's liquidity position is
further strengthened by its access, on both a short- and long-term basis, to
local and regional funding sources.
Funding sources primarily comprise customer-based core deposits but also include
borrowed funds and cash flows from operations. Customer-based core deposits,
the Company's largest and most cost-effective source of funding, comprised 85%
of the funding base at June 30, 2001, virtually unchanged from 2000 levels.
Borrowed funds, which variously encompass U.S. Treasury demand notes, federal
funds purchased, and FHLB advances, totaled $6,957,511 at June 30, 2001 versus
$6,001,957 at December 31, 2000. More specifically, the maximum amount of U.S.
Treasury demand notes available to the Company at June 30, 2001 totaled
$3,000,000, of which $1,957,511 was outstanding. Unused borrowings under
unsecured federal funds lines of credit from other banks, each with varying
terms and expiration dates, totaled $24,000,000. Additionally, under a credit
facility with the FHLB, the Company can borrow up to 16% of SEB's total assets;
at mid-year 2001, unused borrowings approximated $52 million. Refer to the
subsection entitled FHLB Advances for details on the Company's outstanding
balance with the FHLB. Cash flows from operations also constitute a significant
source of liquidity. Net cash from operations derives primarily from net income
adjusted for noncash items such as depreciation and amortization, accretion, and
the provision for loan losses.
Management believes the Company has the funding capacity, from operating
activities or otherwise, to meet its financial commitments in 2001. Refer to
the Capital Adequacy section of this Analysis for details on treasury stock
purchases and intercompany dividend policy.
/1/No cash flow assumptions other than final contractual maturities have been
made for installment loans. Nonaccrual loans are excluded.
Deposits
Deposits exceeded $303 million at mid-year 2001, up $8,196,597 or 2.77% from
December 31, 2000. More than 86%, or $7,111,302, of the deposit growth at June
30 was attributable to interest-bearing balances. Overall, interest-bearing
deposits comprised 81.51%, and noninterest-bearing deposits, 18.49%, of total
deposits at June 30, 2001. The distribution of interest-bearing balances at
June 30, 2001 and certain comparable quarter-end dates is shown in the table on
the next page.
11
Southeastern Banking Corporation
Management's Discussion and Analysis
=====================================================================================================================
June 30, 2001 December 31, 2000 June 30, 2000
-----------------------------------------------------------------------------
Percent Percent Percent
Deposits Balances of Total Balances of Total Balances of Total
=====================================================================================================================
(Dollars in thousands)
Interest-bearing demand deposits/1/ $ 53,302 21.52% $ 50,309 20.91% $ 47,926 19.87%
Savings 76,736 30.98% 73,781 30.66% 77,076 31.96%
Time certificates less than $100,000 72,806 29.39% 72,207 30.01% 71,031 29.46%
Time certificates greater than = $100,000 44,878 18.11% 44,314 18.42% 45,122 18.71%
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $247,722 100.00% $240,611 100.00% $241,155 100.00%
=====================================================================================================================
/1/NOW and money market accounts.
The composition of average deposits and the fluctuations therein at June 30 for
each of the last three years is shown in the Average Balances table included in
the Operations section of this Analysis.
FHLB Advances
Advances outstanding with the FHLB totaled $5 million at June 30, 2001,
unchanged from year-end 2000. The outstanding advance, which matures March 17,
2010, accrues interest at an effective rate of 6.00%, payable quarterly. The
advance is convertible into a three-month Libor-based floating rate on or after
March 17, 2001 at the option of the FHLB. During the first half of 2001,
interest expense on the advance approximated $149,000. Mortgage-backed
securities with aggregate carrying values of approximately $10.6 million were
pledged to collateralize current and future advances under this line of credit.
Interest Rate and Market Risk/Interest Rate Sensitivity
The normal course of business activity exposes the Company to interest rate
risk. Fluctuations in interest rates may result in changes in the fair market
value of the Company's financial instruments, cash flows, and net interest
income. The asset/liability committee regularly reviews the Company's exposure
to interest rate risk and formulates strategy based on acceptable levels of
interest rate risk. The overall objective of this process is to optimize the
Company's financial position, liquidity, and net interest income, while limiting
volatility to net interest income from changes in interest rates. The Company
uses gap analysis and simulation modeling to measure and manage interest rate
sensitivity.
An indicator of interest rate sensitivity is the difference between interest
rate sensitive assets and interest rate sensitive liabilities; this difference
is known as the interest rate sensitivity gap. In an asset sensitive, or
positive, gap position, the amount of interest-earning assets maturing or
repricing within a given period exceeds the amount of interest-bearing
liabilities maturing or repricing within that same period. Conversely, in a
liability sensitive, or negative, gap position, the amount of interest-bearing
liabilities maturing or repricing within a given period exceeds the amount of
interest-earning assets maturing or repricing within that time period. During a
period of rising rates, a negative gap would tend to affect net interest income
adversely, while a positive gap would theoretically result in increased net
interest income. In a falling rate environment, a negative gap would tend to
result in increased net interest income, while a positive gap would affect net
interest income adversely. The gap analysis on the next page provides a
snapshot of the Company's interest rate sensitivity position at June 30, 2001.
12
Southeastern Banking Corporation
Management's Discussion and Analysis
====================================================================================================================
Repricing Within
----------------------------------------------------------
More
Interest Rate Sensitivity 0 - 3 4 - 12 One - Five Than Five
June 30, 2001 Months Months Years Years Total
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Rate Sensitive Assets
Federal funds sold $ 19,719 $ 19,719
Securities/1/ 4,842 $ 11,394 $ 78,699 $51,780 146,715
Loans, gross/2/ 60,065 23,502 56,393 23,056 163,016
--------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 84,626 34,896 135,092 74,836 329,450
--------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitive Liabilities
Deposits/3/ 163,222 59,858 24,555 87 247,722
U.S. Treasury demand note 1,958 - - - 1,958
Federal Home Loan Bank advances - - 5,000 5,000
--------------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 165,180 59,858 24,555 5,087 254,680
--------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (80,554) $ (24,962) $110,537 $69,749 $ 74,770
====================================================================================================================
Cumulative gap $ (80,554) $(105,516) $ 5,021 $74,770
====================================================================================================================
Ratio of cumulative gap to total
rate sensitive assets (24.45)% (32.03)% 1.52% 22.70%
====================================================================================================================
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 51.23% 53.11% 102.01% 129.36%
====================================================================================================================
Cumulative gap at December 31, 2000 $ (91,308) $(117,955) $ 15,283 $73,662
====================================================================================================================
Cumulative gap at June 30, 2000 $(103,995) $(135,774) $ 11,121 $75,205
====================================================================================================================
/1/Distribution of maturities for available-for sale-securities is based on
amortized cost. Additionally, distribution of maturities for mortgage-backed
securities is based on expected average lives which may be different from the
contractual terms. Equity securities, if any, are excluded.
/2/No cash flow assumptions other than final contractual maturities have been
made for installment loans with fixed rates. Nonaccrual loans are excluded.
/3/NOW, money market, and savings account balances are included in the 0-3
months repricing category.
As shown in the table above, the Company's gap position remained negative
through the short-term repricing intervals at mid-year 2001, totaling $(80,554)
at three months and $(105,516) through one-year. Excluding traditionally
nonvolatile NOW and savings balances from the gap calculation, the cumulative
gap at June 30, 2001 totaled $26,957 at three months and $1,995 at twelve
months. The narrowing of the short-term gap position at June 30, 2001 versus
2000 was primarily attributable to increases in federal funds sold. As
discussed in earlier sections of this Analysis, the jump in fed funds sold
balances accrued from reductions in loans and higher deposits. The gap position
is expected to widen moderately, resembling 2000 levels, as fed funds sold are
reallocated to other earning assets. Given current and projected economic
conditions, this reallocation is expected to remain a particular challenge of
2001. Shortcomings are inherent in any gap analysis since certain assets and
liabilities may not move proportionally as rates change. For example, the gap
analysis presumes that all loans/2/ and securities/1/ will perform according to
their contractual maturities when, in many cases, actual loan terms are much
shorter than the original terms and securities are subject to early redemption.
In addition to gap analysis, the Company uses simulation modeling to test the
interest rate sensitivity of net interest income and the balance sheet.
Contractual maturity and repricing characteristics of loans are
13
Southeastern Banking Corporation
Management's Discussion and Analysis
incorporated into the model, as are prepayment assumptions, maturity data, and
call options within the investment portfolio. Non-maturity deposit accounts are
modeled based on past experience. Simulation results quantify interest rate
risks under various interest rate scenarios. Based on the Company's June 30,
2001 analysis, the simulation model estimates that a gradual 200 basis points
rise or decline in rates over the next twelve months would have an adverse
impact of 5% or less on its net interest income for the period. In estimating
the impact of these rate movements on the Company's net interest income, the
following general assumptions were made: a) Spreads on all loans, investment
securities, and deposit products remain constant; b) Interest rate movements
occur gradually over an extended period versus rapidly; and c) Loans and
deposits are projected to grow at constant speeds. Limitations inherent with
these assumptions include: a) Certain deposit accounts, in particular, interest-
bearing demand deposits, rarely reprice and therefore, have limited impact on
net interest income from a rate perspective; b) In a down rate environment,
competitive and other factors constrain timing of rate cuts on other deposit
products whereas loans tied to prime and other variable indexes reprice
instantaneously and, as amply demonstrated this year, securities with call or
other prepayment features are likely to be redeemed prior to stated maturity and
replaced at lower rates (lag effect); c) Changes in balance sheet mix, for
example, unscheduled pay-offs of large commercial loans, are oftentimes
difficult to forecast; and d) Rapid and aggressive rate movements by the Federal
Reserve, as in 2001 to-date, can materially impact estimated results. As further
discussed in the Operations section of this Analysis, net interest income
declined $512,065 or 6.46% year-to-date at June 30, 2001 versus 2000. Management
is optimistic that initiatives taken to improve loan production and diversify
the securities portfolio will gradually reduce the interest rate sensitivity of
net interest income and the balance sheet. Because the focus of these
initiatives is long-term versus short-term, net interest income is expected to
lag last year's results the remainder of 2001.
The Company has not in the past, but may in the future, utilize interest rate
swaps, financial options, financial futures contracts, or other rate protection
instruments to reduce interest rate and market risks.
Impact of Inflation
The effects of inflation on the local economy and the Company's operating
results have been relatively modest the last several years. Because
substantially all the Company's assets and liabilities, including cash,
securities, loans, and deposits, are monetary in nature, their values are less
sensitive to the effects of inflation than to changing interest rates. As
discussed in the preceding section, the Company attempts to control the impact
of interest rate fluctuations by managing the relationship between its interest
sensitive assets and liabilities.
Capital Adequacy
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. These
regulations define capital as either Tier 1 (primarily shareholders' equity) or
Tier 2 (certain debt instruments and a portion of the allowance for loan
losses). The Company and SEB are subject to a minimum Tier 1 capital ratio
(Tier 1 capital to risk-weighted assets) of 4%, total capital ratio (Tier 1 plus
Tier 2 to risk-weighted assets) of 8%, and Tier 1 leverage ratio (Tier 1 to
average quarterly assets) of 4%. To be considered a "well-capitalized"
institution, the Tier 1 capital, total capital, and Tier 1 leverage ratios must
equal or exceed 6%, 10%, and 5%, respectively. Banks and bank holding companies
are prohibited from including unrealized gains and losses on debt securities in
the calculation of risk-based capital but are permitted to include up to 45
percent of net unrealized pre-tax holding gains on equity securities in Tier 2
capital. The Company did
14
Southeastern Banking Corporation
Management's Discussion and Analysis
not have any unrealized gains on equity securities includible in the risk-based
capital calculations for any of the periods presented. The Company is committed
to maintaining its well-capitalized status.
Capital ratios for the most recent periods are presented in the table below:
============================================================================================================
June 30, December 31, June 30,
Capital Ratios 2001 2000 2000
============================================================================================================
(Dollars in thousands)
Tier 1 capital:
Realized shareholders' equity $ 45,331 $ 44,710 $ 43,377
Intangible assets and other adjustments (1,022) (1,117) (1,213)
------------------------------------------------------------------------------------------------------------
Total Tier 1 capital 44,309 43,593 42,164
------------------------------------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,364 2,374 2,425
Allowable long-term debt - - -
------------------------------------------------------------------------------------------------------------
Total Tier 2 capital 2,364 2,374 2,425
------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 46,673 $ 45,967 $ 44,589
============================================================================================================
Risk-weighted assets $188,578 $189,139 $192,873
============================================================================================================
Risk-based ratios:
Tier 1 capital 23.50% 23.05% 21.86%
============================================================================================================
Total risk-based capital 24.75% 24.30% 23.12%
============================================================================================================
Tier 1 leverage ratio 12.43% 12.56% 11.96%
============================================================================================================
Realized shareholders' equity to assets 12.62% 12.78% 12.18%
============================================================================================================
Book value per share grew $0.35 or 2.69% during the six month period to $13.36
at mid-year 2001. Dividends declared totaled $0.22 year-to-date at June 30,
2001, up $0.02 or 10% from 2000, which was unchanged from 1999. For particulars
on the Company's dividend policy, refer to the subsection immediately following.
Accumulated other comprehensive income, which measures net fluctuations in the
fair values of investment securities, improved $824,139 at June 30, 2001
compared to year-end 2000. Movement in interest rates remained a dominant
factor in the fair value results. Further details on investment securities and
associated fair values are contained in the Financial Condition section of this
Analysis.
On March 14, 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in Company common stock. In 2000, the Company purchased 144,101
shares from one group of shareholders at a purchase price of $17.25 per share
and during the first half of 2001, an additional 43,633 shares was purchased on
the open market and through private transactions at an average price of $14.91
per share. Since inception, the treasury stock program has reduced the
Company's outstanding common stock from 3,580,797 shares to 3,393,063 shares.
The maximum consideration available for additional treasury purchases, at prices
to be determined in the future, is $3,863,550. Any acquisition of additional
shares will be dictated by market conditions. In accordance with generally
accepted accounting principles, no prior period amounts have been restated to
reflect the treasury stock purchases.
Dividend Policy
The Parent Company is a legal entity separate and distinct from its
subsidiaries, and its revenues and liquidity position depend primarily on the
payment of dividends from its subsidiaries. State banking
15
Southeastern Banking Corporation
Management's Discussion and Analysis
regulations limit the amount of dividends SEB may pay without prior approval of
the regulatory agencies. Year-to-date, SEB has paid 50% or $1,250,000 of the
$2,500,000 in cash dividends available to the Company in 2001 without such prior
approval. The Company uses regular dividends paid by SEB in order to pay
quarterly dividends to its own shareholders. Management anticipates that the
Company will continue to pay cash dividends on a recurring basis.
Results of Operations
Net income for the 2001 second quarter totaled $1,008,168 or $0.29 per share,
down $261,344 or 20.59% from the 2000 second quarter but virtually unchanged
from the 2001 first quarter. Year-to-date, net income fell $516,998 or 20.38%
to $2,020,072 at June 30, 2001 from $2,537,070 in 2000. On a per share basis,
net income declined to $0.59 at June 30, 2001 from $0.72 and $0.65 in 2000 and
1999. Likewise, the return on beginning equity declined 248 basis points to
9.04% at June 30, 2001 from 11.52% a year ago. The earnings decline at June 30,
2001 was primarily attributable to a 6.46% drop in net interest income. Six
months earnings increased $227,059 or 9.83% in 2000 when compared to the same
period in 1999. The most significant factor affecting 2000-1999 comparative
results was a 6.95% improvement in net interest earnings. Variations in net
interest results are further discussed in the next subsection of this Analysis.
Net Interest Income
Net interest income declined $297,971 or 7.47% during the second quarter of 2001
compared to 2000. For the year-to-date period, net interest income fell
$512,065 or 6.46% from 2000. Similarly, the net interest margin and spread fell
to 4.68% and 3.55%, respectively, from 5.06% and 3.96% a year ago. Interest
income on all earning assets other than federal funds sold declined from year-
to-date results in 2000. Specifically, interest earnings on loans, investment
securities, and other earning assets declined $467,841, $173,414, and $3,250
from year-to-date results in 2000 while earnings on federal funds sold jumped
$504,278. Shifts in earning assets and overall declines in asset yields
precipitated the year-to-date results. As discussed in other sections of this
Analysis, the increase in average federal funds sold balances resulted from
reductions in loans, early redemptions of investment securities, and higher
deposit balances. Federal funds sold balances have declined from first quarter
levels and are expected to further decline during the remainder of 2001 as funds
are reallocated to other earning assets. Overall, interest expense on deposits
and borrowed funds increased $371,838 or 6.66% year-to-date at June 30, 2001
versus 2000. Cost of funds increased 20 basis points from 2000 levels, totaling
4.71% at June 30, 2001 versus 4.51% at June 30, 2000. The jump in cost of funds
resulted primarily from higher deposit rates at June 30, 2001 versus 2000.
Given the aggressive rate cuts made by the Federal Reserve in 2001 to-date,
management expects net interest income to continue lagging 2000 results as
significant amounts of investment securities with early redemption features and
loans tied to prime and similar indexes reprice at lower rates. Expected
declines in average loans outstanding during 2001, as discussed in the Loan
section of this Analysis, will exert further pressure on net interest results.
Interest expense on deposits will also decline, but due to the lag inherent in
repricing maturity deposits, the decline in asset yields will initially and
substantially exceed any drop in costs of funds. During the first six months of
2000 compared to 1999, net interest income grew $514,843 or 6.95%. Overall
improvements in average asset balances produced the 2000 results, because asset
yields increased only marginally from 1999.
The intense competition for loans and deposits continued in 2001 and shows no
sign of abating. The high number of new and existing financial institutions in
the Company's market areas essentially guarantees downward pressure on net
interest spreads and margins as all participants struggle to amass and grow
market share. Volume of assets and deposits will become even more important as
margins
16
Southeastern Banking Corporation
Management's Discussion and Analysis
decline. Strategies implemented by management to increase average loans
outstanding emphasize utilization of more competitive pricing on loan products
and development of additional loan relationships, all without compromising
portfolio quality. Management's strategy for deposits is to reduce costs of
funds and employ alternative sources of financing when feasible. Comparative
details about average balances, income/expense, and average yields earned and
rates paid on interest-earning assets and liabilities at June 30 for each of the
last three years are provided in the table on the next page.
Noninterest Income and Expense
Noninterest income grew a negligible $15,037, or 0.89%, year-to-date at June 30,
2001 compared to 2000. A $43,139 improvement in other operating income, negated
in part by declines in service charges on deposit accounts and reduced gains on
investment securities, was the major factor in the six month results. By type
and amount, the chief components of other operating income in 2001 were mortgage
origination fees, $143,218; commissions on the sale of credit life insurance
(generated by SEB), $94,128; surcharge fees - atm, $61,594; safe deposit box
rentals, $54,781; and income on sale of check products, $31,369. Together,
these five income items comprised 71.05% of other operating income year-to-date.
Salaries and employee benefits increased less than 1%, or $28,510, during the
six month period to $3,113,525 year-to-date at June 30, 2001 compared to 2000.
The vast majority, or 83%, of employee expenses remained concentrated in
salaries and other direct compensation, including related payroll taxes, at June
30, 2001. Profit-sharing accruals and other fringe benefits constituted the
remaining 7% and 10% of employee expenses. The division of employee expenses
between compensation, profit-sharing, and other fringe benefits remained
consistent with historical norms at June 30, 2001 and 2000. When compared to
the same period in the prior year, net occupancy and equipment expense increased
6.12% or $59,156 year-to-date at June 30, 2001 and 9.97% at June 30, 2000. The
increase both periods resulted largely from higher computer costs, including
depreciation expense associated with check imaging, internet banking, and voice
banking systems. Other operating expenses climbed $187,759 or 13.87% at June
30, 2001 compared to 2000. Operating costs associated with a major parcel of
foreclosed commercial real estate, as discussed in earlier sections of this
Analysis, plus net losses versus gains on sales of other foreclosed properties
accounted for virtually all of the fluctuation year-to-date. Besides marketing
and supplies expense, no individual component of other operating expenses
aggregated or exceeded 10% of the total at June 30, 2001 or 2000.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination, and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. The Company is required
to adopt SFAS No. 141 and 142 on a prospective basis as of January 1, 2002;
however, certain provisions of these new Standards may also apply to any
acquisitions concluded subsequent to June 30, 2001. As a result of implementing
these new Standards, it is expected that the amortization of goodwill will cease
as of December 31, 2001. The adoption of SFAS No. 141 and SFAS No. 142 is not
expected to have a material effect on the Company's financial position, results
of operations, and cash flows in 2002 and subsequent years.
Various other accounting proposals affecting the banking industry are pending
with the Financial Accounting Standards Board. Given the inherent uncertainty of
the proposal process, the Company cannot assess the impact of any such proposals
on its financial condition or results of operations.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives have made, and may continue to make, various
written or oral forward-looking statements with respect to business and
financial matters, including statements contained in this report, filings with
the Securities and Exchange Commission, and reports to shareholders. Generally,
the words "believe," "expect," "intend," "estimate," "anticipate," "project,"
"will," "should," and similar expressions identify forward-looking statements.
All statements which address operating performance, events or developments that
we expect or anticipate will occur in the future, including statements related
to loan growth, deposit
17
Southeastern Banking Corporation
Management's Discussion and Analysis
SELECTED AVERAGE BALANCES, INCOME/EXPENSE, AND AVERAGE YIELDS EARNED AND RATES
PAID
====================================================================================================================================
2001 2000 1999
------------------------------------------------------------------------------------------
Average Balances/6/ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Six Months Ended June 30, Balances Expense Rates Balances Expense Rates Balances Expense Rates
====================================================================================================================================
(Dollars in thousands)
Assets
Interest-earning assets:
Loans, net/1/,/2/,/4/ $165,507 $ 8,493 10.26% $171,359 $ 8,994 10.50% $163,422 $ 8,545 10.46%
Federal funds sold 27,291 628 4.60% 4,299 124 5.77% 11,931 280 4.69%
Taxable investment securities/3/ 112,731 3,592 6.37% 126,153 3,771 5.98% 117,136 3,457 5.90%
Tax-exempt investment securities/3/,/4/ 25,220 955 7.58% 24,885 946 7.60% 23,969 933 7.79%
Other assets 1,088 42 7.72% 1,088 46 8.46% 1,001 48 9.59%
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $331,837 $13,710 8.26% $327,784 $13,881 8.47% $317,459 $13,263 8.36%
====================================================================================================================================
Liabilities
Interest-bearing liabilities:
Interest-bearing demand deposits/5/ $ 52,704 $ 763 2.90% $ 47,248 $ 664 2.81% $ 45,488 $ 651 2.86%
Savings 75,847 1,476 3.89% 76,743 1,544 4.02% 74,616 1,511 4.05%
Time deposits 118,616 3,547 5.98% 117,815 3,191 5.42% 119,426 3,334 5.58%
Federal funds purchased - - -% 1,027 36 6.75% 142 3 4.75%
U. S. Treasury demand note 737 18 4.88% 994 29 5.84% 660 16 4.85%
Federal Home Loan Bank advances 5,000 149 6.00% 3,737 117 6.26% - - -
-----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $252,904 $ 5,953 4.71% $247,564 $ 5,581 4.51% $240,332 $ 5,515 4.59%
====================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 78,933 $ 80,220 $ 77,127
====================================================================================================================================
Interest rate spread 3.55% 3.96% 3.77%
====================================================================================================================================
Net interest income $ 7,757 $ 8,300 $ 7,748
====================================================================================================================================
Net interest margin 4.68% 5.06% 4.88%
====================================================================================================================================
/1/Average loans are shown net of unearned income. Nonperforming loans are
included.
/2/Includes loan fees.
/3/Securities are presented on an amortized cost basis. Investment securities
with original maturities of three months or less are included, as applicable.
/4/Interest income on tax-exempt loans and securities is presented on a taxable-
equivalent basis, using a federal income tax rate of 34%. No adjustment has been
made for any state tax benefits.
/5/NOW and money market accounts.
/6/Averages presented generally represent average daily balances.
18
Southeastern Banking Corporation
Management's Discussion and Analysis
growth, per share growth, and statements expressing general sentiment about
future operating results and non-historical information, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance. The Company undertakes no obligation to
publicly update or revise any forward-looking statements in light of new
information or future events.
Certain factors that could affect financial performance or cause actual results
to vary significantly from estimates contained in or underlying forward-looking
statements include:
. Interest rate fluctuations and other market conditions.
. Strength of the consumer and commercial credit sectors as well as
real estate markets.
. Changes in laws and regulations, including changes in accounting
standards, monetary policies, and taxation requirements (including
tax rate changes, new tax laws, and revised tax law interpretations).
. Competitive pricing and other pressures on loans and deposits and the
Company's ability to maintain market shares in its trade areas.
. Management of costs associated with expansion of existing and
development of new distribution channels, and ability to realize
increased revenues from these distribution channels.
. The outcome of litigation which depends on judicial interpretations
of law and findings of juries.
. Other risks and uncertainties as detailed from time to time in
Company filings with the Securities and Exchange Commission.
The foregoing list of factors is not exclusive. This Analysis should be read in
conjunction with the consolidated financial statements and related notes.
19
Southeastern Banking Corporation
Part II - Other Information
Item 1. Legal Proceedings
(Not Applicable)
Item 2. Changes in Securities
(Not Applicable)
Item 3. Defaults Upon Senior Securities
(Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders
(Not Applicable)
Item 5. Other Information
(Not Applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits:
Exhibit Table Page
------------- ----
Exhibit 99 Report of Independent Certified Public Accountants
(b) Reports on Form 8-K - NONE
20
Southeastern Banking Corporation
Signatures
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
SOUTHEASTERN BANKING CORPORATION
(Registrant)
By: /s/ S. MICHAEL LITTLE
-------------------------------------------
S. Michael Little, Executive Vice President
By: /s/ ALYSON GRAY
-------------------------------------------
Alyson Gray, Vice President
Date: August 14, 2001
--------------------
21