SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended Commission file
JUNE 30, 2001 No. 0-13660
SEACOAST BANKING CORPORATION OF FLORIDA
(Exact name of registrant as specified in its charter)
Florida 59-2260678
- --------------------------------- -----------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
815 Colorado Avenue, Stuart FL 34994
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(Address of principal executive offices) (Zip code)
(561) 287-4000
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Class A Common Stock, Par Value $.10
(Title of class)
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 the number of shares outstanding of each of the registrant's classes of
common stock as of June 30, 2001:
Class A Common Stock, $.10 Par Value - 4,359,594 shares
Class B Common Stock, $.10 Par Value - 352,560 shares
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 2001, December 31, 2000 and
June 30, 2000 3 - 4
Condensed consolidated statements of income -
Three months and six months ended June 30,
2001 and 2000 5
Condensed consolidated statements of cash flows -
Six months ended June 30, 2001 and 2000 6 - 7
Notes to condensed consolidated financial
statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 16
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- 3 -
Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, December 31, June 30,
(Dollars in thousands) 2001 2000 2000
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ASSETS
Cash and due from banks $33,251 $33,505 $30,988
Federal funds sold 54,225 39,000 0
Securities:
Held for Sale (at market) 192,283 178,722 188,806
Held for Investment (market values:
$17,199 at June 30, 2001,
$26,078 at December 31, 2000
& $27,661 at June 30, 2000) 16,779 25,942 27,815
------------------------------------
TOTAL SECURITIES 209,062 204,664 216,621
Loans available for sale 9,050 2,030 1,474
Loans 827,188 844,546 827,437
Less: Allowance for loan losses (7,185) (7,218) (7,103)
------------------------------------
NET LOANS 820,003 837,328 820,334
Bank premises and equipment 16,088 16,633 17,455
Other assets 14,469 18,213 18,008
------------------------------------
$1,156,148 $1,151,373 $1,104,880
====================================
LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES
Deposits $971,185 $957,089 $939,028
Federal funds purchased and securities
sold under agreements to repurchase,
maturing within 30 days 47,921 65,020 31,218
Other borrowings 40,000 40,000 49,970
Other liabilities 5,931 5,001 5,443
-----------------------------------
1,065,037 1,067,110 1,025,659
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, December 31, June 30,
(Dollars in thousands) 2001 2000 2000
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SHAREHOLDERS' EQUITY
Preferred stock 0 0 0
Class A common stock 483 482 482
Class B common stock 35 36 36
Additional paid-in capital 27,831 27,831 27,809
Retained earnings 76,804 72,562 69,197
Less: Treasury stock (14,740) (14,470) (13,379)
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90,413 86,441 84,145
Other comprehensive income 698 (2,178) (4,924)
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TOTAL SHAREHOLDERS'
EQUITY 91,111 84,263 79,221
--------------------------------------
$1,156,148 $1,151,373 $1,104,880
======================================
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Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
(Dollars in thousands,
except per share data) 2001 2000 2001 2000
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Interest and dividends on
securities $3,674 $3,448 $6,880 $6,844
Interest and fees on loans 16,715 16,284 33,578 31,782
Interest on federal funds sold 332 164 939 323
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TOTAL INTEREST INCOME 20,721 19,896 41,397 38,949
Interest on deposits 2,183 2,411 4,532 4,578
Interest on time certificates 6,147 5,675 12,370 10,878
Interest on borrowed money 1,043 1,169 2,249 2,123
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TOTAL INTEREST EXPENSE 9,373 9,255 19,151 17,579
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NET INTEREST INCOME 11,348 10,641 22,246 21,370
Provision for loan losses 0 150 0 300
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,348 10,491 22,246 21,070
Noninterest income
Securities gains 422 1 567 2
Other income 3,849 3,232 7,389 6,675
----------------------------------------
TOTAL NONINTEREST INCOME 4,271 3,233 7,956 6,677
TOTAL NONINTEREST EXPENSES 9,522 8,741 18,701 17,747
----------------------------------------
INCOME BEFORE INCOME TAXES 6,097 4,983 11,501 10,000
Provision for income taxes 2,395 1,920 4,521 3,830
----------------------------------------
NET INCOME $3,702 $3,063 $6,980 $6,170
========================================
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PER SHARE COMMON STOCK:
Net income basic $0.79 $0.64 $1.48 $1.28
Net income diluted 0.78 0.63 1.46 1.27
CASH DIVIDENDS DECLARED:
Class A 0.28 0.26 0.56 0.52
Class B 0.254 0.236 0.508 0.472
AVERAGE SHARES OUTSTANDING
Basic 4,710,313 4,800,023 4,719,658 4,816,071
Diluted 4,767,295 4,832,070 4,766,807 4,851,305
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See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
-----------------------------
(Dollars in thousands) 2001 2000
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Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $41,818 $38,383
Fees and commissions received 7,562 6,792
Interest paid (19,286) (17,322)
Cash paid to suppliers and employees (16,303) (17,327)
Income taxes paid (4,482) (3,666)
----------------------------
Net cash provided by operating activities 9,309 6,860
Cash flows from investing activities
Proceeds from maturity of securities held for
sale 35,319 8,161
Proceeds from maturity of securities held for
investment 2,545 2,768
Proceeds from sale of securities held for sale 135,032 125
Purchase of securities held for sale (166,105) (592)
Purchase of securities held for investment (5,902) (13,147)
Net new loans and principal repayments 10,206 (50,178)
Proceeds from the sale of other real estate owned 236 565
Additions to bank premises and equipment (505) (1,865)
Net change in other assets 847 291
-----------------------------
Net cash provided by (used in) investing activities 11,673 (53,872)
Cash flows from financing activities
Net increase in deposits 14,096 33,089
Net decrease in federal funds purchased and
repurchase agreements (17,099) (35,746)
Net increase in other borrowings 0 25,000
Exercise of stock options 694 184
Treasury stock acquired (1,083) (1,985)
Dividends paid (2,619) (2,484)
-----------------------------
Net cash provided by (used in) financing activities (6,011) 18,058
-----------------------------
Net increase(decrease) in cash and cash equivalents 14,971 (28,954)
Cash and cash equivalents at beginning of year 72,505 59,942
-----------------------------
Cash and cash equivalents at end of period $87,476 $30,988
=============================
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
-----------------------------
(Dollars in thousands) 2001 2000
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Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $6,980 $6,170
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,438 1,273
Provision for loan losses 0 300
Gains on sale of securities (567) (2)
Losses on sale and writedown of foreclosed
assets 17 1
Gains (losses) on disposition of fixed assets (1) 15
Change in interest receivable 483 (434)
Change in interest payable (135) 257
Change in prepaid expenses 217 (20)
Change in accrued taxes 400 337
Change in other liabilities 477 (1,037)
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Total adjustments 2,329 690
-----------------------------
Net cash provided by operating activities $9,309 $6,860
=============================
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Supplemental disclosure of noncash investing activities:
Transfers from loans to other real estate owned $99 $302
Market value adjustment to securities 4,654 150
Transfers from securities held for investment to
securities held for sale 12,510 0
Transfers from loans to securities held for sale 19,595 0
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See notes to condensed consolidated financial statements.
- -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEACOAST
BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 2001, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
NOTE B - COMPREHENSIVE INCOME
Under FASB Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, the Company is required to report a measure of all changes
in equity, not only reflecting net income but certain other changes as well. At
June 30, 2001 and 2000, comprehensive income was as follows:
Three Months Ended June 30,
(Dollars in thousands) 2001 2000
-----------------------------
Net income $3,702 $3,063
Unrealized gains-securities 145 284
-----------------------------
Comprehensive income $3,847 $3,347
=============================
Six Months Ended June 30,
(Dollars in thousands) 2001 2000
-----------------------------
Net income $6,980 $6,170
Unrealized gains-securities 2,876 226
-----------------------------
Comprehensive income $9,856 $6,396
=============================
NOTE C - DERIVATIVE INSTRUMENTS
Derivative financial instruments, such as interest rate swaps, options, caps,
floors, futures and forward contracts have not been components of the Company's
past risk management profile. The Company monitors its sensitivity to changes in
interest rates and may use derivative instruments to limit volatility of net
interest income. Derivative instruments had no effect on net interest income in
the first two quarters of 2001 or the prior year.
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001. There was no financial impact on earnings or other comprehensive income
as a result of the adoption.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 2001
The following discussion and analysis is designed to provide a better
understanding of the significant factors related to the Company's results of
operations and financial condition. Such discussion and analysis should be read
in conjunction with the Company's Condensed Consolidated Financial Statements
and the notes attached thereto.
EARNINGS SUMMARY
Net income for the second quarter of 2001 totaled $3,702,000 or $0.78 per share
diluted, compared to $3,278,000 or $0.69 per share diluted recorded in the first
quarter of 2001 and $3,063,000 or $0.63 per share diluted reported in the second
quarter of 2000. Profits realized from investment securities sold added $259,000
or $0.05 per share diluted to second quarter 2001's results and $348,000 or
$0.07 per share diluted year-to-date for 2001. The securities were sold to
reduce exposure to future interest rate increases.
Return on average assets was 1.28 percent and return on average shareholders'
equity was 16.52 percent for the second quarter of 2001, compared to first
quarter 2001's performance of 1.17 percent and 15.06 percent, respectively, and
the prior year's second quarter results of 1.11 percent and 14.45 percent,
respectively.
NET INTEREST INCOME
Net interest income (fully taxable equivalent) increased $690,000 or 6.4 percent
to $11,403,000 for the second quarter of 2001 compared to a year ago, and was
$444,000 or 4.1 percent higher than the first quarter of 2001. For the six-month
period ending June 30, 2001, net interest income (on a tax equivalent basis)
increased $844,000 or 3.9 percent year over year to $22,362,000.
The Federal Reserve spent the first half of 2000 increasing short term interest
rates 100 basis points, and as a result, the Company along with other banks saw
its net interest margin decline. However, since December 2000 the Federal
Reserve has been fairly aggressive in decreasing short term interest rates (by
275 basis points). A 50 basis point cut in December 2000 and subsequent cuts of
50 basis points in January, March, April, and May 2001 and 25 basis points in
June 2001, have contributed to an improvement in the Company's margin. On a tax
equivalent basis the net interest margin during the second quarter of 2001 was 2
basis points higher than for the first quarter of 2001. The margin for the
current quarter and prior quarters is as follows:
Second Quarter 2001 4.12%
First Quarter 2001 4.10
Fourth Quarter 2000 3.93
Third Quarter 2000 3.90
Second Quarter 2000 4.08
In the second quarter of 2001, the cost of interest-bearing liabilities
decreased 29 basis points to 4.13 percent from the first quarter of 2001, with
rates for NOW, savings, money market accounts, certificates of deposit, short
term borrowings (entirely composed of repurchase agreements with customers and
federal funds purchased), and other borrowings decreasing 14, 54, 5, 22, 23 and
1 basis points, respectively. The rate for NOW accounts decreased less than what
might be expected as a result of the Company continuing to successfully market a
new product called Investor NOW, initially offered in late 2000 the product is
index priced to be competitive with third party money funds, but requires a
minimum balance of $100,000. The average balance for this account during the
second quarter increased to $29.9 million from $22.6 million in the first
quarter of this year and $12.6 million in the fourth quarter of 2000. Money
market accounts as well were refined during the second quarter of this year with
the Company adjusting tiering on its stratified money market products to meet
customer expectations, thereby stemming outflow of core funds but causing the
rate paid on money market deposits to not decline as much as might be expected.
The rate on certificates of deposit is expected to continue to decline over the
remainder of 2001 as $184.0 million or 43.0 percent of outstanding certificates
of deposit mature and re-price.
With regards to interest earned, the yield on earning assets for the second
quarter of 2001 decreased 25 basis points to 7.51 percent, compared to the first
quarter of 2001. Decreases in the yield on loans of 16 basis points to 8.04
percent, the yield on securities of 29 basis points to 6.05 percent, and the
yield on federal funds sold of 109 basis points to 4.46 percent were recorded.
Average earning assets increased $25.8 million during the second quarter, with
an increase of $40.8 million to $245.3 million in securities partially offset by
declines of $14.5 million to $29.8 million in federal funds sold and $0.5
million (0.1 percent) to $835.0 million in loans. Impacting loan growth during
the second quarter of 2001 was a securitization of residential mortgages
totaling $9.5 million (compared to $10.1 million during the first quarter of
2001), and the origination of residential mortgage loans for sale to permanent
third party investors.
The Company's held for sale securities portfolio had sales totaling $69.1
million and purchases of $65.9 million transacted during the current quarter
compared to $65.9 million in sales and $106.1 million in purchases during the
first quarter of 2001. Activity in the securities portfolio in the first quarter
reflected a restructuring effort to maximize performance in the declining
environment that was occurring. Of the $65.9 million in sales in the second
quarter, $58.8 million was transacted in June 2001, in part to meet seasonal
liquidity, but also to position the Company to better benefit from future rising
interest rates.
For the second quarter a year ago, the net interest margin was 4.08 percent. The
yield on average earning assets was 7.60 percent and rate on interest bearing
liabilities was 4.26 percent.
The mix of earning assets and interest bearing liabilities impacts the margin.
Second Quarter
--------------
2001 2000
---- ----
Average Earning Asset Mix:
Loans 75.2% 77.8%
Securities 22.1 21.2
Federal Funds Sold 2.7 1.0
Average Interest Bearing Liabilities Mix:
NOW, Savings, Money Market Deposits 43.1% 44.3%
Certificates of Deposit 46.9 46.7
Federal Funds Purchased and
Repurchase Agreements 5.6 3.3
Other Borrowings 4.4 5.7
Loans (the highest yielding component of earning assets) as a percentage of
average earning assets decreased 2.6 percent compared to a year ago, while
average securities and federal funds sold (lower yielding components) increased
0.9 percent and 1.7 percent, respectively. While total loans did not increase as
a percentage of earning assets versus prior year, the Company is successfully
changing the mix of loans, with commercial and consumer volumes increasing as a
percentage of total loans (see "Loan Portfolio").
As can be seen in the above table, average certificates of deposit (a higher
cost component of interest-bearing liabilities) as a percentage of
interest-bearing liabilities increased only slightly. Lower loan growth has
diminished funding requirements, thereby allowing the Company to price less
competitively for certificates of deposit and to de-emphasize promotional
advertising for such deposits. Also, with consumer interest in acquiring
short-term certificates of deposit (less than six months) heightened, the
Company has benefited from more frequent pricing of its certificates to lower
rates (in synch with recent Federal Reserve actions in 2001). Lower cost core
interest bearing deposits (NOW, savings and money market deposits) grew $4.5
million or 1.2 percent to $392.0 million year over year and noninterest bearing
demand deposits grew $9.0 million or 6.0 percent to $158.5 million, favorably
affecting the Company's deposit mix. Short-term borrowings (including federal
funds purchased, but principally sweep repurchase agreements with customers of
the Company's bank subsidiary) increased to 5.6 percent of interest bearing
liabilities, reflecting an increase in the number of customers utilizing such
sweep arrangements.
PROVISION FOR LOAN LOSSES
No provisioning was recorded in the first or second quarter of 2001, reflecting
the Company's exceptional credit quality, declining nonperforming assets, and
slower loan growth. A provision of $150,000 was recorded in all quarters in
2000, $600,000 for the total year in 2000. Net charge-offs of $39,000 for the
second quarter of 2001 were partially offset by net recoveries in the first
quarter of 2001 of $6,000. Net charge-offs annualized as a percent of average
loans were at 0.1 percent for the first six months of 2001, compared to 0.02
percent for the same period in 2000 and 0.03 percent for the total year in 2000.
These ratios are much better than the banking industry as a whole.
Management determines the provision for loan losses charged to operations by
constantly analyzing and monitoring delinquencies, nonperforming loans and the
level of outstanding balances for each loan category, as well as the amount of
net charge-offs, and by estimating losses inherent in its portfolio. While the
Company's policies and procedures used to estimate the monthly provision for
loan losses charged to operations are considered adequate by management and are
reviewed from time to time by the Office of the Comptroller of the Currency
(OCC), there exist factors beyond the control of the Company, such as general
economic conditions both locally and nationally, which make management's
judgment as to the adequacy of the provision necessarily approximate and
imprecise (See "Allowance for Loan Losses").
NONINTEREST INCOME
Noninterest income, excluding gains and losses from securities sales, totaled
$3,849,000 for the second quarter, an increase of $617,000 or 19.1 percent from
the same period last year. Noninterest income was favorably impacted by growth
in fee-based businesses. Noninterest income accounted for 25.3 percent of
revenue in the second quarter of 2001 compared to 23.3 percent a year ago.
Market turmoil has affected revenue from brokerage activities since late 2000
and the trend continued in the first quarter of 2001 with consumers shifting
from the purchase of investment products to more conservative deposit products.
However, financial markets rebounded in the second quarter and brokerage revenue
increased $24,000 or 4.5 percent to $556,000. Trust income was sluggish in the
second quarter, declining $51,000 or 7.6 percent year over year to $618,000.
The Company has been among the leaders in the production of residential mortgage
loans in its market. In order to improve profitability and better manage
interest rate risks, the Company began producing loans for third party permanent
investors in 2000. As a result, the Company increased noninterest income related
to mortgage loan production to $521,000 in the second quarter of 2001, an
increase of $321,000 or 160.5 percent from a year ago and $72,000 or 16.0
percent from the first quarter of this year.
Greater usage of check cards by the Company's core deposit customers and an
increased cardholder base increased interchange income to $182,000, an increase
of $76,000 or 71.7 percent from last year for the second quarter. Fees earned
from the production of marine loans totaling $19.5 million by Seacoast Marine
Finance (which began operations in February 2000) totaled $258,000, compared to
$167,000 last year (a 54.5 percent increase). Also increasing year over year in
the second quarter, service charges on deposits grew $103,000 or 8.8 percent to
$1,268,000. Remaining noninterest revenue sources (principally other service
charges and fees) increased $53,000 or 13.5 percent to $446,000.
Lower rates for fixed rate residential 15- and 30-year loan products during late
2000 and in 2001 have resulted in higher refinance activity. While refinance
activity will likely decline, mortgage banking revenues are expected to remain
strong over the remainder of 2001 as a result of increased market penetration.
Although financial markets have been in turmoil, the Company intends to continue
to emphasize investment products in 2001 and expects it will derive a benefit
from the sale of life insurance, a new product in the second quarter of 2001.
Noninterest income, excluding gains and losses from securities sales, totaled
$7,389,000 for the six-month period ending June 30, 2001, an increase of
$714,000 or 10.7 percent from the same period last year. As in the quarterly
comparison, the more significant increases were in mortgage banking, check card
interchange income, the sale of marine loans, and service charges on deposits,
increasing year over year $593,000, $151,000, $157,000 and $172,000,
respectively. Year-to-date trust and brokerage income decreased $25,000 and
$470,000 year over year, respectively, with brokerage revenue hardest hit by
financial market turmoil in the first quarter of 2001, declining $494,000 or
55.3 percent for that period (versus 2000). Remaining noninterest revenue
sources increased $136,000.
Securities gains of $422,000 and $145,000 were recognized during the second and
first quarter of 2001, respectively, compared to $1,000 in each of the same
quarters a year ago (See "Securities").
NONINTEREST EXPENSES
When compared to 2000, noninterest expenses for the second quarter increased by
$781,000 or 8.9 percent to $9,522,000. The Company's overhead ratio has
decreased over the past three years, from 68.6 percent in the second quarter of
1998 to 65.3 percent in 1999 to 62.7 percent a year ago. The overhead ratio was
62.4 percent in the second quarter of 2001. This is reflective of initiatives to
reduce overhead costs, particularly staffing, and streamlined operational and
procedural changes that have been implemented.
Compared to the second quarter of 2000, salaries and wages increased $435,000 or
13.4 percent to $3,677,000. Base salaries increased $195,000 or 6.6 percent,
with staffing (on a full-time equivalent basis) increasing from 339 a year ago
to 359 at June 30, 2001 (including additional staff for the Company's newest
branch location at a WalMart superstore in Ft. Pierce, Florida). Incentives were
$76,000 higher year over year due to the Company's improved performance and
deferred loan origination costs were lower by $77,000, reflecting the Company's
transition from residential portfolio lending to mortgage banking. Employee
benefits increased $134,000 or 15.4 percent to $1,002,000. Most of the increase
in benefit costs is related to higher performance award accruals for 2001.
Occupancy expenses and furniture and equipment expenses, on an aggregate basis,
increased $71,000 or 5.3 percent to $1,404,000, versus second quarter results
last year. Higher depreciation and maintenance costs were the primary cause.
Marketing expenses, including sales promotion costs, ad agency production and
printing costs, newspaper and radio advertising, and other public relations
costs associated with the Company's efforts to market products and services,
increased by $64,000 or 15.7 percent to $472,000 in the second quarter of 2001
when compared to a year ago. Of the increase, $25,000 was a result of newspaper
and radio advertising, $15,000 for higher sales promotion costs, and $7,000 for
direct mail campaigns.
Noninterest expenses for the six-month period ending June 30, 2001 were $954,000
or 5.4 percent higher and totaled $18,701,000. Changes year over year were as
follows: 1) salaries and wages increased $467,000 or 7.1 percent, 2) employee
benefits grew $194,000 or 11.2 percent, 3) occupancy and furniture and equipment
expenses increased $95,000 or 3.5 percent, on an aggregate basis, 4) marketing
expenses were $137,000 or 16.1 percent higher, and 5) outsourced data processing
costs increased $99,000 or 4.8 percent.
INCOME TAXES
Income taxes as a percentage of income before income taxes were 39.3 percent for
the first six months of this year, compared to 38.3 percent in 2000. The rate
reflects a higher rate of provisioning for state income taxes, a result of lower
tax credit, lower tax-exempt interest income and the Company's effective federal
tax rate increasing due to adjusted income before taxes expected to exceed $18
million.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Company's ratio of average shareholders' equity to average total assets
during the first six months of 2001 was 7.74 percent, compared to 7.73 percent
during the first six months of 2000. The Company manages the size of equity
through a program of share repurchases of its outstanding Class A Common stock.
In treasury stock at June 30, 2001, there were 470,792 shares totaling
$14,740,000, compared to 423,313 shares or $13,379,000 a year ago.
The risk-based capital minimum ratio for total capital to risk-weighted assets
for "well-capitalized" financial institutions is 10 percent. At June 30, 2001,
the Company's ratio was 12.16 percent.
LOAN PORTFOLIO
The Company's loan activity is principally with customers located within its
defined market area known as the Treasure Coast of Florida. This area is located
on the southeastern coast of Florida above Palm Beach County and extends north
to Brevard County.
Total loans (net of unearned income and excluding the allowance for loan losses)
were $827,188,000 at June 30, 2001, $249,000 less than at June 30, 2000, and
$17,358,000 or 2.1 percent lower than at December 31, 2000.
At June 30, 2001, the Company's mortgage loan balances secured by residential
properties amounted to $433,145,000 or 52.4 percent of total loans (versus 56.4
percent a year ago). The next largest concentration was loans secured by
commercial real estate totaling $216,602,000 or 26.2 percent (versus
$185,914,000 or 22.5 percent a year ago). The Company was also a creditor for
consumer loans to individual customers totaling $105,168,000 (versus $88,110,000
a year ago), most secured with collateral and including marine loans totaling
approximately $26.5 million generated by the Company's subsidiary bank's marine
lending division, Seacoast Marine Finance, headquartered in Fort Lauderdale,
Florida. Commercial loans of $34,983,000 (versus $35,393,000 last year), home
equity lines of credit of $12,361,000 (compared to $13,179,000 for prior year),
and construction loans of $24,291,000 (versus $37,646,000 a year ago) were
outstanding as well at June 30, 2001.
The Treasure Coast is a residential community with commercial activity centered
in retail and service businesses serving the local residents. Therefore, real
estate mortgage lending is an important segment of the Company's lending
activities. Exposure to market interest rate volatility with respect to mortgage
loans is managed by attempting to match maturities and re-pricing opportunities
for assets against liabilities, when possible. At June 30, 2001, approximately
$183 million or 42 percent of the Company's residential mortgage loan balances
were adjustable, compared to $187 million or 40 percent a year ago.
Of the approximate $27 million of new residential loans originated in 2001 for
the loan portfolio, roughly $24 million were adjustable and $3 million were
fixed rate. Loans secured by residential mortgages having fixed rates totaled
approximately $250 million at June 30, 2001, of which 15- and 30-year mortgages
totaled $107 million and $91 million, respectively. At June 30, 2000, fixed rate
residential loans totaled $280 million, with 15- and 30-year fixed rate
mortgages totaling $120 million and $111 million, respectively. Remaining fixed
rate balances were comprised of home improvement loans with maturities less than
15 years.
The majority of all loans and commitments for one-to-four family residential
properties and commercial real estate are generally secured with first mortgages
on property with the amount loaned at inception to the fair value of the
property not to exceed 80 percent. A majority of residential real estate loans
are made upon terms and conditions that would make such loans eligible for
resale under Federal National Mortgage Association (FNMA) or Federal Home Loan
Mortgage Corporation (FHLMC) guidelines. The Company's historical charge-off
rates for residential real estate loans have been minimal, with $5,000 in net
recoveries for the first six months of 2001 compared to $43,000 in net
charge-offs for all of 2000. The Company considers residential mortgages less
susceptible to adverse effects from a downturn in the real estate market,
especially given the area's large percentage of retired persons.
Fixed rate and adjustable rate loans secured by commercial real estate totaled
approximately $126 million and $90 million, respectively, at June 30, 2001,
compared to $118 million and $68 million, respectively, a year ago. The Company
attempts to reduce its exposure to the risk of the local real estate market by
limiting the aggregate size of its commercial real estate portfolio and by
making commercial real estate loans primarily on owner occupied properties.
At June 30, 2001, the Company had commitments to make loans (excluding unused
home equity lines of credit) of $84,382,000, compared to $79,948,000 at June 30,
2000.
ALLOWANCE FOR LOAN LOSSES
Net recoveries on residential real estate loans, commercial loans and credit
cards of $5,000, $30,000 and $18,000, respectively, were recorded for the first
half of 2001. Net charge-offs of $68,000 and $18,000 occurred on installment
loans and commercial real estate loans, respectively, for the same period. In
comparison, net recoveries were recorded for commercial real estate loans,
commercial loans and credit cards of $33,000, $49,000 and $50,000, respectively,
in the first six months of 2000. Net charge-offs on installment loans totaled
$141,000 for the first six months of 2000, and net losses arising from
residential real estate of $59,000 were recorded. As a result of the sale of the
credit card portfolio in 1998, the Company eliminated its exposure to future
credit card losses and continues to recover amounts on losses recorded prior to
the sale. Current and historical credit losses arising from real estate lending
transactions continue to compare favorably with the Company's peer group.
The ratio of the allowance for loan losses to net loans outstanding was 0.87
percent at June 30, 2001. This ratio was 0.86 percent at June 30, 2000. The
allowance for loan losses as a percentage of nonaccrual loans and loans 90 days
or more past due was 326.3 percent at June 30, 2001, compared to 260.1 percent
at the same date in 2000.
The model utilized to analyze the adequacy of the allowance for loan losses
takes into account such factors as credit quality, internal controls, audit
results, staff turnover, local market economics and loan growth. The resulting
lower allowance level necessitated is also reflective of the subsidiary bank's
favorable and consistent delinquency trends and historical loss performance.
These performance results are attributed to conservative, long-standing and
consistently applied loan credit policies and to a knowledgeable, experienced
and stable staff. The size of the allowance also reflects the large amount of
permanent residential loans held by the Company whose historical charge-offs and
delinquencies have been superior by any comparison.
Concentration of credit risk, discussed under "Loan Portfolio" of this
discussion and analysis, may affect the level of the allowance. Concentrations
typically involve loans to one borrower, an affiliated group of borrowers,
borrowers engaged in or dependent upon the same industry, or a group of
borrowers whose loans are predicated on the same type of collateral. The
Company's significant concentration of credit is a collateral concentration of
loans secured by real estate. At June 30, 2001, the Company had $650 million in
loans secured by real estate, representing 78.5 percent of total loans, down
from 78.9 percent at June 30, 2000. In addition, the Company is subject to a
geographic concentration of credit because it operates in southeastern Florida.
Although not material enough to constitute a significant concentration of credit
risk, the Company has meaningful credit exposure to real estate developers and
investors. Levels of exposure to this industry group, together with an
assessment of current trends and expected future performance, are carefully
analyzed in order to determine an adequate allowance level. Problem loan
activity for this exposure needs to be evaluated over the long term to include
all economic cycles when determining an adequate allowance level.
While it is the Company's policy to charge off in the current period loans in
which a loss is considered probable, there are additional risks of future losses
that cannot be quantified precisely or attributed to particular loans or classes
of loans. Because these risks include the state of the economy as well as
conditions affecting individual borrowers, management's judgment of the
allowance is necessarily approximate and imprecise. It is also subject to
regulatory examinations and determinations as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance for loan
losses and the size of the allowance for loan losses in comparison to a group of
peer companies identified by the regulatory agencies.
The unprecedented strong economic growth over the last five years has resulted
in improved credit quality measures for the Company and the entire banking
industry. At year-end 2000, the Company's allowance for loan losses equated to
8.8 times average charge offs for the last three years. In contrast, the
allowance equated to approximately two times charge-offs in the early 1990's
when Florida experienced a real estate economic decline.
NONPERFORMING ASSETS
At June 30, 2001, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned (OREO) was 0.26 percent, compared to
0.34 percent one year earlier.
At June 30, 2001, accruing loans past due 90 days or more outstanding totaled
$273,000 and OREO totaled $192,000. In 2000 on the same date, no loans were past
due 90 days or more and OREO balances of $105,000 were outstanding.
Nonaccrual loans totaled $1,929,000 at June 30, 2001, compared to a balance of
$2,731,000 at June 30, 2000. A portion of the nonaccrual loans outstanding at
June 30, 2001 were performing with respect to payments, with the exception of
ten loans aggregating to $1,281,000. The performing loans were placed on
nonaccrual status because the Company has determined that the collection of
principal or interest in accordance with the terms of such loans is uncertain.
Of the amount reported in nonaccrual loans at June 30, 2001, 97 percent is
secured with real estate, the remainder by other collateral. Management does not
expect significant losses for which an allowance for loan losses has not been
provided associated with the ultimate realization of these assets.
SECURITIES
Debt securities that the Company has the intent and ability to hold to maturity
are carried at amortized cost. All other securities are carried at market value
and are available for sale. At June 30, 2001, the Company had $191,137,000 or
92.2 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $16,779,000, representing 7.8
percent of total securities.
The Company's securities portfolio has decreased $17,559,000 or 7.8 percent from
June 30, 2000 and $256,000 or 0.1 percent from December 31, 2000. During the
first six months of 2001, proceeds from the sale of securities totaled
$135,032,000, of which $65,927,000 occurred in the first quarter and $69,105,000
was transacted in the second quarter, resulting in net gains of $145,000 and
$422,000, respectively, in each quarter. Maturities over the first six months of
2001 totaled $37,864,000 and purchases totaled $172,007,000. With the Federal
Reserve's policy shift to decreasing interest rates, the Company transacted
sales of certain securities to restructure its portfolio to take advantage of
the lower rate environment in 2001 while also posturing the portfolio to limit
exposure to possible rising rates in the future. Included in the sales was the
divestiture of the Company's $23 million investment in mutual funds.
The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001. There was no financial impact on earnings or other comprehensive income
as a result of the adoption. However, the Company did reclassify during the
first quarter of 2001 $12,510,000 of securities available for sale previously
classified as held to maturity in accordance with SFAS No. 115.
Management controls the Company's interest rate risk by maintaining a low
average duration for the securities portfolio and with securities returning
principal monthly that can be reinvested. At June 30, 2001, the duration of the
portfolio was 3.1 years, compared to 3.3 years a year ago.
Unrealized securities gains totaled $1,566,000 at June 30, 2001, compared to
losses of $9,008,000 at June 30, 2000 and $3,372,000 at December 31, 2000. The
Federal Reserve Bank increased rates 100 basis points in 2000 and decreased
rates 275 basis points most recently, over the period December 2000 to June
2001. The increase in rates in 2000 did not affect rates for instruments with
maturities over 2 years significantly, but recent rate declines did provide
appreciation in the market value of the Company's securities portfolio. Company
management considers the overall quality of the securities portfolio to be high.
No securities are held which are not traded in liquid markets.
DEPOSITS / BORROWINGS
Total deposits increased $32,157,000 or 3.4 percent to $971,185,000 at June 30,
2001, compared to one year earlier. Certificates of deposit increased $9,089,000
or 2.2 percent to $427,225,000 over the past twelve months, lower cost interest
bearing deposits (NOW, savings and money market accounts) increased $13,191,000
or 3.5 percent to $389,480,000, and noninterest bearing demand deposits
increased $9,877,000 or 6.8 percent to $154,480,000. Lower interest rates, an
uncertain economic environment, and recent turmoil in financial markets have
aided growth in deposits as customers seek the stability of bank products.
Short term borrowings, entirely comprised of repurchase agreement balances at
June 30, 2001, increased $16,703,000 or 53.5 percent to $47,921,000 at June 30,
2001 from a year ago when repurchase agreements and federal funds purchased
totaled $21,218,000 and $10,000,000, respectively. The number of accounts with
customers who wish to sweep excess balances on a daily basis for investment
purposes has increased from 110 a year ago to 125 at June 30, 2001, and the
incremental dollar amount invested by customers has increased. Other borrowings
decreased $9,970,000 to $40,000,000 year over year, reflecting funding obtained
through Donaldson, Lufkin and Jenrette (DLJ) at 5.40 percent being terminated
(called) at the end of August 2000.
INTEREST RATE SENSITIVITY
Interest rate exposure is managed by monitoring the relationship between earning
assets and interest bearing liabilities, focusing primarily on those that are
rate sensitive. Rate sensitive assets and liabilities are those that re-price at
market interest rates within a relatively short period, defined here as one year
or less. The difference between rate sensitive assets and rate sensitive
liabilities represents the Company's interest sensitivity gap, which may be
either positive (assets exceed liabilities) or negative (liabilities exceed
assets).
Based on the Company's most recent asset/liability management committee (ALCO)
modeling, the Company had a negative gap position based on contractual
maturities and prepayment assumptions for the next twelve months, with a
negative cumulative interest rate sensitivity gap as a percentage of total
earning assets of 22.8 percent.
The Company uses model simulation to manage and measure its interest rate
sensitivity. The Company has determined that an acceptable level of interest
rate risk would be for net interest income to fluctuate no more than 6 percent
given an immediate change in interest rates (up or down) of 200 basis points.
The Company's most recent ALCO model simulation indicated net interest income
would decline 1.1 percent if interest rates would immediately rise 200 basis
points. It has been the Company's experience that non-maturity core deposit
balances are stable and subjected to limited re-pricing when interest rates
increase or decrease within a range of 200 basis points.
Derivative financial instruments, such as interest rate swaps, options, caps,
floors, futures and forward contracts have not been components of the Company's
past risk management profile. The Company may use derivative instruments to
limit the volatility of net interest income. Derivative instruments had no
effect on net interest income in the first six months of 2001 or the prior year.
LIQUIDITY MANAGEMENT
Contractual maturities for assets and liabilities are reviewed to adequately
maintain current and expected future liquidity requirements. Sources of
liquidity, both anticipated and unanticipated, are maintained through a
portfolio of high quality marketable assets, such as residential mortgage loans,
securities available for sale and federal funds sold. The Company has access to
federal funds lines of credit and is able to provide short term financing of its
activities by selling, under an agreement to repurchase, United States Treasury
and Government agency securities not pledged to secure public deposits or trust
funds. At June 30, 2001, the Company had available lines of credit of
$130,500,000. The Company also had $130,269,000 of United States Treasury and
Government agency securities and mortgage backed securities not pledged and
available for use under repurchase agreements. At June 30, 2000, the amount of
securities available and not pledged was $110,328,000.
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold), totaled $87,476,000 at June 30, 2001 as compared to
$30,988,000 at June 30, 2000. Cash and cash equivalents vary with seasonal
deposit movements and are generally higher in the winter than in the summer, and
vary with the level of principal repayments and investment activity occurring in
the Company's securities portfolio and loan portfolio. As is typical of
financial institutions, cash flows from investing activities (primarily in loans
and securities) and from financial activities (primarily through deposit
generation and short term borrowings) exceeded cash flows from operations. In
2001, the cash flow from operations of $9,309,000 was $2,449,000 higher than
during the same period of 2000.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been
prepared in accordance with U.S. generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money, over time, due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
general level of inflation. However, inflation affects financial institutions'
increased cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense, and similar items. Inflation and related increases
in interest rates generally decrease the market value of investments and loans
held and may adversely affect liquidity, earnings, and shareholders' equity.
Mortgage originations and re-financings tend to slow as interest rates increase,
and likely will reduce the Company's earnings from such activities and the
income from the sale of residential mortgage loans in the secondary market.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations". SFAS 141 addresses financial
accounting and reporting for business combinations and supercedes APB No. 16,
"Business Combinations" and SFAS No. 38 "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises". All business combinations in the scope
of SFAS 141 are to be accounted for under the purchase method. SFAS 141 is
effective July 1, 2001. The adoption of SFAS 141 will not have an impact on the
Company's financial position, results of operations or cash flows.
In July 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible
Assets". SFAS 142 addresses financial accounting and reporting for intangible
assets acquired individually or with a group of other assets (but not those
acquired in a business combination) at acquisition. SFAS 142 also addresses
financial accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. With the adoption of SFAS 142, goodwill is no
longer subject to amortization. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair value-based test. The
impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS 142 is to be reported as resulting
from a change in accounting principle. The Company has assessed the impact of
adopting SFAS 142 and does not believe the impact is material to its financial
position, results of operations or cash flows.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
This discussion and analysis contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.
Forward-looking statements, including statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
involve known and unknown risks, uncertainties and other factors, which may be
beyond our control, and which may cause the actual results, performance or
achievements of Seacoast Banking Corporation of Florida ("Seacoast" or the
Company") to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. You should
not expect us to update any forward-looking statements.
You can identify these forward-looking statements through our use of words such
as "may", "will", "anticipate", "assume", "should", "indicate", "would",
"believe", "contemplate", "expect", "estimate", "continue", "point to",
"project", "may", "intend", or other similar words and expressions of the
future. These forward-looking statements may not be realized due to a variety of
factors, including, without limitation: the effects of future economic
conditions; governmental monetary and fiscal policies, as well as legislative
and regulatory changes; the risks of changes in interest rates on the level and
composition of deposits, loan demand, and the values of loan collateral,
securities, and interest sensitive assets and liabilities; interest rate risks;
the effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities brokerage
firms, insurance companies, money market and other mutual funds and other
financial institutions operating in the Company's market area and elsewhere,
including institutions operating regionally, nationally, and internationally,
together with such competitors offering bank products and services by mail,
telephone, computer and the Internet; the failure of assumptions underlying the
establishment of reserves for possible loan losses, and the risks of mergers and
acquisitions, including, without limitation, the related costs, including
integrating operations as part of these transactions, and the failure to achieve
the expected gains, revenue growth and/or expense savings from such
transactions.
All written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by this Cautionary Notice including,
without limitation, those risks and uncertainties, described in the Company's
annual report on Form 10-K for the year ended December 31, 2000 under "Special
Cautionary Notice Regarding Forward Looking Statements", and otherwise in the
Company's Securities and Exchange Commission (SEC) reports and filings. Such
reports are available upon request from Seacoast, or from the SEC, including the
SEC's website at http://www.sec.gov.
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2001 Annual Meeting of Shareholders was held April 19, 2001.
(b) All directors reported to the Commission in the 2001 Proxy
statement were re-elected in entirety.
(c) The following matters were voted upon at the meeting:
(i) The election of ten directors to serve until the 2002
Annual Meeting of Shareholders and until their successors
have been elected and qualified. Out of 6,910,759 votes
represented at the meeting, the number of votes cast for
and against (or withheld) their re-election were 6,823,933
(98.7%) and 86,826, respectively.
(ii) The ratification of the appointment of Arthur Andersen LLP
as independent auditors for the fiscal year ending
December 31, 2001. Out of 6,910,759 votes represented at
the meeting, the number of votes cast for and against the
ratification were 6,880,741 (99.6%) and 25,825,
respectively. Abstaining were votes totaling 4,193.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed for the three month period
ended June 30, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEACOAST BANKING CORPORATION OF FLORIDA
August 13, 2001 /s/ Dennis S. Hudson, III
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DENNIS S. HUDSON, III
President &
Chief Executive Officer
August 13, 2001 /s/ William R. Hahl
- --------------- ---------------------------------
WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer