##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter period ended March 31, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 CONFIRMATION FILE NUMBER: 0001385090
 SOUTHEAST BANCSHARES, INC.
  Tennessee
    
    20-8101695(State or other jurisdiction or organization)
    
    (I.R.S. Employer ID No.)
 1878 S. Congress Parkway
Athens, Tennessee 37303
 (423) 745-6444
 N/A
 Yes þ No o
 1,281,129
 o þ




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##### 



SOUTHEAST BANCSHARES, INC.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheet March 31, 2007 (unaudited)
    
    
    1Statements of Operations
Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    3Statements of Cash Flows
Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    5Statements of Changes in Stockholders Equity
Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    7Notes to Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    19Item 2  Unregistered Sales of Securities and Use of Proceeds
    
    
    19Item 3  Defaults Upon Senior Securities
    
    
    20Item 4  Submission of Matters to a Vote of Security Holders
    
    
    20Item 5  Other Information
    
    
    20Item 6  Exhibits
    
    
    20Signatures
    
    
    21Ex-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEO & CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 SOUTHEAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2007
 (Unaudited)ASSETSCash and due from banks
    
    $
    4,860,362Federal funds sold
    
    
    17,241,206Total cash and cash equivalents
    
    
    22,101,568Securities available for sale
    
    
    15,894,846Restricted investments
    
    
    813,623Loans, net of unearned interest and allowance for loan losses
    
    
    153,783,858Premises and equipment
    
    
    7,725,184Accrued interest receivable
    
    
    844,247Intangible assets
    
    
    918,153Cash surrender value of life insurance
    
    
    761,952Other assets
    
    
    1,110,712Total assets
    
    $
    203,954,143LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits
    
    $
    16,785,653Interest-bearing demand deposits
    
    
    23,866,168Savings and money market accounts
    
    
    38,673,277Time deposits
    
    
    103,001,285Total deposits
    
    
    182,326,383Accrued interest payable
    
    
    612,590Subordinated debentures
    
    
    3,093,000Federal Home Loan Bank advances
    
    
    3,000,000Other liabilities
    
    
    872,323Total liabilities
    
    
    189,904,296Stockholders equity:
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##### Table of Contents



(Unaudited)Common stock, $1.00 par value; 4,000,000 shares authorized;
1,281,129 shares outstanding
    
    
    1,281,129Surplus
    
    
    12,162,368Undivided profits
    
    
    600,174Accumulated other comprehensive income
    
    
    6,176Total stockholders equity
    
    
    14,049,847Total liabilities and stockholders equity
    
    $
    203,954,143
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##### Table of Contents



PART 1  FINANCIAL INFORMATION (continued)
 ITEM 1. FINANCIAL STATEMENTS (continued)
 
 SOUTHEAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006INTEREST INCOMELoans, including fees
    
    $
    3,054,603
    
    
    $
    2,196,582Securities
    
    
    192,068
    
    
    
    136,159Federal funds sold and deposits in bank
    
    
    125,440
    
    
    
    66,7653,372,111
    
    
    
    2,399,506INTEREST EXPENSEDeposits
    
    
    1,518,681
    
    
    
    970,006Federal Home Loan Bank advances
    
    
    34,274
    
    
    
    45,410Subordinated debentures and other
    
    
    19,569
    
    
    
    Total interest expense
    
    
    1,572,524
    
    
    
    1,015,416Net interest income
    
    
    1,799,587
    
    
    
    1,384,090Provision for loan losses
    
    
    120,000
    
    
    
    105,000Net interest income
after provision for
loan losses
    
    
    1,679,587
    
    
    
    1,279,090NONINTEREST INCOMECustomer service fees
    
    
    384,519
    
    
    
    300,668Other noninterest income
    
    
    35,434
    
    
    
    73,627419,953
    
    
    
    374,295NONINTEREST EXPENSESSalaries and employee benefits
    
    
    772,463
    
    
    
    607,711Occupancy and equipment
    
    
    251,145
    
    
    
    170,183Data processing
    
    
    106,236
    
    
    
    72,076Other operating expenses
    
    
    540,244
    
    
    
    362,6931,670,088
    
    
    
    1,212,663
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##### Table of Contents



Three Months EndedMarch 31,2007
    
    
    2006Net income before income taxes
    
    
    429,452
    
    
    
    440,722Provision for income taxes
    
    
    166,000
    
    
    
    Net income
    
    $
    263,452
    
    
    $
    440,722EARNINGS PER COMMON SHAREBasic
    
    $
    0.21
    
    
    $
    0.34Diluted
    
    
    0.20
    
    
    
    0.33
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##### Table of Contents



PART 1  FINANCIAL INFORMATION (continued)
 ITEM 1. FINANCIAL STATEMENTS (continued)
 
 SOUTHEAST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2007 and March 31, 2006
(Unaudited)
 2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    263,452
    
    
    $
    440,722Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    129,142
    
    
    
    97,261Provision for loan losses
    
    
    120,000
    
    
    
    105,000Net accretion on securities
    
    
    (5,310
    )
    
    
    (2,694
    )Restricted stock dividends
    
    
    (5,240
    )
    
    
    (7,401
    )Net gain (loss) on sale of other real estate and reposessions
    
    
    862
    
    
    
    (1,696
    )Write down of other real estate and reposessions
    
    
    5,350
    
    
    
    2,967Loss on disposal of equipment
    
    
    
    
    
    
    429Change in operating assets and liabilities:Accrued interest receivable
    
    
    63,397
    
    
    
    458Other assets
    
    
    (285,717
    )
    
    
    (6,243
    )Accrued interest payable
    
    
    36,349
    
    
    
    54,746Other liabilities
    
    
    582,793
    
    
    
    106,515Net cash provided by operating activities
    
    
    905,078
    
    
    
    790,064CASH FLOWS FROM INVESTING ACTIVITIESLoan originations and principal collections, net
    
    
    (9,552,252
    )
    
    
    (5,331,373
    )Purchases of securities available for sale
    
    
    (993,438
    )
    
    
    (4,062,451
    )Proceeds from maturities, calls and prepayments of
securities available for sale
    
    
    2,547,571
    
    
    
    151,763Proceeds from sale of other real estate
    
    
    7,090
    
    
    
    25,913Purchase of premises and equipment
    
    
    (284,982
    )
    
    
    (349,327
    )Net cash used in investing activities
    
    
    (8,276,011
    )
    
    
    (9,565,475
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
    
    
    17,830,301
    
    
    
    14,419,227Decrease in FHLB advances
    
    
    
    
    
    
    (2,000,000
    )Issuance of subordinated debentures
    
    
    3,000,000
    
    
    
    Purchase of common stock
    
    
    (65,000
    )
    
    
    
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2007
    
    
    2006Net cash provided by financing activities
    
    
    20,765,301
    
    
    
    12,419,227NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    13,394,368
    
    
    
    3,643,816CASH AND CASH EQUIVALENTS, beginning of period
    
    
    8,707,200
    
    
    
    8,327,342CASH AND CASH EQUIVALENTS, end of period
    
    $
    22,101,568
    
    
    $
    11,971,158SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    1,635,921
    
    
    $
    960,670Income taxes
    
    
    89,618
    
    
    
    
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##### Table of Contents



PART 1  FINANCIAL INFORMATION (continued)
 ITEM 1. FINANCIAL STATEMENTS (continued)
 
 SOUTHEAST BANCSHARES, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)
 AccumulatedTotal
    
    
    
    
    
    
    
    
    
    
    
    
    OtherComprehensive
    
    
    Stockholders
    
    
    Common
    
    
    
    
    
    
    Undivided
    
    
    ComprehensiveIncome
    
    
    Equity
    
    
    Stock
    
    
    Surplus
    
    
    Profits
    
    
    IncomeBALANCE, January 1, 2006
    
    
    
    
    
    $
    12,047,728
    
    
    $
    1,284,379
    
    
    $
    12,176,118
    
    
    $
    (1,157,278
    )
    
    $
    (255,491
    )Comprehensive income:Net income
    
    $
    440,722
    
    
    
    440,722
    
    
    
    
    
    
    
    
    
    
    
    440,722
    
    
    
    Other comprehensive income:Unrealized holding gains (losses)
on securities available for sale,
net of related tax
effect
    
    
    (17,535
    )
    
    
    (17,535
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,535
    )Total comprehensive income
    
    $
    423,187BALANCE, March 31, 2006
    
    
    
    
    
    $
    12,470,915
    
    
    $
    1,284,379
    
    
    $
    12,176,118
    
    
    $
    (716,556
    )
    
    $
    (273,026
    )BALANCE, January 1, 2007
    
    
    
    
    
    $
    13,809,910
    
    
    $
    1,284,379
    
    
    $
    12,224,118
    
    
    $
    336,722
    
    
    $
    (35,309
    )Comprehensive income:Net income
    
    $
    263,452
    
    
    
    263,452
    
    
    
    
    
    
    
    
    
    
    
    263,452
    
    
    
    Other comprehensive income:Unrealized holding gains on
securities
available for sale,
net of related tax
effect
    
    
    41,485
    
    
    
    41,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,485Total comprehensive income
    
    $
    304,937Purchase of common stock
    
    
    
    
    
    
    (65,000
    )
    
    
    (3,250
    )
    
    
    (61,750
    )
    
    
    
    
    
    
    BALANCE, March 31, 2007
    
    
    
    
    
    $
    14,049,847
    
    
    $
    1,281,129
    
    
    $
    12,162,368
    
    
    $
    600,174
    
    
    $
    6,176
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##### Table of Contents



(1)
    
    Summary of Significant Accounting Policies. The accounting and reporting policies of
SouthEast Bancshares, Inc. (the Company) conform with generally accepted accounting
principles and practices within the banking industry. The policies that materially affect
financial position and results of operations are summarized as follows:Nature of Operations:
The Company is a bank holding company whose principal activity is the ownership and
management of its wholly-owned subsidiary, SouthEast Bank & Trust (the Bank). The Bank
provides a variety of financial services to individuals and corporate customers at its
offices in Athens, Cleveland, Decatur, Dayton, Spring City and Ten Mile, Tennessee. The
Banks primary deposit products are interest-bearing checking accounts and certificates of
deposit. Its primary lending products are commercial, residential, and consumer loans. The
Bank defines its market area as all counties in which it operates and all contiguous
counties.Basis of Consolidation:
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, SouthEast Bank & Trust and its wholly-owned subsididary, Frontier
Reinsurance Company. All material intercompany balances and transactions have been
eliminated in consolidation.(2)
    
    Subordinated Debentures. Effective February 22, 2007, a wholly owned subsidiary grantor
trust, SouthEast Bancshares, Inc. Statutory Trust I (the Trust), was established by the
Company. The Trust was created for the sole purpose of issuing and selling trust preferred
securities and using the proceeds from the sale to acquire long term subordinated debentures
issued by the Company. The debentures are the sole assets of the Trust. This subsidiary
issued $3 million of pooled trust preferred securities (Trust Preferred Securities) on March
1, 2007. The Trust Preferred Securities accrue and pay distributions periodically at
specified rates as provided in the indentures. The Trust used the net proceeds from the
offering to purchase a like amount of Junior Subordinated Debentures (the Debentures) of the
Company. The Debentures are the sole assets of the Trust. The Trust Preferred Securities
must be redeemed upon maturity of the Debentures, or earlier redemption as provided in the
indentures. The Company has the right to redeem the Debentures in whole or in part after five
years, at a redemption price of par plus any accrued but unpaid interest as of the redemption
date. The Trust Preferred Securities have a maturity of 30 years and are redeemable after
five years with certain exceptions. At March 1, 2007, the fixed rate securities in the Trust
had a 6.78% interest rate which resets after five years.For regulatory capital purposes, under current guidelines the Trust Preferred Securities
qualify as a component of Tier 1 capital, subject to certain limitations.Implementation of FASBI 46-R resulted in the Companys investment in the common equity of
the Trust being included in the consolidated balance sheet at March 31, 2007, as investments
totaling $93,000. As of March 31, 2007, the outstanding balance of the
subordinated debentures was $3,093,000.
 Page 8




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##### Table of Contents



(3)
    
    Earnings Per Common Share. Basic earnings per share represent income available to common
stockholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common shares that may be
issued by the Company relate to outstanding stock options, determined using the treasury stock
method. Earnings per common share have been computed based on the following:
 2007
    
    
    2006Net income
    
    $
    263,452
    
    
    $
    440,722Average number of common shares outstanding
    
    
    1,281,573
    
    
    
    1,284,379Effect of dilutive stock options and warrants
    
    
    48,426
    
    
    
    63,206Average number of common shares outstanding
used to calculate diluted earnings per
common share
    
    
    1,329,999
    
    
    
    1,347,585
 (4)
    
    Stock Options. The Bank has a stock option plan which is administered by the Board of
Directors and provides for both incentive stock options and nonqualified stock options.
The Plans purpose is to attract, retain, motivate and reward management, key employees and
directors. Under the Plan the purchase price of all options granted is to be at fair
market value of the common stock on the date of grant. The maximum number of shares of
common stock that can be granted under the Plan is 250,000, and options may be granted with
vesting and expiration terms not to exceed 10 years. The effect of stock options forfeited
is recognized as the forfeitures occur. There were no new grants, terminations or
expirations of stock options during the first quarter of 2007. All granted options were
vested at March 31, 2007.The aggregate intrinsic value of options outstanding and exercisable at March 31, 2007 is
$1,583,000. The aggregate intrinsic value represents the total pre-tax intrinsic value
(the amount by which the current market value of the underlying stock exceeds the exercise
price of the option) that would have been received by the option holders had all option
holders exercised their options on March 31, 2007. This amount changes based on changes in
the market value of the Companys stock.The interim financial statements should be read in conjunction with the notes to the
financial statements presented in Form 10-KSB filed by the Company with the Securities and
Exchange Commission (the SEC) for the year ended December 31, 2006. The quarterly
financial statements reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for interim periods. All such adjustments
are of a normal recurring nature. The results for the interim periods are not necessarily
indicative of the results to be expected for the complete fiscal year.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Forward-Looking Statements
 SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 Statements and financial discussion and analysis contained in this Report on Form 10-QSB (this
Report) of the Company that are not historical facts are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements describe the Companys future plans, strategies and expectations, are
based on assumptions and involve a number of risks and uncertainties, many of which are beyond the
Companys control. The important factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include, without limitation:
 
    
    general business and economic conditions in the markets the Company
serves may be less favorable than anticipated;
    
    changes in market rates and prices may impact the value of securities,
loans, deposits and other financial instruments;
    
    changes in the levels of loan prepayments and the resulting effects on
the value of the Banks loan portfolio;
    
    changes in local economic and business conditions that could adversely
affect the Banks customers and their ability to transact profitable business with
the Bank, including among other things, the ability of borrowers to repay their
loans according to their terms and the value of related collateral;
    
    the failure of assumptions underlying the establishment of and
provisions made to the allowance for possible credit losses;
    
    the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
    
    the Companys ability to acquire, operate and maintain cost effective
and efficient systems without incurring unexpectedly difficult or expensive but
necessary technological changes;
    
    legislative or regulatory developments including changes in laws or
regulations concerning taxes, banking, securities, insurance or other aspects of
the financial services industry;
    
    competitive factors including among other things, product and pricing
pressures among financial services organizations may increase;
    
    the Companys ability to expand and grow its business and operations
through the opening of de novo branches or the acquisition of additional banks, and
the Companys ability to realize the cost savings and revenue enhancements it expects
from such expansion or acquisitions;
    
    fiscal and governmental policies of the United States government; and
    
    other factors discussed in this Report.
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##### Table of Contents



The words anticipate, estimate, project, intend, expect, believe, continue,
may, will, should and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are found at various places throughout this document
and the other documents incorporated herein by reference. All written and oral forward-looking
statements attributable to the Company are expressly qualified in their entirety by these
cautionary statements. The Company undertakes no obligation to publicly update or otherwise revise
any forward-looking statements, whether as a result of new information, future events or otherwise,
unless the securities laws require the Company to do so.
 Critical Accounting Policies
   Allowance for loan losses
 Securities
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Managements Financial Review
 Introduction
  Overview
  www.southeastbank.net
 Page 12




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##### Table of Contents



Balance Sheet Analysis
  Page 13




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##### Table of Contents



Real estate loans:Residential 1-4 family
    
    $
    62,052Commercial
    
    
    32,075Construction
    
    
    16,324Other
    
    
    10,942Total mortgage loans on real estate
    
    
    121,393Commercial and industrial loans
    
    
    17,757Consumer loans
    
    
    13,142Other
    
    
    3,260Total loans
    
    
    155,552Less: Allowance for loan losses
    
    
    (1,732
    )Less: Deferred loan fees
    
    
    (36
    )Net Loans
    
    $
    153,784
    (In Thousands)U.S. Government and federal agencies
    
    $
    6,703Mortgage-backed securities
    
    
    8,019State and municipal securities
    
    
    1,173Total
    
    $
    15,895
  Page 14




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(in thousands)MARCH 31,
    
    
    DECEMBER 31,
    
    
    %2007
    
    
    2006
    
    
    CHANGENon-Interest bearing accounts
    
    $
    16,786
    
    
    $
    13,727
    
    
    
    22.3
    %NOW Accounts
    
    
    23,866
    
    
    
    20,921
    
    
    
    14.1
    %Money Market Accounts
    
    
    30,119
    
    
    
    25,367
    
    
    
    18.7
    %Savings Accounts
    
    
    8,554
    
    
    
    7,103
    
    
    
    20.4
    %Certificates of Deposits
    
    
    90,916
    
    
    
    86,641
    
    
    
    4.9
    %Individual Retirement Accounts
    
    
    12,085
    
    
    
    10,737
    
    
    
    12.6
    %TOTAL DEPOSITS
    
    $
    182,326
    
    
    $
    164,496
    
    
    
    10.8
    %
    Page 15




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Income Statement Analysis
  Quarterly Income(in thousands)2007
    
    
    2006First Quarter
    
    $
    263
    
    
    $
    441Second Quarter
    
    
    N/A
    
    
    
    243Third Quarter
    
    
    N/A
    
    
    
    367Fourth Quarter
    
    
    N/A
    
    
    
    443Annual Total
    
    $
    263
    *
    
    $
    1,494
 
 *
    
    As of March 31, 2007, the Companys income for the first quarter of 2007 totaled $263,452.
Results for the first quarter of 2007 are not necessarily indicative of results to be expected
in the remaining quarters of 2007.  (in thousands)
    
    
    %2007
    
    
    2006
    
    
    CHANGENet Interest Income*
    
    $
    1,799
    
    
    $
    1,384
    
    
    
    30.0
    %Provision for Loan Losses
    
    
    (120
    )
    
    
    (105
    )
    
    
    14.3
    %Non-Interest Income
    
    
    420
    
    
    
    374
    
    
    
    12.3
    %Non-Interest Expenses
    
    
    (1,670
    )
    
    
    (1,212
    )
    
    
    37.8
    %Net Income Before Income Taxes
    
    
    429
    
    
    
    441
    
    
    
    (2.7
    %)Provision for income taxes
    
    
    (166
    )
    
    
    
    
    
    
    N/ANet Income
    
    $
    263
    
    
    $
    441
    
    
    
    (40.4
    %)
 
 *
    
    Net interest income is the difference between the interest income received on the Companys
earning assets and the interest expense paid on its deposits and borrowings.  Page 16




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Net Interest Income
  Net Interest Margin
  Provision For Loan Losses/Asset Quality
  Non-Interest Income
  Page 17




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Off-Balance Sheet Arrangements
     Non-Interest Expense
  Liquidity And Funding Sources
   Page 18




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ITEM 3. CONTROLS AND PROCEDURES
  
 PART II- OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
    Page 19




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(c)31.2
    
    Certification of Principal Financial Officer pursuant to Rule
13(a)-14(a)/15d-14(c)32.1
    
    Certificate of the Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350
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SIGNATURES
  SOUTHEAST BANCSHARES, INC.Date: May 11, 2007
    
    /s/ F. Stephen MillerF. Stephen Miller, Chairman and CEODate: May 11, 2007
    
    /s/ M. Shellie FugateM. Shellie Fugate, Chief Financial Officer
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