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 March 31, 2002
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 April 30, 2002, 3,385,470 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding.
Southeastern Banking Corporation
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2002 2001
-----------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 14,722,555 $ 16,787,021
Federal funds sold 18,664,000 7,580,000
-----------------------------------------------------------------------------------------------
Cash and cash equivalents 33,386,555 24,367,021
Investment securities
Held-to-maturity (market value of approximately $35,499,000
and $35,451,000 at March 31, 2002 and December 31, 2001) 35,120,154 35,090,649
Available-for-sale, at market value 117,754,735 122,529,275
-----------------------------------------------------------------------------------------------
Total investment securities 152,874,889 157,619,924
Loans, gross 175,110,308 163,805,412
Unearned income (397,493) (457,087)
Allowance for loan losses (3,402,954) (3,134,594)
-----------------------------------------------------------------------------------------------
Loans, net 171,309,861 160,213,731
Premises and equipment, net 8,338,282 6,675,354
Intangible assets 967,811 904,836
Other assets 5,433,069 5,433,949
-----------------------------------------------------------------------------------------------
Total Assets $372,310,467 $355,214,815
===============================================================================================
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing deposits $ 60,708,278 $ 57,826,266
Interest-bearing deposits 256,155,848 240,880,561
-----------------------------------------------------------------------------------------------
Total deposits 316,864,126 298,706,827
U. S. Treasury demand note 1,867,377 493,153
Federal Home Loan Bank advances 5,000,000 5,000,000
Other liabilities 2,908,804 5,417,508
-----------------------------------------------------------------------------------------------
Total liabilities 326,640,307 309,617,488
-----------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock ($1.25 par value; 10,000,000 shares authorized;
3,580,797 shares issued; 3,385,470 shares outstanding) 4,475,996 4,475,996
Additional paid-in-capital 1,391,723 1,391,723
Retained earnings 42,733,835 42,035,982
Treasury stock, at cost (195,327 shares) (3,247,718) (3,247,718)
-----------------------------------------------------------------------------------------------
Realized shareholders' equity 45,353,836 44,655,983
Accumulated other comprehensive income -- unrealized
gains on available-for-sale securities, net of tax 316,324 941,344
-----------------------------------------------------------------------------------------------
Total shareholders' equity 45,670,160 45,597,327
-----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $372,310,467 $355,214,815
===============================================================================================
See accompanying notes to consolidated financial statements.
1
Southeastern Banking Corporation
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31, 2002 2001
-----------------------------------------------------------------------------------------------
Interest income
Loans, including fees $3,703,337 $4,319,209
Federal funds sold 57,802 320,112
Investment securities
Taxable 1,652,414 1,774,021
Tax-exempt 374,252 305,853
Other assets 15,505 19,337
-----------------------------------------------------------------------------------------------
Total interest income 5,803,310 6,738,532
-----------------------------------------------------------------------------------------------
Interest expense
Deposits 1,975,794 2,936,513
U. S. Treasury demand note 4,218 10,365
Federal Home Loan Bank advances 74,000 74,000
-----------------------------------------------------------------------------------------------
Total interest expense 2,054,012 3,020,878
-----------------------------------------------------------------------------------------------
Net interest income 3,749,298 3,717,654
Provision for loan losses 300,000 300,000
-----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,449,298 3,417,654
-----------------------------------------------------------------------------------------------
Noninterest income
Service charges on deposit accounts 566,936 582,688
Investment securities gains, net 2,000 -
Other operating income 369,544 291,384
-----------------------------------------------------------------------------------------------
Total noninterest income 938,480 874,072
-----------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits 1,645,498 1,567,805
Occupancy and equipment, net 534,219 528,731
Other operating expense 702,232 765,011
-----------------------------------------------------------------------------------------------
Total noninterest expense 2,881,949 2,861,547
-----------------------------------------------------------------------------------------------
Income before income taxes 1,505,829 1,430,179
Income tax expense 418,647 418,275
-----------------------------------------------------------------------------------------------
Net income $1,087,182 $1,011,904
===============================================================================================
Net income per average share - basic $ 0.32 $ 0.30
===============================================================================================
Average common shares - basic 3,385,470 3,413,618
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, 2000 $4,475,996 $1,391,723 $41,327,784 $(2,485,742) $(369,586) $44,340,175
Comprehensive income:
Net income - - 1,011,904 - - 1,011,904
Other comprehensive income, net
of tax effect of $429,880:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - 834,473 834,473
-----------
Comprehensive income 1,846,377
-----------
Cash dividends declared
($0.11 per share) - - (374,447) - - (374,447)
Acquisition of treasury stock - - - (488,208) - (488,208)
-----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $4,475,996 $1,391,723 $41,965,241 $(2,973,950) $ 464,887 $45,323,897
=======================================================================================================================
Balance, December 31, 2001 $4,475,996 $1,391,723 $42,035,982 $(3,247,718) $ 941,344 $45,597,327
Comprehensive income:
Net income - - 1,087,182 - - 1,087,182
Other comprehensive income, net
of tax effect of $321,980:
Change in unrealized gains
(losses) on available-for-sale
securities - - - - (625,020) (625,020)
-----------
Comprehensive income 462,162
-----------
Cash dividends declared
($0.11 1/2 per share) - - (389,329) - - (389,329)
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Balance, March 31, 2002 $4,475,996 $1,391,723 $42,733,835 $(3,247,718) $ 316,324 $45,670,160
=======================================================================================================================
See accompanying notes to consolidated financial statements.
3
Southeastern Banking Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 2002 2001
--------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 1,087,182 $ 1,011,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 300,000
Depreciation 201,024 193,095
Amortization and accretion, net 152,086 (43,011)
Investment securities gains, net (2,000) -
Net losses on other real estate 26,215 34,605
Changes in assets and liabilities:
Decrease in other assets 346,927 1,026,699
(Decrease) increase in other liabilities (635,460) 448,437
--------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,475,974 2,971,729
--------------------------------------------------------------------------------------------------------
Investing activities
Principal collections and maturities of investment securities:
Held-to-maturity 1,262,000 230,000
Available-for-sale 13,243,162 36,028,926
Purchases of investment securities held-to-maturity (1,311,111) (1,342,264)
Purchases of investment securities available-for-sale (9,509,076) (19,985,847)
Net (increase) decrease in loans (1,072,933) 9,334,955
Proceeds from sales of other real estate 41,429 300
Net funds paid in purchase of branch (7,748,200) -
Capital expenditures, net (360,587) (78,308)
--------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (5,455,316) 24,187,762
--------------------------------------------------------------------------------------------------------
Financing activities
Net increase in deposits 13,892,917 12,781,941
Net increase (decrease) in U. S. Treasury demand note 1,374,224 (463,008)
Purchase of treasury stock - (488,208)
Dividends paid (2,268,265) (721,706)
--------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,998,876 11,109,019
--------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 9,019,534 38,268,510
Cash and cash equivalents at beginning of year 24,367,021 19,062,283
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $33,386,555 $57,330,793
========================================================================================================
Supplemental disclosure
Cash paid during the period
Interest $ 2,416,494 $ 2,340,045
Noncash investing and financing activities
Real estate acquired through foreclosure $ 92,441 $ 2,146,402
Loans made in connection with sales of foreclosed real estate $ 41,175 $ -
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 accounting principles generally accepted in the United
States of America 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 ended March 31, 2002 are not necessarily indicative of
trends or results to be expected for the year ended December 31, 2002. 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, 2001.
2. Recent Accounting Pronouncements
Business Combinations/Goodwill and Other Intangible Assets
In July 2001, the FASB 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. With the adoption of these
standards, goodwill is no longer amortized but instead is subject to
impairment tests at least annually. The Company adopted SFAS 141 and 142,
in entirety, effective January 1, 2002. Adoption of these standards did not
have a material impact on the Company's financial position or results of
operations.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes both
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment
of a Business and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." This standard improves financial reporting by requiring
one accounting model be used for long-lived assets to be disposed by sale
and by broadening the presentation of discontinued operations to include
more disposal transactions. The Company adopted SFAS 144 effective January
1, 2002. SFAS 144 did not have a material impact on the consolidated
financial statements.
3. Acquisition
On January 31, 2002, the Company acquired the Richmond Hill office of
Valdosta, Georgia-based Park Avenue Bank. The Company received certain
loans, property and equipment, and other assets
5
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
(Unaudited)
with fair values of approximately $12,201,000, while assuming deposits and
other liabilities totaling approximately $4,270,000. Cash balances applied
towards the purchase approximated $8,000,000. A deposit premium of $100,000
was recorded in conjunction with the transaction.
6
Southeastern Banking Corporation
Management's Discussion and Analysis
This Analysis should be read in conjunction with the 2001 Annual Report on Form
10-K and the consolidated financial statements & related notes on pages 1 - 6 of
this quarterly filing.
Description of Business
Southeastern Banking Corporation (the Company), with assets of $372 million, is
a financial services company with operations in southeast Georgia and northeast
Florida. Southeastern Bank (SEB), 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 fifteen branch locations, including its new Richmond
Hill office, and atm network. Services offered include traditional deposit and
credit services, long-term mortgage originations, and credit cards. SEB 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 March 31, 2002 and 2001.
Acquisition
On January 31, 2002, the Company acquired the Richmond Hill office of Valdosta,
Georgia-based Park Avenue Bank. The Company received certain loans, property and
equipment, and other assets with fair values of approximately $12.2 million,
while assuming deposits and other liabilities totaling approximately $4.27
million. Cash balances applied towards the purchase approximated $8 million. A
deposit premium of $100,000 was recorded in conjunction with the transaction.
More details on the Richmond Hill acquisition are provided in later sections of
this Analysis.
Financial Condition
Consolidated assets exceeded $372 million at March 31, 2002, growing $17,095,652
or 4.81% from year-end 2001 and $9,328,082 or 2.57% from March 31, 2001. The
acquisition of the Richmond Hill branch and deposit growth at other SEB
locations were the primary factors in the year-to-date increase. Approximately
$11.1 million of the 2002 growth year-to-date occurred in the loan portfolio.
Offsetting moderate reductions in investment securities, the remainder of the
growth was concentrated in federal funds sold. Federal funds sold balances are
expected to decline throughout 2002 as funds are reallocated to other earning
assets. Loans comprised 51%, investment securities, 44%, and federal funds sold,
5%, of earning assets at March 31, 2002 versus 50%, 48%, and 2% at December 31,
2001. Overall, earning assets aggregated 92% of total assets at March 31, 2002
and year-end 2001. During the year-earlier period, total assets increased
$13,403,833 or 3.83%. Increased deposits funded the 2001 growth. Refer to the
Liquidity section of this Analysis for additional details on deposits and other
funding sources.
Investment Securities
On a carrying value basis, investment securities declined $4,745,035 or 3.01%
since December 31, 2001. Purchases of securities during the three month period
approximated $10,820,000, and redemptions, $14,503,000. Approximately 60% of
securities transactions year-to-date were attributable to various issuers'
exercise of call options and other prepayments as a result of interest rate
reductions during the last twelve months. 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. Although no significant changes occurred in
the investment securities mix during the first quarter of 2002, during the
preceding twelve months the Company
7
Southeastern Banking Corporation
Management's Discussion and Analysis
increased its holdings of mortgage-backed securities, corporates, and municipals
to reduce its exposure to Agency securities with call features. At March 31,
2002, mortgage-backed securities, corporates, and municipals comprised 25%, 6%,
and 23% of the portfolio. Overall, securities aggregated 44% of earning assets
at March 31, 2002, down 400 basis points from year-end 2001 levels. The
amortized cost and estimated fair value of investment securities are delineated
in the table below:
------------------------------------------------------------------------------------------
Investment Securities by Category Amortized Unrealized Unrealized Fair
March 31, 2002 Cost Gains Losses Value
------------------------------------------------------------------------------------------
(In thousands)
Available-for-sale:
U. S. Government agencies $ 69,687 $ 717 $ 240 $ 70,164
Mortgage-backed securities 37,843 226 209 37,860
Corporates 9,745 54 68 9,731
------------------------------------------------------------------------------------------
117,275 997 517 117,755
Held-to-maturity:
States and political subdivisions 35,120 611 232 35,499
------------------------------------------------------------------------------------------
Total investment securities $ 152,395 $ 1,608 $ 749 $153,254
------------------------------------------------------------------------------------------
As shown, the market value of the securities portfolio exceeded the cost basis
at December 31, 2001; 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, grew 6.96% or $11,364,490 since year-end 2001 to
exceed $174 million at March 31, 2002. As a percent of deposits, net loans
aggregated 55.14% at March 31, 2002 versus 54.69% at December 31, 2001 and
52.42% at March 31, 2001. More than 90%, or $10.3 million, of the 2002
improvement was attributable to the Richmond Hill acquisition. The remaining
increase resulted from loan origination at other SEB locations. The commercial
and consumer portfolios grew $12,857,442 and $940,955, offsetting overall
declines of less than 3.23% in the real estate-construction and real
estate-mortgage portfolios. Within the commercial portfolio, nonfarm real estate
and agricultural loans grew $7,759,000 and $6,132,612; other
commercial/industrial loans and governmental loans fell $531,210 and $502,960.
Consumer loans increased 3.10% at March 31, 2002 compared to December 31, 2001.
Consumer loans remain the Company's highest-yielding interest-earning asset, and
the Company is committed to increasing balances in this portfolio. Real-estate
construction balances fell $640,311 during the first quarter of 2002 compared to
year-end 2001. 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 residential mortgages for new
construction, it traditionally does not hold or service long-term mortgage loans
for its own portfolio. Rather, permanent residential 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. Real estate-mortgage balances fell $1,853,190 or 2.63% in 2002
year-to-date. Although down from year-end 2001 levels, real estate-mortgage
loans increased $6,774,350 or 10.97% since March 31, 2001.
8
Southeastern Banking Corporation
Management's Discussion and Analysis
Despite the current economic slowdown within our markets, management is
optimistic that loan volumes will improve, albeit moderately, throughout 2002.
Strategies implemented by management to increase loan production include
continuing 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 last year, net
loans declined 6.95% or $12,081,971. Declines in the commercial and real
estate-construction portfolio were the primary factors in the 2001 results.
Loans outstanding are presented by type in the table below:
----------------------------------------------------------------------------------
March 31, December 31, March 31,
Loans by Category 2002 2001 2001
----------------------------------------------------------------------------------
(In thousands)
Commercial, financial, and agricultural/1/ $ 68,923 $ 56,065 $ 60,357
Real estate - construction 6,318 6,959 6,926
Real estate - mortgage/2/ 68,507 70,361 61,735
Consumer, including credit cards 31,362 30,420 33,356
----------------------------------------------------------------------------------
Loans, gross 175,110 163,805 162,374
Unearned income 397 457 654
----------------------------------------------------------------------------------
Loans, net $ 174,713 $ 163,348 $ 161,720
----------------------------------------------------------------------------------
/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 March 31, 2002 and December 31,
2001, gross loans secured by real estate approximated $120,830,000 and
$109,842,000. 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 $23,648,000 at March 31, 2002; 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
$2,106,000 at March 31, 2002, down $92,000 or 4.19% from year-end 2001 and more
significantly, down 49.54% or $2,068,000 from March 31, 2001. As a percent of
total assets, nonperforming assets totaled 0.57% at March 31, 2002 versus 0.62%
at December 31, 2001 and 1.15% at March 31, 2001. The fluctuation in
nonperforming asset balances at March 31, 2002 versus 2001 resulted
predominantly from a single commercial real estate loan. Specifically,
foreclosed real estate balances at March 31, 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 initially 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. This property was sold to a third party in August 2001. Pending
furtherance of various legal proceedings, management is optimistic that various
costs associated with the property may ultimately be recovered.
9
Southeastern Banking Corporation
Management's Discussion and Analysis
Included in nonaccrual balances for all periods presented is a single credit
with principal balances aggregating $615,000. 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 interest, is expected on these loans. Foreclosure of the real
estate collateral was initially stalled by bankruptcy proceedings, but in March
2002, the bankruptcy court ordered the borrower to make cash payments and sell
certain parcels of real estate; if not sold within the prescribed time, the real
estate parcels will be auctioned. At March 31, 2002 and year-end 2001,
nonaccrual balances also included loans to four other borrowers averaging
$222,000 each. Due to the underlying collateral coverage, no material losses, if
any, are expected on these credits. No material loans have been transferred to
nonaccrual status during 2002 year-to-date. Refer to the subsection entitled
Policy Note for criteria used by management in classifying loans as nonaccrual.
Exclusive of the credits specifically discussed in the preceding paragraphs, the
allowance for loan losses approximated 12.89X the nonperforming loans balance at
March 31, 2002 versus 8.29X at year-end 2001 and 2.87X a year ago.
Loans past due 90 or more days totaled $1,644,000, or less than 1% of net loans,
at March 31, 2002. The table below provides further information about
nonperforming assets and loans past due 90 days or more:
---------------------------------------------------------------------------------------
March 31, December 31, March 31,
Nonperforming Assets 2002 2001 2001
---------------------------------------------------------------------------------------
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural $ 1,265 $ 1,275 $ 1,110
Real estate - construction - - -
Real estate - mortgage 498 588 149
Consumer, including credit cards 4 18 20
---------------------------------------------------------------------------------------
Total nonaccrual loans 1,767 1,881 1,279
Restructured loans/1/ - - 331
---------------------------------------------------------------------------------------
Total nonperforming loans 1,767 1,881 1,610
Foreclosed real estate/2/ 339 317 2,564
---------------------------------------------------------------------------------------
Total nonperforming assets $ 2,106 $ 2,198 $ 4,174
---------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 1,644 $ 1,528 $ 1,397
---------------------------------------------------------------------------------------
/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
10
Southeastern Banking Corporation
Management's Discussion and Analysis
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. 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 inherent
losses in the loan portfolio. At March 31, 2002, the Company's allowance totaled
$3,402,954, or 1.95% of period-end loans. Net charge-offs totaled $31,640, down
significantly, or $568,976, from 2001's $600,616, which was up $499,655 from
2000. Approximately one-half of the high charge-offs at March 31, 2001 were
attributable to the large nonperforming loan discussed earlier. Long-term
strategies implemented by management the last several years 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. Activity
in the allowance is presented in the table below:
-----------------------------------------------------------------------------------------------------
Allowance for Loan Losses
Three Months Ended March 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,135 $ 3,160 $ 3,223
Provision for loan losses 300 300 300
Charge-offs:
Commercial, financial, and agricultural 6 433 34
Real estate - construction - - -
Real estate - mortgage - 68 25
Consumer, including credit cards 106 204 192
-----------------------------------------------------------------------------------------------------
Total charge-offs 112 705 251
-----------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 2 6 13
Real estate - construction - - -
Real estate - mortgage 1 1 15
Consumer, including credit cards 77 97 122
-----------------------------------------------------------------------------------------------------
Total recoveries 80 104 150
-----------------------------------------------------------------------------------------------------
Net charge-offs 32 601 101
-----------------------------------------------------------------------------------------------------
Allowance for loan losses at March 31 $ 3,403 $ 2,859 $ 3,422
-----------------------------------------------------------------------------------------------------
Net loans outstanding/1/ at March 31 $174,713 $161,720 $173,475
-----------------------------------------------------------------------------------------------------
Average net loans outstanding/1/ at March 31 $172,556 $168,255 $166,406
-----------------------------------------------------------------------------------------------------
Ratios:
Allowance to net loans 1.95% 1.77% 1.97%
-----------------------------------------------------------------------------------------------------
Net charge-offs to average loans 0.07% 1.45% 0.24%
-----------------------------------------------------------------------------------------------------
Provision to average loans 0.70% 0.71% 0.72%
-----------------------------------------------------------------------------------------------------
/1/Net of unearned income
11
Southeastern Banking Corporation
Management's Discussion and Analysis
The Company prepares a comprehensive analysis of the allowance for loan losses
at least quarterly. SEB's Board of Directors is responsible for affirming the
allowance methodology and assessing the general and specific allowance factors
in relation to estimated and actual net charge-off trends. The allowance for
loan losses consists of three elements: a) specific allowances for individual
loans; b) general allowances for loan pools based on historical loan loss
experience and current trends; and c) allowances based on economic conditions
and other risk factors in the Company's markets. The specific allowance is based
on a regular analysis of classified loans where the internal risk ratings are
below a predetermined classification. The specific allowance established for
these classified loans is based on a careful analysis of probable and potential
sources of repayment, including cash flow, collateral value, and guarantor
capacity. The general allowance is determined by the mix of loan products within
the portfolio, an internal loan grading process, and associated allowance
factors. These general allowance factors are updated at least annually and are
based on a statistical loss migration analysis and current loan charge-off
trends. The loss migration analysis examines loss experience for loan portfolio
segments in relation to internal loan grades. Charge-off trends are analyzed for
homogeneous loan categories (e.g., residential real estate, consumer loans,
etc.). While formal loss migration and charge-off trend analyses are conducted
annually, the Company continually monitors credit quality in all portfolio
segments and may revise the general allowance factors whenever necessary in
order to address improving or deteriorating credit quality trends or specific
risks associated with a given loan category. The third element, comprised of
economic conditions, concentrations, and other risk factors, is based on
marketplace conditions and/or events that may affect loan repayment in the
near-term. This element requires a high degree of managerial judgment to
anticipate the impact that economic trends, legislative or governmental actions,
or other unique market and/or portfolio issues will have on credit losses.
Consideration of other risk factors typically includes such issues as recent
loss experience in specific portfolio segments, trends in loan quality, changes
in market focus, and concentrations of credit. These factors are based on the
influence of current external variables on portfolio risk, so there will
typically be some movement between this element and the specific allowance
component during various stages of the economic cycle. Because of their
subjective nature, these risk factors are carefully reviewed by management and
revised as conditions indicate. Based on its analyses, management believes the
allowance was adequate at March 31, 2002. The Richmond Hill acquisition did not
materially affect the allowance for loan losses.
Other Commitments
Other than the pending purchase of various computer equipment approximating
$180,000 and renovation of the Darien office, the Company had no material plans
or commitments for capital expenditures as of March 31, 2002.
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 March 31, 2002, loans(1) and investment securities with carrying values
exceeding $64 million and $7 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
12
Southeastern Banking Corporation
Management's Discussion and Analysis
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 89% of
the funding base at March 31, 2002, virtually unchanged from 88% at December 31,
2001. Borrowed funds, which variously encompass U.S. Treasury demand notes,
federal funds purchased, and FHLB advances, totaled $6,867,377 at March 31, 2002
versus $5,493,153 at year-end 2001. More specifically, the maximum amount of
U.S. Treasury demand notes available to the Company at December 31, 2001 totaled
$3,000,000, of which $1,867,377 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 March 31, 2002, unused borrowings approximated $55 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 2002. 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 approximated $317 million at March 31, 2002, up $18,157,299 or 6.08%
from December 31, 2001. The majority, or 84.13%, of the deposit growth at March
31, 2002 was attributable to interest-bearing balances. Notably, customers
continue to utilize savings as an alternative to time certificates in the
current low-rate environment; savings balances jumped $10,036,000 or 11.93%
since year-end 2001 and 22.25% since March 31, 2001. Overall, interest-bearing
deposits comprised 80.84%, and noninterest-bearing deposits, 19.16%, of total
deposits at March 31, 2002. The distribution of interest-bearing balances at
March 31 and certain comparable quarter-end dates is shown in the table below:
----------------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001 March 31, 2001
------------------------- ------------------------- ------------------------
Percent Percent Percent
Deposits Balances of Total Balances of Total Balances of Total
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing demand deposits/1/ $ 64,366 25.13% $ 54,050 22.44% $ 54,322 21.65%
Savings 94,176 36.76% 84,140 34.93% 77,038 30.70%
Time certificates (less than) $100,000 62,647 24.46% 66,145 27.46% 73,550 29.30%
Time certificates >= $100,000 34,967 13.65% 36,546 15.17% 46,056 18.35%
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $256,156 100.00% $240,881 100.00% $250,966 100.00%
----------------------------------------------------------------------------------------------------------------------
/1/NOW and money market accounts.
13
Southeastern Banking Corporation
Management's Discussion and Analysis
Approximately 82% of time certificates at March 31, 2002 were scheduled to
mature within the next twelve months. The composition of average deposits and
the fluctuations therein at March 31 for the last two 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 March 31, 2002,
unchanged from year-end 2001. 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 anytime at
the option of the FHLB. Year-to-date, interest expense on the advance
approximated $74,000. Mortgage-backed securities with aggregate carrying values
of approximately $8.7 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 March 31, 2002.
14
Southeastern Banking Corporation
Management's Discussion and Analysis
---------------------------------------------------------------------------------------------------------
Repricing Within
-------------------------------------------------
More
Interest Rate Sensitivity 0 - 3 4 - 12 One - Five Than Five
March 31, 2002 Months Months Years Years Total
----------------------------------------- --------- ------------ ---------- --------- --------
(Dollars in thousands)
Interest Rate Sensitive Assets
Federal funds sold $ 18,664 $ 18,664
Securities/1/ 3,135 $ 4,765 $ 93,528 $ 50,967 152,395
Loans, gross/2/ 76,975 19,011 59,246 18,111 173,343
----------------------------------------- --------- ------------ ---------- --------- --------
Total interest rate sensitive assets 98,774 23,776 152,774 69,078 344,402
----------------------------------------- --------- ------------ ---------- --------- --------
Interest Rate Sensitive Liabilities
Deposits/3/ 182,117 55,998 17,981 60 256,156
U.S. Treasury demand note 1,867 - - - 1,867
Federal Home Loan Bank advances - - 5,000 5,000
----------------------------------------- --------- ------------ ---------- --------- --------
Total interest rate sensitive
liabilities 183,984 55,998 17,981 5,060 263,023
----------------------------------------- --------- ------------ ---------- --------- --------
Interest rate sensitivity gap $(85,210) $ (32,222) $ 134,793 $ 64,018 $ 81,379
----------------------------------------- --------- ------------ ---------- --------- --------
Cumulative gap $(85,210) $ (117,432) $ 17,361 $ 81,379
----------------------------------------- --------- ------------ ---------- --------- --------
Ratio of cumulative gap to total
rate sensitive assets (24.74)% (34.10)% 5.04% 23.63%
----------------------------------------- --------- ------------ ---------- --------- --------
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 53.69% 51.07 % 106.73% 130.94%
----------------------------------------- --------- ------------ ---------- --------- --------
Cumulative gap at December 31, 2001 $(91,212) $ (113,943) $ 11,932 $ 79,324
----------------------------------------- --------- ------------ ---------- --------- --------
Cumulative gap at March 31, 2001 $(60,755) $ (92,331) $ 21,870 $ 78,285
----------------------------------------- --------- ------------ ---------- --------- --------
/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 March 31, 2002, totaling $(85,210)
at three months and $(117,432) through one-year. Excluding traditionally
nonvolatile NOW and savings balances from the gap calculation, the cumulative
gap at March 31, 2002 totaled $44,894 at three months and $12,672 at twelve
months. The widening of the short-term gap position at March 31, 2002 versus
2001 was primarily attributable to federal funds sold. Although federal funds
sold balances increased $11,084,000 from year-end 2001, balances dropped more
than 56% from March 31, 2001. The gap position is expected to widen further
throughout 2002 as federal funds sold are reallocated to other earning assets.
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.
15
Southeastern Banking Corporation
Management's Discussion and Analysis
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 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 latest 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 in both 2001 and 2002, 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, can materially impact estimated results. 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.
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
16
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.
As expected, capital ratios have declined slightly since year-end 2001 due
largely to the Richmond Hill acquisition. Capital ratios for the most recent
periods are presented in the table below:
--------------------------------------------------------------------------------
March 31, December 31, March 31,
Capital Ratios 2002 2001 2001
--------------------------------------------------------------------------------
(Dollars in thousands)
Tier 1 capital:
Realized shareholders' equity $45,354 $44,656 $44,859
Intangible assets and other adjustments (968) (905) (1,070)
--------------------------------------------------------------------------------
Total Tier 1 capital 44,386 43,751 43,789
--------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,528 2,342 2,307
Allowable long-term debt - - -
--------------------------------------------------------------------------------
Total Tier 2 capital 2,528 2,342 2,307
--------------------------------------------------------------------------------
Total risk-based capital $46,914 $46,093 $46,096
================================================================================
Risk-weighted assets $201,389 $186,565 $184,023
================================================================================
Risk-based ratios:
Tier 1 capital 22.04% 23.45% 23.80%
================================================================================
Total risk-based capital 23.30% 24.71% 25.05%
================================================================================
Tier 1 leverage ratio 12.15% 12.32% 12.38%
================================================================================
Realized shareholders' equity to assets 12.19% 12.60% 12.37%
================================================================================
Book value per share grew $0.21 or 1.59% during the three month period to $13.40
at March 31, 2002. Dividends declared totaled $0.11 1/2, up 4.55% or $0.005 from
2001, which was up 10.00% from 2000. For more specifics 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, declined $625,020 at March 31, 2002 compared to
year-end 2001. 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 and 2001, the Company purchased
195,327 shares on the open market and through private transactions at an average
price of $16.63 per share. No treasury stock purchases have been made in 2002
year-to-date. The maximum consideration available for additional treasury
purchases, at prices to be determined in the future, is $3,752,282. 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.
Refer to the Financial Condition and Liquidity sections of this Analysis for
details on planned capital expenditures.
17
Southeastern Banking Corporation
Management's Discussion and Analysis
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 regulations limit the
amount of dividends SEB may pay without prior approval of the regulatory
agencies. Year-to-date, SEB has paid 25% or $523,000 of the $2,092,000 in cash
dividends available to the Company in 2002 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 2002 first quarter totaled $1,087,182, up $75,278 or 7.44%
from 2001. On a per share basis, quarterly earnings grew $0.02 to $0.32 at March
31, 2002 from $0.30 in 2001. Likewise, the return on beginning equity increased
69 basis points to 9.74% at March 31, 2002 from 9.05% a year ago. A $64,408
improvement in noninterest income was the dominant factor in the 2002 results
year-to-date. Variations in operating results are further discussed within the
next two subsections of this Analysis.
Net Interest Income
Net interest income increased $31,644, or less than 1%, during the first three
months of 2002 compared to 2001. The net interest margin approximated 4.62% at
March 31, 2002 versus 4.71% a year ago; the interest rate spread, 3.85% versus
3.59%. Interest income on all earning assets other than tax-exempt securities
declined from 2001 results. Specifically, interest earnings on loans, taxable
securities, federal funds sold, and other earning assets declined $615,872,
$121,607, $262,310, and $3,832 from same period results in 2001 while earnings
on tax-exempt securities increased $68,399 or 22.36%. Overall declines in asset
yields and, to a lesser extent, shifts in earning assets precipitated the 2002
results. On average, asset yields totaled 7.03% at March 31, 2002, down 134
basis points from 2001. Interest expense on deposits and other borrowed funds
fell $966,866 or 32.01% during the first quarter of 2002 versus 2001. Similarly,
cost of funds declined 160 basis points to 3.18% at March 31, 2002 from 4.78% in
2001. Expected declines in yields on investment securities, as discussed in the
Financial Condition section of this Analysis, will exert pressure on net
interest results in 2002. Reallocation of federal funds sold balances to other
earning assets, anticipated loan growth in Richmond Hill and other locations, as
well as reduced pricing on deposits are expected to alleviate declines in
securities yields. Additionally, because most of the loans in the variable
portfolio are tied to prime and similar indexes, the portfolio is positioned to
take advantage of any rate hikes promulgated by the Federal Reserve in 2002;
variable loans comprised approximately 38% of total loans at March 31, 2002.
The intense competition for loans and deposits continues in 2002 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 decline. Strategies implemented by management to increase average loans
outstanding emphasize 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 for the last two years are provided in
the table on the next page.
18
Southeastern Banking Corporation
Management's Discussion and Analysis
Selected Average Balances, Income/Expense, and Average Yields Earned and Rates
Paid
------------------------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------
Average Balances/6/ Average Income/ Yields/ Average Income/ Yields/
Three Months Ended March 31, Balances Expense Rates Balances Expense Rates
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans, net/1/,/2/,/4/ $172,556 $ 3,710 8.60% $168,255 $ 4,332 10.30%
Federal funds sold 14,130 58 1.70% 24,328 320 5.26%
Taxable investment securities/3/ 121,960 1,652 5.42% 112,053 1,774 6.33%
Tax-exempt investment securities/3/,/4/ 31,873 567 7.12% 24,375 463 7.60%
Other assets 1,088 16 5.88% 1,088 19 6.99%
------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $341,607 $ 6,003 7.03% $330,099 $ 6,908 8.37%
------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-bearing liabilities:
Interest-bearing demand deposits/5/ $62,186 $ 377 2.42% $ 53,527 $ 384 2.87%
Savings 90,037 504 2.24% 75,318 778 4.13%
Time deposits 99,951 1,095 4.38% 118,021 1,775 6.02%
U. S. Treasury demand note 1,099 4 1.46% 783 10 5.11%
Federal Home Loan Bank advances 5,000 74 6.00% 5,000 74 6.00%
------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $258,273 $ 2,054 3.18% $252,649 $ 3,021 4.78%
------------------------------------------------------------------------------------------------------------------------
Excess of interest-earning assets
over interest-bearing liabilities $83,334 $ 77,450
------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.85% 3.59%
------------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,949 $ 3,887
------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.62% 4.71%
------------------------------------------------------------------------------------------------------------------------
/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.
19
Southeastern Banking Corporation
Management's Discussion and Analysis
Noninterest Income and Expense
Noninterest income grew $64,408, or 7.37%, at March 31, 2002 compared to 2001. A
26.82% or $78,160 improvement in other operating income, partially offset by a
2.70% decline in service charges on deposit accounts, was the key factor in the
three month results. Mortgage origination fees led the improvement in other
operating income, growing an appreciative $79,268 or 121.37% year-to-date. By
type and amount, the chief components of other operating income at March 31,
2002 were mortgage origination fees, $144,581; commissions on the sale of credit
life insurance (generated by SEB), $48,012; surcharge fees - atm, $31,767; safe
deposit box rentals, $42,499; and income on sale of check products, $16,388.
Together, these five income items comprised 76.65% of other operating income at
March 31, 2002. Salaries and employee benefits increased $77,693 or 4.96% at
March 31, 2002 compared to 2001. The vast majority, or 83%, of employee expenses
remained concentrated in salaries and other direct compensation, including
related payroll taxes, at March 31, 2002. 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 in 2002. When compared
to the prior year, net occupancy and equipment expense increased a negligible
$5,488, or 1.04%, during the first three months of 2002 compared to 2001. Other
operating expenses declined $62,779 or 8.21% at March 31, 2002 compared to 2001.
Operating costs associated with a major parcel of foreclosed commercial real
estate, as discussed in earlier sections of this Analysis, accounted for the
bulk of the 2002-2001 fluctuation. No individual component of other operating
expenses aggregated or exceeded 10% of the total at March 31, 2002 or 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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. With the adoption of these standards, goodwill is
no longer amortized but instead is subject to impairment tests at least
annually. The Company adopted SFAS 141 and 142, in entirety, effective January
1, 2002. Adoption of these standards did not have a material impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which previously governed impairment of long-lived assets, and
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," which addressed the disposal of
a business segment. This standard improves financial reporting by requiring one
accounting model be used for long-lived assets to be disposed by sale and by
broadening the presentation of discontinued operations to include more disposal
transactions. The Company adopted SFAS 144 effective January 1, 2002. SFAS 144
did not have a material impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, 64,
Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4, which was
amended by SFAS No. 64, required all gains and losses from the extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Opinion 30 will now
be used to classify those gains and losses. SFAS No. 13 was amended to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. The adoption of SFAS No. 145
will not have a current impact on the Company's consolidated financial
statements.
20
Southeastern Banking Corporation
Management's Discussion and Analysis
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 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.
21
Southeastern Banking Corporation
Signatures
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 - NONE
(b) Reports on Form 8-K - NONE
22
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/ ALYSON G. BEASLEY
-------------------------------------
Alyson G. Beasley, Vice President
Date: May 15, 2002
----------------------
23