UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[X] 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.)
1010 NORTHWAY STREET
DARIEN, GEORGIA 31305
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 437-4141
-------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 25, 2002, 3,385,470 shares of the Registrant's common stock, par
value $1.25 per share, were outstanding. The aggregate market value of the
common equity held by nonaffiliates of the Registrant on such date was
approximately $32,140,717 (based on a per share price of $14.66 which is
based on over-the-counter trades executed by principal market-makers).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990 are incorporated by reference in Part IV, Item 14.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 28, 2002, are incorporated by reference in
Part III.
Part I
Item 1. Business.
1. History and Organization. Southeastern Banking Corporation (the
Company) and its wholly-owned subsidiaries, Southeastern Bank and SBC Financial
Services, Inc., provide a full array of financial services to meet the needs of
individual, corporate, and government customers in southeast Georgia and
northeast Florida. The Company's corporate offices are located at 1010 Northway
Street, Darien, Georgia.
The Company was formed in 1980 to serve as the parent holding company of its
then sole subsidiary bank, The Citizens Bank, Folkston, Georgia, which later
changed its name to Southeastern Bank (SEB). In 1983, the Company acquired The
Darien Bank, Darien, Georgia. Since 1983, the Company has acquired three
additional financial institutions in the southeast Georgia market. These
acquisitions were consummated by merging the acquired bank with SEB; the
acquired banks were subsequently converted to branches of SEB. In this manner,
the Company acquired The Camden County State Bank, Woodbine, Georgia, in 1984;
the Jeff Davis Bank, Hazlehurst, Georgia, in 1986; and the Nicholls State Bank,
Nicholls, Georgia, in 1988. In 1990, SEB merged with and into The Darien Bank,
with The Darien Bank being the surviving bank in the merger operating under its
1888 Charter. Immediately, The Darien Bank changed its name to "Southeastern
Bank." SEB is a state banking association incorporated under the laws of the
State of Georgia.
In 1991, the Company acquired the Folkston, St. Marys, and Douglas, Georgia,
offices of First Georgia Savings Bank, a savings bank in Brunswick, Georgia.
Offices located in St. Marys and Douglas are now operating as branches of SEB,
but the First Georgia office in Folkston was closed and merged into the existing
Folkston branch. In 1993, the Company acquired the Folkston and St. Marys
offices of Bank South, N.A., Atlanta, Georgia. Both of the acquired offices were
closed and merged into existing offices of the Company.
On October 14, 1994, the Company acquired 100% of the outstanding common stock
of United Citizens Bank of Alachua County, Alachua, Florida under the name
Southeastern Bank of Florida (SEBF). The aggregate consideration paid by the
Company pursuant to the transaction was approximately $5,139,000, payable in
cash to the shareholders of Alachua. On February 15, 1996, the Company acquired
the Callahan, Hilliard, and Yulee offices of Compass Bank in northeast Florida's
Nassau County; the Company received approximately $22,982,000 in assets and
assumed approximately $23,709,000 in deposit and other liabilities.
Geographically, Nassau County borders Camden and Charlton Counties in southeast
Georgia where the Company has other offices.
On January 16, 1998, SEBF sold its three offices in central Florida to First
National Bank of Alachua. Cash, loans, and fixed assets sold on January 16
aggregated approximately $32,159,000; deposits and other liabilities divested
totaled $33,646,000. The sale of these locations has enabled the Company to
concentrate its resources and strengthen its presence in its northeast Florida
and southeast Georgia markets. At the close of business on June 25, 1998, SEBF
merged with and into SEB. The merger of the two bank subsidiaries reduced the
duplicative overhead costs associated with two separate entities.
The Company acquired the Richmond Hill office of Valdosta, Georgia-based Park
Avenue Bank on January 31, 2002. Certain loans, property and equipment, and
other assets with fair values of approximately $12,201,000 were acquired, while
deposits and other liabilities totaling approximately $4,270,000 were assumed.
Cash ballances applied towards the purchase approximated $8,000,000. Richmond
Hill is located approximately ten miles outside the greater Savannah area.
1
SBC Financial Services, Inc. (SBCF) was formed in 1998 to sell insurance and
other financial products to the public. Currently, SBCF is licensed to sell
insurance and investment products in Georgia and Florida. The insurance
subsidiary had minimal impact on the Company's financial condition and results
of operations in 2001 and 2000.
2. Business. SEB, the Company's commercial bank subsidiary, offers a wide range
of services to meet the financial needs of its customer base through its branch
and atm network in northeast Florida and southeast Georgia. SEB's primary
business comprises traditional deposit and credit services as well as official
check services, wire transfers, and safe deposit box rentals. Deposit services
offered include time certificates plus NOW, money market, savings, and
individual retirement accounts. Credit services include commercial and
installment loans, long-term mortgage originations, credit cards, and standby
letters of credit. Commercial loans are made primarily to fund real estate
construction and to meet the needs of customers engaged in the agriculture,
timber, seafood, and other industries. Installment loans are made for both
consumer and non-consumer purposes. At December 31, 2001, SEB operated fourteen
full-service banking offices with total assets exceeding $354 million. A list of
SEB offices is provided in Part I, Item 2. SBCF, the Company's insurance
subsidiary, 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.
The Federal Reserve Bank of Atlanta is the principal correspondent of the
Company's bank subsidiary. SEB also maintains accounts with other correspondent
banks in Georgia, Florida, and Alabama. SBCF sells insurance and investment
products primarily in association with two subagents, AXA Advisors, LLC and
Palmer & Cay. In exchange for providing marketing and other support, the
subagents receive a varying percentage of the commissions earned on sales.
At December 31, 2001, the Company and its subsidiaries had 152 and 15 full and
part-time employees. Three of these employees are licensed to sell insurance to
customers in Georgia or Florida.
3. Competition. The Company has direct competition with other commercial banks,
savings and loan associations, and credit unions in each market area. Since
mid-1998, intrastate branching restrictions in all of the Company's market areas
have been lifted. The removal of intrastate branching restrictions has given the
Company opportunities for growth but also intensified competition as other banks
branch into the Company's markets.
The Company faces increasingly aggressive competition from other domestic
lending institutions and from numerous other providers of financial services.
The ability of nonbanking financial institutions to provide services previously
reserved for commercial banks has intensified competition. Because nonbanking
financial institutions are not subject to the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater
flexibility and lower cost structures. Recent abolishment of certain
restrictions between banks, securities firms, and insurance companies will
further intensify competition; refer to the Supervision and Regulation section
of this Item for more details.
4. Supervision and Regulation. As a bank holding company, the Company is subject
to the supervision and regulation of the Board of Governors of the Federal
Reserve System (Federal Reserve). SEB, an insured state non-member bank
chartered by the Georgia Department of Banking and Finance (GDBF), is subject to
supervision and regulation by the GDBF and the Federal Deposit Insurance
Corporation (FDIC). SEB is subject to various requirements and restrictions
under federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be made and
the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Numerous consumer laws
2
and regulations also affect the operations of SEB. In addition to the impact of
regulation, the Company is also significantly affected by the actions of the
Federal Reserve as it attempts to control the money supply and credit
availability in order to influence the economy. The Company's nonbank subsidiary
is regulated and supervised by applicable bank, insurance, and various other
regulatory agencies.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, bank holding companies from any state may acquire banks located in any
other state, subject to certain conditions, including concentration limits. In
addition, a bank may establish branches across state lines by merging with a
bank in another state, subject to certain restrictions.
A number of obligations and restrictions imposed on bank holding companies and
their bank subsidiaries by federal law and regulatory policy are designed to
reduce potential loss exposure to bank depositors and to the FDIC insurance fund
in the event of actual or possible default. For example, under Federal Reserve
policy with respect to bank holding company operations, the Company is expected
to serve as a source of financial strength to, and commit resources to support,
its bank subsidiary where it might refuse absent such policy. The federal
banking agencies have broad powers under current federal law to take prompt
corrective action to resolve problems of insured depository institutions. The
extent of these powers depends upon whether the applicable institution is
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized," as those terms are defined
under regulations issued by each of the federal banking agencies. The Company
and its bank subsidiary are considered "well-capitalized" by their respective
federal banking regulators. The Company's capital position is delineated in Note
14 to the Consolidated Financial Statements and in the Capital Adequacy section
of Part II, Item 7.
There are various legal and regulatory limits on the amount of dividends and
other funds the bank subsidiary may pay or otherwise supply the Company.
Additionally, federal and state regulatory agencies have the authority to
prevent a bank or bank holding company from engaging in any activity that, in
the opinion of the agency, would constitute an unsafe or unsound practice.
On November 12, 1999, financial modernization legislation known as the
Gramm-Leach-Bliley Act (the Act) was signed into law. The Act created a new type
of financial services company called a financial holding company. A bank holding
company which elects to become a financial holding company may engage in
expanded financial activities, including insurance and securities underwriting,
and may also acquire securities and insurance companies, subject in each case to
certain conditions. Securities firms and insurance companies may also choose to
establish or become financial holding companies and thereby acquire banks, also
subject to certain conditions. The abolishment of certain restrictions between
banks, securities firms, and insurance companies provides both challenges and
opportunities to the Company. The Company has no present intention to change its
status from a bank holding company to a financial holding company under the Act,
major provisions of which became effective in 2000.
There have been a number of legislative and regulatory proposals that would have
an impact on the operation of bank holding companies and their subsidiaries. It
is impossible to predict whether or in what form these proposals may be adopted
in the future and, if adopted, what their effect will be on the Company.
Item 2. Properties.
Company Property. The Company's executive offices are located in SEB's main
banking office at 1010 Northway Street, Darien, Georgia.
3
Banking Facilities. Besides its main office in Darien, SEB has thirteen branch
offices in northeast Florida and southeast Georgia as shown in the table below:
================================================================================
Branch Locations
================================================================================
Florida 1948 S. Kings Road 1376 E. State Road 200
Nassau County Nassau County
Callahan, Florida 32011 Yulee, Florida 32097
7964 W. County Road 108
Nassau County
Hilliard, Florida 32046
================================================================================
Georgia 620 S. Peterson Street Highway 40 East
Coffee County Camden County
Douglas, Georgia 31533 Kingsland, Georgia 31548
Highway 17 110 Bacon Street
McIntosh County Brantley County
Eulonia, Georgia 31331 Nahunta, Georgia 31553
101 Love Street 910 Van Streat Highway
Charlton County Coffee County
Folkston, Georgia 31537 Nicholls, Georgia 31554
14 Hinson Street 2512 Osborne Road
Jeff Davis County Camden County
Hazlehurst, Georgia 31539 St. Marys, Georgia 31558
107 E. Main Street Bedell Avenue & Highway 17
Brantley County Camden County
Hoboken, Georgia 31542 Woodbine, Georgia 31569
================================================================================
At December 31, 2001, the Company owned all of its banking facilities. See Note
5 to the Consolidated Financial Statements for further property information.
Insurance Facilities. SBCF leases office space from SEB at 1010 Northway Street,
Darien, Georgia.
Item 3. Legal Proceedings.
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
Item 4. Submission Of Matters to a Vote of Security Holders.
None
4
PART II
Item 5. Market for the Registrant's Common Equity And Related Shareholder
Matters.
The Company's stock trades publicly over-the-counter under the symbol "SEBC."
The high and low sales prices shown below are based on information being posted
to electronic bulletin boards by market-makers in the Company's stock. These
market prices may include dealer mark-up, markdown, and/or commission. Prices
paid on treasury stock purchases are excluded from these results.
The table below sets forth the high and low sales prices and the cash dividends
declared on the Company's common stock during the periods indicated:
================================================================================
Sales Price
Market Sales Price & -------------------------------- Dividends
Dividends Declared Quarter High Low Declared
================================================================================
2001 4th 15 1/2 13 1/16 0.67
3rd 15 3/4 14 19/64 0.11
2nd 16 1/2 13 0.11
1st 15 3/4 14 1/4 0.11
2000 4th 15 9/16 14 0.21
3rd 16 1/4 14 1/2 0.10
2nd 16 3/8 13 1/4 0.10
1st 17 3/4 12 0.10
1999 4th 17 3/4 16 1/2 0.17
3rd 20 18 1/8 0.10
2nd 19 3/4 18 5/8 0.10
1st 20 18 1/4 0.10
================================================================================
The Company had approximately 500 shareholders of record at December 31, 2001.
The Company has paid regular cash dividends on a quarterly basis every year
since its inception. Additionally, in recent years, the Company has declared a
special dividend in the fourth quarter of each year. Management anticipates that
the Company will continue to pay regular and special cash dividends. See the
Capital Adequacy section of Part II, Item 7 for particulars on an extraordinary
cash dividend declared by the Company in the 2002 fourth quarter.
The Company is a legal entity separate and distinct from its subsidiaries, and
its revenues depend primarily on the payment of dividends from its subsidiaries.
State banking regulations limit the amount of dividends the Company's bank
subsidiary may pay without prior approval of the regulatory agencies. The amount
of cash dividends available from the bank subsidiary for payment in 2002 without
such prior approval is approximately $2,092,000.
5
Item 6. Selected Consolidated Financial Data.
Selected financial data for the last five years is provided in the table below:
====================================================================================================================
Financial Data 2001 2000 1999 1998 1997
====================================================================================================================
(Dollars in thousands except per share data)
At December 31:
Total assets $355,215 $349,579 $340,545 $337,933 $347,898
Loans, net of unearned income 163,348 173,802 165,994 164,761 186,823
Allowance for loan losses 3,135 3,160 3,223 3,407 3,705
Deposits 298,707 295,736 290,284 292,697 302,369
Long-term debt 5,000 5,000 -- -- --
Treasury stock 3,248 2,486 -- -- --
Realized stockholders' equity 44,656 44,710 44,028 40,861 37,854
====================================================================================================================
For the Year:
Net interest income $ 14,616 $ 15,539 $ 15,084 $ 15,217 $ 16,391
Provision for loan losses 1,200 1,200 1,200 1,230 1,715
Net income 4,097 4,935 4,849 4,393 4,722
Common dividends paid 1,842 1,654 1,743 1,182 1,122
====================================================================================================================
Per Common Share:
Basic earnings $ 1.21 $ 1.42 $ 1.35 $ 1.23 $ 1.32
Dividends declared 1.00 0.51 0.47 0.38 2/3 0.32
Book value 13.19 13.01 12.30 11.41 10.57
====================================================================================================================
Financial Ratios:
Return on average assets 1.15% 1.41% 1.43% 1.35% 1.40%
Return on beginning equity 9.16 11.21 11.87 11.60 13.78
Tier 1 capital ratio 23.45 23.05 23.56 22.37 17.91
Total capital ratio 24.71 24.30 24.82 23.62 19.16
Tier 1 leverage ratio 12.32 12.56 12.57 11.78 10.31
====================================================================================================================
The book value per share and equity ratios exclude the effects of mark-to-market
accounting for investment securities. In accordance with generally accepted
accounting principles, prior period amounts have not been restated to reflect
the treasury stock purchases made in 2001 and 2000.
Business Combinations and Divestitures
The financial data in the table above reflects the following divestiture:
. On January 16, 1998, the Company sold its banking offices in
Alachua, Gainesville, and Jonesville, Florida. Cash, loans, and
fixed assets sold by SEB aggregated approximately $32,159,000;
deposits and other liabilities divested totaled $33,646,000. The
Company recognized a pretax gain of $101,908 but after-tax loss of
$457,823 on the sale of these branches. The sale of these locations
has enabled the Company to concentrate its resources and strengthen
its presence in its northeast Florida and southeast Georgia markets.
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Description of Business
Southeastern Banking Corporation (the Company), with assets of $355 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 fourteen branch locations 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 in 2001
and 2000.
Financial Condition
Consolidated assets totaled $355,214,815 at December 31, 2001, up $5,636,263 or
1.61% from year-end 2000. Investment securities were the predominant factor in
the 2001 results, increasing $12,564,787. A $10,454,094 reduction in loan
balances and a $2,970,516 increase in deposits, particularly noninterest-bearing
balances, precipitated the majority of the growth in investment securities.
Although the mix of earning assets shifted at year-end 2001 versus December 31,
2000, earning assets continued to approximate, overall, 92% of total assets.
During the year-earlier period, total assets grew 2.65% or $9,033,664. More than
86%, or $7.8 million, of the 2000 growth was attributable to improvements in net
loan balances. Increased deposits and other borrowings, including a $5 million
advance from the Federal Home Loan Bank (FHLB) funded the 2000 growth.
Additional details on FHLB advances and other funding sources are provided in
the Liquidity section of this Analysis.
Investment Securities
On a carrying value basis, investment securities increased $12.6 million or
8.66% since December 31, 2000. Purchases of securities during 2001 approximated
$113,886,000, and redemptions, $103,390,000. The high volume of securities
transactions was attributable to various issuers' exercise of call options as a
result of interest rate reductions during 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 26%, 6%, and 22% of
the portfolio at year-end 2001 from 13%, 0%, and 18% at December 31, 2000.
Overall, securities aggregated 48% of earning assets at December 31, 2001 versus
45% and 47% at December 31, 2000 and 1999. The amortized cost and estimated fair
value of investment securities are delineated in the table on the next page.
7
==============================================================================================
Investment Securities by Category Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
==============================================================================================
(In thousands)
Available-for-sale:
U. S. Government agencies $70,317 $ 1,346 $ 193 $71,470
Mortgage-backed securities 41,021 272 79 41,214
Corporates 9,765 123 43 9,845
----------------------------------------------------------------------------------------------
121,103 1,741 315 122,529
Held-to-maturity:
States and political subdivisions 35,091 614 254 35,451
----------------------------------------------------------------------------------------------
Total investment securities $156,194 $ 2,355 $ 569 $157,980
==============================================================================================
As shown, the market value of the securities portfolio exceeded the cost basis
at December 31, 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 6.01% or $10,454,094 at year-end 2001
compared to December 31, 2000. As a percent of deposits, net loans aggregated
54.69% at year-end 2001 versus 58.77% and 57.18% at December 31, 2000 and 1999.
A $14,110,318 drop in commercial loans outstanding was the chief factor in the
2001 decline. The decline in commercial loans outstanding resulted from multiple
factors, including normal pay-offs, the loss of several sizable loans to
competitors offering below market fixed rates over abnormally long repayment
periods, and less origination due to the current economic slowdown. Basically
all sectors of the commercial portfolio registered declines during 2001: Nonfarm
real estate loans fell $9,459,634; agricultural loans, $3,051,345; other
commercial/industrial loans, $350,625; and governmental loans, $1,248,714.
Consumer loans declined $4,951,210 or 14.00% at December 31, 2001 compared to
2000. A softening of consumer demand in the Company's trade areas was the
principal 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 10.21% or $791,443 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 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. Although balances in the commercial, consumer, and real estate-
construction portfolios fell, real estate-mortgage balances increased $9,103,024
during 2001.
Despite the current economic slowdown within our markets and overall declines in
loan balances during 2001, management is optimistic that loan volumes will
improve, albeit moderately, during 2002. Loans acquired from the Bank of
Richmond Hill, as discussed in later sections of this Analysis, will add $10
million to the loan portfolio during the 2002 first quarter. Strategies
implemented by management to increase loan production at other SEB locations
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 2000,
net loans grew $7,808,308 or 4.70%.
8
Growth in the commercial, real estate-construction, and real estate-mortgage
portfolios fueled the 2000 results. Loans outstanding are presented by type in
the table below:
================================================================================
Loans by Category
December 31, 2001 2000 1999
================================================================================
(In thousands)
Commercial, financial, and agricultural/1/ $ 56,065 $ 70,175 $ 67,515
Real estate - construction 6,959 7,750 3,161
Real estate - mortgage/2/ 70,361 61,257 59,656
Consumer, including credit cards 30,420 35,373 37,312
--------------------------------------------------------------------------------
Loans, gross 163,805 174,555 167,644
Unearned income 457 753 1,650
--------------------------------------------------------------------------------
Loans, net $163,348 $173,802 $165,994
================================================================================
/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 December 31, 2001 and 2000,
gross loans secured by real estate approximated $109,842,000 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 $17,874,000 at December 31, 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
$2,198,000, or 0.62% of total assets, at year-end 2001, down significantly, or
42.79%, from $3,842,000 at year-end 2000. Nonperforming loans fell more than
45%, or $1,564,000, while foreclosed real estate dropped a moderate $80,000 at
December 31, 2001. The fluctuation in nonperforming asset balances during 2001
resulted predominantly from a single commercial real estate loan. Specifically,
nonaccrual balances at December 31, 2000 included an impaired real estate loan
totaling approximately $2,300,000. 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.
During the third quarter, 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 $125,000 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 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 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 mid-2002. Additionally, during the latter half
9
of 2001, loans to four other borrowers averaging $212,000 each were transferred
to nonaccrual status. Due to the underlying collateral coverage, no material
losses, if any, are expected on these credits. 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 7.50X the nonperforming loans balance at
year-end 2001 versus 2.76X a year ago. Management is unaware of any other
material developments in nonperforming assets or large, significant potential
problem loans at December 31, 2001 that should be presented or otherwise
discussed.
Loans past due 90 plus days totaled $1,528,000, or less than 1% of net loans, at
year-end 2001. Management is unaware of any material concentrations within these
past due balances. The table below provides further information about
nonperforming assets and loans past due 90 days or more:
================================================================================
Nonperforming Assets
December 31, 2001 2000 1999
================================================================================
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural $1,275 $2,894 $ 492
Real estate - construction -- -- --
Real estate - mortgage 588 189 175
Consumer, including credit cards 18 21 18
--------------------------------------------------------------------------------
Total nonaccrual loans 1,881 3,104 685
Restructured loans/1/ -- 341 357
--------------------------------------------------------------------------------
Total nonperforming loans 1,881 3,445 1,042
Foreclosed real estate/2/ 317 397 858
--------------------------------------------------------------------------------
Total nonperforming assets $2,198 $3,842 $1,900
--------------------------------------------------------------------------------
Accruing loans past due 90 days or more $1,528 $1,191 $1,467
================================================================================
/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. 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.
10
Allowance for Loan Losses
The Company maintains an allowance for loan losses available to absorb inherent
losses in the loan portfolio. At year-end 2001, the Company's allowance totaled
$3,134,594, or 1.92% of period-end loans. Net charge-offs totaled $1,225,000,
down slightly, or $38,000, from 2000, which was down $121,000 from 1999.
Approximately 24%, or $300,000, of 2001 charge-offs and 32% of 2000 charge-offs
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. Activity in the allowance is
presented in the table below:
============================================================================================
Allowance for Loan Losses
Years Ended December 31, 2001 2000 1999
============================================================================================
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,160 $ 3,223 $ 3,407
Provision for loan losses 1,200 1,200 1,200
Charge-offs:
Commercial, financial, and agricultural 698 557 496
Real estate - construction -- -- 351
Real estate - mortgage 132 298 213
Consumer, including credit cards 720 817 950
--------------------------------------------------------------------------------------------
Total charge-offs 1,550 1,672 2,010
--------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 38 46 258
Real estate - construction -- -- --
Real estate - mortgage 13 20 27
Consumer, including credit cards 274 343 341
--------------------------------------------------------------------------------------------
Total recoveries 325 409 626
--------------------------------------------------------------------------------------------
Net charge-offs 1,225 1,263 1,384
--------------------------------------------------------------------------------------------
Allowance for loan losses at December 31 $ 3,135 $ 3,160 $ 3,223
============================================================================================
Net loans outstanding/1/ at December 31 $163,348 $173,802 $165,994
============================================================================================
Average net loans outstanding/1/ at December 31 $164,402 $172,768 $163,124
============================================================================================
Ratios:
Allowance to net loans 1.92% 1.82% 1.94%
============================================================================================
Net charge-offs to average loans 0.75% 0.73% 0.85%
============================================================================================
Provision to average loans 0.73% 0.69% 0.74%
============================================================================================
/1/ Net of unearned income
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
11
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 December 31, 2001. The acquisition of the Bank of
Richmond Hill, as discussed in the next section of this Analysis, did not
materially affect the allowance for loan losses.
Other Commitments
On October 15, 2001, the Company signed a definitive agreement to acquire the
Richmond Hill office of Valdosta, Georgia-based Park Avenue Bank. This
transaction closed on January 31, 2002. Under the agreement, the Company
acquired 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.
Other than the purchase of property and equipment in conjunction with its
acquisition of the Bank of Richmond Hill, management has also contracted for
future branch sites in Glynn County, Georgia. Renovation of the Darien office is
also planned. The total cost of these projects approximates $2.5 million, of
which $1.5 million is associated with the Richmond Hill acquisition.
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 December 31, 2001, loans/1/ and investment securities with carrying values
exceeding $64 million and $10 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 88% of
the funding base at year-end 2001, up 3 basis points from 2000 levels. Borrowed
funds, which variously encompass U.S. Treasury demand notes, federal funds
purchased, and FHLB advances, totaled $5,493,153 at year-end 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 December 31, 2001 totaled
$3,000,000, of which $493,153 was outstanding. Unused borrowings
12
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 year-end 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 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 exceeded $298 million at year-end 2001, up $2,970,516 or 1.00% from
December 31, 2000. The majority, or $2,700,605, of the deposit growth at
year-end 2001 was attributable to noninterest-bearing balances. Overall,
noninterest-bearing deposits comprised 19.36%, and interest-bearing deposits,
80.64%, of total deposits at December 31, 2001. The distribution of
interest-bearing balances at December 31, 2001, 2000, and 1999 is shown in the
table below:
==============================================================================================================
2001 2000 1999
-------------------- -------------------- --------------------
Deposits Percent Percent Percent
December 31, Balances of Total Balances of Total Balances of Total
==============================================================================================================
(Dollars in thousands)
Interest-bearing demand deposits/1/ $ 54,050 22.44% $ 50,309 20.91% $ 45,569 19.18%
Savings 84,140 34.93% 73,781 30.66% 72,348 30.45%
Time certificates * $100,000 66,145 27.46% 72,207 30.01% 75,251 31.67%
Time certificates *** $100,000 36,546 15.17% 44,314 18.42% 44,445 18.70%
--------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $240,881 100.00% $240,611 100.00% $237,613 100.00%
==============================================================================================================
/1/ NOW and money market accounts
* Indicates "less than" symbol
*** Indicates "greater than or equal to" symbol
The composition of average deposits and the fluctuations therein at December 31
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 year-end 2001,
unchanged from 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 anytime at the
option of the FHLB. Year-to-date, interest expense on the advance approximated
$300,000. Mortgage-backed securities with aggregate carrying values of
approximately $9.4 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
13
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 below provides a snapshot of the
Company's interest rate sensitivity position at December 31, 2001.
=================================================================================================================
Repricing Within
-----------------------------------------------------
More
Interest Rate Sensitivity 0 - 3 4 - 12 One - Five Than Five
December 31, 2001 Months Months Years Years Total
=================================================================================================================
(Dollars in thousands)
Interest Rate Sensitive Assets
Federal funds sold $ 7,580 $ 7,580
Securities/1/ 4,591 $ 6,666 $ 92,525 $ 52,412 156,194
Loans, gross/2/ 65,386 22,001 54,470 20,067 161,924
-----------------------------------------------------------------------------------------------------------------
Total interest rate sensitive assets 77,557 28,667 146,995 72,479 325,698
-----------------------------------------------------------------------------------------------------------------
Interest Rate Sensitive Liabilities
Deposits/3/ 168,276 51,398 21,120 87 240,881
U.S. Treasury demand note 493 -- -- -- 493
Federal Home Loan Bank advances -- -- 5,000 5,000
-----------------------------------------------------------------------------------------------------------------
Total interest rate sensitive
liabilities 168,769 51,398 21,120 5,087 246,374
-----------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (91,212) $ (22,731) $ 125,875 $ 67,392 $ 79,324
=================================================================================================================
Cumulative gap $ (91,212) $(113,943) $ 11,932 $ 79,324
=================================================================================================================
Ratio of cumulative gap to total
rate sensitive assets (28.01)% (34.98)% 3.66% 24.35%
=================================================================================================================
Ratio of cumulative rate sensitive
assets to rate sensitive liabilities 45.95% 48.24% 104.95% 132.20%
=================================================================================================================
Cumulative gap at December 31, 2000 $ (91,308) $(117,955) $ 15,283 $ 73,662
=================================================================================================================
Cumulative gap at December 31, 1999 $ (99,992) $(142,141) $ 3,459 $ 75,466
=================================================================================================================
/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 year-end 2001, totaling $(91,212)
at three months and $(113,943) through one-year. Excluding traditionally
nonvolatile NOW and savings balances from the gap calculation, the cumulative
gap at December 31, 2001 totaled $24,125 at three months and $1,394 at twelve
months. As expected,
14
the gap position widened moderately from earlier positions in 2001, closely
resembling 2000 levels at year-end. The high volume of federal funds sold that
accrued from reductions in loans and higher deposits throughout 2001 has been
largely reallocated to other earning assets. Federal funds sold balances are
expected to decline further, on average, in 2002 due to the purchase of the Bank
of Richmond Hill and anticipated loan growth. 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 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 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, can materially
impact estimated results. As further discussed in the Operations section of this
Analysis, net interest income declined $923,346 or 5.94% in 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.
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).
15
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 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:
======================================================================================
Capital Ratios
December 31, 2001 2000 1999
======================================================================================
(Dollars in thousands)
Tier 1 capital:
Realized shareholders' equity $ 44,656 $ 44,710 $ 44,028
Intangible assets and other adjustments (905) (1,117) (1,309)
--------------------------------------------------------------------------------------
Total Tier 1 capital 43,751 43,593 42,719
--------------------------------------------------------------------------------------
Tier 2 capital:
Portion of allowance for loan losses 2,342 2,374 2,278
Allowable long-term debt -- -- --
--------------------------------------------------------------------------------------
Total Tier 2 capital 2,342 2,374 2,278
--------------------------------------------------------------------------------------
Total risk-based capital $ 46,093 $ 45,967 $ 44,997
======================================================================================
Risk-weighted assets $ 186,565 $ 189,139 $ 181,326
======================================================================================
Risk-based ratios:
Tier 1 capital 23.45% 23.05% 23.56%
======================================================================================
Total risk-based capital 24.71% 24.30% 24.82%
======================================================================================
Tier 1 leverage ratio 12.32% 12.56% 12.57%
======================================================================================
Realized shareholders' equity to assets 12.60% 12.78% 12.82%
======================================================================================
On a per share basis, realized book value grew $0.19 during 2001 to $13.19 at
year-end. Dividends declared totaled $1.00, up 96% or $0.49 from 2000, which was
up 8.51% from 1999. The most significant factor affecting comparative results
was a $0.56 extraordinary dividend declared in the 2001 fourth quarter. Although
the Company's continuing strong capital position enabled the payment of this
dividend, management does not anticipate payment of extraordinary dividends on a
regular basis. For more 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 $1,310,930 at year-end 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 in 2001, an additional 51,226 shares on the open market and through private
transactions at an average price of $14.87 per share. Since inception, the
treasury stock program has reduced the Company's outstanding common stock from
3,580,797 shares to 3,385,470 shares. 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
16
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 regulations limit the
amount of dividends SEB may pay without prior approval of the regulatory
agencies. In 2001, SEB paid $4,500,000 in cash dividends to the Company. A
$2,000,000 special dividend approved by the regulators enabled the Company, in
turn, to pay the extraordinary dividend described in the preceding section. The
additional $2,500,000 payout represented regular cash dividends available to the
Company in 2001 without prior regulatory approval. Cash dividends available from
SEB for payment in 2002 without similar approval approximate $2,092,000. 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 totaled $4,097,126 in 2001, down $837,968 or 16.98% from 2000. On a
per share basis, income for the year declined $0.21 to $1.21 in 2001 from $1.42
in 2000. Similarly, the return on beginning equity dropped 205 basis points to
9.16% in 2001 from 11.21% in 2000. The return on average assets for the same
periods totaled 1.15% and 1.41%. A 5.94%, or $923,346, drop in net interest
income was the overriding factor in the 2001 results. Earnings increased $85,929
or 1.77% in 2000 compared to 1999. A 3.02%, or $455,177, improvement in net
interest earnings, offset by a $379,319 increase in employee costs, was the most
significant factor affecting 2000-1999 comparative results. Variations in net
interest results are further discussed in the next subsection of this Analysis.
Net Interest Income
Net interest income fell $923,346 or 5.94% in 2001 compared to 2000. Likewise,
the net interest margin and spread fell to 4.63% and 3.55%, respectively, from
4.98% and 3.82% a year ago. Interest income on all earning assets other than
federal funds sold declined from 2000 results. Specifically, interest earnings
on loans, investment securities, and other earning assets declined $1,951,716,
$250,943, and $9,948 from results in 2000 while earnings on federal funds sold
jumped $603,282. Shifts in earning assets and overall declines in asset yields
precipitated the 2001 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 earlier levels in 2001 and are
expected to further decline, on average, during 2002 as funds are reallocated to
other earning assets. Interest expense on deposits and borrowed funds declined
an appreciable $685,979 or 5.85% during 2001 versus 2000. On average, cost of
funds totaled 4.40%, down 34 basis points from 2000. 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 35% of total
loans at year-end 2001. Net interest income grew $455,177 or 3.02% in 2000
compared to 1999. Higher loan volumes, or average asset balances, produced most
of the 2000 improvement.
17
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 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 each of the last three years are
provided in the table on the next page.
Noninterest Income and Expense
Noninterest income grew $32,982, or 0.97%, in 2001 compared to 2000. A $109,957
increase in other operating income, negated in part by declines in service
charges on deposit accounts, was the principal factor in the 2001 results.
Mortgage origination fees led the 2001 improvement in other operating income,
growing an appreciative $153,388. By type and amount, the chief components of
other operating income in 2001 were mortgage origination fees, $345,328;
commissions on the sale of credit life insurance (generated by SEB), $198,627;
surcharge fees - atm, $123,368; safe deposit box rentals, $74,828; and income on
sale of check products, $62,698. Combined, these five income items comprised
73.01% of other operating income in 2001. In 2000, these same five income
components comprised approximately 65% of other operating income. Salaries and
employee benefits increased less than 1%, or $60,763, in 2001. The vast
majority, or 83%, of employee expenses remained concentrated in salaries and
other direct compensation, including related payroll taxes, in 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 in 2001 and 2000. When compared to the prior year, net
occupancy and equipment expense increased 6.34% or $123,302 in 2001 and 5.46% in
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 $189,880 or 6.94% in
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 2001 fluctuation. Other operating expenses fell $192,692 or
6.58% in 2000 compared to 1999. A net improvement on sales of foreclosed real
estate was the key element in the 2000 results. Besides marketing and supplies
expense, which in 2001 approximated $234,000 and $314,000, and in 2000, $293,000
and $280,000, no individual component of other operating expenses aggregated or
exceeded 10% of the total in 2001 or 2000.
18
====================================================================================================================================
2001 2000 1999
---------------------------- --------------------------- ----------------------------
Average Balances/5/ Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Years Ended December 31, Balances Expense Rates Balances Expense Rates Balances Expense Rates
====================================================================================================================================
(Dollars in thousands)
Assets
Cash and due from banks $ 13,673 $ 13,099 $ 12,379
Interest-earning assets:
Loans, net/1/, /2, /3/ 164,402 $16,311 9.92% 172,768 $18,325 10.61% 163,124 $17,160 10.52%
Federal funds sold 20,568 829 4.03% 3,727 227 6.09% 6,813 325 4.77%
Taxable investment securities 118,160 7,116 6.02% 124,702 7,487 6.02% 121,743 7,195 5.93%
Tax-exempt investment securities/3/ 27,783 2,065 7.43% 24,787 1,883 7.60% 24,880 1,923 7.73%
Other interest-earning assets 1,281 80 6.25% 1,281 90 7.03% 1,043 94 9.01%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 332,194 26,401 7.95% 327,265 28,012 8.56% 317,603 26,697 8.42%
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (2,993) (3,500) (3,197)
Premises and equipment, net 6,581 6,885 6,632
Intangible and other assets 6,346 7,555 7,214
Unrealized gains (losses) on
investment securities 956 (3,733) (1,512)
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $356,757 $347,571 $339,119
====================================================================================================================================
Liabilities and
Shareholders' Equity
Noninterest-bearing deposits $ 56,445 $ 55,487 $54,438
Interest-bearing liabilities:
Interest-bearing demand deposits/4/ 51,472 $ 1,460 2.84% 46,539 $ 1,325 2.85% 43,510 $ 1,218 2.80%
Savings 79,062 2,756 3.49% 75,728 3,255 4.30% 74,495 2,974 3.99%
Time deposits 114,345 6,491 5.68% 116,869 6,620 5.66% 120,523 6,641 5.51%
Federal funds purchased -- 801 52 6.49% 553 30 5.35%
U. S. Treasury demand note 846 30 3.55% 846 53 6.26% 828 39 4.75%
Federal Home Loan Bank advances 5,000 300 6.00% 6,452 418 6.48% --
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 250,725 11,037 4.40% 247,235 11,723 4.74% 239,909 10,902 4.54%
------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 3,501 3,169 3,154
Realized shareholders' equity 45,455 44,144 42,616
Unrealized gains (losses) on
investment securities, net of tax 631 (2,464) (998)
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $356,757 $347,571 $339,119
====================================================================================================================================
Excess of interest-earning assets
over interest-bearing liabilities $ 81,469 $ 80,030 $ 77,694
====================================================================================================================================
Interest rate spread 3.55% 3.82% 3.88%
====================================================================================================================================
Net interest income $15,364 $16,289 $15,795
====================================================================================================================================
Net interest margin 4.63% 4.98% 4.97%
====================================================================================================================================
/1/ Average loans are shown net of unearned income. Nonperforming loans are
included.
/2/ Interest income includes loan fees of approximately $1,218,000,
$1,316,000, and $1,431,000 in 2001, 2000, and 1999.
/3/ Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. The
taxable-equivalent amounts included in the above table aggregated
approximately $748,000, $749,000, and $711,000 in 2001, 2000, and 1999. No
adjustment has been made for any state tax benefits.
/4/ NOW and money market accounts.
/5/ Averages presented generally represent average daily balances.
19
Quarterly Results (Unaudited)
The following tables set forth certain consolidated quarterly financial
information. This information is derived from unaudited consolidated financial
statements which include, in the opinion of management, all normal recurring
adjustments necessary for a fair presentation. The results for any quarter are
not necessarily indicative of trends or results for any future period.
============================================================================================================
Selected Quarterly Financial Data
2001 Quarter Ended December 31 September 30 June 30 March 31
============================================================================================================
(Dollars in thousands except per share data)
Interest income $5,987 $6,303 $6,625 $6,739
Interest expense 2,339 2,746 2,932 3,021
Net interest income 3,648 3,557 3,693 3,718
Provision for loan losses 300 300 300 300
Investment securities gains 10 5 -- --
Income before income taxes 1,410 1,414 1,404 1,430
Net income 1,052 1,025 1,008 1,012
Basic earnings per share $ 0.31 $ 0.31 $ 0.29 $ 0.30
============================================================================================================
============================================================================================================
Selected Quarterly Financial Data
2000 Quarter Ended December 31 September 30 June 30 March 31
============================================================================================================
(Dollars in thousands except per share data)
Interest income $6,853 6,906 $6,871 $6,632
Interest expense 3,079 3,064 2,881 2,700
Net interest income 3,774 3,842 3,990 3,932
Provision for loan losses 300 300 300 300
Investment securities gains -- -- -- 7
Income before income taxes 1,683 1,633 1,799 1,807
Net income 1,245 1,153 1,270 1,268
Basic earnings per share $ 0.36 $ 0.34 $ 0.37 $ 0.35
============================================================================================================
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. At December 31, 2001, goodwill balances totaled $256,775; related
amortization for the year totaled $49,288. 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
20
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. 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
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
The discussion on market risk is included in the Interest Rate and Market
Risk/Interest Rate Sensitivity section of Part II, Item 7.
Item 8. Financial Statements and Supplementary Data.
The response to this Item commences on page 32. Selected Statistical Information
begins on page 23. Both the financial statements and statistical information
presented should be read in conjunction with the accompanying management
discussion of Southeastern Banking Corporation and subsidiaries.
[Remainder of page intentionally left blank.]
22
Southeastern Banking Corporation
Selected Statistical Information
Analysis of Changes in Net Interest Income
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about average balances, income/expense, and
average yields earned and rates paid on interest-earning assets and
interest-bearing liabilities for each of the last three years. The table below
summarizes the changes in interest income and interest expense attributable to
volume and rates in 2001 and 2000.
=======================================================================================================
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
Interest -------------------------------- ------------------------------
Differential/1/ Volume Rate Net Volume Rate Net
=======================================================================================================
(In thousands)
Interest income
Loans/2/, /3/ $(863) $(1,151) $(2,014) $1,022 $143 $1,165
Federal funds sold 703 (101) 602 (173) 75 (98)
Taxable investment securities (371) -- (371) 177 115 292
Tax-exempt investment securities/3/ 223 (41) 182 (7) (33) (40)
Other interest-earning assets -- (10) (10) 19 (23) (4)
-------------------------------------------------------------------------------------------------------
Total interest income (308) (1,303) (1,611) 1,038 277 1,315
-------------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing demand deposits/4/ 140 (5) 135 86 21 107
Savings 138 (637) (499) 50 231 281
Time deposits (143) 14 (129) (204) 183 (21)
Federal funds purchased/5/ (52) -- (52) 15 7 22
U. S. Treasury demand note -- (23) (23) 1 13 14
Federal Home Loan Bank Advances/5/ (89) (29) (118) 418 -- 418
-------------------------------------------------------------------------------------------------------
Total interest expense (6) (680) (686) 366 455 821
-------------------------------------------------------------------------------------------------------
Net change in net interest income $(302) $(623) $(925) $672 $(178) $494
=======================================================================================================
/1/ Changes in net interest income are attributed to either changes in average
balances (volume change) or changes in average rates (rate change) for
earning assets and sources of funds on which interest is received or paid.
Volume change is calculated as change in volume times the previous rate
while rate change is change in rate times the previous volume. The
rate/volume change, change in rate times change in volume, is allocated
between volume change and rate change at the ratio each component bears to
the absolute value of their total.
/2/ Includes loan fees. See the average balances table included in the
Operations section of Part II, Item 7 for more details.
/3/ Interest income on tax-exempt loans and securities is presented on a
taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustments have been made for any state tax benefits or the nondeductible
portion of interest expense.
/4/ NOW and money market accounts.
/5/ The entire change in net interest income attributable to the Company's
initial borrowings under these credit facilities has been allocated to the
change in volume. Similarly, when these facilities are unutilized in
subsequent years, the change in net interest income is allocated to the
change in volume.
23
Southeastern Banking Corporation
Selected Statistical Information
Investment Securities
Investment securities available-for-sale (carried at estimated fair value) and
held-to-maturity (carried at amortized cost) for each of the last three years
are presented in the table below. The maturity distribution of these securities
and their weighted average yields are presented in an additional table on the
next page.
==============================================================================================
Investment Securities by Category Amortized Fair Unrealized Unrealized
At December 31, Cost Value Gains Losses
==============================================================================================
(In thousands)
Available-for-sale
U. S. Treasury and
U.S. Government agencies
2001 $ 70,317 $ 71,470 $1,346 $ 193
2000 100,085 99,840 275 520
1999 98,408 95,151 7 3,264
Mortgage-backed securities
2001 41,021 41,214 272 79
2000 18,850 18,535 11 326
1999 22,753 21,655 9 1,107
Corporates
2001 9,765 9,845 123 43
2000 -- -- -- --
1999 -- -- -- --
----------------------------------------------------------------------------------------------
Total available-for-sale
2001 121,103 122,529 1,741 315
2000 118,935 118,375 286 846
1999 121,161 116,806 16 4,371
Held-to-maturity
States and political subdivisions
2001 35,091 35,451 614 254
2000 26,679 26,940 444 183
1999 28,018 27,476 250 792
----------------------------------------------------------------------------------------------
Total investment securities
2001 $156,194 $157,980 $2,355 $ 569
2000 145,614 145,315 730 1,029
1999 149,179 144,282 266 5,163
==============================================================================================
24
Southeastern Banking Corporation
Selected Statistical Information
The distribution of maturities and the weighted average yields of debt
securities at December 31, 2001 are shown in the table below:
========================================================================================================
Maturity Distribution
of Investment Securities 1 Year 1 - 5 5 - 10 After 10
December 31, 2001 or Less Years Years Years Total
========================================================================================================
(Dollars in thousands)
Distribution of maturities
Amortized cost:
U.S. Treasury and
U.S. Government agencies $ 8,239 $49,407 $12,671 -- $ 70,317
Mortgage-backed securities/1/ 164 33,819 7,038 -- 41,021
Corporates 760 4,405 4,600 -- 9,765
States and political subdivisions 1,934 5,053 12,295 $15,809 35,091
--------------------------------------------------------------------------------------------------------
Total debt securities $11,097 $92,684 $36,604 $15,809 $156,194
========================================================================================================
Fair value:
U.S. Treasury and
U.S. Government agencies $ 8,341 $50,255 $12,874 -- $ 71,470
Mortgage-backed securities/1/ 165 34,006 7,043 -- 41,214
Corporates 772 4,425 4,648 -- 9,845
States and political subdivisions 1,952 5,174 12,545 $15,780 35,451
--------------------------------------------------------------------------------------------------------
Total debt securities $11,230 $93,860 $37,110 $15,780 $157,980
========================================================================================================
Weighted average yield:
U.S. Treasury and
U.S. Government agencies 5.61% 5.07% 6.01% -- 5.30%
Mortgage-backed securities/1/ 5.19% 5.77% 5.91% -- 5.79%
Corporates 5.20% 5.46% 6.72% -- 6.04%
States and political subdivisions/2/ 6.96% 7.31% 7.18% 7.01% 7.11%
--------------------------------------------------------------------------------------------------------
Total debt securities 5.80% 5.46% 6.48% 7.01% 5.88%
========================================================================================================
/1/ Distribution of maturities for mortgage-backed securities is based on
expected average lives which may be different from the contractual terms.
/2/ The weighted average yields for tax-exempt securities have been calculated
on a taxable-equivalent basis, using a federal income tax rate of 34%. No
adjustments have been made for any state tax benefits or the nondeductible
portion of interest expense pertaining to tax-exempt income.
The Company had no investments in the obligations of any state or municipality
which exceeded 10% of shareholders' equity at December 31, 2001.
25
Southeastern Banking Corporation
Selected Statistical Information
Loans
Loans outstanding are presented by type below:
======================================================================================================
Loans by Category
At December 31, 2001 2000 1999 1998 1997
======================================================================================================
(In thousands)
Commercial, financial, and agricultural/1/ $ 56,065 $ 70,175 $ 67,515 $ 69,125 $ 92,587
Real estate - construction 6,959 7,750 3,161 2,318 4,029
Real estate - mortgage/2/ 70,361 61,257 59,656 60,035 59,652
Consumer, including credit cards 30,420 35,373 37,312 36,566 34,187
------------------------------------------------------------------------------------------------------
Loans, gross 163,805 174,555 167,644 168,044 190,455
Unearned income 457 753 1,650 3,283 3,632
------------------------------------------------------------------------------------------------------
Loans, net $163,348 $173,802 $165,994 $164,761 $186,823
======================================================================================================
/1/ Includes obligations of states and political subdivisions.
/2/ Typically have maturities of 15 years or less.
The amount of certain gross loans outstanding at December 31, 2001, based on
remaining contractual repayments of principal, are shown by maturity and
interest rate sensitivity in the table below:
============================================================================================
Remaining Maturities of Selected Loans
----------------------------------------------
Loan Maturity and More
Interest Rate Sensitivity Within One - Five Than Five
December 31, 2001 Total One Year Years Years
============================================================================================
(In thousands)
Loan maturity
Commercial, financial, and agricultural/1/ $54,790 $21,516 $28,954 $4,320
Real estate - construction 6,959 5,823 1,032 104
--------------------------------------------------------------------------------------------
Total $61,749 $27,339 $29,986 $4,424
============================================================================================
Interest rate sensitivity
Selected loans with:
Predetermined interest rates $15,739 $3,548
Floating or adjustable interest rates 14,247 876
--------------------------------------------------------------------------------------------
Total $29,986 $4,424
============================================================================================
/1/ Excludes nonaccrual loans totaling approximately $1,275.
The above maturity schedule is not necessarily indicative of future principal
reductions since each loan is evaluated at maturity and, in many instances, is
renewed in part or total.
26
Southeastern Banking Corporation
Selected Statistical Information
Nonperforming Assets
Nonperforming assets for each of the last five years are presented in the table
below:
==============================================================================================
Nonperforming Assets
At December 31, 2001 2000 1999 1998 1997
==============================================================================================
(Dollars in thousands)
Nonaccrual loans $1,881 $3,104 $ 685 $ 872 $ 775
Restructured loans/1/ -- 341 357 374 389
----------------------------------------------------------------------------------------------
Total nonperforming loans 1,881 3,445 1,042 1,246 1,164
Foreclosed real estate/2/ 317 397 858 778 722
----------------------------------------------------------------------------------------------
Total nonperforming assets $2,198 $3,842 $1,900 $2,024 $1,886
==============================================================================================
Accruing loans past due 90 days or more $1,528 $1,191 $1,467 $1,607 $1,767
==============================================================================================
Ratios:
Nonperforming loans to net loans 1.15% 1.98% 0.63% 0.76% 0.62%
==============================================================================================
Nonperforming assets to net loans
plus foreclosed real estate 1.34% 2.21% 1.14% 1.22% 1.01%
==============================================================================================
/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.
The Company's nonperforming loans and assets for the three years ended December
31, 2001 are discussed and policies pertaining to same are delineated in the
Loan section of Part II, Item 7 (management discussion); accordingly, the
discussion below is limited to nonperforming asset levels at year-end 1998 and
1997 unless otherwise indicated:
a) Unrecognized income on nonaccrual and restructured loans totaled
approximately $146,000, $127,000, $114,000, $49,000, and $143,000 in 2001,
2000, 1999, 1998, and 1997.
b) All known potential problem loans were included in nonperforming loans at
December 31, 1997. Potential problem loans not included in nonperforming
loans at December 31, 1998 totaled approximately $1,295,000; subsequent to
year-end 1998, these potential problem loans were placed on nonaccrual
status and charged-off to their estimated collectible values.
c) The Company had no concentration of loans to borrowers engaged in any
single industry that exceeded 10% of total loans at year-end 1998 and
1997.
27
Southeastern Banking Corporation
Selected Statistical Information
Allowance for Loan Losses
As further discussed in the loan section of Part II, Item 7, the Company
maintains an allowance for loan losses available to absorb inherent losses in
the loan portfolio. Activity in the allowance for each of the last five years is
presented in the table below:
=====================================================================================================================
Allowance for Loan Losses
Years Ended December 31, 2001 2000 1999 1998 1997
=====================================================================================================================
(Dollars in thousands)
Allowance for loan losses at beginning of year $ 3,160 $ 3,223 $ 3,407 $ 3,705 $ 3,735
Provision for loan losses 1,200 1,200 1,200 1,230 1,715
Charge-offs:
Commercial, financial, and agricultural 698 557 496 829 1,187
Real estate - construction -- -- 351 -- --
Real estate - mortgage 132 298 213 330 202
Consumer, including credit cards 720 817 950 802 845
---------------------------------------------------------------------------------------------------------------------
Total charge-offs 1,550 1,672 2,010 1,961 2,234
---------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 38 46 258 117 99
Real estate - construction -- -- -- -- --
Real estate - mortgage 13 20 27 15 6
Consumer, including credit cards 274 343 341 301 384
---------------------------------------------------------------------------------------------------------------------
Total recoveries 325 409 626 433 489
---------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,225 1,263 1,384 1,528 1,745
---------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at December 31 $ 3,135 $ 3,160 $ 3,223 $ 3,407 $ 3,705
=====================================================================================================================
Net loans outstanding/1/ at December 31 $163,348 $173,802 $165,994 $164,761 $186,823
=====================================================================================================================
Average loans outstanding at December 31 $164,402 $172,768 $163,124 $165,391 $186,174
=====================================================================================================================
Ratios:
Allowance to net loans 1.92% 1.82% 1.94% 2.07% 1.98%
=====================================================================================================================
Net charge-offs to average loans 0.75% 0.73% 0.85% 0.92% 0.94%
=====================================================================================================================
Provision to average loans 0.73% 0.69% 0.74% 0.74% 0.92%
=====================================================================================================================
Recoveries to total charge-offs 20.97% 24.46% 31.14% 22.08% 21.89%
=====================================================================================================================
/1/ Net of unearned income.
See the table on the next page and the accompanying management discussion for
additional information on the allowance for loan losses.
28
Southeastern Banking Corporation
Selected Statistical Information
The Company has allocated the allowance for loan losses according to the amount
deemed to be reasonably necessary to absorb potential losses within the loan
categories summarized in the table below:
==============================================================================================
Allocation of Allowance
for Loan Losses
At December 31, 2001 2000 1999 1998 1997
==============================================================================================
(Dollars in thousands)
Allocation of allowance
by loan category
Commercial, financial, and agricultural $ 909 $1,054 $1,286 $1,135 $1,132
Real estate - construction 140 117 117 -- --
Real estate - mortgage 931 707 651 861 368
Consumer, including credit cards 841 755 675 678 553
Unallocated 314 527 494 733 1,652
----------------------------------------------------------------------------------------------
Total $3,135 $3,160 $3,223 $3,407 $3,705
==============================================================================================
Allocation of allowance
as a percent of total allowance
Commercial, financial, and agricultural 29% 33% 40% 33% 30%
Real estate - construction 4% 4% 4% -- --
Real estate - mortgage 30% 22% 20% 25% 10%
Consumer, including credit cards 27% 24% 21% 20% 15%
Unallocated 10% 17% 15% 22% 45%
----------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
==============================================================================================
Year-end loan categories as
a percent of total loans
Commercial, financial, and agricultural 34% 40% 40% 41% 49%
Real estate - construction 4% 5% 2% 1% 2%
Real estate - mortgage 43% 35% 36% 36% 31%
Consumer, including credit cards 19% 20% 22% 22% 18%
----------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
==============================================================================================
29
Southeastern Banking Corporation
Selected Statistical Information
Deposits
The average balances table included in the Operations section of Part II, Item 7
provides detailed information about income/expense and rates paid on deposits
for the three most recent years. The composition of average deposits for these
same periods is shown below:
===========================================================================================================
Balances Percent of Total
Composition of Average Deposits -------------------------------- ---------------------------------
Years Ended December 31, 2001 2000 1999 2001 2000 1999
===========================================================================================================
(Dollars in thousands)
Noninterest-bearing deposits $ 56,445 $ 55,487 $ 54,438 18.73% 18.83% 18.58%
Interest-bearing demand deposits 51,472 46,539 43,510 17.08% 15.80% 14.85%
Savings 79,062 75,728 74,495 26.24% 25.70% 25.43%
Time deposits 114,345 116,869 120,523 37.95% 39.67% 41.14%
===========================================================================================================
Total $301,324 $294,623 $292,966 100.00% 100.00% 100.00%
===========================================================================================================
The maturities of certificates of deposit totaling $100,000 or more at year-end
2001 are presented below:
================================================================================
Maturities of Certificates
Of Deposit of $100,000 or More Certificates
December 31, 2001 of Deposit
================================================================================
(In thousands)
Months to maturity:
3 or less $ 30,066
Over 3 through 6 19,154
Over 6 through 12 32,240
Over 12 21,231
--------------------------------------------------------------------------------
Total $102,691
================================================================================
Selected Ratios for Measurement of Net Income and Equity
Selected ratios for the measurement of net income and equity are presented
below:
================================================================================
Return on Equity and Assets
Years Ended December 31,/1/ 2001 2000 1999
================================================================================
Return on average assets 1.15% 1.41% 1.43%
Return on average equity 9.01% 11.18% 11.38%
Dividend payout ratio/2/ 82.71% 35.81% 34.71%
Average equity to average assets ratio 12.76% 12.57% 12.53%
================================================================================
/1/ These ratios exclude the effects of mark-to-market accounting for
investment securities.
/2/ Refer to the Capital Adequacy section of Part II, Item 7 (management
discussion) for particulars on the Company's dividend policy and the 2001
dividend payout.
30
Report of Independent Certified Public Accountants
The Shareholders
Southeastern Banking Corporation
Darien, Georgia
We have audited the accompanying consolidated balance sheets of Southeastern
Banking Corporation and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Southeastern Banking Corporation and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Atlanta, Georgia
March 7, 2002
31
Southeastern Banking Corporation
Consolidated Balance Sheets
December 31, 2001 2000
==========================================================================================================
Assets
Cash and due from banks, including reserve requirements of approximately $ 16,787,021 $ 15,852,283
$6,464,000 and $5,805,000 at December 31, 2001 and 2000
Federal funds sold 7,580,000 3,210,000
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 24,367,021 19,062,283
Investment securities
Held-to-maturity (market value of approximately $34,451,000 and 35,090,649 26,679,250
$26,941,000 at December 31, 2001 and 2000)
Available-for-sale, at market value 122,529,275 118,375,887
----------------------------------------------------------------------------------------------------------
Total investment securities 157,619,924 145,055,137
Loans, gross 163,805,412 174,555,359
Unearned income (457,087) (752,940)
Allowance for loan losses (3,134,594) (3,159,165)
----------------------------------------------------------------------------------------------------------
Loans, net 160,213,731 170,643,254
Premises and equipment, net 6,675,354 6,723,135
Intangible assets 904,836 1,095,560
Other assets 5,433,949 6,999,183
----------------------------------------------------------------------------------------------------------
Total Assets $355,214,815 $349,578,552
==========================================================================================================
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing deposits $ 57,826,266 $ 55,125,661
Interest-bearing deposits 240,880,561 240,610,650
----------------------------------------------------------------------------------------------------------
Total deposits 298,706,827 295,736,311
U.S. Treasury demand note 493,153 1,001,957
Federal Home Loan Bank advances 5,000,000 5,000,000
Other liabilities 5,417,508 3,500,109
----------------------------------------------------------------------------------------------------------
Total liabilities 309,617,488 305,238,377
----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 15 and 16)
Shareholders' Equity
Common stock ($1.25 par value; 10,000,000 shares authorized; 3,580,797
shares issued; 3,385,470 and 3,436,696 shares outstanding at
December 31, 2001 and 2000) 4,475,996 4,475,996
Additional paid-in capital 1,391,723 1,391,723
Retained earnings 42,035,982 41,327,784
Treasury stock, at cost (195,327 and 144,101 shares at December 31, 2001
and 2000) (3,247,718) (2,485,742)
----------------------------------------------------------------------------------------------------------
Realized shareholders' equity 44,655,983 44,709,761
Accumulated other comprehensive income - unrealized gains (losses) on
investment securities, net of tax 941,344 (369,586)
----------------------------------------------------------------------------------------------------------
Total shareholders' equity 45,597,327 44,340,175
----------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $355,214,815 $349,578,552
==========================================================================================================
See accompanying notes to consolidated financial statements.
32
Southeastern Banking Corporation
Consolidated Statements of Income
Years ended December 31, 2001 2000 1999
=================================================================================================
Interest income
Loans, including fees $16,263,390 $18,215,106 $17,100,365
Federal funds sold 829,442 226,160 323,975
Investment securities
Taxable 7,116,022 7,487,002 7,195,796
Tax-exempt 1,364,028 1,243,991 1,271,925
Other assets 80,457 90,405 93,967
-------------------------------------------------------------------------------------------------
Total interest income 25,653,339 27,262,664 25,986,028
-------------------------------------------------------------------------------------------------
Interest expense
Deposits 10,707,104 11,200,883 10,832,888
Federal funds purchased -- 51,705 29,578
U.S. Treasury demand note 30,076 53,050 39,345
Federal Home Loan Bank advances 300,111 417,632 --
-------------------------------------------------------------------------------------------------
Total interest expense 11,037,291 11,723,270 10,901,811
-------------------------------------------------------------------------------------------------
Net interest income 14,616,048 15,539,394 15,084,217
Provision for loan losses 1,200,000 1,200,000 1,200,000
-------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,416,048 14,339,394 13,884,217
-------------------------------------------------------------------------------------------------
Noninterest income
Service charges on deposit accounts 2,306,877 2,391,950 2,542,076
Investment securities gains, net 14,942 6,844 3,738
Other operating income 1,102,410 992,453 922,965
-------------------------------------------------------------------------------------------------
Total noninterest income 3,424,229 3,391,247 3,468,779
-------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits 6,187,339 6,126,576 5,747,257
Occupancy and equipment, net 2,067,672 1,944,370 1,843,734
Other operating expense 2,927,190 2,737,310 2,930,002
-------------------------------------------------------------------------------------------------
Total noninterest expense 11,182,201 10,808,256 10,520,993
-------------------------------------------------------------------------------------------------
Income before income tax expense 5,658,076 6,922,385 6,832,003
Income tax expense 1,560,950 1,987,291 1,982,838
-------------------------------------------------------------------------------------------------
Net income $ 4,097,126 $ 4,935,094 $ 4,849,165
=================================================================================================
Basic earnings per common share $ 1.21 $ 1.42 $ 1.35
=================================================================================================
See accompanying notes to consolidated financial statements.
33
Southeastern Banking Corporation
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
====================================================================================================================================
Balance, December 31, 1998 $4,475,996 $1,391,723 $ 34,993,625 $ -- $ 288,953 $ 41,150,297
Comprehensive income:
Net income -- -- 4,849,165 -- -- 4,849,165
Other comprehensive income, net of tax
effect of $1,629,709:
Change in unrealized gains (losses)
on available-for-sale securities -- -- -- -- (3,163,551) (3,163,551)
------------
Comprehensive income 1,685,614
------------
Cash dividends declared
($0.47 per share) -- -- (1,682,975) -- -- (1,682,975)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 4,475,996 1,391,723 38,159,815 -- (2,874,598) 41,152,936
Comprehensive income:
Net income -- -- 4,935,094 -- -- 4,935,094
Other comprehensive income, net of tax
effect of $1,290,463:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- -- 2,505,012 2,505,012
------------
Comprehensive income 7,440,106
------------
Cash dividends declared
($0.51 per share) -- -- (1,767,125) -- -- (1,767,125)
Purchase of treasury stock -- -- -- (2,485,742) -- (2,485,742)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 4,475,996 1,391,723 41,327,784 (2,485,742) (369,586) 44,340,175
(consistency w/presentation other years)
Comprehensive income:
Income -- -- 4,097,126 -- -- 4,097,126
Other comprehensive income, net of tax
effect of $675,328:
Change in unrealized gains
(losses) on available-for-sale
securities -- -- -- -- 1,310,930 1,310,930
------------
Comprehensive income 5,408,056
------------
Cash dividends declared
($1.00 per share) -- -- (3,388,928) -- -- (3,388,928)
Purchase of treasury stock -- -- -- (761,976) -- (761,976)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $4,475,996 $1,391,723 $ 42,035,982 $(3,247,718) $ 941,344 $ 45,597,327
====================================================================================================================================
See accompanying notes to consolidated financial statements.
34
Southeastern Banking Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2001 2000 1999
===================================================================================================================
Operating activities
Net income $ 4,097,126 $ 4,935,094 $ 4,849,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,200,000 1,200,000 1,200,000
Depreciation 767,170 702,023 672,934
Amortization and accretion, net 123,228 177,149 249,835
Deferred income tax (benefit) expense (29,353) 96,159 49,101
Investment securities gains, net (14,942) (6,844) (3,738)
Net losses (gains) on sales of other real estate 37,157 (25,981) 214,337
Changes in assets and liabilities:
Decrease (increase) in other assets 813,755 (855,984) (77,500)
Increase in other liabilities 370,840 138,945 37,606
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,364,981 6,360,561 7,191,740
-------------------------------------------------------------------------------------------------------------------
Investing activities
Principal collections and maturities of investment securities:
Held-to-maturity 3,514,700 3,173,400 2,205,200
Available-for-sale 99,875,547 7,501,147 49,793,188
Proceeds from sales of investment securities available-for-sale -- 2,996,719 1,001,562
Purchases of investment securities held-to-maturity (11,958,805) (1,856,585) (6,371,457)
Purchases of investment securities available-for-sale (101,927,535) (8,229,345) (64,357,623)
Net (decrease) increase in loans 9,050,120 (8,890,486) (3,652,848)
Proceeds from sales of other real estate 247,753 452,568 761,018
Capital expenditures, net (719,389) (716,344) (777,800)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,917,609) (5,568,926) (21,398,760)
-------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits 2,970,516 5,452,050 (2,412,335)
Net (decrease) increase in federal funds purchased -- (3,950,000) 3,950,000
Net (decrease) increase in U.S. Treasury demand note (508,804) (907,541) 1,093,445
Proceeds from Federal Home Loan Bank advances -- 10,000,000 --
Repayment of Federal Home Loan Bank advances -- (5,000,000) --
Purchase of treasury stock (761,976) (2,485,742) --
Dividends paid (1,842,370) (1,654,154) (1,742,774)
-------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (142,634) 1,454,613 888,336
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,304,738 2,246,248 (13,318,684)
Cash and cash equivalents at beginning of year 19,062,283 16,816,035 30,134,719
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,367,021 $ 19,062,283 $ 16,816,035
===================================================================================================================
See accompanying notes to consolidated financial statements.
35
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting and Reporting
Policies
Description of Business
Southeastern Banking Corporation and its subsidiaries, Southeastern Bank and SBC
Financial Services, Inc. (collectively, the Company), provide a full array of
financial services to meet the financial needs of individual, commercial, and
government customers in southeast Georgia and northeast Florida. The
consolidated financial statements include the accounts of Southeastern Banking
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period, the most significant of which pertain to the allowance for
loan losses. Actual results could vary from these estimates.
Reclassifications
Certain prior year amounts have been restated to conform with the current year
financial statement presentation.
Cash Equivalents
Cash equivalents include due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale.
Securities which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost.
Securities not classified as held-to-maturity are classified as
available-for-sale and are carried at market value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate component of
shareholders' equity until realized. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity. Gains and
losses on sales of investment securities are recognized based on the adjusted
costs of the specific securities at disposition.
Loans
Loans are reported at the principal amount outstanding, net of unearned income
and the allowance for loan losses. Interest income on loans is generally
recognized on a level-yield basis.
Loans are changed to nonaccrual status when the full timely collection of
principal or interest becomes doubtful or the loans become contractually past
due 90 days or more as to either principal or interest, unless the loans are
both well-secured and in the process of collection. Accrued interest on any loan
changed to nonaccrual status is reversed. Cash receipts on nonaccrual loans are
applied first to outstanding principal balances and secondly to interest.
36
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
The Company typically measures the impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate. The exception to this policy is real estate loans whose impairment is
based on the estimated fair value of the collateral. If the fair value of the
underlying collateral is less than the recorded balance of the loan, the Company
includes this deficiency in evaluating the overall adequacy of the allowance for
loan losses.
Allowance for Loan Losses
The Company's allowance for loan losses is that amount considered adequate to
absorb potential losses in the loan portfolio based on management's evaluation
of the size and current risk characteristics of the portfolio. Such evaluations
consider the balance of impaired loans and prior loan loss experience as well as
the impact of current economic conditions. Management considers a loan to be
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan. Specific allowances
are established for impaired loans based on a comparison of the recorded
carrying value of the loan to either the present value of the loan's expected
cash flow, the loan's estimated market price, or the estimated fair value of the
underlying collateral. Prior loss experience is based on a statistical loss
migration analysis that examines loss experience and the related internal risk
ratings of loans charged-off. The general economic conditions and other risk
elements are based on marketplace conditions that are impacting borrowers and
could affect the collectibility of loans.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are normally
capitalized and recognized as an adjustment to the yields on the related loans.
As the net amount of loan origination fees for the years ended December 31,
2001, 2000 and 1999 was not significant, no amounts have been capitalized or
deferred.
Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation is calculated primarily using the straight-line
method over the assets' estimated useful lives. Expenditures for maintenance and
repairs are charged to operations as incurred, while betterments are
capitalized.
Intangible Assets
Intangible assets consist of deposit base premiums and goodwill. The deposit
base premiums are being amortized using the straight-line method over estimated
useful lives ranging from 11 to 15 years. Goodwill is being amortized using the
straight-line method over periods of 20 years or less. Due to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, goodwill will no
longer be amortized effective January 1, 2002.
Long-lived assets, including certain fixed assets and intangibles, are evaluated
regularly for other-than-temporary impairment. If circumstances suggest that the
value of such assets may be impaired and a write-down would be material, an
assessment of recoverability is performed prior to any write-down. Impairment of
intangibles is evaluated at each balance sheet date or whenever events or
changes in circumstances indicate that the carrying amount should be assessed.
Impairment, if any, is recognized through a valuation allowance with a
corresponding charge recorded in the income statement. The Company did not
consider any of its long-lived assets to be impaired at December 31, 2001 and
2000.
37
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Other Real Estate
Other real estate represents property acquired through foreclosure or in
settlement of loans and is recorded at the lower of cost or fair value less
estimated selling expenses. Other real estate also includes any property owned
that was formerly used as a branch facility. Provisions for subsequent
devaluation of other real estate are charged to operations, while costs
associated with improving the property are capitalized. Gains and losses on
sales of other real estate are recognized at disposition based on adjusted
carrying values.
Income Taxes
The Company files consolidated income tax returns where permissible. Income tax
expense (benefit) is allocated to each member of the consolidated group on the
basis of their respective taxable income or loss included in the consolidated
income tax returns. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.
Off-Balance Sheet Financial Instruments
In the normal course of business, the Company originates financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the consolidated balance sheets. Commitments to extend
credit represent legally binding agreements to lend to a customer with fixed
expiration dates or other termination clauses. Since many commitments expire
without being funded, total commitment amounts do not necessarily represent
future liquidity requirements. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party.
The Company does not invest in off-balance sheet derivative financial
instruments such as swaps, options or forward contracts.
Basic Earnings Per Common Share
Basic earnings per common share are based on the weighted average number of
common shares outstanding during each period. Shares outstanding totaled
3,397,823 in 2001, 3,474,887 in 2000 and 3,580,797 in 1999.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS 137 and SFAS 138 in June 1999 and June 2000, respectively. These
statements were required to be adopted for fiscal years beginning after June 15,
2000 and require all derivatives to be recorded on the balance sheet at fair
value and establish new accounting rules for hedging instruments. The transition
provisions of SFAS 133 permit a one-time transfer of debt securities categorized
as held-to-maturity into the available-for-sale category without calling into
question the entity's intent to hold other debt securities to maturity in the
future. The Company adopted the provisions of SFAS 133, as amended, on January
1, 2001. SFAS 133 did not have a material impact on the
38
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Company's financial position or results of operations.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of SFAS No. 125." The new statement revises accounting criteria for
securitizations, other financial asset transfers, and collateral and introduces
new disclosures, but otherwise carries forward most of SFAS No. 125's provisions
without amendment. Adoption of this statement did not have a significant impact
on the consolidated financial statements.
Business Combinations/Goodwill and Other Intangible Assets
In July 2001, the FASB issued 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.
At December 31, 2001, goodwill balances totaled $256,775; related amortization
for the year totaled $49,288. 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.
2. Supplemental Cash Flow Information
Certain supplemental disclosure of cash flow information and noncash investing
and financing activities follows:
Years ended December 31, 2001 2000 1999
==========================================================================================================
Cash paid during the year
Interest $11,081,691 $11,666,270 $10,911,512
Income taxes 1,360,000 2,045,000 2,042,000
Noncash investing and financing activities
Loans foreclosed $ 2,305,441 $ 488,810 $ 1,382,851
Loans made in connection with sales of foreclosed real estate 2,126,038 545,156 346,712
39
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
3. Investment Securities
The amortized cost and estimated fair value of investment securities were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------------
Available-for-sale
U.S. Treasury and U.S.
Government agencies $ 70,316,658 $1,345,778 $192,239 $ 71,470,197
Mortgage-backed securities 41,021,456 271,591 79,369 41,213,678
Corporates 9,764,882 123,192 42,674 9,845,400
-----------------------------------------------------------------------------------------------------------------------
121,102,996 1,740,561 314,282 122,529,275
-----------------------------------------------------------------------------------------------------------------------
Held-to-maturity
States and political subdivisions 35,090,649 614,405 253,774 35,451,280
-----------------------------------------------------------------------------------------------------------------------
35,090,649 614,405 253,774 35,451,280
-----------------------------------------------------------------------------------------------------------------------
Total investment securities $156,193,645 $2,354,966 $568,056 $157,980,555
=======================================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
========================================================================================================================
Available-for-sale
U.S. Treasury and U.S.
Government agencies $100,086,039 $274,753 $ 519,764 $ 99,841,028
Mortgage-backed securities 18,849,826 11,405 326,372 18,534,859
-----------------------------------------------------------------------------------------------------------------------
118,935,865 286,158 846,136 118,375,887
-----------------------------------------------------------------------------------------------------------------------
Held-to-maturity
States and political subdivisions 26,679,250 443,913 182,634 26,940,529
-----------------------------------------------------------------------------------------------------------------------
26,679,250 443,913 182,634 26,940,529
-----------------------------------------------------------------------------------------------------------------------
Total investment securities $145,615,115 $730,071 $1,028,770 $145,316,416
========================================================================================================================
The amortized cost and estimated fair value of debt securities at December 31,
2001, by contractual maturity, are shown in the next table. Expected maturities
may differ from contractual maturities because borrowers may in many instances
exercise early redemption features inherent in these securities with or without
prepayment penalties.
40
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Available-for-Sale Held-to-Maturity
--------------------------- -------------------------
Amortized Fair Amortized Fair
December 31, 2001 Cost Value Cost Value
==========================================================================================
Due within one year $ 8,999,033 $ 9,113,380 $ 1,933,782 $ 1,951,199
Due after one year through five
years 53,811,657 54,679,822 5,052,807 5,174,758
Due after five years through ten
years 17,270,850 17,522,395 12,295,062 12,545,359
Due after ten years -- -- 15,808,998 15,779,964
------------------------------------------------------------------------------------------
80,081,540 81,315,597 35,090,649 35,451,280
Mortgage-backed securities 41,021,456 41,213,678 -- --
------------------------------------------------------------------------------------------
$121,102,996 $122,529,275 $35,090,649 $35,451,280
==========================================================================================
Gross realized gains were $14,942, $6,900 and $3,738, and gross realized losses
were $0, $56 and $0 on sales and other redemptions of investment securities in
2001, 2000 and 1999, respectively.
Investment securities with carrying values of approximately $62,721,000 and
$70,335,000 were pledged to secure public deposits and other funds, including
advances from the Federal Home Loan Bank of Atlanta (Note 8), at December 31,
2001 and 2000.
4. Loans
The composition of the Company's loan portfolio is summarized as follows:
December 31, 2001 2000
================================================================================
Commercial, financial and agricultural $ 56,064,795 $ 70,175,113
Real estate - construction 6,958,547 7,749,990
Real estate - mortgage 70,360,558 61,257,534
Consumer, including credit cards 30,421,512 35,372,722
--------------------------------------------------------------------------------
Loans, gross $163,805,412 $174,555,359
================================================================================
41
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses is summarized below:
2001 2000 1999
================================================================================
Balance at beginning of year $ 3,159,165 $ 3,222,889 $ 3,406,626
Provision for loan losses 1,200,000 1,200,000 1,200,000
Charge-offs (1,550,351) (1,672,463) (2,010,066)
Recoveries 325,780 408,739 626,329
--------------------------------------------------------------------------------
Net charge-offs (1,224,571) (1,263,724) (1,383,737)
--------------------------------------------------------------------------------
Balance at end of year $ 3,134,594 $ 3,159,165 $ 3,222,889
================================================================================
The Company's primary lending area is southeast Georgia and northeast Florida.
Although the Company's loan portfolio is diversified, a significant portion of
its loans is collateralized by real estate. Loans secured by real estate
aggregated approximately $109,842,000 and $113,570,000 at December 31, 2001 and
2000. Real estate loans are collateralized based on certain loan-to-appraised
value ratios.
Nonaccrual and restructured loans totaled approximately $1,881,000, $3,445,000
and $1,042,000 at December 31, 2001, 2000 and 1999, respectively. Unrecognized
interest income on such loans during the years ended December 31, 2001, 2000 and
1999 totaled approximately $146,000, $127,000 and $114,000.
In the normal course of business, the bank subsidiary has made loans at
prevailing interest rates and terms to directors, executive officers, and
principal shareholders of the Company and its subsidiaries, and to their
affiliates. The aggregate dollar amount of these loans, as defined, approximated
$2,525,000 at December 31, 2001 and $3,001,000 at December 31, 2000. During
2001, approximately $1,117,000 of such loans were made and $1,593,000 were
repaid. None of these loans have been restructured, nor were any related party
loans charged-off during 2001 and 2000.
5. Premises and Equipment
Premises and equipment are summarized as follows:
December 31, 2001 2000
================================================================================
Land $ 1,449,614 $ 1,224,507
Buildings 6,725,557 6,767,214
Furniture and equipment 6,232,099 5,760,365
--------------------------------------------------------------------------------
14,407,270 13,752,086
Accumulated depreciation and amortization (7,731,916) (7,028,951)
--------------------------------------------------------------------------------
Premises and equipment, net $ 6,675,354 $ 6,723,135
================================================================================
Depreciation and amortization of premises and equipment totaled $767,170,
$702,023 and $672,934 in 2001, 2000 and 1999, respectively.
42
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
6. Interest-Bearing Deposits
Interest-bearing deposits consisted of the following:
December 31, 2001 2000
================================================================================
Interest-bearing demand deposits $ 54,049,567 $ 50,308,816
Savings 84,140,099 73,781,134
Time certificates under $100,000 66,145,141 72,206,555
Time certificates $100,000 or more 36,545,754 44,314,145
--------------------------------------------------------------------------------
Total interest-bearing deposits $240,880,561 $240,610,650
================================================================================
Interest expense on time certificates of $100,000 or more approximated
$2,518,000, $2,525,000 and $2,381,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
The maturity distribution of the Company's time certificates over $100,000 was
as follows:
December 31, 2001
================================================================================
Due in one year or less $ 81,460,111
Over one year through three years 17,648,720
Over three years 3,582,064
--------------------------------------------------------------------------------
$102,690,895
================================================================================
7. Short-Term Borrowings
The Company utilizes short-term borrowings as needed for liquidity purposes in
the form of U.S. Treasury demand notes and federal funds purchased. At December
31, 2001, the maximum amount of U.S. Treasury demand notes available to the
Company was $3,000,000, of which $493,153 was outstanding. Unsecured lines of
credit for federal funds purchased from third party banks totaled $24,000,000.
No amounts were drawn against these lines at December 31, 2001 and 2000.
8. Other Borrowings
The Company has a line of credit from the Federal Home Loan Bank of Atlanta
(FHLB) to meet general liquidity and other needs. Under this line, the Company
can borrow, in total or increments, up to 16% of the bank subsidiary's total
assets; at December 31, 2001, maximum borrowings totaled approximately
$51,700,000. Advances outstanding with the FHLB totaled $5,000,000 at December
31, 2001 and 2000. The outstanding advance, which matures March 17, 2010,
accrues interest at an effective rate of 6.00%, payable quarterly. The
$5,000,000 advance is convertible into a three-month Libor-based floating rate
anytime at the option of the FHLB.
43
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
9. Income Tax Expense
The components of income tax expense were as follows:
Years ended December 31, 2001 2000 1999
================================================================================
Federal
Current tax expense $1,513,718 $1,811,896 $1,836,977
Deferred tax (benefit) expense (29,353) 96,159 49,101
--------------------------------------------------------------------------------
1,484,365 1,908,055 1,886,078
State
Current tax expense 76,585 79,236 96,760
--------------------------------------------------------------------------------
$1,560,950 $1,987,291 $1,982,838
================================================================================
The Company's provisions for income taxes differ from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. A reconciliation of this difference follows:
Years ended December 31, 2001 2000 1999
==========================================================================================
Taxes at federal statutory rate $ 1,923,746 $ 2,353,611 $ 2,322,881
Increase (decrease) resulting from:
Tax-exempt interest income, net (434,627) (432,300) (411,273)
State income taxes, net of federal benefit 50,546 52,296 63,863
Other, net 21,285 13,684 7,367
------------------------------------------------------------------------------------------
Total income tax expense $ 1,560,950 $ 1,987,291 $ 1,982,838
==========================================================================================
The following schedule summarizes the temporary differences which comprised the
net deferred tax asset:
December 31, 2001 2000
================================================================================
Deferred tax assets (liabilities)
Allowance for loan losses $ 622,356 $ 632,258
Other real estate 73,786 52,207
Unrealized (gains) losses on investment securities
available-for-sale, net (484,936) 190,392
Accretion of discounts on investment securities (11,621) (33,377)
Other -- 4,080
--------------------------------------------------------------------------------
Net deferred tax asset $ 199,585 $ 845,560
================================================================================
The Company has not recorded any valuation allowances for deferred tax assets.
10. Employee Benefit Plan
The Company has a noncontributory profit-sharing plan which covers substantially
all employees. Under the terms of the plan, the Company's contributions are
discretionary but are not to exceed an amount determined by a formula provided
in the plan or the amount deductible for income tax purposes. Total
contributions expensed under this plan totaled $450,000 in both 2001 and 2000
and $415,000 in 1999.
44
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
11. Disclosures About Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial instruments
are made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts shown.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities - For investment securities, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans - For variable rate loans that reprice frequently with no significant
change in credit risk, fair value approximates carrying value. The fair value of
all other loans is estimated based upon a discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Deposit Liabilities - The fair value of demand and savings deposits is the
amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated using the rates currently offered for deposits of
similar remaining maturities. The estimate of fair value is not intended to
represent market value, deposit base premium or portfolio liquidation value.
Short-Term and Other Borrowings - The carrying value of federal funds purchased
and U.S. Treasury demand notes approximates fair value. The fair value of
Federal Home Loan Bank advances is estimated using the Company's incremental
borrowing rate at December 31, 2001.
Commitments to Extend Credit and Standby Letters of Credit - Because the Company
generally offers lending commitments and standby letters of credit to its
customers for only short periods of time and the rates underlying such
commitments therefore approximate market rates, the fair value of such
commitments and standby letters of credit is equal to the amount outstanding at
December 31, 2001 and 2000.
45
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
The following table presents the carrying values and estimated fair values of
the Company's financial instruments:
2001 2000
--------------------------- ---------------------------
December 31, Carrying Fair Carrying Fair
Value Value Value Value
===================================================================================================
Financial assets
Cash and cash equivalents $ 24,367,021 $ 24,367,021 $ 19,062,283 $ 19,062,283
Investment securities 157,619,924 157,980,555 145,055,137 145,316,416
Loans, net 160,213,731 161,954,701 170,643,254 173,642,225
Financial liabilities
Deposits $298,706,827 $299,368,317 $295,736,311 $295,673,361
U.S. Treasury demand note 493,153 493,153 1,001,957 1,001,957
Federal Home Loan Bank advances 5,000,000 5,934,592 5,000,000 5,028,011
Off-balance sheet financial instruments
Commitments to extend credit $ 16,492,000 $ 17,975,000
Standby letters of credit 1,382,000 320,000
46
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
12. Condensed Financial Information of Southeastern Banking Corporation
(Parent Company Only)
Parent Company only financial information is presented below:
Condensed Balance Sheets
December 31, 2001 2000
====================================================================================
Assets
Cash $ 2,810,693 $ 1,106,966
Investment in subsidiaries, at equity 44,204,769 43,221,928
Premises and equipment, net 54,430 64,465
Other assets 795,700 668,522
------------------------------------------------------------------------------------
Total Assets $47,865,592 $45,061,881
====================================================================================
Liabilities and Shareholders' Equity
Liabilities
Other liabilities $ 2,268,265 $ 721,706
------------------------------------------------------------------------------------
Shareholders' Equity
Common stock 4,475,996 4,475,996
Additional paid-in capital 1,391,723 1,391,723
Retained earnings 42,035,982 41,327,784
Treasury stock, at cost (3,247,718) (2,485,742)
====================================================================================
Realized shareholders' equity 44,655,983 44,709,761
Accumulated other comprehensive income - unrealized
gains (losses) on investment securities, net of tax 941,344 (369,586)
------------------------------------------------------------------------------------
Total shareholders' equity 45,597,327 44,340,175
------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $47,865,592 $45,061,881
====================================================================================
47
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Condensed Statements of Income
Years ended December 31, 2001 2000 1999
============================================================================================
Income
Dividends $ 4,500,000 $ 3,962,000 $2,232,000
Interest income 27,170 41,428 52,785
Equity in undistributed income of subsidiaries (328,088) 1,025,881 2,656,047
Other income 74 -- --
--------------------------------------------------------------------------------------------
Total income 4,199,156 5,029,309 4,940,832
--------------------------------------------------------------------------------------------
Operating expenses
Occupancy and other expenses 115,452 95,872 88,608
--------------------------------------------------------------------------------------------
Income before income tax (benefit) expense 4,083,704 4,933,437 4,852,224
Income tax (benefit) expense (13,422) (1,657) 3,059
--------------------------------------------------------------------------------------------
Net income $ 4,097,126 $ 4,935,094 $4,849,165
============================================================================================
48
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Years ended December 31, 2001 2000 1999
====================================================================================================
Operating activities
Net income $ 4,097,126 $ 4,935,094 $ 4,849,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries 328,088 (1,025,881) (2,656,047)
Depreciation and amortization 59,322 59,322 59,322
Changes in assets and liabilities:
Increase in other assets (176,463) (72,467) (183,197)
Decrease in other liabilities -- (2,110) (3,837)
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,308,073 3,893,958 2,065,406
----------------------------------------------------------------------------------------------------
Investing activities
Investment in subsidiaries -- -- (50,000)
----------------------------------------------------------------------------------------------------
Financing activities
Purchase of treasury stock (761,976) (2,485,742) --
Dividends paid (1,842,370) (1,654,154) (1,742,774)
----------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,604,346) (4,139,896) (1,742,774)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,703,727 (245,938) 272,632
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,106,966 1,352,904 1,080,272
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,810,693 $ 1,106,966 $ 1,352,904
====================================================================================================
49
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
13. Treasury Stock
In March 2000, the Board of Directors authorized the purchase of up to
$7,000,000 in treasury stock. In 2000, the Company purchased 144,101 shares of
its common stock from one group of shareholders at a purchase price of $17.25
per share and in 2001, an additional 51,226 shares on the open market and
through private transactions at an average price of $14.87 per share. The
treasury stock purchases have decreased the Company's outstanding stock from
3,580,797 shares to 3,385,470 shares. 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.
14. Regulatory Requirements
The Company and its bank subsidiary are subject to various regulatory capital
requirements. Failure to meet adequate or minimum capital requirements can
initiate certain mandatory and additional discretionary actions by regulators
that could have a material effect on the Company's financial statements. The
Company and its bank subsidiary must meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to qualitative
judgments about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Tier 1 (primarily
shareholders' equity less intangible assets) and total (Tier 1, certain debt
instruments, and a portion of the allowance for loan losses) capital to
risk-weighted assets and a leverage ratio of Tier 1 capital to average quarterly
assets. As of December 31, 2001, the most recent notification from the Georgia
Department of Banking and Finance categorized the bank subsidiary as well
capitalized under the regulatory framework for prompt corrective action.
Management believes that the Company and its bank subsidiary meet all applicable
capital requirements as of December 31, 2001. Actual capital amounts and ratios
for 2001 and 2000 are presented in the following tables:
Regulatory
Regulatory Definition of
Definition of Adequately
Well Capitalized Capitalized Actual
December 31, 2001 (Ratio) (Ratio) (Capital Amount/Ratio)
==========================================================================================
Tier 1 Capital Ratio
Consolidated 6.00% 4.00% 43,751,000 23.45%
Southeastern Bank 6.00% 4.00% 42,592,000 22.86%
Total Capital Ratio
Consolidated 10.00% 8.00% 46,093,000 24.71%
Southeastern Bank 10.00% 8.00% 44,930,000 24.12%
Tier 1 Leverage Ratio
Consolidated 5.00% 4.00% 43,751,000 12.32%
Southeastern Bank 5.00% 4.00% 42,592,000 12.01%
50
Southeastern Banking Corporation
Notes to Consolidated Financial Statements
Regulatory
Regulatory Definition of
Definition of Adequately
Well Capitalized Capitalized Actual
December 31, 2000 (Ratio) (Ratio) (Capital Amount/Ratio)
==========================================================================================
Tier 1 Capital Ratio
Consolidated 6.00% 4.00% $43,593,000 23.05%
Southeastern Bank 6.00% 4.00% 42,744,000 22.65%
Total Capital Ratio
Consolidated 10.00% 8.00% 45,967,000 24.30%
Southeastern Bank 10.00% 8.00% 45,113,000 23.91%
Tier 1 Leverage Ratio
Consolidated 5.00% 4.00% 43,593,000 12.56%
Southeastern Bank 5.00% 4.00% 42,744,000 12.33%
State banking regulations limit the amount of dividends the bank subsidiary may
pay without prior approval. The amount of cash dividends available from the bank
subsidiary for payment in 2002 without such prior approval is approximately
$2,092,000.
15. Commitments
Commitments to extend credit totaled approximately $16,492,000 and $17,975,000
at December 31, 2001 and 2000. Standby letters of credit totaled approximately
$1,382,000 and $320,000 for the same periods, respectively. A substantial amount
of these contracts expire without being drawn upon. As a result, total
contractual amounts do not represent future credit exposure or liquidity
requirements.
16. Contingencies
The Parent Company and its subsidiaries are parties to claims and lawsuits
arising in the course of their normal business activities. Although the ultimate
outcome of these suits cannot be ascertained at this time, it is the opinion of
management and counsel that none of these matters, when resolved, will have a
material effect on the Company's consolidated results of operations or financial
position.
17. Subsequent Event
On October 15, 2001, the Company signed a definitive agreement to acquire the
Richmond Hill office of Valdosta-Georgia based Park Avenue Bank. This
transaction closed on January 31, 2002. Under the agreement, the Company
acquired certain loans, property and equipment, and other assets 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.
51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference to the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 28, 2002 (Proxy Statement).
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
Supplemental Disclosure/Compensation Pursuant to Plans. The Company maintains an
Employee Profit-Sharing Plan (the Plan). The purpose of the Plan is to provide
employees with an opportunity to share in the profits generated by participating
subsidiaries. A participating employee's (the Participant) eligibility for
benefits is determined by his or her period of service. A Participant's period
of service begins on the commencement date of his employment and continues
through (i) periods of temporary illness; (ii) periods of temporary lay-off;
(iii) authorized leaves of absence; (iv) periods of termination of employment
lasting less than one year; and (v) certain periods of transfer to a member of
the controlled group of corporations of which the Company may become a part, as
defined by the Employee Retirement Income Security Act and regulations issued
thereunder.
Contributions are made each year in an amount determined by each participating
subsidiary's Board of Directors, subject to certain limitations regarding
earnings. No contributions by Participants are required or permitted.
Contributions are placed in a trust account, which is administered by a
corporate entity determined by the Company's Board of Directors.
Although records of the trust are maintained for each Participant's account for
accounting purposes, the assets of the trust are not segregated as to individual
Participant's accounts. The balances in a Participant's account are adjusted
annually to reflect contributions to the trust, income received from trust
assets, and any forfeitures which become available during the year.
A Participant's interest in his account vests 100% when his employment is
terminated (i) at or after the Participant attains the normal retirement age of
65; (ii) at or after the Participant attains age 59 1/2, has 10 years of
service, and early retirement is approved by the Board of Directors; or (iii)
due to disability. If termination is caused by a Participant's death, the
Participant's beneficiary becomes vested in the Participant's account as of the
date of the Participant's death. If a Participant's employment is terminated for
any reason other than those set out above, vesting in the Participant's account
is determined according to the schedule on the next page.
52
================================================================================
Vested Forfeited
Years of Service Percentages Percentages
================================================================================
Less than 3 0% 100%
3 but less than 4 20 80
4 but less than 5 40 60
5 but less than 6 60 40
6 but less than 7 80 20
7 or more 100 0
================================================================================
A Participant may choose to receive his benefits in a lump sum, in periodic
payments, or by the purchase of an annuity contract.
The Plan is administered solely by the Profit-Sharing Committee appointed by the
Board of Directors. A trustee appointed by the Company has the sole
responsibility to administer the trust assets. Both the Profit-Sharing Committee
and the trustee are considered fiduciaries of the Plan and have the
corresponding duties, obligations, and responsibilities.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
[Remainder of page intentionally left blank.]
53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. - Financial Statements and Schedules
================================================================================
Page Number
in Annual
Index to Financial Statements & Schedules Report
================================================================================
Audited Financial Statements
Independent auditors' report 31
Consolidated balance sheets at December 31, 2001 and 2000 32
Consolidated statements of income for each of
the three years ended December 31, 2001 33
Consolidated statements of shareholders' equity for each of
the three years ended December 31, 2001 34
Consolidated statements of cash flows for each of
the three years ended December 31, 2001 35
Notes to consolidated financial statements 36
================================================================================
(b) Reports on Form 8-K - NONE
(c) Index to Exhibits:
Exhibit Table Page
------------- ----
Articles of Incorporation and By-Laws Incorporated by reference from
Form 10-K filed for year ended
December 31, 1990.
Exhibit 22 Subsidiaries of Registrant 54
Exhibit 22.
Subsidiaries of the Company:
Southeastern Bank, Darien, Georgia
SBC Financial Services, Inc., Darien, Georgia
54
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: April 9, 2002
55
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Directors Date
/s/ ALYSON G. BEASLEY April 9, 2002
-----------------------------
Alyson G. Beasley
/s/ LESLIE H. BLAIR April 9, 2002
-----------------------------
Leslie H. Blair
-----------------------------
David H. Bluestein
/s/ GENE F. BRANNEN April 9, 2002
-----------------------------
Gene F. Brannen
/s/ WILLIAM DOWNEY April 9, 2002
-----------------------------
William Downey
/s/ CORNELIUS P. HOLLAND, III April 9, 2002
-----------------------------
Cornelius P. Holland, III
/s/ ALVA J. HOPKINS, III April 9, 2002
-----------------------------
Alva J. Hopkins, III
/s/ G. NORRIS JOHNSON April 9, 2002
-----------------------------
G. Norris Johnson
56