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, 1999 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
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Class A Common Stock, Par Value $.10
------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of June 30, 1999:
Class A Common Stock, $.10 Par Value - 4,449,957 shares
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Class B Common Stock, $.10 Par Value - 361,353 shares
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<PAGE>
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 1999, December 31, 1998 and June 30, 1998 3 - 4
Condensed consolidated statements of income -
Three months and six months ended June 30, 1999 and 1998 5
Condensed consolidated statements of cash flows -
Six months ended June 30, 1999 and 1998 6 - 7
Notes to condensed consolidated financial statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 19
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 21
Article 9 - Financial Data Schedule 22
<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) 1999 1998 1998
- -------------------------------------------------------------------
ASSETS
Cash and due from banks $ 25,602 $ 36,848 $ 28,209
Federal funds sold 0 60,590 0
Securities:
Held for Sale (at market) 229,054 238,934 195,912
Held for Investment
(market values:
$19,918 at June 30, 1999,
$22,895 at Dec. 31, 1998 &
$29,737 at June 30, 1998) 19,670 22,249 29,066
-------------------------------
TOTAL SECURITIES 248,724 261,183 224,978
Loans available for sale 0 3,991 5,990
Loans 747,038 701,550 684,308
Less: Allowance for loan losses (6,658) (6,343) (5,719)
-------------------------------
NET LOANS 740,380 695,207 678,589
Bank premises and equipment 17,144 17,762 18,710
Other real estate owned 594 288 421
Core deposit intangibles 1,137 1,304 1,472
Goodwill 3,132 3,282 3,432
Other assets 13,129 11,775 10,916
---------------------------------
$1,049,842 $1,092,230 $972,717
=================================
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $920,784 $905,202 $866,652
Federal funds purchased and
securities sold under
agreements to repurchase,
maturing within 30 days 21,930 77,758 18,899
Other borrowings 24,970 24,970 0
Other liabilities 6,309 5,858 4,273
-------------------------------
973,993 1,013,788 889,824
SHAREHOLDERS' EQUITY
Preferred stock 0 0 0
Class A common stock 482 481 480
Class B common stock 36 37 38
Additional paid-in capital 27,664 27,439 27,439
Retained earnings 63,249 59,738 57,050
Less: Treasury stock (12,230) (8,806) (1,423)
-----------------------------------
79,201 78,889 83,584
Securities valuation allowance (3,352) (447) (691)
-----------------------------------
TOTAL SHAREHOLDERS'
EQUITY 75,849 78,442 82,893
-----------------------------------
$1,049,842 $1,092,230 $972,717
===================================
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Note: The balance sheet at December 31, 1998 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)
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Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------------------
(Dollars in thousands, except per 1999 1998 1999 1998
share data)
- --------------------------------------------------------------------------------
Interest and dividends on
securities $ 3,915 $ 3,428 $ 7,813 $ 6,747
Interest and fees on loans 14,493 13,610 28,360 26,710
Interest on federal funds sold 64 210 322 500
------------------- --------------------
TOTAL INTEREST INCOME 18,472 17,248 36,495 33,957
Interest on deposits 1,894 1,780 3,751 3,541
Interest on time certificates 4,980 5,253 9,869 9,942
Interest on borrowed money 599 182 1,226 474
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TOTAL INTEREST EXPENSE 7,473 7,215 14,846 13,957
------------------- --------------------
NET INTEREST INCOME 10,999 10,033 21,649 20,000
Provision for loan losses 0 450 360 900
------------------- --------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,999 9,583 21,289 19,100
Noninterest income
Securities gains 92 120 319 244
Other income 3,066 3,037 6,193 5,739
------------------- --------------------
TOTAL NONINTEREST INCOME 3,158 3,157 6,512 5,983
TOTAL NONINTEREST EXPENSES 9,239 9,023 18,464 17,890
------------------- --------------------
INCOME BEFORE INCOME TAXES 4,918 3,717 9,337 7,193
Provision for income taxes 1,826 1,382 3,534 2,656
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NET INCOME $ 3,092 $ 2,335 $ 5,803 $ 4,537
=================== ====================
- --------------------------------------------------------------------------------
PER SHARE COMMON STOCK:
Net income basic $ 0.64 $ 0.45 $ 1.20 $ 0.88
Net income diluted 0.63 0.44 1.18 0.86
CASH DIVIDENDS DECLARED:
Class A 0.24 0.22 0.48 0.44
Class B 0.218 0.20 0.436 0.40
AVERAGE SHARES OUTSTANDING
Net income basic 4,809,822 5,178,173 4,850,280 5,174,783
Net income diluted 4,886,147 5,289,185 4,919,688 5,288,221
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See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Seacoast Banking Corporation of Florida and Subsidiaries
Six
Months Ended
June 30,
-----------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $36,458 $34,059
Fees and commissions received 6,401 5,871
Interest paid (14,950) (13,865)
Cash paid to suppliers and employees (16,790) (16,780)
Income taxes paid (3,509) (1,974)
-----------------
Net cash provided by operating activities 7,610 7,311
Cash flows from investing activities
Proceeds from maturity of securities held for
sale 61,726 66,601
Proceeds from maturity of securities held for
investment 2,557 13,114
Proceeds from sale of securities held for sale 49,137 53,385
Purchase of securities held for sale (105,475)(136,800)
Purchase of securities held for investment 0 (989)
Proceeds from sale of loans 0 533
Net new loans and principal repayments (41,851) (62,721)
Proceeds from the sale of other real estate
owned 59 488
Additions to bank premises and equipment (385) (1,459)
Net change in other assets 526 (231)
-----------------
Net cash used in investing activities (33,706) (68,079)
Cash flows from financing activities
Net increase in deposits 15,579 60,565
Net decrease in federal funds purchased and
repurchase agreements (55,828) (33,213)
Exercise of stock options 601 676
Treasury stock acquired (3,801) (1,228)
Dividends paid (2,291) (2,259)
-----------------
Net cash provided by (used in) financing
activities (45,740) 24,541
-----------------
Net decrease in cash and cash equivalents (71,836) (36,227)
Cash and cash equivalents at beginning of year 97,438 64,436
-----------------
Cash and cash equivalents at end of period $25,602 $28,209
=================
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
- --------------------------------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months
Ended June 30,
-----------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------
Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $ 5,803 $ 4,537
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,513 1,536
Provision for loan losses 360 900
Gains on sale of securities (319) (244)
Gains on sale of loans 0 (6)
Losses on sale and writedown of foreclosed
assets 58 76
Losses on disposition of fixed assets 9 45
Change in interest receivable (12) 114
Change in interest payable (104) 92
Change in prepaid expenses (283) (829)
Change in accrued taxes 177 880
Change in other liabilities 408 210
- --------------------------------------------------------------------
Total adjustments 1,807 2,774
-----------------
Net cash provided by operating activities $ 7,610 $ 7,311
=================
- --------------------------------------------------------------------
Supplemental disclosure of noncash investing activities:
Transfers from loans to other real estate owned $ 423 $ 449
Transfers from loans to securities available
for sale 24,936 33,988
Market value adjustment to securities (4,539) (137)
- ----------
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, 1999,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. 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, 1998.
NOTE B - NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the Financial Accounting Standards Board ("FASB")issued Statement
of Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and for Hedging Activities("SFAS 137") --- an amendment of FASB Statement No.
133 (SFAS 133"), which delayed the implementation date for SFAS 133 for one year
to fiscal years beginning after June 15, 2000. Management does not believe the
adoption of SFAS 133 will have a significant impact on the Company's financial
statements or related disclosures.
NOTE C - COMPREHENSIVE INCOME
Under FASB Statement of Financial Accounting Standard's No. 130, Reporting
Comprehensive Income, the Company is required to report a measure of all changes
in equity, not only reflecting net income but certain other changes as well. At
June 30, 1999 and 1998, comprehensive income was as follows:
Three Months Ended June 30,
(Dollars in thousands)
1999 1998
----------------------------
Net income $ 3,092 $ 2,335
Unrealized losses
on securities (2,330) (179)
----------------------------
Comprehensive income $ 762 $ 2,156
============================
Six Months Ended June 30,
1999 1998
-----------------------------
Net income $ 5,803 $ 4,537
Unrealized losses
on securities (2,905) (22)
-----------------------------
Comprehensive income $ 2,898 $ 4,515
=============================
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SECOND QUARTER 1999
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 1999 totaled $3,092,000 or $0.63 per share
diluted, higher than the $2,711,000 or $0.55 per share diluted recorded in the
first quarter of 1999 and higher than the $2,335,000 or $0.44 per share diluted
reported in the second quarter of 1998.
Earnings in 1998 and 1999 have improved each quarter. In large part, the better
performance is due to initiatives taken over the past two years to increase the
Company's penetration in existing and new markets, as well as efforts to better
align cost structures for higher performance and to improve noninterest revenue.
These efforts effected the favorable earnings improvement reported for the first
and second quarter of 1999 and should result in better performance for the
remainder of 1999.
Return on average assets was 1.14 percent and return on average shareholders'
equity was 15.40 percent for the second quarter of 1999, compared to first
quarter 1999's performance of 1.04 percent and 13.92 percent, respectively, and
the prior year's second quarter results of 0.98 percent and 11.15 percent,
respectively.
NET INTEREST INCOME
Net interest income (fully taxable equivalent) increased $972,000 or 9.6 percent
to $11,091,000 for the second quarter of 1999 compared to a year ago, and was
$344,000 higher than the first quarter of 1999. For the six month period ending
June 30, 1999, net interest income (on a tax equivalent basis) grew $1,672,000
or 8.3 percent year over year to $21,838,000.
On a tax equivalent basis the margin was the same at 4.38 percent during the
second quarter of 1999 as it was for the first quarter of 1999. The cost of
interest-bearing liabilities declined 1 basis point to 3.55 percent from the
first quarter of 1999, with rates for NOW and savings increasing 3 and 9 basis
points, respectively, while the rate for certificates of deposit decreased 14
basis points to 4.86%. Rates for savings accounts increased primarily as a
result of the Company successfully marketing a savings product called Grand
Savings that earns a higher rate, 3.75 percent presently. Rates for money market
deposits were level quarter to quarter at 1.97 percent and short term borrowings
(composed of federal funds purchased and repurchase agreements) increased 36
basis points to 3.86 percent. The yield on earning assets decreased 3 basis
points to 7.35 percent, compared to the first quarter of 1999. A decrease in the
yield on loans of 8 basis points to 7.86 percent and the yield on securities of
3 basis points to 5.98 percent was somewhat offset by a changing earning assets
mix (with a $28.0 million growth in average loans during the second quarter of
1999). The yield on federal funds sold of 4.74 percent was level quarter over
quarter.
For the second quarter a year ago, the net interest margin was 4.49 percent. The
yield on average earning assets was 7.70 percent and rate on interest bearing
liabilities was 3.85 percent.
Average earning assets for the second quarter of 1999 are $106,493,000 or 11.8
percent higher when compared to the prior year's second quarter. Average loan
balances grew $77,513,000 or 11.7 percent to $737,383,000, while average
investment securities increased $38,843,000 or 17.0 percent to $266,682,000 and
average federal funds sold decreased $9,863,000 or 64.6 percent to $5,413,000.
The mix of earning assets and interest bearing liabilities also has impact on
the margin:
Second Quarter
1999 1998
Average Earning Asset Mix:
Loans 73.1% 73.1%
Securities 26.4 25.2
Federal Funds Sold 0.5 1.7
Average Interest Bearing Liabilities Mix:
NOW, Savings, Money Market Deposits 45.4% 44.6%
Certificates of Deposit 48.7 53.0
Federal Funds Purchased and
Repurchase Agreements 3.0 2.3
Other Borrowings 2.9 0
Loans (the highest yielding component of earning assets) as a percentage of
average earning assets was level compared to a year ago, but average securities
increased 1.2 percent as a percentage while federal funds sold (the lowest
yielding component) declined 1.2 percent. As a percentage of average interest
bearing liabilities, average certificates of deposit (the highest cost component
of interest-bearing liabilities) decreased by 4.3 percent while lower cost core
deposits which earn interest (NOW, savings and money market deposits) increased
by 0.8 percent. Average NOW, savings and money market deposits grew $48,230,000
or 14.4 percent to $383,158,000 year over year. Other borrowings, comprised of
funds borrowed from the Federal Home Loan Bank and Donaldson, Lufkin & Jenrette
(having a duration of less than three years and rate of 5.73 percent), totaled
$24,970,000 and were not utilized a year ago.
Favorably affecting the mix of deposits as well was an increase in average
noninterest bearing demand deposits of $21,240,000 or 17.8 percent to
$140,812,000.
PROVISION FOR LOAN LOSSES
No provision was recorded in the second quarter of this year, compared to
$360,000 for the first quarter of 1999 and $450,000 in the second quarter of
1998. Net charge-offs for the first six months decreased from $544,000 last year
to $45,000 in 1999. Net recoveries of $82,000 in the second quarter of this year
included a recovery of $71,000 for a single commercial real estate loan
previously charged-off. Net charge-offs annualized as a percent of average loans
totaled 0.01 percent for the first six months of 1999, compared to 0.17 percent
for the same period in 1998. These ratios are much better than the banking
industry as a whole. While increased loan balances are forecast, the sale of the
Company's credit card portfolio in 1998 reduced the Company's exposure to losses
arising from consumer bankruptcies and should result in lower net charge-offs
and lower provisioning in 1999.
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
$3,066,000 for the second quarter, an increase of $29,000 or 1.0 percent from
the same period last year.
The largest increase in noninterest income occurred in service charges on
deposits, which increased $112,000 or 10.4 percent year over year to $1,189,000
for the second quarter, a result of a growing customer base, better collection
of fees charged, and price increases put in effect during the first quarter.
Fees from brokerage services decreased slightly from $667,000 to $653,000, while
trust fees increased slightly from $561,000 a year ago to $608,000, reflecting a
stable economic environment. The Company intends to continue to promote its
brokerage and trust services to both existing and new customers, as expectations
are these financial products will remain in demand. Other service charges and
fees decreased $119,000 to $386,000, primarily due to credit card related fees
no longer being collected since the sale of the Company's credit card portfolio
in the third quarter of 1998. Other income grew $3,000 to $230,000.
Noninterest income, excluding gains and losses from securities sales, totaled
$6,193,000 for the six month period ending June 30, 1999, an increase of
$454,000 or 7.9 percent from the same period last year. As in the quarterly
comparison, the most significant increase was a $344,000 increase in fees from
service charges on deposits, followed by increases of $78,000 and $152,000 in
brokerage commissions and trust income, respectively. Similarly, other service
charges and fees were $179,000 lower, due to the impact of the sale of the
credit card portfolio.
The relatively low rates for residential loan products has resulted in higher
activity and balances for fixed rate products. The Company, to manage interest
rate risk, securitizes some of the excess residential mortgage production.
During the first six months of 1999 the Company securitized $24.9 million of its
residential mortgage loan production, compared to $34.0 million in 1998. In
1999, sales of securitized mortgages generated additional income of $198,000, of
which $45,000 is included in the investment securities gains of $92,000 recorded
in the second quarter and $148,000 is included in the investment securities
gains of $227,000 in the first quarter. In comparison, sales in 1998 generated
income of $205,000, of which $103,000 was recorded in the second quarter and
$102,000 in the first quarter in investment securities gains.
NONINTEREST EXPENSES
When compared to 1998, noninterest expenses for the second quarter increased by
$216,000 or 2.4 percent to $9,239,000. The Company's overhead ratio decreased to
65.3 percent this quarter, compared to 68.6 percent a year ago and 66.5 percent
in the first quarter of 1999. This is reflective of initiatives to reduce
overhead costs, particularly staffing, and lower costs related to Year 2000
remediation and the sale of the credit card portfolio.
Salaries and wages increased $189,000 or 5.3 percent to $3,772,000. Incentive
compensation related to the achievement of certain operating performance
thresholds was approximately $400,000 higher year over year and $300,000 higher
than in the first quarter of 1999. Provided the Company's performance is
maintained, additional incentive compensation could be earned in the third
quarter. Employee benefits grew $80,000 or 9.2 percent to $954,000, compared to
the second quarter of 1998. All of the increase in benefit costs is related to
higher group health insurance costs and profit sharing accruals for 1999.
Occupancy expenses and furniture and equipment expenses, on an aggregate basis,
decreased $120,000 or 8.5 percent to $1,285,000, versus second quarter results
last year. A decrease in computer hardware maintenance, equipment depreciation
and costs for leasing equipment of $78,000 was the primary cause, a result of
the Company outsourcing its core data processing to a third party in
mid-September 1998 (see "The Year 2000 Issue").
The premium for Federal Deposit Insurance Corporation ("FDIC") insurance totaled
$36,000, 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 decreased $40,000 or 44.4 percent, and totaled only $50,000, a
reflection of low nonperforming asset balances (see "Nonperforming Assets").
Legal and professional costs increased $133,000 or 53.8 percent to $380,000.
Most of this increase was related to hiring an outside consulting service to
partner with the Company in assessing a number of internal processes for
overhead improvement and revenue enhancement.
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 $78,000 or 16.0% to $411,000.
Outside data processing costs totaled $876,000 for the second quarter of 1999,
an increase of $286,000 from a year ago. This increase reflects the company's
implementation and conversion of its core data processing system to a third
party in lieu on in-house mainframe processing which the Company's subsidiary
utilized to mid-September 1998. Year 2000 compliance was a significant factor
affecting the decision to convert to a third party service for data processing.
Partially offsetting the increase in cost for core data processing was a decline
for credit card processing of $58,000 year over year, a result of the Company
selling its $7.1 million credit card portfolio in July 1998.
The other expense category decreased $237,000 or 15.3 percent to $1,307,000 in
the second quarter of 1999 year over year. The largest decreases occurred in
stationery, printing and supplies, (due primarily to automated alternatives
reducing paper utilization), education and training, and employee placement,
relocation and advertising costs.
Noninterest expenses for the six month period ending June 30, 1999 were
$574,000 or 3.2 percent higher and totaled $18,464,000. Changes year over
year were as follows: 1) salaries and wages grew $143,000 or 2.0 percent, 2)
employee benefits rose $188,000 or 10.8 percent, 3) occupancy and furniture
and equipment expenses decreased $195,000 or 7.0 percent, on an aggregate
basis, 4) costs associated with foreclosed and repossessed asset management
and dispositions decreased $53,000 to $98,000, 5) legal and professional fees
grew $301,000 or 66.0 percent, 6) marketing expenses were $148,000 or 14.7
percent lower, 7) outsourced data processing costs increased $576,000 or 45.5
percent to $1,842,000 and 7) the other expense category decreased $244,000 or
8.2 percent.
INCOME TAXES
Income taxes as a percentage of income before taxes were 37.8 percent for the
first six months of this year, compared to 36.9 percent in 1998. The increase in
rate reflects a higher rate of provisioning for state income taxes, a result of
lower state intangible tax credits, lower tax-exempt interest income and the
Company's effective federal tax rate increasing due to adjusted income before
taxes exceeding $10 million.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Company's ratio of average shareholders' equity to average total assets
during the first six months of 1999 was 7.44 percent, compared to 8.87 percent
during the first six months of 1998. In large part this ratio has declined as a
result of the Company buying back outstanding shares of its Class A Common
Stock. The cost of repurchased shares totaled $12,230,000 at June 30, 1999,
compared to $1,423,000 a year ago.
The risk-based capital minimum ratio for total capital to risk-weighted
assets for "well-capitalized" financial institutions is 10 percent. At June
30, 1999, the Company's ratio was 11.88 percent.
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 $747,038,000 at June 30, 1999, $62,730,000 or 9.2 percent more than at June
30, 1998, and $45,488,000 or 6.5 percent more than at December 31, 1998. During
the first six months of 1999, $24.9 million in fixed rate residential mortgage
loans were securitized and placed in the available for sale securities
portfolio. Over the past twelve months, $71.7 million in such loans were
securitized or sold.
At June 30, 1999, the Company's mortgage loan balances secured by residential
properties amounted to $406,997,000 or 54.5 percent of total loans (versus 55.7
percent a year ago). The next largest concentration was loans secured by
commercial real estate which totaled $184,311,000 or 24.7 percent. The Company
was also a creditor for consumer loans to individual customers (primarily
secured by motor vehicles) totaling $75,901,000, commercial loans of
$31,398,000, home equity lines of credit of $13,165,000, and construction loans
of $34,991,000.
The majority of all loans and commitments for one-to-four family residential
properties and commercial real estate are generally secured with first mortgages
on property with the amount loaned at inception to the fair value of the
property not to exceed 80 percent. A majority of residential real estate loans
are made upon terms and conditions that would make such loans eligible for
resale under Federal National Mortgage Association ("FNMA") or Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines.
The Treasure Coast is a residential community with commercial activity centered
in retail and service businesses serving the local residents. Therefore, real
estate mortgage lending is an important segment of the Company's lending
activities. Exposure to market interest rate volatility with respect to mortgage
loans is managed by attempting to match maturities and re-pricing opportunities
for assets against liabilities, when possible. At June 30, 1999, approximately
$150 million or 37 percent of the Company's residential mortgage loan balances
were adjustable.
Of the $150 million, $144 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
$10 million were outstanding at June 30, 1999, 2) those limited to a two percent
per annum increase and a six percent cap over the life of the loan, of which
approximately $38 million in balances existed at June 30, 1999, 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 $96 million were
outstanding at June 30, 1999.
Loans secured by residential mortgages having fixed rates totaled approximately
$257 million at June 30, 1999, of which 15- and 30-year mortgages totaled $122
million and $94 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 $49,000 in net charge-offs for the first six months of 1999
compared to $17,000 for all of 1998.
Fixed rate and adjustable rate loans secured by commercial real estate totaled
approximately $120 million and $64 million, respectively, at June 30, 1999. 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 24.7 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.
At June 30, 1999, the Company had commitments to make loans (excluding unused
home equity lines of credit and credit card lines) of $69,775,000, compared to
$60,166,000 at June 30, 1998.
ALLOWANCE FOR LOAN LOSSES
Net losses on installment loans totaled $134,000 for the first six months of
1999, compared to net losses of $335,000 in 1998. 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 $49,000 were recorded in the first six months, versus $14,000 a
year ago. Net recoveries recorded for commercial real estate loans and credit
cards of $58,000 and $46,000, respectively, in the first six months of 1999
compared with the prior year when net charge-offs of $59,000 and $161,000,
respectively, were reported. Net recoveries for commercial loans of $34,000 in
the first six months of 1999 compared to $25,000 in recoveries in 1998. As a
result of the sale of the credit card portfolio, the Company has eliminated its
exposure to future credit card losses.
The ratio of the allowance for loan losses to net loans outstanding was 0.89
percent at June 30, 1999. This ratio was 0.84 percent at June 30, 1998. The
allowance for loan losses as a percentage of nonaccrual loans and loans 90 days
or more past due was 317.2 percent at June 30, 1999, compared to 289.6 percent
at the same date in 1998.
NONPERFORMING ASSETS
At June 30, 1999, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.35 percent, compared to
0.28 percent one year earlier.
At June 30, 1999, accruing loans past due 90 days or more of $45,000 and OREO of
$594,000 were outstanding. In 1998 on the same date, loans totaling $510,000
were past due 90 days or more and OREO balances of $421,000 were outstanding.
Nonaccrual loans totaled $2,054,000 at June 30, 1999, compared to a balance of
$1,465,000 at June 30, 1998. All of the nonaccrual loans outstanding at June 30,
1999 were performing with respect to payments, with the exception of fifteen
loans aggregating to $952,000. 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, 1999, 83 percent is secured with real
estate, 3 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, 1999, the Company had $229,054,000 or
92.1 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $19,670,000, representing 7.9
percent of total securities.
The Company's securities portfolio increased $23,746,000 or 10.6 percent from
June 30, 1998. The securities portfolio as a percentage of earning assets was
25.0 percent at June 30, 1999, compared to 24.6 percent one year ago. This
increase is directly related to increases in funding over the past twelve months
in both deposits and borrowings.
Management has lowered the Company's interest rate risk by reducing the average
duration of the securities portfolio. At June 30, 1999, the duration of the
portfolio was 3.0 years. Over the next twelve months, $10 million in securities
will mature and $53 million of periodic principal payments from mortgage backed
securities are expected to be received. Management believes a portion of these
funds will be used to fund increases in its consumer and commercial loan
portfolio.
Company management considers the overall quality of the securities portfolio to
be high. The securities portfolio had gross unrealized losses of $4,998,000 at
June 30, 1999, compared to losses of $350,000 at June 30, 1998. Rates have
remained low and a shifting U.S. Treasury yield curve caused an increase 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 $54,132,000 or 6.2 percent to $920,784,000 at June 30,
1999, compared to one year earlier. Certificates of deposit declined while all
other types of deposits grew. Certificates of deposit decreased $1,804,000 or
0.4 percent to $405,805,000 over the past twelve months while lower cost
interest bearing deposits (NOW, savings and money markets deposits) increased
$42,934,000 or 12.8 percent to $378,462,000. Noninterest bearing demand deposits
increased $13,002,000 or 10.5 percent to $136,517,000.
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 36.6 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.
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 5.7 percent if interest rates would immediately rise 200 basis
points. It has been the Company's experience that non-maturity core deposit
balances are stable and subjected to limited re-pricing when interest rates
increase or decrease within a range of 200 basis points.
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, 1999, the Company had federal funds lines of credit available
and unused of $53,000,000 and had $53,584,000 of United States Treasury and
Government agency securities and mortgage backed securities not pledged and
available for use under repurchase agreements. In addition, at June 30, 1999
access to borrowings up to $125,000,000 from the Federal Home Loan Bank ("FHLB")
was available utilizing the residential mortgage loan portfolio as collateral.
Of this amount, $15,000,000 has been drawn upon and was outstanding at June 30,
1999.
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold), totaled $25,602,000 at June 30, 1999 as compared to
$28,209,000 at June 30, 1998. 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 1999, the cash flow from operations of $7,610,000 was $299,000
higher than during the same period of 1998. Cash flows from investing and
financing activities reflect the increase in loan and deposit balances
experienced.
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. 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
with M&I Data Services ("M&I"), a division of Marshal & Isley Corporation, in
the third quarter of 1998. The costs related to this conversion were expensed as
incurred and, as expected, did not have a material adverse impact on the results
of operation. M&I has been executing an extensive plan for Year 2000 compliance
in accordance with regulatory requirements and has informed its customers that
its systems have been fully remediated and are expected to be Year 2000 ready.
Testing of the new third party core processing system for Year 2000 compliance
by a select user group was successfully performed during early 1999. The Company
intends to continue to monitor M&I's program for compliance over the remainder
of this year.
The Company has communicated with loan and deposit customers in 1998 and 1999.
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 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 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 remainder of this year, 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.
The Company has developed a contingency plan for continued operations in the
event temporary disruptions are experienced affecting critical systems. Testing
of the plan and further refinements are expected to be completed over the next
few months. Management also intends to monitor progress of significant vendors
and others for circumstances that would change or affect this contingency plan.
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.
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 1999 Annual Meeting of Shareholders was held April 22, 1999
(b) All directors reported to the Commission in the 1999 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 2000 Annual Meeting of
Shareholders and until their successors have been elected and qualified.
Out of 7,171,938 votes represented at the meeting, the number of votes cast
for and against their re-election were 7,151,440 (99.7%) and 20,498,
respectively.
(ii) The ratification of the appointment of Arthur Andersen LLP as
independent auditors for the fiscal year ending December 31, 1999. Out of
7,171,938 votes represented at the meeting, the number of votes cast for
and against their ratification were 7,156,956 (99.8%) and 2,893,
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,
1999.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEACOAST BANKING CORPORATION OF FLORIDA
August 13, 1999 /s/ Dennis S. Hudson, III
- --------------- -------------------------
DENNIS S. HUDSON, III
President & Chief Executive Officer
August 13, 1999 /s/ William R. Hahl
- --------------- ---------------------------------
WILLIAM R. HAHL
Executive Vice President & Chief Financial Officer
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