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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
JUNE 30, 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 accelerated 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 June 30, 2003:
Common Stock, $.10 Par Value - 15,328,669 shares
------------------------------------------------
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
Part I FINANCIAL INFORMATION PAGE #
Item 1 Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 2003 and December 31, 2002 3 - 4
Condensed consolidated statements of income -
Three months and six months ended June 30, 2003
and 2002 5
Condensed consolidated statements of cash flows -
Six months ended June 30, 2003 and 2002 6 - 7
Notes to condensed consolidated financial
statements 8 - 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 25
Item 3 Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 Evaluation of Disclosure Controls and Procedures 27
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 6 Exhibits and Reports on Form 8-K 28 - 29
SIGNATURES 30
Part I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, December 31,
(Dollars in thousands, except share amounts) 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 37,522 $ 49,571
Federal funds sold and interest bearing deposits 254 251
Securities:
Trading (at fair value) 10,949 0
Held for sale (at fair value) 463,848 466,278
Held for investment (fair values:
$114,554 at June 30, 2003 and
$33,168 at December 31, 2002) 113,720 32,181
------------ -------------
TOTAL SECURITIES 588,517 498,459
Loans sold and available for sale 13,675 13,814
Loans 651,491 688,161
Less: Allowance for loan losses (6,111) (6,826)
------------ -------------
NET LOANS 645,380 681,335
Bank premises and equipment, net 16,748 16,045
Other assets 18,055 21,822
------------ -------------
$1,320,151 $1,281,297
============ =============
LIABILITIES
Deposits $1,075,252 $1,030,540
Federal funds purchased and securities
sold under agreements to repurchase,
maturing within 30 days 71,919 102,967
Other borrowings 65,000 40,000
Other liabilities 6,410 7,043
------------ -------------
1,218,581 1,180,550
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
June 30, December 31,
(Dollars in thousands, except share amounts) 2003 2002
- --------------------------------------------------------------------------------
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 $.10 per share,
authorized 22,000,000 shares, issued
17,104,316 and outstanding 15,328,669
shares at June 30, 2003, issued 15,549,378
and outstanding is 13,890,001 shares at
December 31, 2002. 1,710 1,555
Additional paid-in capital 26,839 26,994
Retained earnings 92,489 89,960
Less: Treasury stock
1,775,647 shares at June 30, 2003
1,659,377 shares at December 31, 2002 (17,800) (18,578)
--------------------------------
103,238 99,931
Other comprehensive income (loss) (1,668) 816
--------------------------------
TOTAL SHAREHOLDERS'
EQUITY 101,570 100,747
--------------------------------
$1,320,151 $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 Six Months Ended
June 30, June 30,
---------------------------------------------
(Dollars in thousands,
except per share data) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Interest and dividends on
securities $ 3,756 $ 3,864 $ 7,830 $ 7,172
Interest and fees on loans 11,702 14,132 23,684 28,900
Interest on federal funds sold 20 138 41 423
------------------- -------------------
TOTAL INTEREST INCOME 15,478 18,134 31,555 36,495
Interest on deposits 864 1,280 1,767 2,626
Interest on time certificates 2,596 3,854 5,297 8,242
Interest on borrowed money 857 792 1,730 1,642
------------------- -------------------
TOTAL INTEREST EXPENSE 4,317 5,926 8,794 12,510
------------------- -------------------
NET INTEREST INCOME 11,161 12,208 22,761 23,985
Provision for loan losses 0 0 0 0
------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,161 12,208 22,761 23,985
Noninterest income
Securities gains (losses) (11) 398 (1,168) 464
Other income 5,190 4,033 10,561 8,016
------------------- -------------------
TOTAL NONINTEREST INCOME 5,179 4,431 9,393 8,480
TOTAL NONINTEREST EXPENSES 10,805 10,002 21,680 19,770
------------------- -------------------
INCOME BEFORE INCOME TAXES 5,535 6,637 10,474 12,695
Provision for income taxes 1,985 2,588 3,701 4,960
------------------- -------------------
NET INCOME $ 3,550 $ 4,049 $ 6,773 $ 7,735
=================== ===================
- --------------------------------------------------------------------------------
PER SHARE COMMON STOCK (A):
Net income diluted $ 0.23 $ 0.26 $ 0.43 $ 0.49
Net income basic 0.23 0.26 0.44 0.50
Cash dividends declared 0.10 0.09 0.20 0.18
Average shares outstanding
- Diluted 15,640,582 15,754,263 15,657,015 15,744,891
Average shares outstanding
- Basic 15,325,412 15,393,329 15,320,819 15,400,635
- --------------------------------------------------------------------------------
(A) Reflects stock split effective August 1, 2003 where one new share was
issued for each 10 shares owned.
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
- --------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Interest received $ 36,804 $ 38,754
Fees and commissions received 10,523 8,193
Interest paid (8,811) (12,763)
Cash paid to suppliers and employees (20,470) (18,786)
Income taxes paid (4,250) (5,162)
Trading securities activity 49,062 0
Change in loans sold and available for sale, net 139 5,696
Net change in other assets 4,380 (190)
-------- --------
Net cash provided by operating activities 67,377 15,742
Cash flows from investing activities
Proceeds from maturity of securities held for sale 148,252 137,227
Proceeds from maturity of securities held for investment 29,682 1,700
Proceeds from sale of securities held for sale 111,593 37,288
Purchase of securities held for sale (327,251) (252,273)
Purchase of securities held for investment (111,198) 0
Net new loans and principal repayments 35,905 46,821
Proceeds from the sale of other real estate owned 10 75
Additions to bank premises and equipment (1,620) (692)
-------- --------
Net cash used in investing activities (114,627) (29,854)
Cash flows from financing activities
Net increase (decrease) in deposits 44,718 (1,174)
Net decrease in federal funds purchased and
repurchase agreements (31,048) (33,206)
Net increase in other borrowings 25,000 0
Exercise of stock options 717 469
Treasury stock acquired (1,118) (669)
Dividends paid (3,065) (2,788)
-------- --------
Net cash provided by (used in) financing activities 35,204 (37,368)
-------- --------
Net decrease in cash and cash equivalents (12,046) (51,480)
Cash and cash equivalents at beginning of period 49,822 92,114
-------- --------
Cash and cash equivalents at end of period $ 37,776 $ 40,634
======== ========
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
Six Months Ended
June 30,
- --------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002
----------------------------
Reconciliation of Net Income to Cash Provided by
Operating Activities
Net Income $ 6,773 $ 7,735
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 5,931 3,486
Trading securities activity 49,062 0
Change in loans sold and available for sale, net 139 5,696
Securities losses (gains) 1,168 (464)
Gain on sale of loans (224) 0
Gain on sale of foreclosed assets (2) (2)
Gain on disposition of fixed assets 8 (3)
Change in interest receivable 539 17
Change in interest payable (17) (253)
Change in prepaid expenses 304 302
Change in accrued taxes (340) 7
Change in other assets 4,380 (190)
Change in other liabilities (344) (589)
--------- ---------
Total adjustments 60,604 8,007
--------- ---------
Net cash provided by operating activities $ 67,377 $ 15,742
========= =========
- --------------------------------------------------------------------------------
Supplemental disclosure of noncash investing
activities:
Transfers from loans to other real estate owned $ 50 $ 73
Change in net unrealized securities gains (3,360) 394
Transfers from securities held for sale to trading
securities 60,165 0
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 six-month period
ended June 30, 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 gain net of income taxes from these instruments at June 30, 2003 was
$104,000.
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 counter-party that 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 June 30, 2003 and 2002, comprehensive income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2003 2002 2003 2002
-------------------------------------
Net income $ 3,550 $ 4,049 $ 6,773 $ 7,735
Unrealized loss on cash flow hedge
(net of tax) (291) -- (349) --
Unrealized gains (losses) on securities
(net of tax) (941) 1,656 (1,803) 11
Net reclassification adjustment for prior
unrealized (security gains)losses 378 230 (332) 230
------------------------------------
Comprehensive income $ 2,696 $ 5,935 $ 4,289 $ 7,976
- --------------------------------------------------------------------------------
NOTE C - DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, such as interest rate swaps and forward
contracts are valued at quoted market prices or using 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 June 30, 2003, as follows:
Carrying Value Fair Value
(Dollars in thousands) --------------------------------
Derivative Product Assets
Interest rate swap which does qualify
for hedge accounting $1,206 $1,206
Derivative contracts which do not
qualify for hedge accounting 104 104
Derivative Product Liabilities
Cash flow interest rate swap which
does qualify for hedge accounting 568 568
The above changes in fair value of derivative financial instruments had no
effect on net income. A total of $568,000 was recorded to other comprehensive
income, net of taxes of $219,000.
NOTE D - EARNINGS PER SHARE DATA
Three Months Ended Six Months Ended
June 30 June 30
_______________________________________________
(Dollars in thousands, 2003 2002 2003 2002
except per share data) _______________________________________________
Basic:
Net Income $3,550 $4,049 $6,773 $7,735
Average shares outstanding 15,325,412 15,393,329 15,320,819 15,400,635
Basic EPS $ 0.23 $ 0.26 $ 0.44 $ 0.50
Diluted:
Net Income $3,550 $4,049 $6,773 $7,735
Average shares outstanding 15,325,412 15,393,329 15,320,819 15,400,635
Net effect of dilutive stock
options - based on treasury
stock method 315,170 360,934 336,196 344,256
________________________________________________
Total 15,640,582 15,754,263 15,657,015 15,744,891
Diluted EPS $ 0.23 $ 0.26 $ 0.43 $ 0.49
All per share data reflect the stock split effective August 1, 2003.
NOTE E - ACCOUNTING STANDARDS
On January 17, 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest
Entities", which addresses consolidation by business enterprises of variable
interest entities. FIN No. 46 clarifies the application of Accounting Research
Bulletin No. 51 ("ARB No. 51"), "Consolidated Financial Statements", to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise hold a variable interest that it
acquired before February 1, 2003. The Company does not expect the requirements
of FIN No. 46 to have a material impact on its financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of this
statement is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, a financial instrument
that embodies an obligation for the issuer is required to be classified as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
SECOND 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 second quarter of 2003 totaled $3,550,000 or $0.23 per share
diluted, compared to $3,223,000 or $0.21 per share diluted recorded in the first
quarter of 2003 and was lower than the $4,049,000 or $0.26 per share diluted
reported in the second quarter of 2002. Profits realized from investment
securities sold, net of income taxes, added $244,000 or $0.02 per share diluted
to second quarter 2002's results. Note that earnings per share results for the
current and prior periods reflect the retroactive application of stock split on
Common Stock effective August 15, 2003 for shareholders of record on August 1,
2003. As a result of the stock split, one additional share of common stock will
be distributed for every ten shares held. Fractional shares from the split will
be paid in cash.
Return on average assets was 1.09 percent and return on average shareholders'
equity was 14.08 percent for the second quarter of 2003, compared to first
quarter 2003's performance of 1.02 percent and 13.07 percent, respectively, and
the prior year's second quarter results of 1.33 percent and 16.76 percent,
respectively.
NET INTEREST INCOME
Net interest income (on a fully taxable equivalent basis) for the second quarter
of 2003 totaled $11,198,000, $441,000 or 3.8 percent less than for the first
quarter of 2003 and $1,062,000 or 8.7 percent lower than for the second quarter
of 2002.
Net interest margin on a tax equivalent basis declined 26 basis points to 3.63
percent for the second quarter of 2003 after declining 13 basis points to 3.89
percent in the first quarter of 2003 from fourth quarter 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 reductions of 50
basis points in November 2002 and 25 basis points in May 2003.
During the second half of 2002, the yield curve flattened over 100 basis points.
More recently, during the first quarter of 2003 and into the second quarter of
2003, the yield curve flattened again and resulted in accelerated principal
repayments of loans and investment securities collateralized by residential
properties. Loan payments totaled $66 million for the quarter and $130 million
for the first six months. In addition, activity in the Company's securities
portfolio was significant during the second quarter, with maturities of
securities of $110.6 million (versus $116.4 million in the first quarter of
2003) and purchases totaling $253.8 million (versus $184.7 million in the first
quarter of 2003).
These higher principal repayments of loans and investments combined with deposit
growth was invested in earning assets at lower rates. The yield on earning
assets for the second quarter of 2003 declined 36 basis points to 5.03 percent
from first quarter 2003. Decreases in the yield on loans of 5 basis points to
7.00 percent, the yield on securities of 46 basis points to 2.71 percent, and
the yield on federal funds sold of 8 basis points to 1.19 percent were recorded
during the second quarter of 2003. Average earning assets for the second quarter
of 2003 increased $23,912,000 or 2.0 percent when compared to first quarter
2003's average. Average loan balances declined $18,282,000 or 2.6 percent to
$671,740,000, while average federal funds sold increased slightly to $6,769,000
and average investment securities increased $42,148,000 or 8.2 percent to
$558,122,000. 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. While residential loan originations
totaled over $68 million and $150 million for the quarter and six months,
respectively, the majority of residential mortgage loans were sold servicing
released to manage interest rate risk and to generate fee income.
The cost of interest-bearing liabilities in the second quarter of 2003 decreased
10 basis points to 1.73 percent from first quarter 2003, with rates for NOW,
savings, money market accounts, and certificates of deposit (CDs) decreasing 8,
7, 7, and 16 basis points, respectively. The average aggregated balance for NOW,
savings and money market balances increased $19,125,000 or 4.0 percent from the
first quarter of 2003 and noninterest bearing deposits increased $9,838,000 or
5.3 percent, while certificates of deposit grew $2,870,000 or 0.8 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.
Year over year the mix of earning assets and interest bearing liabilities has
changed. Long term fixed rate residential and commercial loans have declined $91
million over the last twelve months. Loans (the highest yielding component of
earning assets) as a percentage of average earning assets totaled 54.3 percent
in the second quarter of 2003 compared to 64.9 percent a year ago, while
securities increased from 32.3 percent to 45.1 percent and federal funds sold
decreased from 2.8 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 37.4 percent, compared to 40.2 percent
in the second quarter of 2002, reflecting diminished funding requirements and
allowing for lower rates to be paid on CDs. Approximately $77 million in CDs
matured during the second quarter of 2003. An additional $87 million in CDs will
mature in the third 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 49.9 percent of
interest bearing liabilities, versus 49.8 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 12.7 percent of interest bearing liabilities in the
second quarter from 10.0 percent a year ago, reflecting an increase in average
balances maintained by customers utilizing sweep arrangements and the new FHLB
borrowing.
All of this activity was managed in an effort to minimize net interest margin
compression while maintaining a neutral to slightly negative one-year static
gap.
PROVISION FOR LOAN LOSSES
No provision was recorded in the first or second 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
$715,000 for the first six months of 2003 compared to $132,000 for the same
period in 2002. While net charge-offs totaled $435,000 for the second quarter of
2003 (principally due to the complete write-off of a single commercial credit
for $439,000), management is not aware of any factors that would significantly
impact the Company's credit quality. Net charge-offs annualized as a percent of
average loans were at 0.21 percent for the first six months of 2003, compared to
0.03 percent for the same period in 2002 and the total year in 2002. Over the
last twelve months the ratio was 0.11 percent.
The Company's loan portfolio mix has been changing as the Company continues to
improve its loan portfolio mix by emphasizing higher yield commercial and
consumer credits. Recently these changes have also resulted in negative overall
loan growth due to rapid prepayments experienced in residential loans. This
factor, together with favorable credit loss experience, has made it unneccessary
to provide additions to the allowance for loan losses. Restoration of overall
loan growth as well as continued changes in the mix of loans may result in
increased loan loss provisions in future periods. In addition, a decline in
economic activity could impact loss experience resulting in additions to the
allowance for loan losses. Management believes that its credit granting process
follows a comprehensive and disciplined process 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 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
$5,190,000 for the second quarter of 2003, $1,157,000 or 28.6 percent higher
than for the same period last year. Noninterest income was favorably impacted by
growth in fee-based businesses. Noninterest income accounted for 31.7 percent of
net revenue in the second quarter, compared to 24.8 percent a year ago.
The financial market turmoil, which began in late 2000 and carried through into
2001, affected brokerage activities with consumers avoiding the riskier equities
markets for more conservative deposit products. Revenues from the Company's
financial services businesses rebounded somewhat in 2002, and for the second
quarter of 2003 brokerage commissions and fees increased $16,000 or 2.8 percent
to $586,000, year over year. Trust income was lower, declining $15,000 or 2.8
percent to $527,000 for the second quarter of 2003. 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 2003, mortgage banking fees totaled $1,223,000 for the second
quarter, an increase of $603,000 or 97.3 percent more than a year ago for the
second quarter. Further growth in these revenues will be dependent upon the
Company's success in achieving additional market penetration, market expansion
and expanding sources of fees collected from this business. Recent increases in
interest rates may begin to negatively impact these revenues due to a decline in
overall mortgage activity in the Company's markets and a shifting of production
into portolio based mortgage products.
Greater usage of check cards during the second quarter 2003 by core deposit
customers and an increased cardholder base increased interchange income to
$320,000, an increase of $68,000 or 27.0 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. The Company estimates that the impact on
current monthly fee income from the change in rates would reduce income by
approximately $20,000 per month. Other deposit based electronic funds transfer
income increased $15,000 or 16.7 percent to $105,000. Service charges on
deposits were lower year over year at $1,202,000. Greater analysis fees
collected from commercial customers, a result of reduced earnings credits in the
current interest rate environment, were more than offset by lower overdraft
fees.
Marine finance fees from the sale of marine loans totaled $859,000, an increase
of $520,000 from second quarter a year ago. The Company's marine financing
division (Seacoast Marine Finance) produced $47.1 million in boat loans during
the second quarter of 2003, up $31.1 million year over year. Of the $47.1
million produced, a total of $45.5 million 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.
Noninterest income, excluding gains and losses from securities sales, totaled
$10,561,000 for the six-month period ended June 30, 2003, an increase of
$2,545,000 or 31.7 percent from the same period last year. As in the quarterly
comparison, the more significant increases were in mortgage banking, check card
interchange income, and marine finance fees, increasing year over year
$1,465,000, $134,000 and $1,160,000, respectively. Year-to-date service charges
on deposits and trust income decreased $68,000 and $88,000, respectively.
Losses from the sale of securities totaled $1,157,000 and $11,000 during the
first and second quarters of 2003, respectively, compared to gains of $66,000
and $398,000 in 2002. Sales of investments in early 2003 were transacted to
restructure the portfolio. Sales in the second 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 second quarter of 2003
increased by $803,000 or 8.0 percent to $10,805,000. The Company's overhead
ratio has decreased over the last several years. However, the 65.9 percent
efficiency ratio for the second quarter of 2003 was higher than the 61.4 percent
ratio recorded a year ago.
Salaries and wages increased $418,000 or 10.8 percent to $4,273,000 during the
second quarter of 2003 compared to the prior year quarter. Commissions on
revenue from mortgage banking were $125,000 higher year over year and base
salaries increased $346,000 or 10.1 percent. The increase in base salaries
included $82,000 for branch personnel in two new offices opened in Palm Beach
County in January of this year, $39,000 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 $149,000 or 14.0 percent to $1,212,000 from
the second 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 $73,000 or 5.5 percent to $1,403,000, versus second 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 $131,000 to occupancy expenses and furniture and
equipment expenses in 2003 versus a year ago.
Outsourced data processing costs totaled $1,315,000 for the second quarter of
2003, an increase of $130,000 or 11.0 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 and increase as the Company's business volumes grow
and new products such as bill pay, internet banking, etc. become more popular.
Legal and professional costs decreased $85,000 or 18.7 percent to $370,000 when
compared to second quarter 2002. Additional legal costs in 2002 were a result of
various regulatory and shareholder communications regarding the simplification
of the Company's capital structure and a number of changes to its Articles of
Incorporation approved by shareholders in 2002.
Other expenses increased $114,000 or 7.4 percent to $1,651,000. The primary
increase was in subcontractor fees paid to marine finance solicitors, which
increased by $142,000 from a year ago, principally due to the addition of sales
staff in California.
Noninterest expenses for the six-month period ending June 30, 2003 were
$1,910,000 or 9.7 percent higher, totaling $21,680,000. Changes year over year
were as follows: 1) salaries and wages increased $817,000 or 10.7 percent, 2)
employee benefits grew $317,000 or 15.0 percent, 3) occupancy and furniture and
equipment expenses rose $202,000 or 7.5 percent, on an aggregate basis, 4)
outsourced data processing costs increased $170,000 or 7.0 percent, 5) legal and
professional fees declined slightly, by $2,000, 6) marketing expenses were
$41,000 or 4.0 percent higher, 7) amortization of intangibles remained level,
and 8) other expenses increased $365,000 or 12.2 percent.
INCOME TAXES
Income taxes as a percentage of income before taxes were 35.3 percent for the
first six months of this year, compared to 39.1 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 six months of 2003 was 7.77 percent, compared to 7.81 percent
during the first six months 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 June 30, 2003, there were 1,775,647 shares totaling
$17,800,000, compared to 1,569,675 shares or $17,012,000 a year ago.
The risk-based capital minimum ratio for total capital to risk-weighted assets
for "well-capitalized" financial institutions is 10%. At June 30, 2003, the
Company's ratio was 14.09 percent.
LOAN PORTFOLIO
Total loans (net of unearned income and excluding the allowance for loan losses)
were $651,491,000 at June 30, 2003, $86,510,000 or 11.7 percent less than at
June 30, 2002, and $36,670,000 or 5.3 percent less than at December 31, 2002.
Higher prepayments of residential mortgage loans has resulted in a decline in
the loan portfolio.
At June 30, 2003, the Company's mortgage loan balances secured by residential
properties amounted to $224,981,000 or 34.5 percent of total loans (versus
$315,218,000 or 42.7 percent a year ago).
During the first six months of 2003, $119.6 million in fixed rate residential
mortgage loans were sold, compared to $61.9 million during the first six months
a year ago. The Company also sold $90.0 million in marine loans (generated by
Seacoast Marine Finance), compared to $24.2 million in the first six months of
2002. Over the past twelve months, $195.2 million in fixed rate residential
loans and $146.9 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
3.5% over the last twelve months. The Company's commercial real estate lending
strategy stresses quality loan growth from local businesses, professionals,
experienced developers and investors. At June 30, 2003, the Company had funded
commercial real estate loans totaling $265,666,000 or 40.8 percent of total
loans (versus $256,634,000 or 34.8 percent a year ago). The Company's top ten
commercial real estate loans aggregated to $86 million at June 30, 2003. At June
30, 2003, funded and unfunded commitments for commercial real estate loans were
comprised of the following types of loans:
(In millions) Funded Unfunded Total
________________________________________________________________________________
Office buildings $ 36.3 $ 0.8 $ 37.1
Retail trade 35.9 0.8 36.7
Land development 44.1 34.7 78.8
Industrial 25.5 4.2 29.7
Healthcare 25.4 2.9 28.3
Churches and educational facilities 11.1 4.9 16.0
Recreation 12.2 0.5 12.7
Multifamily 8.7 4.4 13.1
Mobile home parks 3.1 -- 3.1
Land 7.8 2.5 10.3
Lodging 3.4 -- 3.4
Restaurant 2.9 0.1 3.0
Miscellaneous 49.3 6.8 56.1
_________________________________
Total $ 265.7 $ 62.6 $ 328.3
________________________________________________________________________________
Also increasing, commercial and industrial loans totaled $43,034,000 at June 30,
2003, compared to $35,918,000 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 $13,692,000,
residential construction loans totaled $14,198,000 and home equity lines
outstanding totaled $9,826,000 at June 30, 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 $79,295,000 (versus $99,558,000 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 June 30,
2003, approximately $96 million or 42 percent of the Company's residential
mortgage loan balances were adjustable, compared to $116 million or 37 percent a
year ago.
Approximately $153.0 million of new residential loans were originated in the
first six months of 2003 and $119.6 million were sold. Loans secured by
residential properties having fixed rates totaled approximately $129 million at
June 30, 2003, of which 15- and 30-year mortgages totaled approximately $51
million and $35 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 June 30, 2002
totaled approximately $88 million and $70 million, respectively.
The Company's historical charge-off rates for residential real estate loans have
been minimal, with $1,000 in net recoveries for the first six months 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 $79 million and $131
million, respectively, at June 30, 2003, compared to $98 million and $102
million, respectively, a year ago.
At June 30, 2003, the Company had commitments to make loans (excluding unused
home equity lines of credit) of $146,299,000, compared to $103,666,000 at June
30, 2002.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses totaled $6,111,000 at June 30, 2003, $791,000
lower than one year earlier and $715,000 lower than at December 31, 2002. During
the first half of 2003, net charge-offs of $604,000 on commercial loans and
$149,000 on consumer loans were partially offset by recoveries on residential
real estate loans, commercial real estate loans, and credit cards of $1,000,
$20,000, and $17,000, respectively. Commercial loan charge-offs during the
second quarter included a write off of one commercial credit for $439,000. A
year ago, net charge-offs of $132,000 were recorded during the first six months.
Management is not aware of any factors that would significantly impact credit
quality. Although the allowance balance declined $791,000 over the last twelve
months, the ratio of the allowance for loan losses to net loans outstanding
remained level at 0.94 percent for June 30, 2003 and 2002, respectively. This
ratio was 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 191.7
percent at June 30, 2003, compared to 366.2 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 June 30, 2003, the Company had $528 million in loans secured by real
estate, representing 81.1 percent of total loans, down slightly from 81.6
percent at June 30, 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 June 30, 2003, the Company's ratio of nonperforming assets to loans
outstanding plus other real estate owned ("OREO") was 0.50 percent, compared to
0.27 percent one year earlier.
At June 30, 2003, there were no accruing loans past due 90 days or more and OREO
totaled $50,000. In 2002 on the same date, there were $11,000 in accruing loans
past due 90 days or more and OREO balances of $192,000 were outstanding.
Nonaccrual loans totaled $3,188,000 at June 30, 2003, compared to a balance of
$1,874,000 at June 30, 2002. The primary cause for the increase was a single
commercial real estate loan totaling approximately $2.0 million added to
nonaccrual loans during the second quarter. Nonaccrual loans outstanding at June
30, 2003 that were performing with respect to payments totaled $1,088,000. The
performing loans were placed on nonaccrual status because the Company has
determined that the collection of principal or interest in accordance with the
terms of such loans is uncertain. Of the amount reported in nonaccrual loans at
June 30, 2003, 100 percent is secured with real estate. 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 June 30, 2003, the Company had $10,949,000 or 1.9 percent of total securities
designated as trading, $463,848,000 or 78.8 percent of total securities
available for sale and securities held to maturity were carried at an amortized
cost of $113,720,000, representing 19.3 percent of total securities. The
Company's securities portfolio increased $207,490,000 or 54.5 percent from June
30, 2002 and $90,058,000 or 18.1 percent from December 31, 2002. Maturities and
sales of securities of $227.0 million and $111.6 million, respectively, and
purchases totaling $438.4 million were transacted during the first six months 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 June 30, 2003, the duration of the
portfolio was 0.84 years. The average duration of the investment portfolio
increases to a range of 1 to 3 years should interest rates increase 50 to 150
basis points.
Unrealized net securities losses of $2,026,000 at June 30, 2003, compared to net
gains of $3,368,000 at June 30, 2002 and $2,320,000 at December 31, 2002. A
shifting yield curve affected the market value of the securities portfolio
during the first six months of 2003.
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 $61,280,000 or 6.0 percent to $1,075,252,000 at June
30, 2003, compared to one year earlier. Certificates of deposits decreased
$6,039,000 or 1.6 percent to $372,723,000 over the past twelve months, lower
cost interest bearing deposits (NOW, savings and money markets deposits)
increased $38,679,000 or 8.4 percent to $497,930,000, and noninterest bearing
demand deposits increased $28,640,000 or 16.3 percent to $204,599,000. 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 increased over the past twelve months by
$9,421,000 or 24.5 percent to $47,919,000 at June 30, 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. While
the number of sweep repurchase accounts declined from 101 a year ago to 98 at
June 30, 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, remaining repurchase agreement customers have increased their
balances.
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 June 30, 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 ALCO model simulations indicate net
interest income would decrease 2.0 percent if interest rates 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 in
November 2002 and 25 basis point reduction in May 2003, the model simulation
indicates net interest income would decrease zero (0.0) 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 June 30, 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 4.4 percent compared to 14.8 percent at year-end 2002.
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 that 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 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 June 30, 2003 was $10,949,000. The fair
value of the available for sale portfolio at June 30, 2003 was less than
historical amortized cost, producing net unrealized losses of $2,026,000. 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 that
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 June 30, 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 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 June 30, 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 June 30, 2003, the total
estimated fair value of those rights was $413,000. 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 June 30, 2003, the Company had
available lines of credit of $66,600,000. The Company had $390,705,000 of United
States Treasury and Government agency securities and mortgage backed securities
not pledged and available for use under repurchase agreements. At June 30, 2002,
the amount of securities available and not pledged was $279,817,000.
Liquidity, as measured in the form of cash and cash equivalents (including
federal funds sold and interest bearing deposits), totaled $37,776,000 at June
30, 2003 as compared to $40,634,000 at June 30, 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 re-financings 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 re-pricing 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. Based
on our most recent modeling, an instantaneous 100 basis point increase in rates
is estimated to increase the EVE 6.0 percent versus the EVE in a stable rate
environment. An instantaneous 100 basis point decrease in rates is estimated to
decrease the EVE 12.7 percent 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."
The Company's chief executive officer and chief financial officer have evaluated
the Company's disclosure controls and procedures (as defined in Rule 13a-14(c)
and Rule 15d-14(c) under the Exchange Act) as of June 30, 2003 and concluded
that those disclosure controls and procedures are effective.
There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation, nor any corrective actions with regard to
significant deficiencies and material weaknesses.
While the Company believes that its existing disclosure controls and procedures
have been effective to accomplish these objectives, the Company intends to
continue to examine, refine and formalize its disclosure controls and procedures
and to monitor ongoing developments in this area.
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2003 Annual Meeting of Shareholders was held on May 1, 2003.
(b) Four Class I directors and two Class III reported to the Commission in the
2003 Proxy statement were elected.
(c) The following matters were voted upon at the meeting:
(1) Proposal 1 - The election of four (4) Class I directors to serve until
the 2006 Annual Meeting of Shareholders and two (2) Class III
directors to serve until the 2005 Annual Meeting of Shareholders have
been elected and qualified. Out of 13,274,827 votes represented at the
meeting, the number of votes cast for and against (or withheld) their
election were 12,972,100 (97.7%) and 302,727, respectively. All of the
directors were elected.
(2) Proposal 2 - The approval of an amendment to Article VII of the
Company's Articles of Incorporation clarifying the intent that, upon
the approval of (i) 66-2/3% of the Whole Board of Directors, and (ii)
a majority of the Continuing Directors, the vote of only a majority of
Voting Shares would be needed to approve business combinations. Out of
the 13,949,905 votes entitled to be cast 9,690,106 votes (69.5%) were
cast in favor of the amendment and 2,250,820 were cast against the
amendment. The amendment was approved.
(3) Proposal 3 - The granting of discretionary authority to vote to
adjourn the Meeting for up to 120 days if there are not sufficient
shares voted at the Meeting, in person or by proxy, to approve
Proposal 2. Out of 13,274,827 votes represented at the meeting the
number of votes cast in favor and against Proposal 3 were 11,542,912
(87.0%) and 1,493,539. The proposal was approved.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.4 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Form 8-K filed on April 16, 2003
On April 16, 2003, the Registrant announced its financial results for the first
quarter ended March 31, 2003. A copy of the press release is attached to the
Form 8-K. On April 16, 2003, the Registrant held an investor conference call to
discuss financial results.
Form 8-K filed on May 1, 2003
On May 1, 2003, the Registrant's shareholders elected all nominees for its board
of directors. Shareholders also approved an amendment to the Registrant's
Articles of Incorporation that will allow the Company to enter into business
combinations approved by the board of directors without a supermajority vote as
previously required. Business combinations will now require a vote of only a
simple majority of the outstanding shares entitled to vote if the business
combination is approved by 66-2/3% of the board of directors and a majority of
continuing directors.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEACOAST BANKING CORPORATION OF FLORIDA
August 13, 2003 /s/ Dennis S. Hudson, III
DENNIS S. HUDSON, III
President &
Chief Executive Officer
August 13, 2003 /s/ William R. Hahl
WILLIAM R. HAHL
Executive Vice President &
Chief Financial Officer