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
MARCH 31, 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
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(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 March 31, 1999:
Class A Common Stock, $.10 Par Value - 4,806,001 shares
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Class B Common Stock, $.10 Par Value - 374,513 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 -
March 31, 1999, December 31, 1998 and
March 31, 1998 3 - 4
Condensed consolidated statements of income -
Three months ended March 31, 1999 and 1998 5 - 6
Condensed consolidated statements of cash flows -
Three months ended March 31, 1999 and 1998 7 - 9
Notes to condensed consolidated financial
statements 10
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 21
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
Article 9 - Financial Data Schedule 24 - 25
<PAGE>
Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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Seacoast Banking Corporation of Florida and Subsidiaries
March 31, Dec. 31, March 31,
(Dollars in thousands) 1999 1998 1998
- -------------------------------------------------------------------
ASSETS
Cash and due from banks $36,442 $36,848 $30,986
Federal funds sold 1,000 60,590 12,100
Securities:
Held for sale (at market) 254,823 238,934 184,032
Held for investment
(market values:
$21,311 at Mar. 31, 1999,
$22,895 at Dec. 31, 1998 &
$35,996 at Mar. 31, 1998) 20,756 22,249 35,296
-------------------------------
TOTAL SECURITIES 275,579 261,183 219,328
Loans available for sale 4,996 3,991 5,994
Loans 724,599 701,550 642,071
Less: Allowance for loan
losses (6,576) (6,343) (5,455)
-------------------------------
NET LOANS 718,023 695,207 636,616
Bank premises and equipment 17,478 17,762 18,576
Other real estate owned 402 288 458
Core deposit intangibles 1,221 1,304 1,556
Goodwill 3,207 3,282 3,507
Other assets 11,100 11,775 9,667
-------------------------------
$1,069,448 $1,092,230 $ 938,788
================================
LIABILITIES
Deposits $939,405 $905,202 $830,364
Federal funds purchased and
securities sold under
agreements to repurchase,
maturing within 30 days 23,447 77,758 21,473
Other borrowings 24,970 24,970 0
Other liabilities 5,827 5,858 3,963
-------------------------------
993,649 1,013,788 855,800
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
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Seacoast Banking Corporation of Florida and Subsidiaries
March 31, Dec. 31, March 31,
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock 0 0 0
Class A common stock 481 481 480
Class B common stock 37 37 38
Additional paid-in capital 27,370 27,439 27,381
Retained earnings 61,305 59,738 55,855
Less: Treasury stock (12,372) (8,806) (254)
-----------------------------------
76,821 78,889 83,500
Securities valuation allowance (1,022) (447) (512)
-----------------------------------
TOTAL SHAREHOLDERS'
EQUITY 75,799 78,442 82,988
-----------------------------------
$1,069,448 $1,092,230 $938,788
===================================
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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)
- --------------------------------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
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(Dollars in thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------
Interest and dividends on securities $3,898 $3,319
Interest and fees on loans 13,867 13,100
Interest on federal funds sold 258 290
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TOTAL INTEREST INCOME 18,023 16,709
Interest on deposits 1,857 1,761
Interest on time certificates 4,889 4,689
Interest on borrowed money 627 292
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TOTAL INTEREST EXPENSE 7,373 6,742
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NET INTEREST INCOME 10,650 9,967
Provision for loan losses 360 450
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NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 10,290 9,517
Noninterest income
Securities gains 227 124
Other income 3,127 2,702
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TOTAL NONINTEREST INCOME 3,354 2,826
TOTAL NONINTEREST EXPENSES 9,225 8,867
------------------
INCOME BEFORE INCOME TAXES 4,419 3,476
Provision for income taxes 1,708 1,274
------------------
NET INCOME $ 2,711 $ 2,202
==================
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(Dollars in thousands, except per 1999 1998
share data)
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PER SHARE COMMON STOCK:
Net income diluted $ 0.55 $ 0.42
Net income basic 0.55 0.43
CASH DIVIDENDS DECLARED:
Class A 0.24 0.22
Class B 0.218 0.20
Average shares outstanding - Diluted 4,953,603 5,287,246
Average shares outstanding - Basic 4,891,188 5,171,356
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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
Three Months Ended
March 31,
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(In thousands of dollars) 1999 1998
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Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $ 18,056 $ 17,048
Fees and commissions received 3,228 2,766
Interest paid (7,437) (6,697)
Cash paid to suppliers and employees (9,512) (8,478)
-----------------
Net cash provided by operating activities 4,335 4,639
Cash flows from investing activities
Proceeds from maturity of securities held for
sale 30,642 36,944
Proceeds from maturity of securities held for
investment 1,481 6,888
Proceeds from sale of securities held for sale 31,263 19,829
Purchase of securities held for sale (78,409) (61,468)
Purchase of securities held for investment 0 (989)
Proceeds from sale of loans 0 515
Net new loans and principal repayments (24,289) (20,130)
Proceeds from the sale of other real estate owned 19 229
Additions to bank premises and equipment (223) (767)
Net change in other assets 66 (114)
-----------------
Net cash used in investing activities (39,450) (19,063)
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
- --------------------------------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(In thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in deposits 34,209 24,273
Net decrease in federal funds purchased and
repurchase agreements (54,311)(30,639)
Exercise of stock options 182 598
Treasury stock acquired (3,816) (26)
Dividends paid (1,145) (1,132)
-----------------
Net cash used in financing activities (24,881) (6,926)
-----------------
Net decrease in cash and cash equivalents (59,996)(21,350)
Cash and cash equivalents at beginning of period 97,438 64,436
-----------------
Cash and cash equivalents at end of period $ 37,442 $43,086
=================
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<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
- --------------------------------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(In thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $ 2,711 $ 2,202
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 771 719
Provision for loan losses 360 450
Securities gains (227) (124)
Loss on sale of loans 0 12
Loss on sale and writedown of foreclosed
assets 29 26
Loss on disposition of fixed assets 7 9
Change in interest receivable 31 348
Change in interest payable (64) 45
Change in prepaid expenses (314) (472)
Change in accrued taxes 1,804 1,384
Change in other liabilities (773) 40
------------
Total adjustments 1,624 2,437
-----------------
Net cash provided by operating activities $ 4,335 $ 4,639
=================
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash investing activities:
Transfers from loans to other real estate owned $ 162 $ 177
Market value adjustment to securities (855) 205
Transfers from loans to securities available
for sale 14,960 19,988
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See notes to condensed consolidated financial statements.
<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 three month period ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
year ending 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
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards Number 133, Accounting for Derivative Instruments
and for Hedging Activities ("SFAS 133"). The Company is required to adopt this
statement for fiscal years beginning after June 15, 1999. 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's Statement 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 March 31, 1999 and 1998,
comprehensive income was as follows:
Three Months Ended
March 31,
(Dollars in thousands) 1999 1998
---------------------- ---- ----
NET INCOME $ 2,711 $ 2,202
Unrealized gains (losses)
on securities (575) 157
---- ---
COMPREHENSIVE INCOME $ 2,136 $ 2,359
======= =======
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST 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 first quarter of 1999 totaled $2,711,000 or $0.55 per share
diluted, higher than the $2,543,000 or $0.51 per share diluted recorded in the
fourth quarter of 1998 and higher than the $2,202,000 or $0.42 per share diluted
reported in the first 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
quarter of 1999 and should result in better performance for the remainder of
1999.
Return on average assets was 1.04 percent and return on average shareholders'
equity was 13.92 percent for the first quarter of 1999, compared to fourth
quarter 1998's performance of 0.97 percent and 12.67 percent, respectively, and
the prior year's first quarter results of 0.96 percent and 10.73 percent,
respectively. The increase in return on equity reflects improved earnings and
the impact of the Company's share repurchase program (See "Capital Resources").
NET INTEREST INCOME
Net interest income (fully taxable equivalent) for 1999 totaled $10,747,000,
$219,000 or 2.1 percent greater than for the fourth quarter of 1998 and $700,000
or 7.0 percent higher than for the first quarter of 1998.
Earnings for the first quarter of 1999 benefited from an improved net interest
margin. On a tax equivalent basis the margin increased to 4.38 percent during
the first quarter of 1999 from 4.26 percent in the fourth quarter of 1998. The
cost of interest-bearing liabilities decreased 15 basis points to 3.56 percent
from fourth quarter, with rates for NOW, money market accounts, certificates of
deposit and short term borrowings (entirely composed of repurchase agreements)
decreasing 7, 6, 17 and 19 basis points, respectively. Rates for savings
accounts increased 10 basis points, primarily as a result of the Company
successfully marketing a savings product called Grand Savings that earns a
higher rate, 3.75% presently. Impacting the improved margin as well, the yield
on earning assets decreased only 2 basis points to 7.38 percent during the first
quarter of 1999, compared to the fourth quarter. Decreases in the yield on loans
of 3 basis points to 7.94 percent and the yield on securities of 14 basis points
to 6.01 percent was offset by a changing earning assets mix (with a $12.8
million growth in average loans). The yield on federal funds sold of 4.74
percent declined only one basis point from fourth quarter of 1998.
<PAGE>
For the first quarter a year ago, 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.
Average earning assets for the first quarter of 1999 are $125,436,000 or 14.4
percent higher when compared to the prior year's first quarter. Average loan
balances grew $78,344,000 or 12.4 percent to $709,349,000, average investment
securities increased $46,379,000 or 21.3 percent to $264,470,000, and average
federal funds sold rose $713,000 or 3.3 percent to $22,084,000.
The mix of earning assets and interest bearing liabilities also has impacts on
the margin. Loans (the highest yielding component of earning assets) as a
percentage of average earning assets totaled 71.2 percent in the first quarter
of 1999, compared to 72.5 percent a year ago. Average certificates of deposit (a
higher cost component of interest-bearing liabilities) as a percentage of
interest-bearing liabilities decreased to 47.3 percent, compared to 50.2 percent
in the first quarter of 1998, but was offset by borrowings from the Federal Home
Loan Bank and Donaldson, Lufkin and Jenrette (having a duration less than three
years and rate of 5.73 percent) of 3.0 percent. These borrowings totaling
$24,970,000 were initially drawn upon in the third quarter of 1998 and did not
exist a year ago. Lower cost core deposits which earn interest (NOW, savings and
money market deposits) grew $53,303,000 or 16.0 percent to $385,798,000.
Favorably affecting the mix of deposits as well was an increase in average
noninterest-bearing demand deposits of $15,335,000 or 13.4 percent to
$129,822,000.
If loan demand continues at its current pace as a result of the economy
remaining firm, and local competition allows rates paid for core deposits to
remain low, the net interest margin results should remain stable during 1999.
PROVISION FOR LOAN LOSSES
A provision of $360,000 was recorded in the first quarter of this year, $90,000
lower than provisioning in the first quarter of 1998. Net charge-offs for the
first quarter decreased from $358,000 last year to $127,000 in 1999. Net
charge-offs annualized as a percent of average loans totaled 0.07 percent for
the first quarter of 1999, compared to 0.23 percent for the same quarter 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.
<PAGE>
NONINTEREST INCOME
Noninterest income, excluding gains and losses from securities sales, totaled
$3,127,000 for the first quarter of 1999, $425,000 or 15.7 percent higher than
for the same period last year.
The largest increase in noninterest income occurred in service charges on
deposits, which increased $232,000 or 24.0 percent to $1,198,000, a result of a
growing customer base, better collection of fees charged and price increases put
in effect during the first quarter. Trust fees increased in the first quarter of
1999 by $105,000 to $597,000 and brokerage commissions and fees grew $92,000
year over year to $697,000. A favorable economic environment and increasing
market values during the first quarter contributed to this improvement. The
Company intends to continue to promote its brokerage and trust services to both
existing and new customers, as expectations are that these financial products
will remain in demand. Other service charges and fees declined $60,000 to
$391,000, 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 increased $56,000 to $244,000, due to an increase in check
printing charges and income from the sale of residential mortgages.
Relatively low rates for residential loan products during 1998 and 1999 have
resulted in higher activity and balances for fixed rate products. The Company,
to manage interest rate risk, securitizes some of its excess residential
mortgage production. During the first quarter of 1999 the Company sold $19.7
million in mortgage backed securities, compared to $14.8 million in the first
quarter of 1998. These sales generated additional income of $148,000 which is
included in the investment securities gains of $227,000 recorded in the first
quarter of 1999 and additional income of $102,000 which is included in the
investment securities gains of $124,000 for the first quarter of 1998.
NONINTEREST EXPENSES
When compared to 1998, noninterest expenses for the first quarter increased by
$358,000 or 4.0 percent to $9,225,000. The Company's overhead ratio decreased,
from 69.6 percent a year ago to 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 decreased $46,000 or 1.3 percent to $3,477,000. The Company
expects to benefit from further reductions in staffing in the second half of
1999. Employee benefits grew $108,000 or 12.5 percent to $974,000 from the first
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 $75,000 or 5.5 percent to $1,296,000, versus first quarter results
last year. A decrease in computer hardware maintenance, equipment depreciation
and costs for leasing equipment of $60,000 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").
<PAGE>
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 $13,000 or 21.3 percent, and totaled only $48,000, a
reflection of low nonperforming asset balances (see "Nonperforming Assets").
Legal and professional costs increased $168,000 or 80.4 percent to $377,000.
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 $70,000 to $451,000.
Outsourced data processing costs totaled $966,000 for the first quarter of 1999,
an increase of $290,000 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 of 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 $77,000 year over year, a result of the Company
selling its $7.1 million credit card portfolio in July 1998.
The other expense category increased only $7,000 to $1,432,000 in 1999, compared
to first quarter last year.
INCOME TAXES
Income taxes as a percentage of income before taxes were 38.7 percent for the
first quarter of this year, compared to 36.7 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 quarter of 1999 was 7.50 percent, compared to 8.98 percent
during the first quarter 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 $12,372,000 at March 31, 1999,
compared to $254,000 a year ago.
The risk-based capital minimum ratio for total capital to risk-weighted assets
for "well-capitalized" financial institutions is 10%. At March 31, 1999, the
Company's ratio was 11.64 percent.
<PAGE>
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 $724,599,000 at March 31, 1999, $82,528,000 or 12.9 percent more than at
March 31, 1998, and $23,049,000 or 3.3 percent more than at December 31, 1998.
During the first quarter of 1999, $15.0 million in fixed rate residential
mortgage loans were securitized and placed in the available for sale securities
portfolio (see "Securities"). Over the past twelve months, $75.6 million in such
loans were securitized or sold.
At March 31, 1999, the Company's mortgage loan balances secured by residential
properties amounted to $396,128,000 or 54.7 percent of total loans (versus 55.8
percent a year ago). The next largest concentration was loans secured by
commercial real estate which totaled $186,585,000 or 25.8 percent (versus 23.6
percent a year ago). The Company was also a creditor for consumer loans to
individual customers (primarily secured by motor vehicles) totaling $72,750,000,
commercial loans of $30,517,000, home equity lines of credit of $13,781,000, and
construction loans of $24,575,000.
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 March 31, 1999, approximately
$156 million or 39 percent of the Company's residential mortgage loan balances
were adjustable.
Of the $156 million, $148 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 March 31, 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 $40 million in balances existed at March 31, 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 $98 million were
outstanding at March 31, 1999.
<PAGE>
Loans secured by residential mortgages having fixed rates totaled approximately
$244 million at March 31, 1999, of which 15- and 30-year mortgages totaled $117
million and $92 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 $42,000 in net charge-offs for the first quarter 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 $67 million, respectively, at March 31, 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 25.8 percent of total loans, and by making commercial real estate
loans primarily on owner occupied properties. The remainder of the real estate
loan portfolio is residential mortgages to individuals, and home equity loans,
which the Company considers less susceptible to adverse effects from a downturn
in the real estate market, especially given the area's large percentage of
retired persons.
In the third quarter of 1998, the Company sold its $7.1 million credit card
portfolio. The sale of this portfolio reduces the Company's exposure to losses
from consumer bankruptcies impacting the credit card industry (See "Allowance
for Loan Losses").
At March 31, 1999, the Company had commitments to make loans (excluding unused
home equity lines of credit) of $68,512,000, compared to $62,861,000 at March
31, 1998.
ALLOWANCE FOR LOAN LOSSES
Net losses on residential real estate loans, commercial real estate loans and
installment loans totaled $42,000, $18,000 and $115,000, respectively, for the
first three months of 1999, compared to net losses of $56,000, $79,000 and
$130,000, respectively, in 1998. Current and historical credit losses arising
from real estate lending transactions continue to compare favorably with the
Company's peer group. Net recoveries for commercial loans and credit card loans
of $21,000 and $27,000, respectively, in the first quarter of 1999 compared to
charge-offs of $90,000 and $4,000, respectively, 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 0.91
percent at March 31, 1999. This ratio was 0.85 percent at March 31, 1998. The
allowance for loan losses as a percentage of nonaccrual loans and loans 90 days
or more past due was 292.4 percent at March 31, 1999, compared to 228.1 percent
at the same date in 1998.
NONPERFORMING ASSETS
At March 31, 1999, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.35 percent, compared to
0.38 percent one year earlier.
At March 31, 1999, accruing loans past due 90 days or more of $83,000 and OREO
of $402,000 were outstanding. In 1998 on the same date, loans totaling $396,000
were past due 90 days or more and OREO balances of $458,000 were outstanding.
<PAGE>
Nonaccrual loans totaled $2,166,000 at March 31, 1999, compared to a balance of
$1,995,000 at March 31, 1998. All of the nonaccrual loans outstanding at March
31, 1999 were performing with respect to payments, with the exception of
seventeen loans aggregating to $1,016,000. 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 March 31, 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 March 31, 1999, the Company had $254,823,000 or
92.5 percent of total securities available for sale and securities held to
maturity were carried at an amortized cost of $20,756,000, representing 7.5
percent of total securities.
The Company's securities portfolio increased $56,251,000 or 25.6 percent from
March 31, 1998. The securities portfolio as a percentage of earning assets was
27.4 percent at March 31, 1999, compared to 24.9 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 March 31, 1999, the duration of the
portfolio was 2.5 years. Over the next twelve months, $22 million in securities
will mature and $69 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 unrealized net losses of $1,011,000 at
March 31, 1999, compared to a net gain of $19,000 at March 31, 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 $109,041,000 or 13.1 percent to $939,405,000 at March
31, 1999, compared to one year earlier. Certificates of deposits grew at a lower
rate than other types of deposits. Certificates of deposit increased $36,306,000
or 9.7 percent to $411,492,000 over the past twelve months while lower cost
interest bearing deposits (NOW, savings and money markets deposits) increased
$47,205,000 or 14.0 percent to $384,941,000. Noninterest bearing demand deposits
increased $25,530,000 or 21.7 percent to $142,972,000.
<PAGE>
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 25.1 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 14.4 percent if interest rates would immediately rise 200 basis
points. This result assumes all interest sensitive assets and liabilities are
adjusted for the full 200 basis point rise. It has been the Company's experience
that deposit balances for NOW and savings accounts are stable and subjected to
limited re-pricing when interest rates increase or decrease within a range of
200 basis points.
The Company does not presently use interest rate protection products in managing
its interest rate sensitivity.
LIQUIDITY MANAGEMENT
Contractual maturities for assets and liabilities are reviewed to adequately
maintain current and expected future liquidity requirements. Sources of
liquidity, both anticipated and unanticipated, are maintained through a
portfolio of high quality marketable assets, such as residential mortgage loans,
securities available for sale and federal funds sold. The Company has access to
federal funds lines of credit and is able to provide short term financing of its
activities by selling, under an agreement to repurchase, United States Treasury
and Government agency securities not pledged to secure public deposits or trust
funds. At March 31, 1999, the Company had federal funds lines of credit
available and unused of $48,000,000 and had $86,622,000 of United States
Treasury and Government agency securities and mortgage backed securities not
pledged and available for use under repurchase agreements. In addition, at March
31, 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 March 31, 1999.
<PAGE>
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold), totaled $37,442,000 at March 31, 1999 as compared to
$43,086,000 at March 31, 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 $4,335,000 was $304,000
lower 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.
<PAGE>
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 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed for the three month period ended March 31,
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
May 13, 1999 /s/ Dennis S. Hudson, III
- ------------ ------------------------------
DENNIS S. HUDSON, III
President & Chief Executive Officer
May 13, 1999 /s/ William R. Hahl
- ------------ ------------------------------
WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer
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