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, 1998 No. 0-13660
SEACOAST BANKING CORPORATION OF FLORIDA
(Exact name of registrant as specified in its charter)
Florida 59-2260678
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
815 Colorado Avenue, Stuart FL 34994
(Address of principal executive offices) (Zip code)
(561) 287-4000
(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, 1998:
Class A Common Stock, $.10 Par Value - 4,774,374 shares
Class B Common Stock, $.10 Par Value - 377,183 shares
<PAGE>
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 1998, December 31, 1997 and
June 30, 1997
Condensed consolidated statements of
income - Three months and six
months ended June 30, 1998 and 1997
Condensed consolidated statements of
cash flows - Six months ended
June 30, 1998 and 1997
Notes to condensed consolidated financial
statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
Article 9 - Financial Data Schedule
<PAGE>
Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, Dec. 31, June 30,
(Dollars in thousands) 1998 1997 1997
- - ------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 28,209 $ 28,336 $ 24,515
Federal funds sold 0 36,100 16,150
Securities:
Held for sale (at market) 195,912 178,988 154,595
Held for investment (market values:
$29,737 at June 30, 1998,
$41,873 at Dec. 31, 1997 &
$55,317 at June 30, 1997) 29,066 41,162 54,635
----------------------------------
TOTAL SECURITIES 224,978 220,150 209,230
Loans available for sale 5,990 15,020 0
Loans 684,308 613,930 589,082
Less: Allowance for loan losses (5,719) (5,363) (5,451)
----------------------------------
NET LOANS 678,589 608,567 583,631
Bank premises and equipment 18,710 18,324 18,252
Other real estate owned 421 536 768
Core deposit intangibles 1,472 1,640 1,808
Goodwill 3,432 3,582 3,732
Other assets 10,916 10,782 11,796
----------------------------------
$972,717 $943,037 $869,882
==================================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $866,652 $806,098 $777,353
Federal funds purchased and
securities sold under
agreements to repurchase,
maturing within 30 days 18,899 52,112 9,797
Other liabilities 4,273 3,763 3,486
----------------------------------
889,824 861,973 790,636
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, Dec. 31, June 30,
(Dollars in thousands) 1998 1997 1997
- - ----------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock 0 0 0
Class A common stock 480 479 475
Class B common stock 38 38 39
Additional paid-in capital 27,439 27,256 26,949
Retained earnings 57,050 55,249 53,928
Less: Treasury stock (1,423) (1,289) (729)
------------------------------------
83,584 81,733 80,662
Securities valuation
allowance (691) (669) (1,416)
------------------------------------
TOTAL SHAREHOLDERS'
EQUITY 82,893 81,064 79,246
------------------------------------
$972,717 $943,037 $869,882
====================================
- - ----------------------------------------------------------------
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.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
June 30,
- - -------------------------------------------------------------
(Dollars in thousands, except per share 1998 1997
data)
- - -------------------------------------------------------------
Interest and dividends on securities $ 3,428 $ 3,460
Interest and fees on loans 13,610 12,460
Interest on federal funds sold 210 317
---------------------
TOTAL INTEREST INCOME 17,248 16,237
Interest on deposits 1,780 1,773
Interest on time certificates 5,253 4,795
Interest on borrowed money 182 116
---------------------
TOTAL INTEREST EXPENSE 7,215 6,684
---------------------
NET INTEREST INCOME 10,033 9,553
Provision for loan losses 450 172
---------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,583 9,381
Noninterest income
Securities gains (losses) 120 65
Other income 3,037 2,806
---------------------
TOTAL NONINTEREST INCOME 3,157 2,871
TOTAL NONINTEREST EXPENSES 9,023 9,995
---------------------
INCOME BEFORE INCOME TAXES 3,717 2,257
Provision for income taxes 1,382 820
---------------------
NET INCOME $ 2,335 $ 1,437
=====================
- - -----------------------------------------------------------
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
- - ---------------------------------------------------------
(Dollars in thousands, except per 1998 1997
share data)
- - ------------------------------------------------------------
Interest and dividends on securities $ 6,747 $ 6,730
Interest and fees on loans 26,710 24,818
Interest on federal funds sold 500 852
---------------------
TOTAL INTEREST INCOME 33,957 32,400
Interest on deposits 3,541 3,547
Interest on time certificates 9,942 9,445
Interest on borrowed money 474 394
---------------------
TOTAL INTEREST EXPENSE 13,957 13,386
---------------------
NET INTEREST INCOME 20,000 19,014
Provision for loan losses 900 388
---------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,100 18,626
Noninterest income
Securities gains (losses) 244 (37)
Other income 5,739 5,525
---------------------
TOTAL NONINTEREST INCOME 5,983 5,488
TOTAL NONINTEREST EXPENSES 17,890 18,309
---------------------
INCOME BEFORE INCOME TAXES 7,193 5,805
Provision for income taxes 2,656 2,108
---------------------
NET INCOME $ 4,537 $ 3,697
=====================
- - ------------------------------------------------------------
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
June 30,
- - ------------------------------------------------------
(Dollars in thousands, except per 1998 1997
share data)
- - -------------------------------------------------------
PER SHARE COMMON STOCK:
Net income basic $0.45 $0.28
Net income diluted 0.44 0.28
CASH DIVIDENDS DECLARED:
Class A 0.22 0.20
Class B 0.20 0.18
AVERAGE SHARES OUTSTANDING:
Basic 5,178,173 5,109,802
Diluted 5,289,185 5,226,679
- - -------------------------------------------------------
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
- - ------------------------------------------------------
(Dollars in thousands, except per 1997 1998
share data)
- - -------------------------------------------------------
PER SHARE COMMON STOCK:
Net income basic $ 0.88 $ 0.72
Net income diluted 0.86 0.71
CASH DIVIDENDS DECLARED:
Class A 0.44 0.40
Class B 0.40 0.36
AVERAGE SHARES OUTSTANDING:
Basic 5,174,783 5,124,050
Diluted 5,288,221 5,228,867
- - -------------------------------------------------------
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands of
dollars)
- - --------------------------------------------------------------
Six Months Ended June 30 1998 1997
- - --------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities
Interest received $ 34,059 $ 32,248
Fees and commissions received 5,871 5,396
Interest paid (13,865) (13,689)
Cash paid to suppliers and employees (16,780) (18,789)
Income taxes paid (1,974) (2,768)
-----------------------
Net cash provided by operating
activities 7,311 2,398
Cash flows from investing activities
Proceeds from maturity of securities
held for sale 66,601 14,136
Proceeds from maturity of securities
held for investment 13,114 3,934
Proceeds from sale of securities held
for sale 53,385 44,749
Purchase of securities held for sale (136,800) (42,548)
Purchase of securities held for
investment (989) (5,928)
Proceeds from sale of loans 533 30,862
Net new loans and principal repayments (62,721) (44,218)
Proceeds from the sale of other real
estate owned 488 539
Deletions (additions) to bank premises
and equipment (1,459) (2,089)
Net change in other assets (231) (89)
-----------------------
Net cash used in investing activities (68,079) (652)
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands of
dollars)
-----------------------
Six Months Ended June 30 1998 1997
- - ---------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposits 60,565 (34,133)
Net decrease in federal funds purchased
and repurchase agreements (33,213) (35,291)
Exercise of stock options 676 87
Treasury stock (acquired) issued (1,228) 107
Dividends paid (2,259) (1,859)
-----------------------
Net cash provided by (used in)
financing activities 24,541 (71,089)
-----------------------
Net decrease in cash and cash equivalents (36,227) (69,343)
Cash and cash equivalents at beginning of
year 64,436 110,008
-----------------------
Cash and cash equivalents at end of
period $ 28,209 $ 40,665
=======================
- - ---------------------------------------------------------------
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)(Unaudited)
- - -----------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
(In thousands of
dollars)
---------------------
Six Months Ended June 30 1998 1997
- - ---------------------------------------------------------------
Reconciliation of Net Income to Cash
Provided by Operating Activities
Net Income $ 4,537 $ 3,697
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 1,536 1,336
Provision for loan losses 900 388
Loss (gain) on sale of securities (244) 37
Loss (gain) on sale of loans (6) (193)
Loss on sale and writedown of foreclosed
assets 76 68
Loss on disposition of fixed assets 45 106
Change in interest receivable 114 (144)
Change in interest payable 92 (302)
Change in prepaid expenses (829) (1,012)
Change in accrued taxes 880 (470)
Change in other liabilities 210 (1,113)
- - ---------------------------------------------------------------
Total adjustments 2,774 (1,299)
---------------------
Net cash provided by operating activities $ 7,311 $ 2,398
=====================
- - ---------------------------------------------------------------
Supplemental disclosure of noncash
investing activities:
Transfers from loans to other real
estate owned $ 449 $ 311
Transfers from loans to securities
available for sale 33,988 17,395
Market value adjustment to securities (137) 249
- - ---------------------------------------------------------------
See notes to condensed consolidated financial statement.
<PAGE>
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, 1998,
are not necessarily indicative of the results that may be expected for the year
ended 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 June 30, 1998
---------------------------------
Income
(Dollars in thousands) Before Net
Taxes Taxes Amount
- - -----------------------------------------------------------------
Net unrealized gains (losses) on
securities arising during 1998 $ (281) $(102) $(179)
Net Income as stated on statements
of income 3,717 1,382 2,335
____________________________
Comprehensive income $3,436 $1,280 $2,156
===========================
- - -----------------------------------------------------------------
Six Months Ended June 30, 1998
------------------------------
Income
(Dollars in thousands) Before Net
Taxes Taxes Amount
- - -----------------------------------------------------------------
Net unrealized gains (losses) on
securities arising during 1998 $ (35) $ (13) $ (22)
Net Income as stated on statements
of income 7,193 2,656 4,537
____________________________
Comprehensive income $7,158 $2,643 $4,515
===========================
- - -----------------------------------------------------------------
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SECOND 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 second quarter of 1998 totaled $2,335,000 or $0.44 per share
diluted, higher than the $2,202,000 or $0.42 per share diluted recorded in the
first quarter of 1998 and higher than the $1,437,000 or $0.28 per share diluted
reported in the second quarter of 1997. Earnings were impacted in the second
quarter of 1997 by one-time merger related expenses of $1,467,000 ($928,000
after taxes or $0.17 per share diluted) due to the acquisition of Port St. Lucie
National Bank Holding Corp. ("PSHC").
Return on average assets was 0.98 percent and return on average shareholders'
equity was 11.15 percent for the second quarter of 1998, compared to first
quarter 1998's performance of 0.96 percent and 10.73 percent, respectively, and
the prior year's second quarter results of 1.05 percent and 11.74 percent,
respectively.
The Company acquired PSHC and its subsidiary, Port St. Lucie National Bank
("PSNB"), on May 30, 1997. The transaction was accounted for as a pooling of
interests and all prior year amounts have been restated assuming the companies
had been combined since inception. PSHC shareholders received 900,000 shares of
the Company for all of their issued and outstanding common stock, warrants and
options. 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 $472,000 or 4.9
percent to $10,119,000 for the second quarter of 1998 compared to a year ago,
and was $72,000 higher than the first quarter of 1998. For the six month period
ending June 30, 1998, net interest income (on a tax equivalent basis) grew
$960,000 or 5.0 percent year over year to $20,166,000.
On a tax equivalent basis the margin decreased to 4.49 percent during the second
quarter of 1998 from 4.62 percent in the second quarter of 1997. The cost of
interest-bearing liabilities was level at 3.85 percent from second quarter of
1997, with rates for NOW and savings decreasing 4 and 37 basis points,
respectively, while the rate for certificates of deposit remained level at
5.29%. Rates for money market deposits and short term borrowings (entirely
composed of repurchase agreements) increased 5 and 9 basis points, respectively.
The yield on earning assets decreased 12 basis points to 7.70 percent, compared
to the second quarter of 1997. A decrease in the yield on loans of 28 basis
points and the yield on securities of 21 basis points was somewhat offset by a
changing earning assets mix (with a $68.2 million growth in average loans). The
yield on federal funds sold increased 11 basis points.
Average earning assets for the second quarter of 1998 are $65,261,000 or 7.8
percent higher when compared to the prior year's second quarter. Average loan
balances grew $68,221,000 or 11.5 percent to $659,870,000, while average
investment securities increased $6,673,000 or 3.2 percent to $215,157,000 and
average federal funds sold decreased $8,258,000 or 35.1 percent to $15,276,000.
The growth in loans and 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 73.1 percent in the
second quarter of 1998, compared to 70.6 percent a year ago. Average
certificates of deposit (the highest cost component of interest-bearing
liabilities) as a percentage of interest-bearing liabilities increased slightly
to 53.0 percent, compared to 52.1 percent in the second quarter of 1997. Lower
cost core deposits which earn interest (NOW, savings and money market deposits)
grew $12,502,000 or 3.9 percent to $334,928,000. Favorably affecting the mix of
deposits as well was an increase in average noninterest-bearing demand deposits
of $11,028,000 or 10.2 percent to $119,572,000.
For the first quarter of 1998, the net interest margin was 4.67 percent. The
yield on average earning assets was 7.81 percent and rate on interest-bearing
liabilities was 3.77 percent.
PROVISION FOR LOAN LOSSES
A provision of $450,000 was recorded in the second quarter of this year,
equal to first quarter and $278,000 higher than the provision in the second
quarter of 1997. Net charge-offs for the first six months decreased from
$594,000 last year to $544,000 in 1998. Net charge-offs annualized as a percent
of average loans totaled 0.17 percent for the first six months of 1998, compared
to 0.20 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% for all of 1997.
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, totaled
$3,037,000 for the second quarter, an increase of $231,000 or 8.2 percent from
the same period last year.
The largest increase in noninterest income occurred in fees from brokerage
services, which increased $157,000 or 30.8 percent to $667,000, a result of a
favorable economic environment and a growing customer base. Trust fees declined
slightly from $568,000 a year ago to $561,000, a result of fewer estate accounts
being managed. Service charges on deposit accounts grew $93,000 year over year
to $1,077,000 and other service charges and fees rose $64,000 to $505,000. Other
income declined $76,000 to $227,000, due to a decrease in income from the sale
of residential mortgages, a result of ceasing to offer mortgage products to
customers outside the Company's primary markets and adjacent communities. The
Company intends to continue to emphasize its brokerage and trust services to
both existing and new customers, as expectations are that these financial
products will remain in demand.
Noninterest income, excluding gains and losses from securities sales, totaled
$5,739,000 for the six month period ending June 30, 1998, an increase of
$214,000 or 3.9 percent from the same period last year. As in the quarterly
comparison, the most significant increase was a $250,000 increase in fees from
brokerage services, followed by increases of $111,000 and $103,000 in service
charges on deposits and other service charges and fees. Similarly, trust fees
were lower year over year and other income declined $171,000.
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 excess 30-year production
and sold $13.9 million in the second quarter of 1998 and $14.8 million in the
first quarter. These sales generated additional income of $205,000, of which
$103,000 is included in the investment securities gains of $120,000 recorded in
the second quarter and $102,000 is included in the investment securities gains
of $124,000 in the first quarter.
NONINTEREST EXPENSES
When compared to 1997, noninterest expenses for the second quarter decreased by
$972,000 or 9.7 percent to $9,023,000. Included in noninterest expenses in 1997
were one-time merger related charges totaling $1,467,000 for the acquisition of
PSHC. Without these charges, noninterest expenses increased $495,000 or 5.8
percent year over year. The Company's overhead ratio increased slightly, from
68.5 percent a year ago to 68.6 percent in the second quarter of 1998. This is
reflective of the additional four denovo branches which were added, offset by
operating cost savings associated with the combination with PSHC.
Salaries and wages increased $205,000 or 6.1 percent and employee benefits grew
$105,000 or 13.7 percent from the second quarter of 1997. Additional employment
costs from the addition of four denovo branches (see "Earnings Summary") totaled
$87,000. Higher group health insurance costs and profit sharing accruals for
1998 accounted for $95,000 of the increase in employee benefits.
Occupancy expenses and furniture and equipment expenses, on an aggregate basis,
increased $121,000 or 9.4 percent versus second quarter results last year. Costs
related to the denovo branches totaled $129,000, $86,000 higher than last year's
second quarter when two of the four new denovo offices opened.
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 $10,000 or 12.5 percent, but totaled only $90,000, a
reflection of low nonperforming asset balances (see "Nonperforming Assets").
Legal and professional costs remained the same compared to a year ago for the
same quarter at $247,000.
Compared to second 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 slightly, by $57,000 or 10.4%
to $489,000.
The other expense category increased $114,000 or 5.6 percent in the second
quarter of 1998 year over year. The largest increases: 1) $47,000 in credit card
and merchant processing expenses, due principally to higher fees charged to the
Company through an outsourcing arrangement, 2)$28,000 in stationery, printing
and supplies, due primarily to the impact of the four denovo offices and
increases in costs for paper supplies in general, and 3) $31,000 for telephone
costs, of which $12,000 is directly related to data lines and telephone activity
associated with the Company's four denovo offices.
Noninterest expenses (excluding one-time merger related charges of $1,542,000)
for the six month period ending June 30, 1998 were $1,123,000 or 6.7 percent
higher and totaled $17,890,000. Increases year over year were as follows: 1)
salaries and wages grew $390,000 or 5.8 percent, 2) employee benefits rose
$216,000 or 14.2 percent, 3) occupancy and furniture and equipment expenses
increased $216,000 or 8.4 percent, on an aggregate basis, 4) costs associated
with foreclosed and repossessed asset management and dispositions increased
$49,000 to $151,000, 5) legal and professional fees grew $24,000 or 5.6 percent,
6) marketing expenses were $42,000 or 4.0 percent lower, and 7) the other
expense category increased $272,000 or 6.8 percent.
INCOME TAXES
Income taxes as a percentage of income before taxes were 37.2 percent for
the first six months of this year, compared to 36.9 percent in 1997. The
increase in rate reflects a higher rate of provision 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 six 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 six months of 1998 was 8.87 percent,
compared to 8.96 percent during the first six months of 1997. The risk-based
capital minimum ratio for total capital to risk-weighted assets is 8 percent. At
June 30, 1998, the Company's ratio was 13.88 percent. In comparison, this ratio
was 15.28 percent 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 $684,308,000 at June 30, 1998, $95,226,000 or 16.2 percent more than at
June 30, 1997, and $70,378,000 or 11.5 percent more than at December 31, 1997.
In addition, during the first six months of 1998, $33.8 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 Federal Home Loan Mortgage Corporation ("FHLMC"). Over the past twelve
months, $45.0 million in such loans were securitized or sold.
At June 30, 1998, the Company's mortgage loan balances secured by residential
properties amounted to $381,150,000 or 55.7 percent of total loans. The next
largest concentration was loans secured by commercial real estate which totaled
$161,460,000 or 23.6 percent. The Company was also a creditor for consumer loans
to individual customers (primarily secured by motor vehicles) totaling
$68,152,000, commercial loans of $32,772,000, home equity lines of credit of
$13,063,000, and unsecured credit cards and related plans of $8,129,000.
The Company has entered into an agreement to sell its $7.1 million credit card
portfolio at a modest gain in the third quarter of 1998. 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 the
substantial increase in 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 June 30, 1998, approximately $170 million or 45 percent of the
Company's residential mortgage loan balances were adjustable.
Of the $170 million, $167 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
$16 million were outstanding at June 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 $53 million in balances existed at June 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 June 30, 1998.
Loans secured by residential mortgages having fixed rates totaled
approximately $212 million at June 30, 1998, of which 15- and 30- year mortgages
totaled $104 million and $78 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 $14,000 in net charge-offs for the first six months of 1998
compared to $27,000 for all of 1997.
At June 30, 1998, the Company had commitments to make loans (excluding unused
home equity lines of credit and credit card lines) of $44,490,000, compared to
$31,275,000 at June 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 23.6 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 $161,000 and
$335,000, respectively, for the first six months of 1998, compared to net losses
of $225,000 and $97,000, 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 $14,000 were recorded in the first six months, versus $30,000 a
year ago. Net charge-offs recorded for commercial real estate loans of $59,000
in the first six months of 1998 compared with the prior year when net
charge-offs of $26,000 were reported. Net recoveries for commercial loans of
$25,000 in the first six months of 1998 compared to $216,000 in charge-offs in
1997.
The ratio of the allowance for loan losses to net loans outstanding was
0.84 percent at June 30, 1998. This ratio was 0.93 percent at June 30, 1997. The
allowance for loan losses as a percentage of nonaccrual loans and loans 90 days
or more past due was 289.6 percent at June 30, 1998, compared to 240.7 percent
at the same date in 1997.
Net losses on credit cards will decline significantly in the third quarter of
1998 and should be zero in the fourth quarter of 1998 as a result of the sale of
the credit card portfolio (see "Loan Portfolio").
NONPERFORMING ASSETS
At June 30, 1998, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.28 percent, compared to
0.49 percent one year earlier.
At June 30, 1998, accruing loans past due 90 days or more of $510,000 and OREO
of $421,000 were outstanding. In 1997 on the same date, loans totaling $168,000
were past due 90 days or more and OREO balances of $696,000 were outstanding. Of
the $421,000 in OREO, residential properties total $123,000, the remaining
balance is a single commercial real estate property.
Nonaccrual loans totaled $1,465,000 at June 30, 1998, compared to a balance of
$2,097,000 at June 30, 1997. All of the nonaccrual loans outstanding at June 30,
1998 were performing with respect to payments, with the exception of nine loans
aggregating to $404,000. 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, 1998, 74 percent is secured with real estate, 9
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 June 30, 1998, the Company had $195,912,000 or
87.1 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $29,066,000, representing 12.9
percent of total securities.
The Company's securities portfolio increased $15,748,000 from June 30, 1997. The
securities portfolio as a percentage of earning assets was 24.6 percent at June
30, 1998, compared to 25.7 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 second quarter of 1998, proceeds of $33.3 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 $75.1 million and
consisted of: 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 Federal Home Loan Bank ("FHLB"), 3) $4.0 million in
callable short-term U.S. Agency Notes with a yield of 5.90% (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 loss of $350,000 at June
30, 1998, compared to a net loss of $1,149,000 or 0.5 percent of amortized cost
at June 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 $89,299,000 or 11.5 percent to $866,652,000 at June 30,
1998, compared to one year earlier. Certificates of deposit grew at a faster
rate than other types of deposits. Certificates of deposit increased $47,429,000
or 13.2 percent to $407,609,000 over the past twelve months while lower cost
interest bearing deposits (NOW, savings and money markets deposits) increased
$28,112,000 or 9.1 percent to $335,528,000. Noninterest bearing demand deposits
increased $13,758,000 or 12.5 percent to $123,515,000.
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 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 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 21.2 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 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 10 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 7.7
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 June 30, 1998, the Company had federal funds lines of credit available
and unused of $48,000,000 and had $108,549,000 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 $28,209,000 at June 30, 1998 as compared to
$40,665,000 at June 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 $7,311,000 was $4,913,000
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. 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 plans a conversion 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 preformed 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 that 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
half 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 Standard Number 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and
Number 131, "Disclosures about Segments of an Enterprise" ("SFAS 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.
<PAGE>
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1998 Annual Meeting of Shareholders was held April 23, 1998.
(b) All directors reported to the Commission in the 1998 Proxy statement
were re-elected in entirety.
(c) The following matters were voted upon at the meeting:
(i) The election of ten directors to serve until the 1998 Annual
Meeting of Shareholders and until their successors have been
elected and qualified. Out of 8,552,274 votes represented at
the meeting, the number of votes cast for and against their
re-election were 7,257,989 (99.4%) and 41,021, respectively.
(ii) The ratification of the appointment of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1998.
Out of 8,552,274 votes represented at the meeting, the number
of votes cast for and against their ratification were 7,252,863
(99.9%) and 7,205, respectively.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed for the three month period ended
June 30, 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
August 14, 1998 /s/ Dennis S. Hudson, III
DENNIS S. HUDSON, III
President & Chief Executive Officer
August 14, 1998 /s/ William R. Hahl
WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer
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