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, 1997 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) (407) 287-4000 - -------------- (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, 1997: Class A Common Stock, $.10 Par Value - 4,726,825 shares ------------------------------------------------------- Class B Common Stock, $.10 Par Value - 384,638 shares ----------------------------------------------------- INDEX SEACOAST BANKING CORPORATION OF FLORIDA Part I FINANCIAL INFORMATION PAGE # Item 1 Financial Statements (Unaudited) Condensed consolidated balance sheets - June 30, 1997, December 31, 1996 and June 30, 1996 ........................................ 3 - 4 Condensed consolidated statements of income Three months ended June 30, 1997 and 1996; and Six months ended June 30, 1997 and 1996 .................... 5 - 6 Condensed consolidated statements of cash flows - Six months ended June 30, 1997 and 1996 .................... 7 - 9 Notes to condensed consolidated financial statements ................................................. 10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 11 - 20 Part II OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders.......... 21 - 22 Item 6 Reports on Form 8-K.......................................... 22 SIGNATURES............................................................ 23 Exhibit Article 9 - Financial Data Schedule.......................... 24 - 25 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) 1997 1996 1996 - -------------------------------------------------------------------------------- ASSETS Cash and due from banks .......... 24515 29358 22013 Federal funds sold ............... 16150 80650 3950 Securities: At market .................... 154595 170530 182813 At amortized cost (market values: $55,317 at June 30, 1997, $53,549 at Dec. 31, 1996 & $50,864 at June 30, 1996) .. 54635 52639 50724 ----- ----- ----- TOTAL SECURITIES ........... 209230 223169 233537 Loans, net of unearned income .... 589082 576324 531814 Less: Allowance for loan losses. (5451) (5657) (5149) ------ ------ ------ NET LOANS .................. 583631 570667 526665 Bank premises and equipment ...... 18252 17213 16777 Other real estate owned .......... 768 1064 696 Core deposit intangibles ......... 1808 1975 2143 Goodwill ......................... 3732 3882 4028 Other assets ..................... 11796 10523 16758 ----- ----- ----- 869882 938501 826567 ====== ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Deposits ......................... 777353 811493 724616 Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days ...... 9797 45088 24247 Other liabilities ................ 3486 4925 5226 ------ ------ ------ 790636 861506 754089 CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) - -------------------------------------------------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries June 30, December 31, June 30, (Dollars in thousands) 1997 1996 1996 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock ................... 0 0 0 Class A common stock .............. 475 465 464 Class B common stock .............. 39 49 50 Additional paid-in capital ........ 26949 26936 26756 Retained earnings ................. 53928 52090 49745 Treasury stock ................ (729) (911) (1131) ----- ----- ----- 80662 78629 75884 Securities valuation equity (allowance) (1416) (1634) (3406) ----- ----- ----- TOTAL SHAREHOLDERS' EQUITY ...................... 79246 76995 72478 ----- ----- ----- 869882 938501 826567 ====== ====== ====== - -------------------------------------------------------------------------------- Note: The balance sheet at December 31, 1996 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 Six Months Ended June 30, Ended June 30, -------------- -------------- (Dollars in thousands, except per share data) 1997 1996 1997 1996 - -------------------------------------------------------------------------------- Interest and dividends on investment securities 3460 3620 6730 7256 Interest and fees on loans ....... 12460 11181 24818 22149 Interest on federal funds sold ... 317 136 852 848 ----- ----- ----- ----- TOTAL INTEREST INCOME ........ 16237 14947 32400 30253 Interest on deposits ............. 1773 1514 3547 3129 Interest on time certificates .... 4795 4296 9445 8832 Interest on borrowed money ....... 116 177 394 458 ---- ---- ---- ---- TOTAL INTEREST EXPENSE ....... 6684 5987 13386 12419 ---- ---- ----- ----- NET INTEREST INCOME ........ 9553 8960 19014 17834 Provision for loan losses ........ 172 214 388 397 ----- ----- ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9381 8746 18626 17437 Noninterest income Securities gains (losses) ...... 65 20 (37) 45 Other income ................... 2806 2595 5525 5171 ---- ---- ---- ---- TOTAL NONINTEREST INCOME ..... 2871 2615 5488 5216 TOTAL NONINTEREST EXPENSES ... 9995 7594 18309 15219 ---- ---- ----- ----- INCOME BEFORE INCOME TAXES . 2257 3767 5805 7434 Provision for income taxes ....... 820 1327 2108 2645 ---- ---- ---- ---- NET INCOME ................. 1437 2440 3697 4789 ==== ==== ==== ==== - -------------------------------------------------------------------------------- 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 1997 1996 1997 1996 share data) - -------------------------------------------------------------------------------- PER SHARE COMMON STOCK: NET INCOME 0.28 0.47 0.71 0.93 CASH DIVIDENDS DECLARED: Class A 0.20 0.15 0.40 0.30 Class B 0.18 0.135 0.36 0.27 Average shares outstanding 5226679 5175379 5228867 5168448 - -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - -------------------------------------------------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries (In thousands of dollars) Six Months Ended June 30 1997 1996 - -------------------------------------------------------------------------------- Increase(Decrease) in Cash and Cash Equivalents Cash flows from operating activities Interest received ............................. 32248 30014 Fees and commissions received ................. 5396 4887 Interest paid ................................. (13689) (12613) Cash paid to suppliers and employees .......... (18789) (14200) Income taxes paid ............................. (2768) (2779) ------ ------ Net cash provided by operating activities ....... 2398 5309 Cash flows from investing activities Maturities of securities held for sale ........ 14136 34706 Maturities of securities held for investment .. 3934 6888 Proceeds from sale of securities held for sale 44749 19734 Purchase of securities held for sale .......... (42548) (37659) Purchase of securities held for investment .... (5928) 0 Proceeds from sale of loans ................ 30862 47140 Net new loans and principal repayments ...... (44218) (107654) Proceeds-sale of other real estate owned ...... 539 919 Deletions (additions) to bank premises and equipment ............................ (2089) (417) Net change in other assets ................... (89) (5099) ------ ------ Net cash provided by(used in)investing activities . (652) (41442) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) - -------------------------------------------------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries (In thousands of dollars) Six Months Ended June 30 1997 1996 - -------------------------------------------------------------------------------- Cash flows from financing activities Net decrease in deposits ....................... (34133) (40584) Net decrease in federal funds purchased and securities sold under agreements to repurchase ................................... (35291) (19660) Exercise of stock options ...................... 87 262 Treasury stock issued (acquired) ............... 107 68 Dividends paid ................................. (1859) (1259) ------ ------ Net cash used in financing activities ............ (71089) (61173) ------ ------ Net decrease in cash and cash equivalents ........ (69343) (97306) Cash and cash equivalents at beginning of year ... 110008 123269 ------ ------ Cash and cash equivalents at the end of period ... 40665 25963 ====== ====== - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) - -------------------------------------------------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries (In thousands of dollars) Six Months Ended June 30 1997 1996 - -------------------------------------------------------------------------------- Reconciliation of Net Income to Cash Provided by Operating Activities Net Income ....................................... 3697 4789 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization .................. 1336 1289 Provision for loan losses ...................... 388 397 Loss (gain) on sale of securities .............. 37 (45) Gain on sale of loans .......................... (193) (284) Loss (gain) on sale and writedown of foreclosed assets ....................................... 68 (17) Loss on disposition of fixed assets ............ 106 4 Change in interest receivable .................. (144) (277) Change in interest payable ..................... (302) (194) Change in prepaid expenses ..................... (1012) (129) Change in accrued taxes .............. (470) 74 Change in other liabilities .................... (1113) (298) ---- ---- Total adjustments ................................ (1299) 520 ---- ---- Net cash provided by operating activities ........ 2398 5309 ==== ==== - ----------------------------------------------------------------------------- Supplemental disclosure of noncash investing activities: Transfers from loans to other real estate owned .. 311 709 Transfers from loans to securities held for sale . 17395 26463 Market value adjustment to securities ............ 249 (4160) - ----------------------------------------------------------------------------- See notes to condensed consolidated financial statement. 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 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 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, 1997, are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. NOTE B - ACQUISITION On May 30, 1997, the Company acquired Port St. Lucie National Bank Holding Corporation and its subsidiaries, Port St. Lucie National Bank and Spirit Mortgage. The transaction was treated as a pooling of interests and the prior year financial results have been restated accordingly. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS SECOND QUARTER 1997 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 The Company acquired Port St. Lucie National Bank Holding Corporation on May 30, 1997, and its subsidiaries, Port St. Lucie National Bank and Spirit Mortgage. The transaction was accounted for as a pooling of interests and, as such, prior period financial results have been restated. Additional deposits of approximately $116.0 million and loans of $93.7 million were recorded at May 30, 1997, and over 10,000 new banking customers were acquired. The acquisition increases the Company's subsidiary bank market share in Port St. Lucie to over 30 percent, creating the largest bank in the city of Port St. Lucie and rivaling the 36 percent share in the Company's dominant Stuart/Martin County market. During the second quarter of 1997, the Company took a charge of $1,467,000 ($928,000 after taxes or $0.18 per share) related to the termination of certain contracts, a consolidation of facilities and other one-time expenses related to the merger. For the six month period ended June 30, 1997, an aggregate charge of $1,542,000 ($975,000 after taxes) was recorded for merger related expenditures. Reported earnings for the second quarter of 1997 do not reflect any significant cost savings as the merger was completed late in the quarter. The Company expects these savings to be realized in the second half of the year. Net income for the second quarter of 1997 totalled $1,437,000 or $0.28 per share, compared with $2,440,000 or $0.47 per share in the second quarter of 1996 and $2,260,000 or $0.43 per share in the first quarter of 1997. Return on average assets was 0.65 percent and return on average shareholders' equity was 7.14 percent for the second quarter of 1997, compared to second quarter 1996's performance of 1.17 percent and 13.06 percent, respectively, and 1997's first quarter results of 1.02 percent and 11.48 percent, respectively. NET INTEREST INCOME Earnings for the first and second quarter of 1997 have benefited from a stable net interest margin. On a tax equivalent basis the margin increased to 4.62 percent in the second quarter of 1997 from 4.59 percent in the first quarter of this year. The cost of interest bearing liabilities increased one basis point to 3.85 percent from first quarter, with rates for NOW and savings deposits decreasing 1 and 8 basis points, respectively, and rates for money market deposits and certificates of deposit both remaining flat. This follows a similar decline of 1 basis point in the rate paid on total interest bearing liabilities in the first quarter of 1997 from fourth quarter. In addition to the improvement in cost of funds for the second quarter, the yield on average total earning assets increased 1 basis point to 7.82 percent as compared to first quarter. The yield on loans declined 14 basis points to 8.45 percent during the second quarter, but average loans outstanding as a percentage of earning assets increased to 70.6 percent compared to 69.1 percent in the first quarter. The increase in loans occurred even though $21.8 million in fixed rate residential mortgages were either securitized during the second quarter and transferred to the Company's available for sale securities portfolio or sold. In addition, improvement in the yields on securities and federal funds sold of 19 and 11 basis points contributed to the higher margin. For the second quarter a year ago, the net interest margin recorded was 4.65 percent. A yield on average earnings assets of 7.72 percent and rate on interest bearing liabilities of 3.69 percent was recorded. Average earning assets for the second quarter of 1997 increased $53,639,000 or 6.8 percent to $837,724,000, compared to prior year's second quarter. Enhanced loan demand provided a $60,878,000 or 11.5 percent increase in average loans to $591,649,000. Average loans as a percentage of earning assets increased to 70.1 percent compared to 67.7 percent a year ago. Average investment securities declined $20,466,000 or 8.4 percent to $222,541,000, but average federal funds sold increased $13,230,000 to $23,534,000. The level of federal funds sold is expected to decline as loan growth is funded and deposits decline as they normally do in the summer months. Favorably affecting the mix of deposits in the second quarter as compared to last year, average noninterest-bearing demand deposits increased $6,654,000 or 6.5 percent to $108,544,000 and average other lower cost core deposit products (NOW, savings and money market deposits) increased on an aggregate basis by $12,301,000 or 4.0 percent to $322,246,000. Average certificates of deposit (the highest cost component of interest bearing liabilities) increased $36,357,000 or 11.1 percent to $363,364,000, and as a percentage of deposits increased slightly to 45.8 percent compared to 44.3 percent in the second quarter of 1996. If loan demand continues at its current pace as a result of the economy remaining firm, and local competition allows rates paid for core deposits to remain low, the net interest margin could continue to improve over the remainder of 1997. PROVISION FOR LOAN LOSSES A provision of $172,000 was recorded in the second quarter of this year, compared to $214,000 in provisioning in the second quarter of 1996 and $216,000 in provisioning in the first quarter of this year. Net charge-offs for the second quarter totaled $434,000, compared to net charge offs of $93,000 for the second quarter last year and net charge-offs of $160,000 for the first quarter of 1997. Net charge-offs annualized as a percent of average loans totaled 0.20 percent for the first half of 1997, compared to net charge-offs of 0.05 percent for the same period in 1996. Although the net charge-offs ratio is slightly higher than one year earlier, the level is still among the lowest in the industry. Management determines the provision for loan losses which is 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. NONINTEREST INCOME Noninterest income, excluding gains and losses from securities sales, increased $211,000 or 8.1 percent to $2,806,000 in the second quarter compared to one year earlier. The largest increase in noninterest income occurred in service charges on deposits which increased $164,000 or 20.0 percent compared to prior year. This increase can be largely attributed to additional business volumes in four new branch locations established over the last twelve months, three in Indian River County (South Vero Square and Oak Pointe opening in the current quarter, Sebastian in the third quarter of 1996), and one in St. Lucie County (Nettles Island which opened in January of this year) and the repricing of certain services, in particular overdraft fees which were increased 37.5 percent (from $20 to $27.50). While trust income grew $55,000 or 10.7 percent, brokerage commissions and fees declined $59,000 or 10.4%. The decline in brokerage commissions and fees is attributable to replacing two experienced brokers. The Company intends to continue to emphasize its brokerage and trust services as expectations are that these financial products will remain in demand, in particular by the over 10,000 new banking customers from the acquisition who have not had such services available to them. Noninterest income, excluding gains and losses from securities sales, for the first half of 1997 increased $354,000 or 6.8 percent, with increases in service charges on deposits of $311,000 or 19.2 percent and $87,000 or 8.3 percent in trust income. As indicated above for the quarter, the increase in service charges on deposits is related to internal growth and the repricing of certain services. NONINTEREST EXPENSES When compared to 1996, noninterest expenses for the second quarter increased by $2,401,000or 31.6 percent to $9,995,000 and for the first half increased $3,090,000 or 20.3 percent to $18,309,000. In the second quarter and first six months of 1997, expenses of $1,467,000 and $1,542,000, respectively, were incurred related to the termination of certain contracts, a consolidation of facilities and other one-time expenses related to the merger. Without the effect of these expenses, noninterest expenses increased 12.3 percent and 10.2 percent, respectively, for the second quarter and first half of 1997 when compared to prior year. Salaries and wages increased $421,000 or 14.2 percent, compared to the second quarter of 1996, and increased $756,000 or 12.7 percent for the first half of 1997. Employee benefits have risen 5.5 percent year to year for the first six months. Additional employment costs in lending, trust and brokerage, from expanding the Company's telephone banking center and the addition of four new branches have been incurred over the past twelve months. These efforts have provided the Company with a tremendous opportunity for future growth in loans, deposits and other products to better leverage the Company's capital position and improve earnings in the future. Occupancy expenses and furniture and equipment expenses, on an aggregate basis, increased $73,000 or 6.0 percent versus second quarter results last year and were $196,000 or 8.3 percent higher for the first six months of 1997 versus prior year. The premium for Federal Deposit Insurance Corporation ("FDIC") insurance was $22,000 lower for the second quarter and $48,000 lower for the first six months of 1997 versus last year, reflecting lower premium rates charged by the FDIC effective for 1997. The rate the Company's subsidiary bank is being assessed by the FDIC has been and is the lowest rate, based on FDIC guidelines. Costs for legal and professional services and costs associated with foreclosed and repossessed asset management for the second quarter increased $30,000 when compared to 1996, but were $33,000 lower compared to the first half of 1996, a reflection of lower nonperforming asset balances (see "Nonperforming Assets"). When compared to last year, marketing expenses increased $79,000 or 16.9 percent for the second quarter of 1997 and $177,000 or 20.2 percent for the six months ending June 30, 1997, primarily as a result of increases in sales promotion, ad agency production, printing and media costs, and public relations costs associated with the expanded branch distribution mentioned above. The other expense category increased $266,000 or 15.2 percent year over year for the second quarter, and was $415,000 or 11.7 percent higher for the first half of the year. The increase in other expense was caused primarily by incremental costs associated with the new branch facilities and by: 1) a one-time charge for customer fraud of $130,000, 2) an increase in telephone costs (of $44,000 for the second quarter; $106,000 for the first six months) related to technology upgrades implemented to enhance communications between existing branches and the Company's main office headquarters, and 3) additional expenditures for merchant and credit card processing (of $62,000 for the second quarter; $124,000 for the first half of 1997). INCOME TAXES Income taxes as a percentage of income before taxes were 36.3 percent for the first half of this year, compared to 35.6 percent in 1996. The increase in rate reflects a higher rate of provisioning for state income taxes, a result of lower state intangible taxes paid to the State of Florida that can be taken as a credit. In addition, lower levels of tax-exempt interest income have contributed to a higher effective tax rate. FINANCIAL CONDITION CAPITAL RESOURCES Earnings retained by the Company during the first half of 1997 and over the prior twelve months have provided the Company with a slight increase in its capital ratios. The Company's ratio of average shareholders' equity to average total assets during the second quarter of 1997 was 9.05 percent, compared to 9.00 percent in the second quarter of 1996. The risk-based capital minimum ratio of total capital to risk-weighted assets is 8 percent. At June 30, 1997, the Company's ratio of total capital to risk-weighted assets was 15.28 percent and its ratio of Tier 1 capital to total adjusted assets was 8.35 percent. In comparison, these ratios (as reported) were 15.44 percent and 8.25 percent, respectively, at June 30, 1996. LOAN PORTFOLIO The company's loan activity is generally confined to customers located within the 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 $589,082,000 at June 30, 1997, $57,268,000 or 10.8 percent more than at June 30, 1996, and $12,758,000 or 2.2 percent more than at December 31, 1996. During the first half of 1997, $48.0 million of residential mortgages were securitized or sold, and over the past twelve months, $89.5 million in such loans were securitized or sold. At June 30, 1997, the company's mortgage loan balances secured by residential properties amounted to $317,860,000 or 54.0 percent of total loans. The next largest concentration was loans secured by commercial real estate which totaled $134,107,000 or 22.8 percent. The Company was also a creditor for consumer loans to individual customers (primarily secured by motor vehicles) totaling $65,987,000, commercial loans of $31,818,000, construction loans of $17,214,000 (of which approximately $10.5 million is residential construction), home equity lines of credit of $12,908,000, and unsecured credit cards of $8,709,000. 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. Nearly all 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 FHLMC guidelines. Real estate mortgage lending (particularly residential properties) is expected to remain an important segment of the Company's lending activities. At June 30, 1997, approximately $193 million or 61 percent of the Company's residential mortgage loan balances were adjustable. Of the $193 million, $189 million were adjustable rate 15- or 30-year mortgage loans ("ARMs") that reprice based upon the one year constant maturity United States Treasury Index plus a margin. These 15- and 30-year ARMs generally consist of three types: 1) those repricing annually by up to one percent with a four percent cap over the life of the loan, of which balances of approximately $31 million were outstanding at June 30, 1997, 2) those limited to a two percent per annum increase and a six percent cap over the life of the loan, of which approximately $77 million in balances existed at June 30, 1997, and 3) those that have a fixed rate for a period of three, five or seven years, at the end of which they are limited to a two percent per annum increase and a four percent cap over the life of the loan, of which approximately $81 million were outstanding at June 30, 1997. Loans secured by residential mortgages having fixed rates totaled approximately $125 million at June 30, 1997, of which 15- and 30-year mortgages totaled $63 million and $31 million, respectively. Remaining fixed rate balances were comprised of home improvement loans with maturities less than 15 years. The Company's historical charge off rates for residential real estate loans have been minimal, with charge offs of $30,000 for the first six months of 1997 compared to $84,000 for all of 1996. At June 30, 1997, the Company had commitments to make loans (excluding unused home equity lines of credit and credit card lines) of $31,275,000, compared to $36,246,000 at June 30, 1996. The Company attempts to manage its real estate exposure risk by limiting the aggregate size of its commercial real estate portfolio, currently 22.8 percent of total loans, and by making commercial real estate loans primarily on owner occupied properties. The remainder of the real estate loan portfolio is residential mortgages to individuals, and home equity loans, which the Company considers less susceptible to adverse effects from a downturn in the real estate market, especially given the area's large percentage of retired persons. ALLOWANCE FOR LOAN LOSSES Net losses on credit cards and installment loans totaled $225,000 and $97,000, respectively, for the first six months of 1997, compared to net losses of $95,000 and $49,000, respectively, in 1996. Current and historical credit losses arising from real estate lending transactions continue to compare favorably with the Company's peer group. Losses of $30,000 for residential real estate were recorded in 1997, versus $14,000 a year ago. Net charge-offs recorded for commercial real estate loans of $26,000 in the first half of 1997 compared with the prior year when net recoveries of $6,000 were received. Net charge-offs for commercial loans of $216,000 in the first six months of 1997 compared to $11,000 in recoveries in 1996. The ratio of the allowance for loan losses to net loans outstanding was 0.93 percent at June 30, 1997. This ratio was 0.97 percent at June 30, 1996. The allowance for loan losses as a percentage of nonaccrual loans and loans 90 days or more past due was 240.7 percent at June 30, 1997, compared to 110.6 percent at the same date in 1996. NONPERFORMING ASSETS At June 30, 1997, the Company's ratio of nonperforming assets to loans outstanding plus other real estate owned was 0.49 percent, compared to 0.98 percent one year earlier. At June 30, 1997, accruing loans past due 90 days or more of $168,000 and OREO of $768,000 were outstanding. In 1996 on the same date, $160,000 in loans were past due 90 days or more and $696,000 in OREO balances were outstanding. Nonaccrual loans totaled $2,097,000 at June 30, 1997, compared to a balance of $4,497,000 at June 30, 1996. All of the nonaccrual loans outstanding at June 30, 1997 were performing (current with respect to payments), with the exception of thirteen loans aggregating to $724,000. 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, 1997, approximately 89 percent is secured with real estate, the remainder by the Small Business Administration (SBA). 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, 1997, the Company had $154,595,000 or 73.9 percent of total securities available for sale and securities held to maturity were carried at an amortized cost of $54,635,000, representing 26.1 percent of total securities. The Company's securities portfolio decreased $24,307,000 from June 30, 1996. The securities portfolio as a percentage of earning assets was 25.7 percent at June 30, 1997, compared to 30.4 percent one year ago. This decline is directly related to growth in the loan portfolio and changes to the portfolio mix which have been transacted or pending. During the first half of 1997, proceeds of $44.7 million from securities sales and maturing funds of $18.0 million were derived. Sales in the first and second quarter of 1997 were transacted to fund loan growth, offset the impact of seasonal declines in deposits which normally occur in the summer, and to reduce the Company's sensitivity to possible interest rate increases. Securities purchases of $48.4 million were transacted in the first half of 1997. Of this total, $17.4 million was 15- and 30-year fixed rate residential loans securitized and transferred from the Company's loan portfolio to the available for sale securities portfolio. Company management considers the overall quality of the securities portfolio to be high. The securities portfolio had an unrealized net loss of $1,149,000 or 0.5 percent of amortized cost at June 30, 1997, compared to a net loss of $4,594,000 or 1.9 percent of amortized cost at June 30, 1996. While rates have remained low, a shifting U.S. Treasury curve caused a reduction in unrealized depreciation. No securities are held which are not traded in liquid markets or that meet Federal Financial Institution Examination Council ("FFIEC") definition of a high risk investment. DEPOSITS Total deposits increased $52,737,000 or 7.3 percent to $777,353,000 at June 30, 1997, compared to one year earlier. Certificates of deposit increased $33,688,000 or 10.3 percent to $298,561,000 over the past twelve months. Lower cost interest bearing deposits (NOW, savings and money markets deposits) increased to a lesser degree, by $7,360,000 or 2.5 percent to $300,056,000. Impacting deposit mix favorably, noninterest bearing demand deposits increased $11,689,000 or 11.9 percent to $109,757,000. With the possibility that interest rates may increase further as a result of Federal Reserve action, heightened interest by consumers to invest in certificates of deposit as an alternative investment vehicle may occur. INTEREST RATE SENSITIVITY Interest rate movements and deregulation of interest rates have made managing the Company's interest rate sensitivity increasingly important. The Company's Asset/Liability Management Committee (ALCO) is responsible for managing the Company's exposure to changes in market interest rates. The committee attempts to maintain stable net interest margins by generally matching the volume of assets and liabilities maturing, or subject to repricing, and by adjusting rates to market conditions and changing interest rates. 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 reprice 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). On June 30, 1997, 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 25.3 percent. This means that the Company's assets reprice more slowly than its deposits. In a declining interest rate environment, the cost of the Company's deposits and other liabilities may be expected to fall faster than the interest received on its earning assets, thus increasing the net interest spread. If interest rates generally increase, the negative gap means that the interest received on earning assets may be expected to increase more slowly than the interest paid on the Company's liabilities, therefore decreasing the net interest spread. It has been the Company's experience that deposit balances for NOW and savings accounts are stable and subjected to limited repricing when interest rates increase or decrease within a range of 200 basis points. The Company's ALCO 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 30 percent given an immediate change in interest rates (up or down) of 200 basis points. At June 30, 1997, net interest income would decline 5.8 percent if interest rates would immediately rise 200 basis points. The Company does not presently use interest rate protection products in managing its interest rate sensitivity. LIQUIDITY MANAGEMENT The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for business expansion. 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, 1997, the Company had federal funds lines of credit available of $45,500,000 and had $117,731,000 of United States Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements. Liquidity, as measured in the form of cash and cash equivalents (including federal funds sold), totaled $40,665,000 at June 30, 1997 as compared to $25,963,000 at June 30, 1996. 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 1997, the cash flow from operations of $2,398,000 was $2,911,000 lower than during the same period of 1996. Cash flows from investing and financing activities reflect the change in loan and deposit balances experienced. IMPACT OF INFLATION AND CHANGING PRICES The financial statements presented herein have been prepared in accordance with 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 levels of inflation. However, inflation affects financial institutions' increased cost for 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 refinancings 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. Part II OTHER INFORMATION Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The 1997 Annual Meeting of Shareholders was held May 30, 1997. (b) All directors reported to the Commission in the 1997 proxy statement were re-elected in entirety. (c) The following matters were voted upon at the meeting: (i) To approve, ratify, confirm and adopt the Agreement and Plan of Merger, dated as of February 19, 1997, by and between the Company and Port St. Lucie National Bank Holding Corp. ("PSHC"), a Florida corporation, pursuant to which PHSC will merge with and into Seacoast and the Company shall issue up to 900,000 shares of Class A Common stock. The Company's Articles of Incorporation require that the holders of Company Class A stock approve the Merger Agreement as a separate class as well as a single class together with the Class B stock. Out of 6,665,497 total votes represented at the meeting, the number of votes cast in favor and against the Agreement were 6,015,334 (90.2%) and 16,037, respectively. This represented an affirmative vote of 72.2% of all shares of common stock outstanding and entitled to vote. Out of 3,354,447 Class A votes represented at the meeting, the number of Class A votes in favor and against the Agreement were 2,747,634 (81.9%) and 14,237, respectively. This represented an affirmative vote of 70.9% of all shares of Class A common stock outstanding and entitled to vote. (ii) The election of eight directors to serve until the 1997 Annual Meeting of Shareholders and until their successors have been elected and qualified. Out of 6,665,497 votes represented at the meeting, the number of votes cast for and against their re-election were 6,652,167 (99.8%) and zero, respectively. (ii) The approval of a proposed amendment to Article XI of the Company's Articles of Incorporation to clarify the voting requirements in connection with certain business combinations. The Company's Articles of Incorporation require that the holders of Company Class A stock approve amendments to the Articles of Incorporation as a separate class as well as a single class together with the Class B stock. Out of 6,665,497 total votes represented at the meeting, the number of votes cast in favor and against the amendment were 5,923,785 (88.9%) and 98,157, respectively. This represented an affirmative vote of 70.4% of all shares of common stock outstanding and entitled to vote. Out of 3,354,447 Class A votes represented at the meeting, the number of votes cast in favor and against the amendment were 2,672,885 (79.7%) and 81,957, respectively. This represented an affirmative vote of 69.0% of all shares of Class A common stock outstanding and entitled to vote. (iii)The ratification of the appointment of Arthur Andersen LLP as independent auditors for the fiscal year ending December 31, 1997. Out of 6,665,497 votes represented at the meeting, the number of votes cast for and against their ratification were 6,650,672 (99.8%) and 4,528, respectively. Item 6 EXHIBITS AND REPORTS ON FORM 8-K A report on Form 8-K was filed on June 6, 1997 with respect to the Company's acquisition of Port St. Lucie National Bank Holding Corp., located in Port St. Lucie, Florida. No other reports on Form 8-K were filed for the three month period ended June 30, 1997. 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 14, 1997 /s/ Dale M. Hudson - --------------- ------------------ DALE M. HUDSON President & Chief Executive Officer August 14, 1997 /s/ William R. Hahl - --------------- ------------------- WILLIAM R. HAHL Senior Vice President & Chief Financial Officer ARTICLE 9 - FINANCIAL DATA SCHEDULE At June 30, 1997, and for the six month period ended June 30, 1997: Cash ...................................... 24515 Interest Bearing Deposits ................. 0 Federal Funds Sold ........................ 16150 Trading Assets ............................ 0 Investments Held For Sale ................. 154595 Investments Carrying Value ................ 54635 Investments Market Value .................. 55317 Loans ..................................... 589082 Allowance ................................. 5451 Total Assets .............................. 869882 Deposits .................................. 777353 Short Term Borrowings ..................... 9797 Other Liabilities ......................... 3486 Long Term Borrowings ...................... 0 Common Stock .............................. 514 Mandatory Preferred Stock ................. 0 Other Preferred Stock ..................... 0 Other Shareholders Equity ................. 78732 Total Liabilities and Equity .............. 869882 Interest on Loans ......................... 24818 Interest on Investments ................... 6730 Other Interest Income ..................... 852 Total Interest Income ..................... 32400 Interest on Deposits ...................... 12992 Total Interest Expense .................... 13386 Net Interest Income ....................... 19014 Provision for Loan Losses ................. 388 Securities Gains (Losses) ................. (37) Other Expenses ............................ 18309 Pretax Income ............................. 5805 Net Income - Pre-Extraordinary ............ 3697 Extraordinary Items ....................... 0 Accounting Changes ........................ 0 Net Income ................................ 3697 Earnings Per Share - Primary .............. .71 Earnings Per Share - Fully Diluted......... .71 Yield on Earning Assets ................... 7.82 Loans - Nonaccrual ........................ 2097 Loans - Past Due 90 Days or More .......... 168 Loans - Restructured Troubled Debt ........ 0 Loans - Potential Problem Loans ........... 0 Allowance for Loan Losses - Beg Balance ... 5657 Charge-offs ............................... 733 Recoveries ................................ 139 Allowance for Loan Losses - Closing Balance 5451 Allowance for Loan Losses - Domestic ...... 5451 Allowance for Loan Losses - Foreign ....... 0 Allowance for Loan Losses - Unallocated ... 0