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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
SEPTEMBER 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
- ---------------------------------------- ---------------
(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 September 30, 2001:
Class A Common Stock, $.10 Par Value - 4,322,595 shares
Class B Common Stock, $.10 Par Value - 350,145 shares
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
September 30, 2001, December 31, 2000 and
September 30, 2000 3 - 4
Condensed consolidated statements of income -
Three months and nine months ended September 30,
2001 and 2000 5
Condensed consolidated statements of cash flows -
Nine months ended September 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 - 17
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Sept. 30, December 31, Sept. 30,
(Dollars in thousands) 2001 2000 2000
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ASSETS
Cash and due from banks $ 34,428 $ 33,505 $ 27,881
Federal funds sold 11,000 39,000 0
Securities:
Held for Sale (at market) 229,644 178,722 184,297
Held for Investment (market values:
$26,664 at September 30, 2001,
$26,078 at December 31, 2000
& $26,686 at September 30, 2000) 26,133 25,942 26,776
-----------------------------------------
TOTAL SECURITIES 255,777 204,664 211,073
Loans available for sale 9,645 2,030 2,066
Loans 823,207 844,546 834,689
Less: Allowance for loan losses (7,049) (7,218) (7,108)
-----------------------------------------
NET LOANS 816,158 837,328 827,581
Bank premises and equipment 15,659 16,633 17,071
Other assets 13,265 18,213 18,108
-----------------------------------------
$1,155,932 $1,151,373 $1,103,780
=========================================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 977,008 $ 957,089 $ 919,489
Federal funds purchased and
securities sold under agreements
to repurchase, maturing within
30 days 40,546 65,020 57,104
Other borrowings 40,000 40,000 40,000
Other liabilities 5,641 5,001 5,070
-----------------------------------------
1,063,195 1,067,110 1,021,663
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Sept. 30, December 31, Sept. 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 27,814
Retained earnings 78,644 72,562 71,520
Less: Treasury stock (16,378) (14,470) (13,508)
-----------------------------------------
90,615 86,441 86,344
Other comprehensive income 2,122 (2,178) (4,227)
-----------------------------------------
TOTAL SHAREHOLDERS'
EQUITY 92,737 84,263 82,117
-----------------------------------------
$1,155,932 $1,151,373 $1,103,780
=========================================
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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 Nine Months Ended
September 30, September 30,
-----------------------------------------------
(Dollars in thousands, except
per share data) 2001 2000 2001 2000
- --------------------------------------------------------------------------------
Interest and dividends on
securities $ 3,391 $ 3,452 $ 10,271 $ 10,296
Interest and fees on loans 16,480 16,717 50,058 48,499
Interest on federal funds sold 266 37 1,205 360
--------------------- ---------------------
TOTAL INTEREST INCOME 20,137 20,206 61,534 59,155
Interest on deposits 2,020 2,476 6,552 7,054
Interest on time certificates 5,726 6,214 18,096 17,092
Interest on borrowed money 941 1,230 3,190 3,353
--------------------- ---------------------
TOTAL INTEREST EXPENSE 8,687 9,920 27,838 27,499
--------------------- ---------------------
NET INTEREST INCOME 11,450 10,286 33,696 31,656
Provision for loan losses 0 150 0 450
--------------------- ---------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,450 10,136 33,696 31,206
Noninterest income
Securities gains 8 2 575 4
Other income 3,561 3,221 10,950 9,896
--------------------- ---------------------
TOTAL NONINTEREST INCOME 3,569 3,223 11,525 9,900
TOTAL NONINTEREST EXPENSES 9,441 8,496 28,142 26,243
--------------------- ---------------------
INCOME BEFORE INCOME TAXES 5,578 4,863 17,079 14,863
Provision for income taxes 2,195 1,881 6,716 5,711
--------------------- ---------------------
NET INCOME $ 3,383 $ 2,982 $ 10,363 $ 9,152
===================== =====================
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PER SHARE COMMON STOCK:
Net income basic $ 0.72 $ 0.63 $ 2.20 $ 1.91
Net income diluted 0.71 0.62 2.17 1.89
CASH DIVIDENDS DECLARED:
Class A 0.28 0.26 0.84 0.78
Class B 0.254 0.236 0.762 0.708
AVERAGE SHARES OUTSTANDING
Basic 4,701,916 4,761,592 4,713,714 4,797,778
Diluted 4,793,203 4,796,431 4,775,738 4,832,880
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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
Nine Months Ended
September 30,
---------------------
(Dollars in thousands) 2001 2000
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Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $ 61,701 $ 58,306
Fees and commissions received 11,206 10,071
Interest paid (28,041) (27,236)
Cash paid to suppliers and employees (25,166) (26,429)
Income taxes paid (6,847) (5,522)
------------------------
Net cash provided by operating activities 12,853 9,190
Cash flows from investing activities
Proceeds from maturity of securities held for sale 61,071 14,971
Proceeds from maturity of securities held for
investment 3,072 3,804
Proceeds from sale of securities held for sale 135,041 125
Purchase of securities held for sale (226,992) (765)
Purchase of securities held for investment (15,798) (13,147)
Net new loans and principal repayments 14,456 (58,298)
Proceeds from the sale of other real estate owned 305 665
Additions to bank premises and equipment (582) (1,979)
Net change in other assets 1,240 297
-------------------------
Net cash used in investing activities (28,187) (54,327)
Cash flows from financing activities
Net increase in deposits 18,920 13,551
Net decrease in federal funds purchased and
repurchase agreements (24,474) (9,860)
Net increase in other borrowings 0 15,030
Exercise of stock options 972 184
Treasury stock acquired (3,239) (2,115)
Dividends paid (3,922) (3,714)
-------------------------
Net cash provided by (used in) financing activities (11,743) 13,076
-------------------------
Net decrease in cash and cash equivalents (27,077) (32,061)
Cash and cash equivalents at beginning of year 72,505 59,942
-------------------------
Cash and cash equivalents at end of period $ 45,428 $ 27,881
=========================
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Nine Months Ended
September 30,
------------------------
(Dollars in thousands) 2001 2000
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Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $ 10,363 $ 9,152
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,174 1,929
Provision for loan losses 0 450
Gains on sale of securities (575) (4)
Losses on sale and writedown of foreclosed
assets 10 12
Gains (losses) on disposition of fixed assets (1) 15
Change in interest receivable 220 (655)
Change in interest payable (203) 263
Change in prepaid expenses 265 (723)
Change in accrued taxes 185 476
Change in other liabilities 415 (1,725)
------------------------
Total adjustments 2,490 38
------------------------
Net cash provided by operating activities $ 12,853 $ 9,190
========================
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Supplemental disclosure of noncash investing activities:
Transfers from loans to other real estate owned $ 100 $ 433
Market value adjustment to securities 6,980 2,200
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 nine-month period
ended September 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
September 30, 2001 and 2000, comprehensive income was as follows:
Three Months Ended September 30,
(Dollars in thousands) 2001 2000
------------------------------------
Net income $3,383 $2,982
Unrealized gains-securities 1,424 1,273
------------------------------------
Comprehensive income $4,807 $4,255
====================================
Nine Months Ended September 30,
(Dollars in thousands) 2001 2000
------------------------------------
Net income $10,363 $9,152
Unrealized gains-securities 4,300 1,499
------------------------------------
Comprehensive income $14,663 $10,651
====================================
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 in the future may use derivative instruments to limit
volatility of net interest income. Derivative instruments had no effect on net
interest income in the first three 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.
NOTE D - REVOLVING LINE OF CREDIT
On September 6, 2001, Seacoast Banking Corporation of Florida (the parent
company) entered into an agreement with SunTrust Bank (Orlando, Florida) for a
$5 million unsecured revolving line of credit. Drawn funds will be utilized for
general corporate purposes, including but not limited to the capital needs of
the Company and its subsidiaries and the repurchase of Company common stock. The
term is one year, with interest calculated on a floating basis at 130 basis
points above 90-day LIBOR (payable quarterly) and outstanding principal due at
final maturity. Covenants measured against the Company's subsidiary bank include
an interest coverage ratio equal to or greater than 3 times, a nonperforming
asset ratio less than or equal to 1%, and capital ratios meeting benchmarks for
consideration as "well-capitalized." At September 30, 2001, no principal was
outstanding for this revolving line of credit.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD 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 third quarter of 2001 totaled $3,383,000 or $0.71 per share
diluted, slightly lower than the $3,702,000 or $0.78 per share diluted recorded
in the second of 2001, but higher than the $2,982,000 or $0.62 per share diluted
reported in the third quarter of 2000. Profits realized from investment
securities sold added $259,000 or $0.05 per share diluted to second quarter
2001's results.
Return on average assets was 1.16 percent and return on average shareholders'
equity was 14.72 percent for the third quarter of 2001, compared to second
quarter 2001's performance of 1.28 percent and 16.52 percent, respectively, and
the prior year's third quarter results of 1.07 percent and 13.80 percent,
respectively.
NET INTEREST INCOME
Net interest income (fully taxable equivalent) increased $1,150,000 or 11.1
percent to $11,504,000 for the third quarter of 2001 compared to a year ago, and
was $101,000 or 0.9 percent higher than the second quarter of 2001. For the nine
months ending September 30, 2001, net interest income (on a tax equivalent
basis) increased $1,994,000 or 6.3 percent year over year to $33,866,000.
The Federal Reserve spent the first nine months 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 aggressive in decreasing short-term interest rates (by
400 basis points). A 50 basis point cut in December 2000 and subsequent cuts of
50 basis points in January, March, April, and May 2001, 25 basis points in June
2001 and August 2001, and 100 basis points in September 2001 have contributed to
an improvement in the Company's margin. On a tax equivalent basis the net
interest margin during the third quarter of 2001 was 1 basis point higher than
for the second quarter of 2001. The margin for the current quarter and prior
quarters is as follows:
Third Quarter 2001 4.13%
Second Quarter 2001 4.12
First Quarter 2001 4.10
Fourth Quarter 2000 3.93
Third Quarter 2000 3.90
In the third quarter of 2001, the cost of interest-bearing liabilities decreased
33 basis points to 3.80 percent from the second quarter of 2001, with rates for
NOW, savings, money market accounts, certificates of deposit, and short-term
borrowings (entirely composed of repurchase agreements with customers and
federal funds purchased) decreasing 19, 37, 15, 38, and 51 basis points,
respectively. In part, 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 Investor NOW
product is index priced to be competitive with third party money funds, and
requires a minimum balance of $100,000. The average balance for this account
during the third quarter increased to $32.5 million from $29.9 million in the
second quarter of 2001 and $22.6 million in the first quarter of this year.
Money Manager, another class of NOW account with a premium rate that permits
linkage to brokerage relationships with the Company's subsidiary, FNB Brokerage
Services, Inc., have increased as well. The average balance during the third
quarter for this account increased to $63.9 million, compared to $53.1 million
for the second quarter of 2001 and $51.5 million for the first quarter of this
year. Money market accounts were also refined 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 $112.5 million or 27 percent of outstanding certificates of deposit
mature and re-price.
The yield on earning assets for the third quarter of 2001 decreased 25 basis
points to 7.26 percent, compared to the second quarter of 2001. The yield on
loans declined 19 basis points to 7.85 percent, the yield on securities declined
34 basis points to 5.71 percent, and the yield on federal funds sold declined 93
basis points to 3.53 percent. Average earning assets decreased $6.0 million
during the third quarter, with decreases of $5.5 million to $239.8 million in
securities and $0.5 million to $834.4 million in loans. Loan growth during the
third quarter of 2001 was lower as the result of the sale of $25.3 million in
originated residential mortgage loans.
No sales in the Company's held for sale securities portfolio were transacted and
purchases totaled $70.8 million during the third quarter of 2001. This compares
to $69.1 million in sales and purchases of $65.9 million transacted during the
second quarter of 2001 and $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 earnings in
the declining environment. 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 benefit from possible future interest rates
increases. Of the $70.8 million in purchases during the third quarter of 2001,
$30.2 million was invested in floating rate securities based upon the
expectation (prior to the terrorist event on September 11, 2001) that interest
rates were likely bottoming.
For the third quarter a year ago, the net interest margin was 3.90 percent. The
yield on average earning assets was 7.64 percent and rate on interest bearing
liabilities was 4.51 percent.
The mix of earning assets and interest bearing liabilities has had some impact
on the margin during the third quarter of 2001.
Third Quarter
-------------
2001 2000
---- ----
Average Earning Asset Mix:
Loans 75.6% 78.8%
Securities 21.7 21.0
Federal Funds Sold 2.7 0.2
------ ------
100.0 100.0
Third Quarter
-------------
2001 2000
---- ----
Average Interest Bearing Liabilities Mix:
NOW, Savings, Money Market Deposits 44.3% 42.6%
Certificates of Deposit 46.5 48.3
Federal Funds Purchased and
Repurchase Agreements 4.8 3.8
Other Borrowings 4.4 5.3
------ ------
100.0 100.0
Loans (the highest yielding component of earning assets) as a percentage of
average earning assets decreased 3.2 percent compared to a year ago, while
average securities and federal funds sold (lower yielding components) increased
0.7 percent and 2.5 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 as well, average certificates of deposit (a
higher cost component of interest-bearing liabilities) as a percentage of
interest-bearing liabilities decreased 1.8 percent. 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), 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 $28.8 million or
7.7 percent to $401.2 million year over year and average noninterest bearing
demand deposits grew $17.3 million or 12.6 percent to $154.4 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 4.8 percent of interest bearing
liabilities, reflecting an increase in the balances maintained by customers
utilizing such sweep arrangements.
PROVISION FOR LOAN LOSSES
No provisioning was recorded in the first, second or third 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
$136,000 for the third quarter and $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 0.03 percent for
the first nine months of 2001, compared to 0.03 percent for the same period in
2000 and 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
$3,561,000 for the third quarter, an increase of $340,000 or 10.6 percent from
the same period last year. Noninterest income was favorably impacted by growth
in fee-based businesses. Noninterest income accounted for 23.7 percent of
revenue in the third quarter of 2001 compared to 24.1 percent a year ago.
Market turmoil has affected revenue from brokerage activities since late 2000
and the trend continued in 2001 with consumers shifting from the purchase of
investment products to more conservative deposit products. In the third quarter
brokerage revenue decreased $93,000 or 18.2 percent year over year to $417,000.
Trust income was diminished in the third quarter as well, declining $97,000 or
14.1 percent year over year to $589,000.
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 $534,000 in the third quarter of 2001, an
increase of $329,000 or 160.5 percent from a year ago.
Greater usage of check cards by the Company's core deposit customers and an
increased cardholder base increased interchange income to $191,000, an increase
of $82,000 or 75.2 percent from last year for the third quarter. Fees earned
from the production of marine loans totaling $9.6 million by Seacoast Marine
Finance (which began operations in February 2000) totaled $159,000, compared to
$77,000 last year (a 106.5 percent increase). Decreasing slightly year over year
in the third quarter, service charges on deposits declined $8,000 or 0.6 percent
to $1,261,000. Remaining noninterest revenue sources (principally other service
charges and fees) increased $45,000 or 12.3 percent to $410,000.
Lower rates for fixed rate residential 15- and 30-year loan products during late
2000 and in 2001 have resulted in higher refinance activity. Mortgage banking
revenues are expected to remain strong over the remainder of 2001 as a result of
this lower rate environment and increased market penetration. Although financial
markets have been in turmoil, the Company intends to continue to emphasize
investment products prospectively and expects it will derive a benefit from the
sale of life insurance, a new product added in the second quarter of 2001.
Noninterest income, excluding gains and losses from securities sales, totaled
$10,950,000 for the nine-month period ending September 30, 2001, an increase of
$1,054,000 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, and the sale of marine loans, increasing year over year
$922,000, $233,000 and $245,000, respectively. Service charges on deposits
increased $164,000 or 4.6 percent. Year-to-date trust and brokerage income
decreased $122,000 and $563,000 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 $175,000.
Securities gains of $8,000, $422,000 and $145,000 were recognized during the
third, second and first quarter of 2001, respectively, compared to $2,000,
$1,000 and $1,000 in each of the same quarters a year ago. (See "Securities").
NONINTEREST EXPENSES
When compared to 2000, noninterest expenses for the third quarter increased by
$945,000 or 11.1 percent to $9,441,000. The Company's overhead ratio has
decreased over the past three years, from 67.8 percent in the third quarter of
1998 to 64.2 percent in 1999 to 62.6 percent a year ago. The overhead ratio was
62.7 percent in the third 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 third quarter of 2000, salaries and wages increased $619,000 or
19.5 percent to $3,792,000. Base salaries increased $291,000 or 9.8 percent,
with staffing (on a full-time equivalent basis) increasing from 341 a year ago
to 356 at September 30, 2001 (including additional staff for the Company's
newest branch location at a WalMart superstore in Ft. Pierce, Florida).
Incentives were $269,000 higher year over year due to the Company's improved
performance and temporary services were higher by $39,000, principally in data
processing and loan operations. Employee benefits increased $237,000 or 34.1
percent to $931,000. Most of the increase in benefit costs is related to higher
group health insurance costs of $158,000 and performance award accruals of
$55,000 for 2001.
Outsourced data processing costs were $98,000 or 9.5 percent higher, totaling
$1,130,000. Of the increase, higher costs associated with the Company's core
data processing service provider of $24,000, merchant credit card payment
processing of $34,000, and automatic teller machine (ATM) switch and transaction
processing of $27,000 were recorded.
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 $40,000 or 9.6 percent to $456,000 in the third quarter of 2001
when compared to a year ago. Of the increase, $16,000 was for higher sales
promotion costs and $21,000 for local community support.
Noninterest expenses for the nine-month period ending September 30, 2001 were
$1,899,000 or 7.2 percent higher and totaled $28,142,000. Changes year over year
were as follows: 1) salaries and wages increased $1,086,000 or 11.1 percent, 2)
employee benefits grew $431,000 or 17.7 percent, 3) outsourced data processing
costs increased $197,000 or 6.4 percent, and 4) marketing expenses were $177,000
or 13.9 percent higher.
INCOME TAXES
Income taxes as a percentage of income before income taxes were 39.3 percent for
the first nine months of this year, compared to 38.4 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 nine months of 2001 was 7.79 percent, compared to 7.75 percent
during the first nine 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 September 30, 2001, there were 510,386 shares totaling
$16,378,000, compared to 428,247 shares or $13,508,000 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 September 30,
2001, the Company's ratio was 12.00 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 $823,207,000 at September 30, 2001, $11,482,000 or 1.4 percent less than at
September 30, 2000, and $21,339,000 or 2.5 percent lower than at December 31,
2000.
At September 30, 2001, the Company's mortgage loan balances secured by
residential properties amounted to $399,253,000 or 48.5 percent of total loans
(versus 55.7 percent a year ago). The next largest concentration was loans
secured by commercial real estate totaling $219,191,000 or 26.6 percent (versus
$190,485,000 or 22.8 percent a year ago). The Company was also a creditor for
consumer loans to individual customers totaling $109,032,000 (versus $91,146,000
a year ago), most secured with collateral and including marine loans totaling
approximately $30.1 million generated by the Company's subsidiary bank's marine
lending division, Seacoast Marine Finance, headquartered in Fort Lauderdale,
Florida. Commercial loans of $33,846,000 (versus $36,900,000 last year), home
equity lines of credit of $11,948,000 (compared to $13,175,000 for prior year),
and construction loans of $49,539,000 (versus $38,025,000 a year ago) were
outstanding as well at September 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 September 30, 2001,
approximately $159 million or 40 percent of the Company's residential mortgage
loan balances were adjustable, compared to $190 million or 41 percent a year
ago.
Of the approximate $103 million of new residential loans originated in 2001 for
the loan portfolio, roughly $21 million were adjustable and $82 million were
fixed rate. Loans secured by residential mortgages having fixed rates totaled
approximately $240 million at September 30, 2001, of which 15- and 30-year
mortgages totaled $104 million and $89 million, respectively. At September 30,
2000, fixed rate residential loans totaled $274 million, with 15- and 30-year
fixed rate mortgages totaling $117 million and $110 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 $7,000 in net
recoveries for the first nine 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 $124 million and $95 million, respectively, at September 30, 2001,
compared to $116 million and $75 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 September 30, 2001, the Company had commitments to make loans (excluding
unused home equity lines of credit) of $92,706,000, compared to $68,922,000 at
September 30, 2000.
ALLOWANCE FOR LOAN LOSSES
Net recoveries on residential real estate loans, commercial loans, home equity
lines of credit and credit cards of $7,000, $12,000, $5,000 and $26,000,
respectively, were recorded for the first nine months of 2001. Net charge-offs
of $206,000 and $13,000 occurred on installment loans and commercial real estate
loans, respectively, for the same period. In comparison, net recoveries were
recorded for credit cards of $63,000 in the first nine months of 2000. Net
charge-offs on installment loans, residential real estate loans, and commercial
loans totaled $207,000, $50,000 and $18,000, respectively, were recorded for the
first nine months of 2000. 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 0.86
percent at September 30, 2001. This ratio was 0.85 percent at September 30,
2000. The allowance for loan losses as a percentage of nonaccrual loans and
loans 90 days or more past due was 372.6 percent at September 30, 2001, compared
to 309.7 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 September 30, 2001, the Company had $618
million in loans secured by real estate, representing 75.1 percent of total
loans, down from 78.5 percent at September 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 September 30, 2001, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned (OREO) was 0.24 percent, compared to
0.29 percent one year earlier.
At September 30, 2001, accruing loans past due 90 days or more outstanding
totaled $27,000 and OREO totaled $131,000. In 2000 on the same date, loans past
due 90 days or more totaled $52,000 and OREO balances of $154,000 were
outstanding.
Nonaccrual loans totaled $1,865,000 at September 30, 2001, compared to a balance
of $2,243,000 at September 30, 2000. A portion of the nonaccrual loans
outstanding at September 30, 2001 was performing with respect to payments, with
the exception of eight loans aggregating to $1,243,000. 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 September 30, 2001,
98 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 September 30, 2001, the Company had $226,170,000
or 89.6 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $26,133,000, representing 10.4
percent of total securities.
The Company's securities portfolio has increased $34,426,000 or 15.8 percent
from September 30, 2000 and $44,131,000 or 21.2 percent from December 31, 2000.
During the first nine months of 2001, proceeds from the sale of securities
totaled $135,041,000, 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
nine months of 2001 totaled $64,143,000 and purchases totaled $242,790,000. 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
adjustable rate 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 September 30, 2001, the duration of
the portfolio was 2.0 years, compared to 2.8 years a year ago.
Unrealized securities gains totaled $4,004,000 at September 30, 2001, compared
to losses of $6,894,000 at September 30, 2000 and $3,372,000 at December 31,
2000. The Federal Reserve Bank increased rates 100 basis points in 2000 and
decreased rates 400 basis points most recently, over the period December 2000 to
September 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 $57,519,000 or 6.3 percent to $977,008,000 at September
30, 2001, compared to one year earlier. Certificates of deposit decreased
$3,513,000 or 0.8 percent to $416,815,000 over the past twelve months, lower
cost interest bearing deposits (NOW, savings and money market accounts)
increased $44,550,000 or 12.4 percent to $403,614,000, and noninterest bearing
demand deposits increased $16,482,000 or 11.8 percent to $156,579,000. 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. The Company's success in marketing desirable deposit products
in this environment, in particular its Investor NOW and Money Manager offerings,
enhanced growth in lower cost interest bearing deposits (see "Net Interest
Income").
Short term borrowings, entirely comprised of repurchase agreement balances at
September 30, 2001, decreased $16,558,000 or 29.0 percent to $40,546,000 at
September 30, 2001 from a year ago when repurchase agreements and federal funds
purchased totaled $30,104,000 and $27,000,000, respectively. The number of
accounts with customers who wish to sweep excess balances on a daily basis for
investment purposes has increased from 126 a year ago to 128 at September 30,
2001; more significant, the incremental dollar amount invested by customers
under repurchase agreements has increased. Other borrowings were the same year
over year at $40,000,000, entirely comprised of funding from the Federal Home
Loan Bank (FHLB).
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 20.9 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 0.8 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 nine 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 September 30, 2001, the Company had available lines of credit of
$130,500,000. The Company also had $173,607,000 of United States Treasury and
Government agency securities and mortgage backed securities not pledged and
available for use under repurchase agreements. At September 30, 2000, the amount
of securities available and not pledged was $114,576,000.
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold), totaled $45,428,000 at September 30, 2001 as compared to
$27,881,000 at September 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 $12,853,000 was $3,663,000 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" and Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations - Reporting the Effects of the Disposal of a Segment
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes a single accounting model for assets to
be disposed of by sale whether previously held and used or newly acquired. SFAS
No. 144 retains the provisions of APB No. 30 for presentation of discontinued
operations in the income statement, but broadens the presentation to include a
component of an entity. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. The Company does not
believe that the adoption of SFAS No. 144 will have a material impact on its
consolidated results of operations.
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 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed for the three-month period ended
September 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
November 13, 2001 /s/ Dennis S. Hudson, III
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DENNIS S. HUDSON, III
President &
Chief Executive Officer
November 13, 2001 /s/ William R. Hahl
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WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer