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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, 2003 No. 0-13660
SEACOAST BANKING CORPORATION OF FLORIDA
(Exact name of registrant as specified in its charter)
Florida 59-2260678
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
815 Colorado Avenue, Stuart FL 34994
(Address of principal executive offices) (Zip code)
(772) 287-4000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
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 by check mark whether the registrant is an accellerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of March 31, 2003:
Common Stock, $.10 Par Value - 13,928,951 shares
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
March 31, 2003 and December 31, 2002 3 - 4
Condensed consolidated statements of income
Three months ended March 31, 2003 and 2002 5
Condensed consolidated statements of cash flows -
Three months ended March 31, 2003 and 2002 6 - 7
Notes to condensed consolidated financial
statements 8 - 10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 25
Item 3 Quantitative and Qualitative Disclosures about Market
Risk 26
Item 4 Evaluation of Disclosure Controls and Procedures 27 - 29
Part II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 30
SIGNATURES 31
Part I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
March 31, December 31,
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $63,534 $49,571
Federal funds sold and interest
bearing deposits 30,990 251
Securities:
Trading (at fair value) 43,719 0
Held for sale (at fair value) 440,185 466,278
Held for investment (fair values:
$20,605 at March 31, 2003 and
$33,168 at December 31, 2002) 19,998 32,181
--------------------------------
TOTAL SECURITIES 503,902 498,459
Loans sold and available for sale 11,696 13,814
Loans 661,536 688,161
Less: Allowance for loan losses (6,546) (6,826)
--------------------------------
NET LOANS 654,990 681,335
Bank premises and equipment, net 16,036 16,045
Other assets 16,678 21,822
--------------------------------
$1,297,826 $1,281,297
================================
LIABILITIES
Deposits $1,060,591 $1,030,540
Federal funds purchased and securities
sold under agreements to repurchase,
maturing within 30 days 65,241 102,967
Other borrowings 65,000 40,000
Other liabilities 6,468 7,043
--------------------------------
1,197,300 1,180,550
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share,
authorized 4,000,000 shares, none issued
or outstanding 0 0
Common stock, par value $0.10 per share,
authorized 22,000,000 shares, issued
15,549,378 and outstanding 13,928,951
shares at March 31, 2003, issued 15,549,378
and outstanding 13,890,001 at December 31,
2002 1,555 1,555
Additional paid-in capital 26,994 26,994
Retained earnings 90,533 89,960
Less: Treasury stock
1,620,427 shares at March 31, 2003
1,659,377 shares at December 31, 2002 (17,916) (18,578)
--------------------------------
101,166 99,931
Other comprehensive income (loss) (640) 816
--------------------------------
TOTAL SHAREHOLDERS'
EQUITY 100,526 100,747
--------------------------------
$1,297,826 $1,281,297
================================
- --------------------------------------------------------------------------------
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002
- --------------------------------------------------------------------------------
Interest and dividends on securities $4,074 $3,308
Interest and fees on loans 11,982 14,768
Interest on federal funds sold 21 285
------------------------------
TOTAL INTEREST INCOME 16,077 18,361
Interest on deposits 903 1,346
Interest on time certificates 2,701 4,388
Interest on borrowed money 873 850
------------------------------
TOTAL INTEREST EXPENSE 4,477 6,584
------------------------------
NET INTEREST INCOME 11,600 11,777
Provision for loan losses 0 0
------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 11,600 11,777
Noninterest income
Securities gains (losses) (1,157) 66
Other income 5,371 3,983
------------------------------
TOTAL NONINTEREST INCOME 4,214 4,049
TOTAL NONINTEREST EXPENSES 10,875 9,768
------------------------------
INCOME BEFORE INCOME TAXES 4,939 6,058
Provision for income taxes 1,716 2,372
------------------------------
NET INCOME $ 3,223 $ 3,686
==============================
- --------------------------------------------------------------------------------
PER SHARE COMMON STOCK:
Net income diluted $ 0.23 $ 0.26
Net income basic 0.23 0.26
Cash dividends declared 0.11 0.10
Average shares outstanding - Diluted 14,248,755 14,304,921
Average shares outstanding - Basic 13,923,795 14,007,291
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $ 18,399 $ 19,142
Fees and commissions received 5,432 4,073
Interest paid (4,468) (6,801)
Cash paid to suppliers and employees (12,494) (10,025)
Income taxes paid (81) (2)
---------------------------
Net cash provided by operating activities 6,788 6,387
Cash flows from investing activities
Proceeds from maturity of securities held for
sale and trading 104,142 67,463
Proceeds from maturity of securities held for
investment 12,217 1,334
Proceeds from sale of securities held for sale 57,061 21,571
Purchase of securities held for sale (184,698) (151,155)
Net new loans and principal repayments 28,463 39,334
Proceeds from the sale of other real estate owned 10 0
Additions to bank premises and equipment (462) (214)
Net change in other assets 5,837 457
---------------------------
Net cash provided by (used in) investing activities 22,570 (21,210)
Cash flows from financing activities
Net increase in deposits 30,058 25,026
Net decrease in federal funds purchased and
repurchase agreements (37,726) (950)
Net increase in other borrowings 25,000 0
Exercise of stock options 661 413
Treasury stock issued (acquired) (1,117) 19
Dividends paid (1,532) (1,390)
---------------------------
Net cash provided by financing activities 15,344 23,118
---------------------------
Net increase in cash and cash equivalents 44,702 8,295
Cash and cash equivalents at beginning of period 49,822 92,114
---------------------------
Cash and cash equivalents at end of period $94,524 $100,409
===========================
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------------------------
Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $ 3,223 $ 3,686
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,884 1,587
Securities losses (gains) 1,157 (66)
Loss (gain) on sale and write down of foreclosed
assets (2) 1
Loss (gain) on disposition of fixed assets 4 (5)
Change in interest receivable 29 (178)
Change in interest payable 9 (217)
Change in prepaid expenses 76 11
Change in accrued taxes 1,728 2,454
Change in other liabilities (2,320) (886)
- --------------------------------------------------------------------------------
Total adjustments 3,565 2,701
---------------------------
Net cash provided by operating activities $ 6,788 $ 6,387
===========================
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash investing activities:
Transfers from loans to other real estate owned $ 0 $ 74
Market value adjustment to securities (2,383) (2,683)
Transfers from loans to securities held for sale 0 6,075
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
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 accounting principles generally accepted in the
United States 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, 2003, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. 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, 2002.
Use of Estimates: The preparation of these financial statements required the use
of certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
Trading Securities: Securities classified as trading are carried at estimated
fair values based on quoted market prices or third party sources. Trading income
includes realized and unrealized gains and losses from trading positions and is
included in securities gains (losses) in the consolidated financial statements.
Loan Commitments: The Company enters into mortgage forward delivery contracts,
which are accounted for as free standing derivatives, to economically hedge its
exposure to changes in interest rates in its mortgage loan origination activity.
The notional amount of the forward delivery contracts, along with the underlying
rate and terms of the contracts, are equivalent to the unpaid principal amount
of the mortgage loan commitments being economically hedged, hence the forward
delivery contracts effectively fix the forward sales price and thereby
substantially eliminate interest rate and price risk to the Company.
Mortgage loan commitments can include interest rate locks that have been
extended to borrowers who have applied for loan funding and meet certain defined
credit and underwriting criteria. The Company classifies and accounts for the
interest rate locks as free-standing derivatives with changes in fair value
included in current earnings. Gains (losses) on interest rate lock commitments,
which economically are offset by the mortgage forward delivery contracts,
represent the change in value from rate-lock inception to the balance sheet
date. The net gain of these instruments was $337,000.
Hedging Activities: Hedging derivatives that qualify for hedge accounting are
recognized on the balance sheet at fair value as either derivative product
assets or liabilities with an offset to either current earnings or other
comprehensive income, as appropriate. Hedge ineffectiveness, if any, is
calculated and recorded in current earnings. The Company is exposed to credit
risk in the event of nonperformance by the counterparty which is controlled with
credit monitoring procedures.
NOTE B - COMPREHENSIVE INCOME
Under FASB Statement of Financial Accounting Standards 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, 2003 and 2002, comprehensive income was as follows:
Three Months Ended
March 31,
(Dollars in thousands) 2003 2002
Net Income $3,223 3,686
Unrealized loss on cash flow hedge (net of tax) (58) --
Unrealized gains (losses) on securities (net of tax) (1,105) (1,645)
Net reclassification adjustment for prior unrealized
security gains (293) --
------- -------
Comprehensive Income $1,767 $2,041
- --------------------------------------------------------------------------------
NOTE C - DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, such as interest rate swaps and forward
contracts are valued at quoted market prices or the discounted cash flow method.
The estimated fair value and carrying value of the Company's interest rate swaps
and financial derivatives, utilized for asset and liability management purposes,
were included in the condensed consolidated balance sheet at March 31, 2003, as
follows:
Carrying Value Fair Value
Derivative Product Assets
Interest rate swap which qualify for
hedge accounting $200,000 $200,000
Derivative Contracts which do not qualify
for hedge accounting 337,000 337,000
Derivative Product Liabilities
Cash Flow interest rate swap which does
qualify for hedge accounting 92,000 92,000
The above derivative financial instruments had no effect on net interest income.
A total of $92,000 was recorded to other comprehensive income, net of taxes of
$34,000.
NOTE D - EARNINGS PER SHARE DATA
Three Months Ended
(Dollars in thousands, March 31,
except per share data) 2003 2002
Basic:
Net Income $3,223 $3,686
Average shares outstanding 13,923,795 14,007,291
Basic EPS $ 0.23 $ 0.26
Diluted:
Net Income $3,223 $3,686
Average shares outstanding 13,923,795 14,007,291
Net effect of dilutive stock
Options - based on treasury
Stock method 324,960 297,630
Total 14,248,755 14,304,921
Diluted EPS $ 0.23 $ 0.26
NOTE E - ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
which amends and clarifies financial accounting and reporting for derivative
instruments and hedging activities under FASB Statement 133. The Company
believes that the effect of the amendments, generally effective for after June
30, 2003, will not be material.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FIRST QUARTER 2003
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 2003 totaled $3,223,000 or $0.23 per share
diluted, lower than the $4,044,000 or $0.28 per share diluted recorded in the
fourth quarter of 2002 and lower than the $3,686,000 or $0.26 per share diluted
reported in the first quarter of 2002. Included in first quarter 2003's earnings
is the impact of investment securities losses totaling $1,157,000 or $0.05 per
share diluted, reflecting efforts to restructure the Company's investment
portfolio for better performance in the current interest rate environment. Note
that earnings per share results for prior periods reflect the three-for-one
stock split on Common Stock effective July 15, 2002 for shareholders of record
on July 1, 2002.
Return on average assets was 1.02 percent and return on average shareholders'
equity was 13.07 percent for the first quarter of 2003, compared to fourth
quarter 2002's performance of 1.32 percent and 16.24 percent, respectively, and
the prior year's first quarter results of 1.18 percent and 15.45 percent,
respectively.
NET INTEREST INCOME
Net interest income (on a fully taxable equivalent basis) for 2003 totaled
$11,639,000, $9,000 or 0.1 percent less than for the fourth quarter of 2002 and
$177,000 or 1.5 percent lower than for the first quarter of 2002.
Net interest margin on a tax equivalent basis declined 13 basis points to 3.89
percent for the first quarter of 2003 from 4.02 percent for the fourth quarter
of 2002. Since December 2000, the Federal Reserve has been aggressive in
reducing short-term interest rates. A 50 basis point reduction occurred in
December 2000, followed by subsequent reductions totaling 400 basis points in
2001 and a 50 basis point reduction in November 2002.
During the second half of 2002, the yield curve flattened over 100 basis points.
More recently, during the first quarter of 2003, the yield curve flattened again
and resulted in accelerated principal repayments of loans and investment
securities collateralized by residential properties. Management believed that
the margin would decline in the first six months of 2003 in the range of 6-14
basis points. With a flatter yield curve, a negative impact on the margin can be
expected as reinvestment rates are lower.
To manage margin compression, the Company transfered securities with significant
amortizing premiums to trading and adjusted carrying values to fair market
values, resulting in securities losses of $1,157,000 for the quarter. Of the
$503,902,000 in securities at March 31, 2003, $43,719,000 are classified as
trading. Activity in the Company's securities portfolio was significant during
the quarter, with maturities and sales of securities of $116.4 million and $57.1
million, respectively, and purchases totaling $184.7 million. This compares to
maturities, sales and purchases in the first quarter a year ago of $68.8
million, $21.6 million and $151.2 million. Securities activity during the first
quarter reflects an effort to invest funds for better performance, as well as
manage excess funding and maintain a stable net interest margin.
Higher principal repayments of loans and investments combined with deposit and
borrowing increases had to be invested in earning assets at lower rates. The
yield on earning assets for the first quarter of 2003 declined 35 basis points
to 5.39 percent from fourth quarter 2002. Decreases in the yield on loans of 9
basis points to 7.05 percent, the yield on securities of 36 basis points to 3.17
percent, and the yield on federal funds sold of 13 basis points to 1.27 percent
were recorded during the first quarter of 2003. Average earning assets for the
first quarter of 2003 increased $62,106,000 or 5.4 percent when compared to
prior year's fourth quarter. Average loan balances declined $28,628,000 or 4.0
percent to $690,022,000 and average federal funds sold decreased $10,278,000 or
60.5% to $6,723,000, while average investment securities increased $101,012,000
or 24.3 percent to $515,974,000. The decline in loans was principally in
residential real estate credits, reflecting the low interest rate environment
that has provided customers the opportunity to refinance. Consistent with its
strategy to generate more fee income and reduce interest rate risks, a majority
of residential mortgage loans were sold servicing released.
The cost of interest-bearing liabilities in the first quarter of 2003 decreased
30 basis points to 1.83 percent from fourth quarter, with rates for NOW,
savings, money market accounts, certificates of deposit (CDs), and other
borrowings decreasing 11, 18, 15, 42 and 152 basis points, respectively. The
average balance for NOW, savings and money market balances (aggregated)
increased $20,899,000 or 4.5 percent from fourth quarter and noninterest bearing
deposits increased $5,850,000 or 3.2 percent, while certificates of deposit
declined $3,770,000 or 1.0 percent. Growth in low-cost/no cost funding sources
reflects the Company's longstanding strategy of building core customer
relationships and tailoring its products and services to satisfy customer needs.
During the latter part of 2002 and into the first quarter of 2003, the Company's
interest rate risk position shifted to a more asset sensitive profile. To
mitigate this, on January 3, 2003 the Company swapped fixed rate payments on CDs
with varying maturities beginning in October 2005 and ending in October 2007
with a notional amount of $54 million to floating (three month LIBOR). The swap
with terms identical to the CD's has been 100 percent effective and reduced
interest expense on CDs by $194,000 during the first quarter. An additional $25
million floating rate borrowing (tied to three month LIBOR with a 3-year term)
was acquired on January 30, 2003 from the Federal Home Loan Bank (FHLB). This
funding was invested in securities with 3- to 4-year duration, also reducing the
Company's recent exposure to increasing asset interest rate sensitivity and
leveraging to increase future earnings. A one-year forward contract to swap the
floating rate on the FHLB borrowing to a fixed rate (3.12 percent) was acquired,
based on projections that asset sensitivity will decline in one year. The
forward contract locks the spread in rate between the borrowing and purchased
securities prospectively. (See Note C for further information)
For the first quarter of 2002, the net interest margin was 4.05 percent. The
yield on average earning assets was 6.33 percent and rate on interest-bearing
liabilities was 2.77 percent.
Year over year the mix of earning assets and interest bearing liabilities has
changed. Loans (the highest yielding component of earning assets) as a
percentage of average earning assets totaled 56.9 percent in the first quarter
of 2003 compared to 66.9 percent a year ago, while securities increased from
27.2 percent to 42.5 percent and federal funds sold decreased from 5.9 percent
to 0.6 percent. While total loans did not increase as a percentage of earning
assets, the Company successfully changed the mix of loans, with commercial and
consumer volumes increasing as a percentage of total loans and lower yielding
residential loan balances declining. Average CDs (a higher cost component of
interest-bearing liabilities) as a percentage of interest-bearing liabilities
decreased to 37.6 percent, compared to 40.8 percent in the first quarter of
2002, reflecting diminished funding requirements and allowing for lower rates to
be paid on CDs. Approximately $82 million in CDs matured during the first
quarter of 2003. An additional $77 million in CDs will mature in the second
quarter of 2003, providing further opportunity for these volumes to re-price to
lower rates (assuming the Federal Reserve maintains short-term interest rates at
existing levels). Lower cost interest bearing deposits (NOW, savings and money
market balances) increased to 48.7 percent of interest bearing liabilities,
versus 47.2 percent a year ago, favorably affecting deposit mix. Borrowings
(including federal funds purchased, sweep repurchase agreements with customers
of the Company's subsidiary, and other borrowings) increased to 13.7 percent of
interest bearing liabilities in the first quarter from 12.0 percent a year ago,
reflecting an increase in average balances maintained by customers utilizing
sweep arrangements and the new FHLB borrowing.
PROVISION FOR LOAN LOSSES
No provisioning was recorded in the first quarter of 2003 nor in any quarter in
2002 and 2001, reflecting the Company's exceptional credit quality, low
nonperforming assets, and slower loan growth. Net charge-offs totaled $280,000
for the first quarter of 2003 compared to $124,000 in 2002. Net charge-offs
annualized as a percent of average loans were at 0.16 percent for the first
quarter of 2003, compared to 0.06 percent for the same quarter in 2002 and 0.03
percent for the total year in 2002. These ratios are much better than the
banking industry as a whole.
The Company's loan portfolio mix has been changing. The Company intends to
continue to vary its loan portfolio mix by emphasizing higher yield commercial
and consumer credits. These changes may result in increased loan loss provisions
should the increased exposure result in greater inherent losses in the loan
portfolio. Besides loan mix, the overall level of net charge-offs can be
impacted by a decline in economic activity. Management believes that its credit
granting process contains a disciplined approach that mitigates this risk and
lowers the likelihood of significant increases in charge-offs and nonperforming
loans during economic slowdowns.
Management determines the provision for loan losses 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. ( See "Nonperforming Assets" and "Allowance for Loan Losses")
NONINTEREST INCOME
Noninterest income, excluding gains and losses from securities sales, totaled
$5,371,000 for the first quarter of 2003, $1,388,000 or 34.8 percent higher than
for the same period last year. Noninterest income was favorably impacted by
growth in fee-based businesses. Noninterest income accounted for 31.6 percent of
net revenue in the first quarter, compared to 25.3 percent a year ago.
Market turmoil began in late 2000 and carried through into 2001 affecting
brokerage activities, with consumers shifting from the purchase of investment
products to more conservative deposit products. Revenues rebounded somewhat in
2002, but for the first quarter of 2003 brokerage commissions and fees decreased
$123,000 or 22.7 percent to $420,000, year over year. Trust income was lower as
well, declining $73,000 or 12.2 percent to $524,000. Financial markets remain
troubled. Even so, the Company believes it can be successful in its efforts to
expand its customer relationships through sales of investment management and
brokerage products, including insurance. When financial markets improve, revenue
from these products will expand and contribute to future earnings results.
The Company is among the leaders in the production of residential mortgage loans
in its market. In order to generate additional fee income and better manage
interest rate risks, the Company produces loans for third party permanent
investors. Changes in the fair value of mortgage loan interest rate lock
commitments granted to customers, and the related derivative contracts entered
into with permanent investors used to economically hedge this exposure, are
recorded in income. At March 31, 2003, a change in fair value of $337,000 was
included in mortgage banking fees. In 2003, mortgage banking fees totaled
$1,638,000, an increase of $862,000 or 111.1 percent more than a year ago for
the first quarter. The Company expects to derive further revenue growth in the
future by increasing its market penetration, market expansion and expanding
sources of fees collected from this business. The Company intends to expand
further into Palm Beach County (Florida's top wealth market, expected to grow at
20 percent over the next ten years). And, if interest rates remain relatively
low, additional loan production is expected to support ongoing increases in
mortgage banking fees, assuming the economic environment remains favorable.
Greater usage of check cards during the first quarter 2003 by core deposit
customers and an increased cardholder base increased interchange income to
$289,000, an increase of $66,000 or 29.6 percent from the prior year. VISA and
Mastercard have agreed in principle to a reduction in check card interchange
rates effective August 1, 2003, which most likely will result in lower fees and
income for all financial institutions. Other deposit based electronic funds
transfer income increased $15,000 or 14.9 percent to $116,000. Service charges
on deposits were level year over year at $1,217,000. Greater analysis fees
collected from commercial customers, a result of reduced earnings credits in the
current interest rate environment, were offset by lower overdraft fees.
Marine finance fees totaled $807,000, an increase of $640,000 from first quarter
a year ago. The Company's marine financing division (Seacoast Marine Finance)
produced $44.9 million in boat loans, up $31.1 million year over year. A total
of $44.5 million of production was sold. Seacoast Marine Finance is
headquartered in Ft. Lauderdale, Florida with lending professionals in Florida
and California. The Company continues to look for opportunities to expand its
market penetration of its marine finance business and recently added seven
employees to its production team in California to fully serve the western
markets, including Washington and Oregon.
Losses from the sale of securities totaled $1,157,000 in 2003, compared to gains
of $66,000 in 2002. Sales of investments in early 2003 were transacted to
restructure the portfolio for the current interest rate environment. Sales in
the first quarter of 2002 were transacted to realize appreciation on securities
that management believed had reached their maximum potential total return.
NONINTEREST EXPENSES
When compared to 2002, noninterest expenses for the first quarter increased by
$1,107,000 or 11.3 percent to $10,875,000. The Company's overhead ratio has
decreased over the last several years. The 63.9 percent efficiency ratio for the
first quarter of 2003 was slightly higher than the 62.6 percent ratio recorded a
year ago.
Salaries and wages increased $399,000 or 10.6 percent to $4,159,000 compared to
the prior year quarter. Commissions on revenue from mortgage banking were
$76,000 higher year over year and base salaries increased $383,000 or 11.6
percent. The increase in base salaries included $68,000 for branch personnel in
two new offices opened in Palm Beach County in January of this year, $38,000 for
commercial lending personnel at the loan production office opened in Jupiter,
Florida in August 2002, $32,000 for the Port St. Lucie, Florida WalMart office
opened in October 2002, and $79,000 for personnel in California in the marine
finance division added in November 2002. Employee benefits increased $168,000 or
16.0 percent to $1,216,000 from the first quarter of 2002. Group health
insurance costs were the primary cause for the increase in 2003, up $148,000
year over year.
Occupancy expenses and furniture and equipment expenses, on an aggregate basis,
increased $129,000 or 9.5 percent to $1,493,000, versus first quarter results
last year. Costs related to new locations, specifically the new branches and
loan production office in Palm Beach County, an office in California and the
Port St. Lucie WalMart, added $136,000 to occupancy expenses and furniture and
equipment expenses in 2003 versus a year ago.
Outsourced data processing costs totaled $1,286,000 for the first quarter of
2003, an increase of $40,000 or 3.2 percent from a year ago. The Company
utilizes third parties for its core data processing system and merchant services
processing. Outsourced data processing costs are directly related to the number
of transactions processed, which can be expected to increase as the Company's
business volumes grow and new products such as bill pay, internet banking, etc.
become more popular.
Costs associated with foreclosed and repossessed asset management and
disposition totaled only $10,000, a reflection of low nonperforming asset
balances (see "Nonperforming Assets") in the first quarter 2003. Legal and
professional costs increased $83,000 or 25.5 percent to $408,000 when compared
to March 31, 2002. Additional legal costs and accounting fees associated with
the establishment of a Real Estate Investment Trust (REIT) to more efficiently
manage real estate assets and to reduce the Company's effective tax rate and tax
provisioning were the primary cause for the increase in legal and professional
fees for the first quarter.
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,
increased by $37,000 or 7.2 percent to $550,000 when compared to a year ago.
Included in first quarter costs were grand opening expenditures for the two new
branches in Palm Beach County.
Amortization of other intangibles remained level at $63,000.
Other expenses increased $255,000 or 17.8 percent to $1,690,000. The primary
increase was in subcontractor fees paid to marine finance solicitors, which
increased by $148,000 from a year ago, principally due to the addition of sales
staff in California.
INCOME TAXES
Income taxes as a percentage of income before taxes were 34.7 percent for the
first quarter of this year, compared to 39.2 percent in 2002. Beginning in
January 2003 the Company formed a subsidiary and transferred certain real estate
assets to a real estate investment trust (REIT). As a result, the Company's
state income tax liability was reduced.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Company's ratio of average shareholders' equity to average total assets
during the first quarter of 2003 was 7.81 percent, compared to 7.67 percent
during the first quarter of 2002. The Company manages the size of its equity
through a program of share repurchases of its outstanding Common stock. In
treasury stock at March 31, 2003, there were 1,620,427 shares totaling
$17,916,000, compared to 1,533,504 shares or $16,440,000 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, 2003, the
Company's ratio was 13.95 percent.
LOAN PORTFOLIO
Total loans (net of unearned income and excluding the allowance for loan losses)
were $661,536,000 at March 31, 2003, $92,999,000 or 12.3 percent less than at
March 31, 2002, and $26,625,000 or 3.9 percent less than at December 31, 2002.
Higher prepayments of the residential mortgage loans has resulted in a decline
in loan portfolio.
At March 31, 2003, the Company's mortgage loan balances secured by residential
properties amounted to $237,613,000 or 35.9 percent of total loans (versus
$330,730,000 or 43.8 percent a year ago).
During the first quarter of 2003, $64.1 million in fixed rate residential
mortgage loans were sold, compared to $37.0 million during the first quarter a
year ago. The Company also sold $44.5 million in marine loans (generated by
Seacoast Marine Finance), compared to $11.7 million in the first quarter of
2002. Over the past twelve months, $164.6 million in fixed rate residential
loans and $113.9 million in marine loans have been sold. The loan sales are
without recourse.
The company's loan portfolio secured by commercial real estate has increased
4.9% over the last twelve (12) months.
The Company's commercial real estate lending strategy stresses quality loan
growth from local businesses, professionals, experienced developers and
investors. At March 31, 2003, the Company had funded commercial real estate
loans totaling $263,637,000 or 39.9 percent of total loans (versus $251,267,000
or 33.3 percent a year ago). At March 31, 2003, this amount and unfunded
commitments for commercial real estate were comprised of the following types of
loans:
(In millions) Funded Unfunded Total
- --------------------------------------------------------------------------------
Office buildings $ 38.8 $ -- $ 38.8
Retail trade 34.5 1.8 36.3
Land development 36.8 26.6 63.4
Industrial 27.3 3.7 31.0
Healthcare 26.1 3.8 29.9
Churches and educational facilities 13.6 0.4 14.0
Recreation 11.8 0.5 12.3
Multifamily 7.4 5.2 12.6
Mobile home parks 4.0 -- 4.0
Land 5.9 1.0 6.9
Lodging 3.4 -- 3.4
Restaurant 3.4 0.1 3.5
Miscellaneous 50.6 5.9 56.5
- --------------------------------------------------------------------------------
Total $263.6 $49.0 $312.6
Also increasing, commercial and industrial loans totaled $41,809,000 at March
31, 2003, compared to $38,779,000 a year ago. Commercial lending activities are
directed principally towards businesses whose demand for funds are within the
Company's lending limits, such as small to medium sized professional firms,
retail and wholesale outlets, and light industrial and manufacturing concerns.
Residential lot loans (for private and investor purposes) totaled $12,528,000,
residential construction loans totaled $12,071,000 and home equity lines
outstanding totaled $11,390,000 at March 31, 2003.
The Company was also a creditor for consumer loans to individual customers
(including installment loans, loans for automobiles, boats, and other personal,
family and household purposes) totaling $82,010,000 (versus $99,946,000 a year
ago).
The Treasure Coast is a residential community with commercial activity centered
in retail and service businesses serving the local residents and seasonal
visitors. 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 and through loan sales. At March
31, 2003, approximately $100 million or 42 percent of the Company's residential
mortgage loan balances were adjustable, compared to $123 million or 37 percent a
year ago.
Approximately $70.2 million of new residential loans were originated in the
first quarter 2003 and $64.1 million were sold. Loans secured by residential
properties having fixed rates totaled approximately $137 million at March 31,
2003, of which 15- and 30-year mortgages totaled approximately $62 million and
$43 million, respectively. Remaining fixed rate balances were comprised of home
improvement loans, most with maturities of 10 years or less. In comparison, 15-
and 30-year fixed rate residential mortgages at March 31, 2002 totaled
approximately $91 million and $74 million, respectively.
The Company's historical charge-off rates for residential real estate loans have
been minimal, with $9,000 in net recoveries for the first quarter of 2003
compared to $22,000 in net recoveries for all of 2002. The Company considers
residential mortgages less susceptible to adverse effects from a downturn in the
real estate market.
Fixed rate and adjustable rate loans secured by commercial real estate,
excluding construction loans, totaled approximately $90 million and $114
million, respectively, at March 31, 2003, compared to $105 million and $93
million, respectively, a year ago.
At March 31, 2003, the Company had commitments to make loans (excluding unused
home equity lines of credit) of $136,242,000, compared to $100,732,000 at March
31, 2002.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses totaled $6,546,000 at March 31, 2003, $364,000
lower than one year earlier and $280,000 lower than at December 31, 2002. During
the first quarter of 2003, net charge-offs of $181,000 on commercial loans and
$131,000 on consumer loans were partially offset by recoveries on residential
real estate loans, commercial real estate loans, and credit cards of $9,000,
$12,000, and $10,000, respectively. A year ago, net charge-offs of $124,000 were
recorded during the first quarter.
Although the allowance balance declined $364,000 over the last twelve months,
the ratio of the allowance for loan losses to net loans outstanding increased 7
basis points to 0.99 percent at March 31, 2003. This ratio was 0.92 percent at
March 31, 2002 and 0.99 percent at December 31, 2002. The allowance for loan
losses as a percentage of nonaccrual loans and loans 90 days or more past due
was 344.2 percent at March 31, 2003, compared to 447.0 percent at the same date
in 2002.
The model utilized to analyze the adequacy of the allowance for loan losses
takes into account such factors as credit quality, loan concentrations, internal
controls, audit results, staff turnover, local market economics and loan growth.
The resulting allowance is also reflective of the subsidiary bank's favorable
and consistent delinquency trends, historical loss performance, and the decline
in loans outstanding over the last twelve months. The size of the allowance also
reflects the large amount of residential loans held by the Company whose
historical charge-offs and delinquencies have been favorable and the growth in
commercial real estate loans over the last few years.
These performance results are attributed to conservative, long-standing and
consistently applied loan credit policies and to a knowledgeable, experienced
and stable staff. The allowance for loan losses represents management's estimate
of an amount adequate in relation to the risk of future losses inherent in the
loan portfolio.
Concentration of credit risk may affect the level of the allowance and typically
involve loans to one borrower, an affiliated group of borrowers, borrowers
engaged in or dependent upon the same industry, or a group of borrowers whose
loans are predicated on the same type of collateral. The Company's significant
concentration of credit is a collateral concentration of loans secured by real
estate. At March 31, 2003, the Company had $537 million in loans secured by real
estate, representing 81.2 percent of total loans, down slightly from 81.6
percent at March 31, 2002. In addition, the Company is subject to a geographic
concentration of credit because it operates in southeastern Florida. Although
not material enough to constitute a significant concentration of credit risk,
the Company has meaningful credit exposure to real estate developers and
investors. Levels of exposure to this industry group, together with an
assessment of current trends and expected future financial performance, are
carefully analyzed in order to determine an adequate allowance level. Problem
loan activity for this exposure needs to be evaluated over the long term to
include all economic cycles when determining an adequate allowance level.
While it is the Company's policy to charge off in the current period loans in
which a loss is considered probable, there are additional risks of future losses
that cannot be quantified precisely or attributed to particular loans or classes
of loans. Because these risks include the state of the economy as well as
conditions affecting individual borrowers, management's judgment of the
allowance is necessarily approximate and imprecise. It is also subject to
regulatory examinations and determinations as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance for loan
losses and the size of the allowance for loan losses in comparison to a group of
peer companies identified by the regulatory agencies.
NONPERFORMING ASSETS
At March 31, 2003, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.29 percent, compared to
0.22 percent one year earlier.
At March 31, 2003, there were $1,000 in accruing loans past due 90 days or more
and no OREO was outstanding. In 2002 on the same date, there were $69,000 in
accruing loans past due 90 days or more and OREO balances of $192,000 were
outstanding.
Nonaccrual loans totaled $1,901,000 at March 31, 2003, compared to a balance of
$1,478,000 at March 31, 2002. Nonaccrual loans outstanding at March 31, 2003
that were performing with respect to payments totaled $1,225,000. 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,
2003, 73 percent is secured with real estate, 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.
Nonperforming assets are subject to changes in the economy, both nationally and
locally, changes in monetary and fiscal policies, and changes in conditions
affecting various borrowers from the Company's subsidiary bank. No assurance can
be given that nonperforming assets will not in fact increase or otherwise
change.
SECURITIES
At March 31, 2003, the Company had $43,719,000 or 8.7 percent of total
securities designated as trading, $440,185,000 or 87.4 percent of total
securities available for sale and securities held to maturity were carried at an
amortized cost of $19,998,000, representing 3.9 percent of total securities. The
Company's securities portfolio increased $140,339,000 or 38.6 percent from March
31, 2002 and $5,443,000 or 1.1 percent from December 31, 2002. Maturities and
sales of securities of $116.4 million and $57.1 million, respectively, and
purchases totaling $184.7 million were transacted during the first quarter of
2003. Securities activity reflects an effort to restructure the Company's
investment portfolio for better performance in the current interest rate
environment. The restructuring was necessary due to increased prepayments of
collateralized mortgage obligations, which resulted in unacceptable asset
sensitivity, accelerated premium amortization and a decline in investment
portfolio yield.
Management controls the Company's interest rate risk by maintaining a low
average duration for the securities portfolio and with securities returning
principal monthly that can be reinvested. At March 31, 2003, the duration of the
portfolio was 1.8 years.
Unrealized net securities losses of $442,000 at March 31, 2003, compared to net
gains of $236,000 at March 31, 2002 and $2,320,000 at December 31, 2002. A
shifting yield curve affected the market value of the securities portfolio
during the quarter.
Company management considers the overall quality of the securities portfolio to
be high. No securities are held which are not traded in liquid markets.
DEPOSITS AND BORROWINGS
Total deposits increased $20,421,000 or 2.0 percent to $1,060,591,000 at March
31, 2003, compared to one year earlier. Certificates of deposits decreased
$13,656,000 or 3.5 percent to $373,626,000 over the past twelve months, lower
cost interest bearing deposits (NOW, savings and money markets deposits)
increased $16,869,000 or 3.6 percent to $490,976,000, and noninterest bearing
demand deposits increased $17,208,000 or 9.6 percent to $195,989,000. The
Company's success in marketing desirable products in this environment, in
particular its tiered money market and Money Manager product offerings, enhanced
growth in lower cost interest bearing deposits.
Repurchase agreement balances decreased over the past twelve months by
$5,513,000 or 7.8 percent to $65,241,000 at March 31, 2003. Repurchase
agreements are offered by the Company's subsidiary bank to select customers who
wish to sweep excess balances on a daily basis for investment purposes. The
number of sweep repurchase accounts declined from 109 a year ago to 101 at March
31, 2003, with some customers closing sweep repurchase relationships due to the
low interest rate environment and diminished benefit of utilizing a sweep
repurchase agreement, and choosing to maintain balances in traditional deposit
products.
During the first quarter of 2003, a $25 million adjustable rate borrowing tied
to LIBOR with a three-year term (maturing on January 30, 2006) was acquired. As
a result, at March 31, 2003, other borrowings were $25,000,000 or 62.5 percent
higher than a year ago. Totaling $65,000,000, these borrowings are entirely
comprised of funding from the Federal Home Loan Bank (FHLB).
INTEREST RATE SENSITIVITY
Fluctuations in rates may result in changes in the fair market value of the
Company's financial instruments, cash flows and net interest income. This risk
is managed using simulation modeling to calculate a most likely impact for
interest rate risk utilizing estimated loan and deposit growth. The objective is
to optimize the Company's financial position, liquidity, and net interest income
while limiting their volatility.
Senior management regularly reviews the overall interest rate risk position and
evaluates strategies to manage the risk. The Company has determined that an
acceptable level of interest rate risk would be for net interest income to
fluctuate no more than 6 percent given a parallel change in interest rates (up
or down) of 200 basis points. The Company's most recent ALCO model simulation
indicated net interest income would decrease 2.0 percent if interest rates would
gradually rise 200 basis points over the next twelve months. While management
places a lower probability on significant rate declines after the 50 basis point
reduction on November 6, 2002, the model simulation indicates net interest
income would decrease 0.1 percent and 2.3 percent over the next twelve months
given a gradual decline in interest rates of 100 and 200 basis points,
respectively. 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.
On March 31, 2003, the Company had a negative gap position based on contractual
and prepayment assumptions for the next twelve months, with a negative
cumulative interest rate sensitivity gap as a percentage of total earning assets
of 3.4 percent.
The computations of interest rate risk do not necessarily include certain
actions management may undertake to manage this risk in response to changes in
interest rates. Derivative financial instruments, such as interest rate swaps,
options, caps, floors, futures and forward contracts are utilized as components
of the Company's risk management profile.
CRITICAL ACCOUNTING ESTIMATES
Management after consultation with the audit committee believes that the most
critical accounting estimates which may affect the Company's financial status
and involve the most complex, subjective and ambiguous assessments are as
follows:
The allowance and provision for loan losses, securities trading and
available for sale valuation and accounting, the value of goodwill, and the
fair market value of mortgage servicing rights at acquisition and any
impairment of that value.
Disclosures intended to facilitate a reader's understanding of the possible and
likely events or uncertainties known to management which could have a material
impact on the reported financial information of the Company related to the most
critical accounting estimates are as follows:
Allowance and Provision for Loan Losses
The information contained on pages 13-14 and 17-20 related to the "Provision for
Loan Losses", "Loan Portfolio", "Allowance for Loan Losses" and "Nonperforming
Assets" is intended to describe the known trends, events and uncertainties which
could materially impact the company's accounting estimates.
Securities Trading and Available for Sale
The fair value of trading securities at March 31, 2003 was $43,719,000. The fair
value of the available for sale portfolio at March 31, 2003 was less than
historical amortized cost, producing unrealized losses of $1,049,000. The fair
value of each security was obtained from independent pricing sources utilized by
many financial institutions. However, actual values can only be determined in an
arms-length transaction between a willing buyer and seller which can, and often
do, vary from these reported values. Furthermore, significant changes in
recorded values due to changes in actual and perceived economic conditions can
occur rapidly, producing greater unrealized losses in the available for sale
portfolio and realized losses for the trading portfolio.
The credit quality of the Company's security holdings is such that negative
changes in the fair values, as a result of unforeseen deteriorating economic
conditions, should only be temporary. Further, management believes that the
Company's other sources of liquidity, as well as the cash flow from principal
and interest payments from the securities portfolios, reduces the risk that
losses would be realized as a result of needed liquidity from the securities
portfolio.
Value of Goodwill
Beginning January, 1, 2002, the Company's goodwill is no longer amortized, but
tested for impairment. The amount of goodwill at March 31, 2003 totaled
approximately $2.5 million and was acquired in 1995 as a result of the purchase
of a community bank within the Company's dominant market. The Company has a
commercial bank deposit market share of approximately 35 percent in this market,
which had a population increase of over 25 percent during the past ten years.
The assessment as to the continued value for goodwill involves judgments,
assumptions and estimates regarding the future.
The population is forecast by the Bureau of Economic and Business Research at
the University of Florida to continue to grow at a 20 percent plus rate over the
next ten years. Our highly visible local market orientation, combined with a
wide range of products and services and favorable demographics, has resulted in
increasing profitability in all of the Company's markets. There is data
available indicating that both the products and customers serviced have grown
since the acquisition, which is attributable to the increased profitability and
supports the goodwill value at March 31, 2003.
Mortgage Servicing Rights
A large portion of the Company's loan production involves loans for 1-4 family
residential properties. As part of its efforts to manage interest rate risk, the
Company securitizes pools of loans and creates U.S. Agency-guaranteed
mortgage-backed securities. As part of the agreement with the agency, the
Company is paid a servicing fee to manage the loan and collect the monthly loan
payments. In accordance with FAS No. 140, the Company records an asset (mortgage
servicing rights) at the fair value of those rights. At March 31, 2003, the
total estimated fair value of those rights was $538,000. The fair value of the
mortgage servicing rights is based on judgments, assumptions and estimates as to
the period the fee will be collected, current and future interest rates, and
loan foreclosures. These judgments, assumptions and estimates are initially made
at the time of securitization and reviewed at least quarterly. Impairment, if
any, is recognized through a valuation allowance and charged against current
earnings.
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 and Federal Home Loan Bank (FHLB) 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, 2003, the Company had
available lines of credit of $90,600,000. The Company had $327,351,000 of United
States Treasury and Government agency securities and mortgage backed securities
not pledged and available for use under repurchase agreements. At March 31,
2002, the amount of securities available and not pledged was $244,486,000.
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold), totaled $94,524,000 at March 31, 2003 as compared to
$100,409,000 at March 31, 2002. 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. The Company believes its
liquidity to be strong and stable.
EFFECTS 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
This discussion and analysis contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934.
Forward-looking statements, including statements with respect to our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
involve known and unknown risks, uncertainties and other factors, which may be
beyond our control, and which may cause the actual results, performance or
achievements of Seacoast Banking Corporation of Florida ("Seacoast" or the
"Company") to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. You should
not expect us to update any forward-looking statements.
You can identify these forward-looking statements through our use of words such
as "may", "will", "anticipate", "assume", "should", "indicate", "would",
"believe", "contemplate", "expect", "estimate", "continue", "point to",
"project", "may", "intend", or other similar words and expressions of the
future. These forward-looking statements may not be realized due to a variety of
factors, including, without limitation: the effects of future economic
conditions; governmental monetary and fiscal policies, as well as legislative
and regulatory changes; the risks of changes in interest rates on the level and
composition of deposits, loan demand, and the values of loan collateral,
securities, and interest sensitive assets and liabilities; 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 in the Company's market area and elsewhere,
including institutions operating regionally, nationally, and internationally,
together with such competitors offering bank products and services by mail,
telephone, computer and the Internet; the failure of assumptions underlying the
establishment of reserves for possible loan losses, and the risks of mergers and
acquisitions, including, without limitation, the related costs, including
integrating operations as part of these transactions, and the failure to achieve
the expected gains, revenue growth and/or expense savings from such
transactions.
All written or oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by this Cautionary Notice including,
without limitation, those risks and uncertainties, described in the Company's
annual report on Form 10-K for the year ended December 31, 2002 under "Special
Cautionary Notice Regarding Forward Looking Statements", and otherwise in the
Company's Securities and Exchange Commission (SEC) reports and filings. Such
reports are available upon request from Seacoast, or from the SEC, including the
SEC's website at http://www.sec.gov.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's discussion and analysis "Interest Rate Sensitivity".
Market risk refers to potential losses arising from changes in interest rates,
and other relevant market rates or prices.
Interest rate risk, defined as the exposure of net interest income and Economic
Value of Equity (EVE) to adverse movements in interest rates, is Seacoast's
primary market risk, and mainly arises from the structure of the balance sheet
(non-trading activities). Seacoast is also exposed to market risk in its
investing activities. The Asset and Liability Management Committee (ALCO) meets
regularly and is responsible for reviewing the interest rate sensitivity
position of the Company and establishing policies to monitor and limit exposure
to interest rate risk. The policies established by ALCO are reviewed and
approved by the Company's Board of Directors. The primary goal of interest rate
risk management is to control exposure to interest rate risk, within policy
limits approved by the Board. These limits reflect Seacoast's tolerance for
interest rate risk over short-term and long-term horizons.
Seacoast also performs valuation analysis, which is used for discerning levels
of risk present in the balance sheet that might not be taken into account in the
net interest income simulation analysis. Whereas net interest income simulation
highlights exposures over a relatively short time horizon, valuation analysis
incorporates all cash flows over the estimated remaining life of all balance
sheet positions. The valuation of the balance sheet, at a point in time, is
defined as the discounted present value of asset cash flows minus the discounted
value of liability cash flows, the net of which is referred to as EVE. The
sensitivity of EVE to changes in the level of interest rates is a measure of the
longer-term repricing risk and options risk embedded in the balance sheet. In
contrast to the net interest income simulation, which assumes interest rates
will change over a period of time, EVE uses instantaneous changes in rates. EVE
values only the current balance sheet, and does not incorporate the growth
assumptions that are used in the net interest income simulation model. As with
the net interest income simulation model, assumptions about the timing and
variability of balance sheet cash flows are critical in the EVE analysis.
Particularly important are the assumptions driving prepayments and the expected
changes in balances and pricing of the indeterminate deposit portfolios. As of
March 31, 2003, an instantaneous 100 basis point increase in rates is estimated
to increase the EVE 6.0% versus the EVE in a stable rate environment. An
instantaneous 100 basis point decrease in rates is estimated to decrease the EVE
12.7% versus the EVE in a stable rate environment.
While an instantaneous and severe shift in interest rates is used in this
analysis to provide an estimate of exposure under an extremely adverse scenario,
a gradual shift in interest rates would have a much more modest impact. Since
EVE measures the discounted present value of cash flows over the estimated lives
of instruments, the change in EVE does not directly correlate to the degree that
earnings would be impacted over a shorter time horizon, i.e., the next fiscal
year. Further, EVE does not take into account factors such as future balance
sheet growth, changes in product mix, changes in yield curve relationships, and
changing product spreads that could mitigate the adverse impact of changes in
interest rates.
Item 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The management of the Company including Mr. Dennis S. Hudson, III as Chief
Executive Officer and Mr. William R. Hahl as Chief Financial Officer have
evaluated the Company's disclosure controls and procedures. Under rules
promulgated by the SEC, disclosure controls and procedures are defined as those
"controls or other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports filed or
submitted by it under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and
forms." Based on the evaluation of the company's disclosure controls and
procedures, it was determined that such controls and procedures were effective
as of May 13, 2003, the date of the conclusion of the evaluation.
Further, there were no significant changes in the internal controls or in other
factors that could significantly affect these controls after May 13, 2003, the
date of the conclusion of the evaluation of disclosure controls and procedures.
CERTIFICATION
I, Dennis S. Hudson, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Seacoast Banking
Corporation of Florida;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Dennis S. Hudson, III
------------------------------------
Dennis S. Hudson, III
President & Chief Executive Officer
CERTIFICATION
I, William R. Hahl, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Seacoast Banking
Corporation of Florida;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ William R. Hahl
------------------------------------
William R. Hahl
Chief Financial Officer
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, 2003.
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 14, 2003 /s/ Dennis S. Hudson, III
-------------------------
DENNIS S. HUDSON, III
President & Chief Executive Officer
May 14, 2003 /s/ William R. Hahl
-------------------
WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer