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, 1998 No. 0-13660
SEACOAST BANKING CORPORATION OF FLORIDA
(Exact name of registrant as specified in its charter)
Florida 59-2260678
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(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
--------------
(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, 1998:
Class A Common Stock, $.10 Par Value - 4,623,339 shares
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Class B Common Stock, $.10 Par Value - 376,244 shares
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INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
September 30, 1998, December 31, 1997 and
September 30, 1997 3 - 4
Condensed consolidated statements of income -
Three months and nine months ended September 30,
1998 and 1997 5 - 6
Condensed consolidated statements of cash
flows Nine months ended September 30, 1998 and 1997 7 - 9
Notes to condensed consolidated financial
statements 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 21
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
Article 9 - Financial Data Schedule 24
Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Sep. 30, Dec. 31, Sep.30,
(Dollars in thousands) 1998 1997 1997
- - ----------------------------------------------------------------
ASSETS
Cash and due from banks $ 31,113 $28,336 $ 27,354
Federal funds sold 0 36,100 0
Securities:
Held for Sale (at market) 217,829 178,988 150,360
Held for Investment (market
values:
$24,159 at Sept. 30, 1998,
$41,873 at Dec. 31, 1997 &
$46,608 at Sept. 30, 1997) 23,547 41,162 45,744
---------------------------------
TOTAL SECURITIES 241,376 220,150 196,104
Loans available for sale 20,996 15,020 0
Loans 683,381 613,930 608,539
Less: Allowance for loan
losses (5,943) (5,363) (5,306)
---------------------------------
NET LOANS 677,438 608,567 603,233
Bank premises and equipment 18,536 18,324 17,674
Other real estate owned 280 536 796
Core deposit intangibles 1,388 1,640 1,724
Goodwill 3,357 3,582 3,657
Other assets 10,704 10,782 12,200
---------------------------------
$1,005,188 $943,037 $862,742
=================================
LIABILITIES & SHAREHOLDERS'
EQUITY LIABILITIES
Deposits $869,528 $806,098 $767,264
Federal funds purchased and
securities sold under
agreements to repurchase,
maturing within 30 days 25,483 52,112 11,726
Other borrowings 24,970 0 0
Other liabilities 5,758 3,763 3,658
---------------------------------
925,739 861,973 782,648
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Sep. 30, Dec. 31, Sep. 30,
(Dollars in thousands) 1998 1997 1997
- - -----------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock 0 0 0
Class A common stock 480 479 479
Class B common stock 38 38 38
Additional paid-in capital 27,440 27,256 27,114
Retained earnings 58,357 55,249 54,975
Less: Treasury stock (7,165) (1,289) (1,637)
---------------------------------------
79,150 81,733 80,969
Securities valuation
equity (allowance) 299 (669) (875)
---------------------------------------
TOTAL SHAREHOLDERS'
EQUITY 79,449 81,064 80,094
--------------------------------------
$1,005,188 $943,037 $862,742
======================================
- - -----------------------------------------------------------------
Note: The balance sheet at December 31, 1997 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
September 30,
- - ----------------------------------------------------
(Dollars in thousands, except 1998 1997
per share data)
- - ----------------------------------------------------
Interest and dividends on
securities $ 3,509 $ 3,124
Interest and fees on loans 13,935 12,448
Interest on federal funds sold 154 234
----------------------
TOTAL INTEREST INCOME 17,598 15,806
Interest on deposits 1,897 1,653
Interest on time certificates 5,454 4,722
Interest on borrowed money 455 119
----------------------
TOTAL INTEREST EXPENSE 7,806 6,494
----------------------
NET INTEREST INCOME 9,792 9,312
Provision for loan losses 450 225
----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,342 9,087
Noninterest income
Securities gains 115 51
Other income 3,428 2,681
----------------------
TOTAL NONINTEREST INCOME 3,543 2,732
TOTAL NONINTEREST EXPENSES 9,028 8,575
----------------------
INCOME BEFORE INCOME TAXES 3,857 3,244
Provision for income taxes 1,374 1,182
----------------------
NET INCOME $ 2,483 $ 2,062
======================
- - -----------------------------------------------------
Nine Months
Ended
September 30,
- - ------------------------------------------------
(Dollars in thousands, except 1998 1997
per share data)
- - -----------------------------------------------------
Interest and dividends on
securities $ 10,256 $ 9,854
Interest and fees on loans 40,645 37,266
Interest on federal funds sold 654 1,086
----------------------
TOTAL INTEREST INCOME 51,555 48,206
Interest on deposits 5,438 5,200
Interest on time certificates 15,396 14,167
Interest on borrowed money 929 513
----------------------
TOTAL INTEREST EXPENSE 21,763 19,880
----------------------
NET INTEREST INCOME 29,792 28,326
Provision for loan losses 1,350 613
----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 28,442 27,713
Noninterest income
Securities gains 359 14
Other income 9,167 8,206
----------------------
TOTAL NONINTEREST INCOME 9,526 8,220
TOTAL NONINTEREST EXPENSES 26,918 26,884
----------------------
INCOME BEFORE INCOME TAXES 11,050 9,049
Provision for income taxes 4,030 3,290
----------------------
NET INCOME $ 7,020 $ 5,759
======================
- - -----------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
September 30,
- - --------------------------------------------------
(Dollars in thousands, except 1998 1997
per share data)
- - ---------------------------------------------------
PER SHARE COMMON STOCK:
Net income basic $ 0.49 $ 0.40
Net income diluted 0.48 0.39
Cash dividends declared:
Class A 0.22 0.20
Class B 0.20 0.18
AVERAGE SHARES OUTSTANDING
Net income basic 5,070,565 5,150,048
Net income diluted 5,173,886 5,264,225
- - ---------------------------------------------------
See notes to condensed consolidated financial statements.
Nine Months
Ended
September 30,
- - ---------------------------------------------------
(Dollars in thousands, except 1998 1997
per share data)
- - ---------------------------------------------------
PER SHARE COMMON STOCK:
Net income basic $ 1.37 $ 1.12
Net income diluted 1.34 1.10
Cash dividends declared:
Class A 0.66 0.60
Class B 0.60 0.54
AVERAGE SHARES OUTSTANDING
Net income basic 5,139,662 5,122,396
Net income diluted 5,249,690 5,240,783
- - ---------------------------------------------------
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)
- - -------------------------------------------------------------
Nine Months Ended September 30 1998 1997
- - -------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities
Interest received $ 51,505 $ 48,561
Fees and commissions received 8,726 8,140
Interest paid (21,641) (20,210)
Cash paid to suppliers and employees (23,121) (26,512)
Income taxes paid (3,227) (3,753)
-----------------------
Net cash provided by operating
activities 12,242 6,226
Cash flows from investing activities
Proceeds from maturity of securities
held for sale 93,481 21,014
Proceeds from maturity of securities
held for investment 14,664 12,849
Proceeds from sale of securities held
for sale 79,925 64,035
Purchase of securities held for sale (206,507) (63,614)
Purchase of securities held for
investment (989) (5,928)
Proceeds from sale of loans 8,280 30,889
Net new loans and principal repayments (84,375) (64,188)
Proceeds from the sale of other real
estate owned 631 610
Additions to bank premises and
equipment (1,860) (1,813)
Net change in other assets (978) (1,713)
-----------------------
Net cash used in investing activities (97,728) (7,859)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands of dollars)
- - ------------------------------------------------------------
Nine Months Ended September 30 1998 1997
- - ------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 63,425 (44,237)
Net decrease in federal funds
purchased and repurchase agreements (26,629) (33,362)
Net increase in other borrowings 24,970 0
Exercise of stock options 747 727
Treasury stock acquired (6,996) (1,274)
Dividends paid (3,354) (2,875)
-----------------------
Net cash provided by (used in)
financing activities 52,163 (81,021)
-----------------------
Net decrease in cash and cash
equivalents (33,323) (82,654)
Cash and cash equivalents at
beginning of year 64,436 110,008
-----------------------
Cash and cash equivalents at end of $ 31,113 $ 27,354
period =======================
- - ------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)(Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands of dollars)
- - --------------------------------------------------------------
Nine Months Ended September 30 1998 1997
- - --------------------------------------------------------------
Reconciliation of Net Income to Cash
Provided by Operating Activities
Net Income $ 7,020 $ 5,759
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 2,337 2,031
Provision for loan losses 1,350 613
Gain on sale of securities (359) (14)
Gain on sale of loans (651) (157)
Loss on sale and writedown of
foreclosed assets 146 81
Loss on disposition of fixed assets 81 (69)
Change in interest receivable (106) 340
Change in interest payable 122 (330)
Change in prepaid expenses (389) (1,022)
Change in accrued taxes 1,135 (154)
Change in other liabilities 1,556 (852)
- - --------------------------------------------------------------
Total adjustments 5,222 467
-----------------------
Net cash provided by operating activities $12,242 $ 6,226
=======================
- - --------------------------------------------------------------
Supplemental disclosure of noncash investing activities:
Transfers from loans to other real
estate owned $ 548 $ 423
Transfers from loans to securities
available for sale 47,057 21,015
Transfers from securities held for
investment to securities held for sale 3,994 0
Market value adjustment to securities 1,409 1,059
- - --------------------------------------------------------------
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 nine month period ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
NOTE B - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the Financial Accounting Standard
Board's Statement No. 130, "Reporting Comprehensive Income". This statement
requires the Company to report a measure of all changes in equity, not only
reflecting net income but all other non-owner changes in equity as well. The
following table presents non-owner related income for the periods indicated:
Three Months Ended September 30, 1998
----------------------------------------
Income
Before Taxes Net Amount
Income
(Dollars in thousands) Taxes
- - -------------------------------------------------------------
Net unrealized gains on
securities arising
during 1998 $1,566 $ 576 $ 990
Net Income as stated
on statements of income 3,857 1,374 2,483
-----------------------------------
Comprehensive income $5,423 $1,950 $3,473
===================================
Nine Months Ended September 30, 1998
----------------------------------------
Income
Before
Income
(Dollars in thousands) Taxes Taxes Net Amount
- - ---------------------------------------------------------------
- - ---------------------------------------------------------------
Net unrealized gains on
securities arising
during 1998 $ 1,531 $ 563 $ 968
Net Income as stated on
statements of income 11,050 4,030 7,020
-------------------------------------
Comprehensive income $12,581 $4,593 $7,988
=====================================
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRD QUARTER 1998
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 1998 totaled $2,483,000 or $0.48 per share
diluted, higher than the $2,335,000 or $0.44 per share diluted recorded in the
second quarter of 1998 and higher than the $2,062,000 or $0.39 per share diluted
reported in the third quarter of 1997. Earnings were impacted in the third
quarter of 1998 by net non-recurring gains of $330,000 ($209,000 after tax or
$0.04 per share). This includes a gain of $616,000 on the sale of the Company's
credit card portfolio and a charge of $286,000 taken to cancel a contract for
processing the Company's trust business. A new trust processing agreement will
reduce operating expenses in the future by approximately $200,000 annually.
Return on average assets was 1.00 percent and return on average shareholders'
equity was 12.05 percent for the third quarter of 1998, compared to second
quarter 1998's performance of 0.98 percent and 11.15 percent, respectively, and
the prior year's third quarter results of 0.94 percent and 10.02 percent,
respectively.
The Company acquired Port St. Lucie Bank Holding Corporation ("PSHC") and its
subsidiary, Port St. Lucie National Bank ("PSNB"), on May 30, 1997. Acquired
deposits totaled $116.0 million and loans totaled $93.7 million at acquisition
date. In addition, the Company opened three denovo branches in mid-1997 and one
branch in 1998 (in March), all in Indian River County, the Company's
northernmost market.
NET INTEREST INCOME
Net interest income (on a tax equivalent basis) increased $491,000 or 5.2
percent to $9,893,000 for the third quarter of 1998 compared to a year ago. For
the nine month period ending September 30, 1998, net interest income (on a tax
equivalent basis) grew $1,451,000 or 5.1 percent year over year to $30,059,000.
On a tax equivalent basis the margin decreased to 4.20 percent during the third
quarter of 1998 from 4.57 percent in the third quarter of 1997. The cost of
interest-bearing liabilities increased 13 basis points to 3.94 percent from
third quarter of 1997, with rates for NOW increasing 66 basis points while the
rate for savings deposits decreased 10 basis points to 2.07 percent. Rates for
money market deposits, certificates of deposit and short term borrowings
(entirely composed of repurchase agreements and federal funds purchased)
increased and/or decreased nominally, by 1 to 2 basis points, respectively.
Leveraging the balance sheet, in the third quarter the Company obtained
borrowings totaling approximately $25 million with a duration of 2.7 years for
the purchase of like duration collateralized mortgage obligations ("CMOs"),
locking in a 110 basis point spread. The borrowings were obtained through the
Federal Home Loan Bank ("FHLB") and Donaldson, Lufkin & Jennrette ("DLJ") at a
weighted average rate of 5.75 percent.
The yield on earning assets for the third quarter of 1998 decreased 21 basis
points to 7.52 percent, compared to the third quarter of 1997. A decrease in the
yield on loans of 31 basis points and the yield on securities of 9 basis points
was partially offset by a changing earning assets mix (with a $96.7 million
growth in average loans). The yield on loans was affected primarily by the sale
of the $7.1 million credit card portfolio which had yielded 12 percent. In
addition, lower interest rates caused many homeowners to refinance their
existing mortgages to lower rates over the past twelve months. The yield on
federal funds sold increased 4 basis points.
Average earning assets for the third quarter of 1998 are $118,467,000 or 14.5
percent higher when compared to the prior year's third quarter. Average loan
balances grew $96,685,000 or 16.3 percent to $689,293,000, while average
investment securities increased $27,620,000 or 13.4 percent to $233,852,000 and
average federal funds sold decreased $5,838,000 or 34.7 percent to $10,991,000.
The growth in loans and an increase in lower cost interest bearing liabilities
mitigated the decline in the margin. Loans (the highest yielding component of
earning assets) as a percentage of average earning assets increased to 73.8
percent in the third quarter of 1998, compared to 72.7 percent a year ago.
Average certificates of deposit (the highest cost component of interest-bearing
liabilities) as a percentage of interest-bearing liabilities decreased slightly
to 52.1 percent, compared to 52.7 percent in the third quarter of 1997. Lower
cost core deposits which earn interest (NOW, savings and money market deposits)
grew $32,887,000 or 10.7 percent to $341,027,000. Favorably affecting the mix of
deposits as well was an increase in average noninterest-bearing demand deposits
of $8,818,000 or 8.3 percent to $115,438,000.
For the first nine months of 1998, the net interest margin was 4.45 percent,
compared to 4.60 percent for the same period in 1997.
PROVISION FOR LOAN LOSSES
A provision of $450,000 was recorded in the third quarter of this year, equal to
first quarter and second quarter and $225,000 higher than the provision in the
third quarter of 1997. Net charge-offs for the first nine months decreased from
$964,000 last year to $771,000 in 1998. Net charge-offs annualized as a percent
of average loans totaled 0.15 percent for the first nine months of 1998,
compared to 0.22 percent for the same period in 1997. These ratios are much
better than the banking industry as a whole which averaged net charge-offs of
approximately 0.60 percent for all of 1997. The sale of the credit card
portfolio during the third quarter reduced the Company's exposure to losses from
consumer bankruptcies and should result in lower net charge-offs in the future.
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 from securities sales, totaled $3,428,000
for the third quarter, an increase of $747,000 or 27.9 percent from the same
period last year. Included in noninterest income for the third quarter is a
non-recurring gain of $616,000 for the sale of the Company's $7.1 million credit
card portfolio. Without this gain, noninterest income increased 4.9 percent year
over year.
Service charges on deposit accounts totaled $1,162,000 and were $14,000 lower
year over year, while other service charges and fees rose $75,000 to $464,000.
Other income increased $742,000 to $857,000, including the $616,000 gain on the
sale of the credit card portfolio. Higher check printing charges and servicing
fees collected from the Federal Home Loan Mortgage Corporation (FHLMC), a result
of securitizing fixed rate residential mortgages, contributed to the increase in
other income as well. Income from brokerage services decreased $18,000 to
$422,000 and trust income declined $38,000 to $523,000. The decrease in
brokerage income reflects consumer uncertainty as to the health of the global
economy and resultant volatility in financial markets. Trust fees declined as a
result of fewer estate accounts being managed.
Noninterest income, excluding gains from securities sales, totaled $9,167,000
for the nine month period ending September 30, 1998, an increase of $961,000 or
11.7 percent from the same period last year. As in the quarterly comparison, the
most significant event was the $616,000 non-recurring gain on the sale of the
credit card portfolio. A $232,000 increase in fees from brokerage services was
followed by increases of $178,000 and $97,000 in other service charges and fees
and service charges on deposits, respectively. Trust fees were lower year over
year $117,000.
The relatively low rates for residential loan products during the quarter
resulted in higher activity and balances for fixed rate products. The Company,
to manage interest rate risk, securitized some of the 30-year production and
sold $13.3 million in the third quarter of 1998, $13.9 million in the second
quarter of 1998 and $14.8 million in the first quarter. The securities were then
sold and the sales generated additional income of $296,000.
NONINTEREST EXPENSES
When compared to 1997, noninterest expenses for the third quarter increased by
$453,000 or 5.3 percent to $9,028,000. Included in noninterest expenses in the
third quarter of 1998 is a one-time charge of $286,000 to cancel a contract for
processing the Company's trust business. Without this charge, noninterest
expenses increased $167,000 or 1.9 percent year over year.
Salaries and wages increased $167,000 or 5.1 percent and employee benefits
decreased $11,000 or 1.5 percent from the third quarter of 1997. Of the increase
in salaries, $35,000 is directly related to the opening of the Company's
Sebastian West office in Indian River County in March 1998. Occupancy expenses
and furniture and equipment expenses, on an aggregate basis, increased $141,000
or 10.8 percent versus third quarter results last year. Included in this
increase are costs related to the Sebastian West office totaling $17,000 and
write-offs of obsolete computer hardware totaling $32,000.
The premium for Federal Deposit Insurance Corporation ("FDIC") insurance totaled
$34,000, little changed from last year and reflecting that the rate the
Company's subsidiary bank is being assessed has been and is the lowest rate,
based on FDIC guidelines.
Costs associated with foreclosed and repossessed asset management and
disposition increased $73,000 or 165.9 percent, but totaled only $117,000, a
reflection of low nonperforming asset balances (see "Nonperforming Assets").
Legal and professional costs increased $23,000 or 9.1 percent to $276,000
compared to a year ago.
Compared to third quarter in 1997, 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, decreased by $93,000 or 16.7 percent to $465,000.
The other expense category increased $152,000 or 7.0 percent in the third
quarter of 1998 year over year. Without the one-time non-recurring charge of
$286,000 for processing of the Company's trust business, the other expense
category decreased $134,000 or 6.1 percent.
Noninterest expenses (excluding one-time merger related charges for the
acquisition of PSHC of $1,542,000 incurred) for the nine month period ending
September 30, 1998 were $1,576,000 or 6.2 percent higher and totaled
$26,918,000. Increases/decreases year over year were as follows: 1) salaries and
wages grew $557,000 or 5.6 percent, 2) employee benefits rose $205,000 or 9.1
percent, 3) occupancy and furniture and equipment expenses increased $357,000 or
9.2 percent, on an aggregate basis, 4) costs associated with foreclosed and
repossessed asset management and dispositions increased $122,000 to $268,000, 5)
legal and professional fees grew $47,000 or 6.9 percent, 6) marketing expenses
were $135,000 or 8.4 percent lower, and 7) the other expense category increased
$424,000 or 6.9 percent ($138,000 or 2.2 percent without the one-time
non-recurring charge for processing the Company's trust business).
INCOME TAXES
Income taxes as a percentage of income before taxes were 36.5 percent for the
first nine months of this year, compared to 36.4 percent in 1997. 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 nine months of 1998 and over
the prior twelve months have provided the Company with a continued source of
additional capital.
The Company's ratio of average shareholders' equity to average total assets
during the first nine months of 1998 was 8.66 percent, compared to 9.10 percent
during the first nine months of 1997. The risk-based capital minimum ratio for
total capital to risk-weighted assets is 8 percent. At September 30, 1998, the
Company's ratio was 12.69 percent. In comparison, this ratio was 15.22 percent a
year ago. In part, these ratios have declined as a result of the Company buying
back outstanding shares of its Class A Common stock. The repurchased Treasury
stock at cost totaled $7,165,000 at September 30, 1998 compared to $1,637,000 a
year ago.
LOAN PORTFOLIO
All of the Company's loan activity is 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 $683,381,000 at September 30, 1998, $74,482,000 or 12.3 percent more than
at September 30, 1997, and $69,451,000 or 11.3 percent more than at December 31,
1997. In addition, during the first nine months of 1998, $47.1 million in fixed
rate residential mortgage loans were securitized and placed in the available for
sale securities portfolio (see "Securities") and $0.5 million were sold for cash
to the FHLMC. Over the last twelve months, $54.6 million in such loans were
securitized or sold.
At September 30, 1998, the Company's mortgage loan balances secured by
residential properties amounted to $375,438,000 or 54.9 percent of total loans.
The next largest concentration was loans secured by commercial real estate which
totaled $172,611,000 or 25.3 percent. The Company was also a creditor for
consumer loans to individual customers (primarily secured by motor vehicles)
totaling $69,800,000, commercial loans of $32,830,000, home equity lines of
credit of $12,677,000, and construction loans of $19,396,000.
In the third quarter this year, the Company sold its $7.1 million credit card
portfolio for a gain of $616,000. We believe that our customers will still
receive excellent service and product offerings through a new partnership that
has been created with a major credit card issuer. The sale of this portfolio
will reduce the Company's exposure to losses from consumer bankruptcies
impacting the credit card industry.
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 FHLMC guidelines.
Real estate mortgage lending (particularly residential properties) 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, 1998, approximately $164 million or 44 percent
of the Company's residential mortgage loan balances were adjustable.
Of the $164 million, $161 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
$15 million were outstanding at September 30, 1998, 2) those limited to a two
percent per annum increase and a six percent cap over the life of the loan, of
which approximately $48 million in balances existed at September 30, 1998, 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 $98 million were
outstanding at September 30, 1998.
Loans secured by residential mortgages having fixed rates totaled approximately
$211 million at September 30, 1998, of which 15- and 30-year mortgages totaled
$109 million and $87 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 $31,000 in net charge-offs for the first nine months of 1998
compared to $27,000 for all of 1997.
At September 30, 1998, the Company had commitments to make loans (excluding
unused home equity lines of credit and credit card lines) of $54,987,000,
compared to $29,658,000 at September 30, 1997. 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, currently 25.3 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 $190,000 and $471,000,
respectively, for the first nine months of 1998, compared to net losses of
$361,000 and $186,000, respectively, in 1997. Current and historical credit
losses arising from real estate lending transactions continue to compare
favorably with the Company's peer group. Net losses arising from residential
real estate of $31,000 were recorded in the first nine months, versus $35,000 a
year ago. Net charge-offs recorded for commercial real estate loans of $74,000
in the first nine months of 1998 compared with the prior year when net
charge-offs of $27,000 were reported. Net charge-offs for commercial loans of
$5,000 in the first nine months of 1998 compared to $355,000 in charge-offs in
1997.
The ratio of the allowance for loan losses to net loans outstanding was 0.87
percent at September 30, 1998, the same as September 30, 1997. The allowance for
loan losses as a percentage of nonaccrual loans and loans 90 days or more past
due was 228 percent at September 30, 1998, compared to 207 percent at the same
date in 1997.
As a result of the sale of the credit card portfolio (see "Loan Portfolio"), the
Company has eliminated its exposure to future credit card losses.
NONPERFORMING ASSETS
At September 30, 1998, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.36 percent, compared to
0.53 percent one year earlier.
At September 30, 1998, accruing loans past due 90 days or more of $427,000 and
OREO of $280,000 were outstanding. A single commercial real estate property
comprises the balance in OREO. In 1997 on the same date, loans totaling $112,000
were past due 90 days or more and OREO balances of $796,000 were outstanding.
Nonaccrual loans totaled $2,175,000 at September 30, 1998, compared to a balance
of $2,450,000 at September 30, 1997. Over 50 percent of the nonaccrual loans
outstanding at September 30, 1998 were performing with respect to payments. 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, 1998, 86 percent is secured with real estate, 4 percent is
guaranteed by the Small Business Administration ("SBA"), 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, 1998, the Company had $217,829,000
or 90.2 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $23,547,000, representing 9.8
percent of total securities.
The Company's securities portfolio increased $45,272,000 from September 30,
1997. The securities portfolio as a percentage of earning assets was 25.5
percent at September 30, 1998, compared to 24.4 percent one year ago. This
increase is directly related to changes to the portfolio mix which have been
transacted or pending.
During the third quarter of 1998, proceeds of $26.4 million from securities
sales and maturing funds of $28.4 million were derived. Securities sales
included the divestiture of securitized 30-year fixed rate residential loans
totaling $13.3 million, which resulted in the recognition of gains totaling
$91,000. Additions to the securities portfolio totaled $69.5 million and
consisted of: 1) $13.3 million in FHLMC mortgage backed securities resulting
from the securitization of 30-year fixed rate residential mortgage loans from
the Company's portfolio, 2) $25.7 million in private issue CMOs with a yield of
6.80 percent and duration of 2.7 years, offset by borrowings obtained from the
FHLB and DLJ, 3) $5.0 million for a longer duration (4 years) Federal Farm
Credit Bureau agency bond, and 4) $25.5 million for five different CMOs, all
with durations ranging from 0.5 years to 1.2 years and having a weighted average
yield of 6.12 percent (higher than federal funds sold). All 30-year residential
loan securitizations created during the third quarter were sold.
During the second quarter of 1998, proceeds of $33.6 million from securities
sales and maturing funds of $35.9 million were derived. Securities sales
included the divestiture of securitized 30-year fixed rate residential loans
totaling $13.9 million and securitized 15-year fixed rate residential loans
totaling $6.6 million, which resulted in the recognition of gains totaling
$177,000. Additions to the securities portfolio totaled $75.4 million and
included: 1) $13.9 million in FHLMC mortgage backed securities resulting from
the securitization of 30-year fixed rate residential mortgage loans from the
Company's loan portfolio, 2) $3.4 million for additional stock as required for
membership with the FHLB, 3) $4.0 million in callable short-term U.S. Agency
Notes with a yield of 5.90 percent (higher than federal funds sold), 4) $20.3
million in adjustable rate CMOs with an average duration less than 2 years, and
5) $33.3 million in fixed rate CMOs with an average duration of 3.2 years. All
30-year residential loan securitizations created during the second quarter were
sold.
During the first quarter of 1998, proceeds of $19.8 million from securities
sales and maturing funds of $43.8 million were derived. Securities sales
included the divestiture of securitized 30-year fixed rate residential loans
totaling $14.8 million, which resulted in the recognition of gains totaling
$102,000. Additions to the securities portfolio totaled $62.4 million and
consisted of: 1) $1.0 million for a municipal security for Ft. Pierce, Florida,
a Community Reinvestment Act ("CRA") investment, 2) $19.9 million in FHLMC
mortgage backed securities resulting from the securitization of 15- and 30-year
fixed rate residential mortgage loans from the Company's loan portfolio, 3)
$10.0 million in U.S. Treasury securities with a two-year term, of which $5.0
million was sold during the quarter for a $15,000 gain, 4) $15.5 million in
callable short-term U.S. Agency Notes with yields ranging from 5.85 percent to
6.30 percent (higher than federal funds sold), all called during the quarter,
and 5) $16.0 million in short-term FNMA collateralized mortgage obligations
("CMOs") with an average duration of 2.5 years. All 30-year residential loan
securitizations created during the first quarter were sold as well.
Company management considers the overall quality of the securities portfolio to
be high. The securities portfolio had an unrealized net gain of $1,134,000 at
September 30, 1998, compared to a net loss of $158,000 at September 30, 1997.
Rates have remained low and a shifting U.S. Treasury yield curve caused a
decrease in unrealized depreciation. No securities are held which are not traded
in liquid markets or that meet the Federal Financial Institution Examination
Council ("FFIEC") definition of a high risk investment.
DEPOSITS
Total deposits increased $102,264,000 or 13.3 percent to $869,528,000 at
September 30, 1998, compared to one year earlier.
Certificates of deposit grew at a faster rate than other types of deposits.
Certificates of deposit increased $56,952,000 or 16.1 percent to $411,467,000
over the past twelve months while lower cost interest bearing deposits (NOW,
savings and money markets deposits) increased $44,878,000 or 15.0 percent to
$343,592,000. Noninterest bearing demand deposits increased $434,000 or 0.4
percent to $114,469,000.
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 re-pricing, 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 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 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 23.9 percent. This means that the
Company's assets re-price 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 re-pricing 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 15 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 10.8
percent if interest rates would immediately rise 200 basis points.
The Company does not presently use interest rate protection products in the
management of interest rate risk.
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 September 30, 1998, the Company had federal funds lines of credit
available and unused of $48,000,000 and had $95,305,000 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 $31,113,000 at September 30, 1998 as compared to
$27,354,000 at September 30, 1997. 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 1998, the cash flow from operations of $12,242,000 was
$6,016,000 higher than during the same period of 1997. Cash flows from
investing and financing activities reflect the increase in loan and deposit
balances experienced.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data 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 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 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.
THE YEAR 2000 ISSUE
The Company has been evaluating its information technology (IT) systems, and
currently does not believe that it has an exposure to the Year 2000 issue that
will have a material adverse impact or cost. The Company's evaluation and
assessment has included the identification of all significant IT systems
utilized by the Company in its businesses. These systems have been reviewed, and
where appropriate, vendors and other third parties contacted for information
regarding the status of their plans and progress towards addressing the Year
2000 problem. To date, based upon the information obtained, management has
concluded that all significant vendors and other counter parties, who could have
a material adverse effect on the Company if the Year 2000 issue was not properly
addressed, have completed modifications to their systems or have plans to
complete by year-end 1998. Some of the Company's in-house technology systems
have already been determined by testing to be Year 2000 ready and all other
significant in-house technology systems have been scheduled for testing.
In addition, the Company converted to a new outsourced core processing system in
the third quarter of 1998. The costs related to this conversion have been
expensed as incurred and are not expected to have a material adverse impact on
the results of operations. Testing of the new third party core processing system
for Year 2000 compliance by a select user group is to be performed during early
1999.
The Company recently began communicating with some customers and has plans to
communicate with others in the future. To date, management is unaware of any
single customer or group of customers that will have, or are likely to have, a
significant adverse impact should they not be able to address the Year 2000
problem. However, no assurance can be given that such consequences to the
Company will not be material.
Management expects its plans for dealing with the Year 2000 issue will result in
timely and adequate modification of its IT systems. However, the ultimate
potential impact of the Year 2000 issue will depend not only on the corrective
measures the Company undertakes, but also on the way in which the Year 2000
issue is addressed by governmental agencies, businesses, and other entities who
provide data to, or receive data from, the Company and its third party core
processor, or whose financial condition or operating ability is important to the
Company and its third party core processing vendor as borrowers, vendors,
customers or investment opportunities. Over the next one and a quarter years,
the Company intends to monitor the plans and progress of significant known third
parties to address the Year 2000 issue and to evaluate, and where appropriate
disclose, the identified impacts.
To date, the Company has not identified a worse case scenario, that is
reasonably likely, that would call for the development of contingency plans.
Management intends to monitor progress of significant vendors and others for
circumstances that would change this current assessment.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statements of Financial Accounting Standards Number 133,
Accounting for Derivative Instruments and for Hedging Activities ("SFAS 133"),
and Number 131, Disclosures about Segments of an Enterprise ("SAFS 131"). The
Company is required to adopt these statements in the future. Management does not
believe that the adoption of SFAS 133 and 131 will have a significant impact on
the Company's financial statements or related disclosures.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's Discussion and
Analysis" and elsewhere in this Quarterly Report may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Seacoast Banking Corporation of Florida
to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. The Company's actual
results may differ materially from the results anticipated in these
forward-looking statements due to a variety of factors, including, without
limitation: the effect of future economic conditions; governmental monetary and
fiscal policies, as well as legislative and regulatory changes; the risk of
changes in interest rates on the level and composition of deposits, loan demand,
and the values of loan collateral, securities, and 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 locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone and computer and the Internet; the possible effects of the Year 2000
problem on the Company, including such problems at the Company's vendors,
counter- parties and customers; and the failure of assumptions underlying the
establishment of reserves for possible loan losses. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these Cautionary Statements.
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,
1998.
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, 1998 /s/ Dennis S. Hudson, III
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DENNIS S. HUDSON, III
President & Chief Executive Officer
November 13, 1998 /s/ William R. Hahl
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WILLIAM R. HAHL
Executive Vice President & Chief Financial Officer