Seacoast Banking - 10-Q quarterly report FY

 

(Mark One)

(Exact Name of Registrant as Specified in its Charter)

(772) 287-4000

INDEX

SEACOAST BANKING CORPORATION OF FLORIDA

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries

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 U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. 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 nine-month period ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other period. 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, 2009.

The preparation of these condensed consolidated 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.

The accounting policies that are particularly sensitive to judgments and the extent to which significant estimates are used include the allowance for loan losses and the reserve for unfunded lending commitments, fair value of certain financial instruments, realization of deferred tax assets, and contingent liabilities.

During the third quarter 2010, the Company identified an error related to the valuation allowances on certain troubled debt restructurings. The Company corrected the error in the third quarter 2010 which reduced the allowance for loan losses and the net loss reported for the current period by $1.5 million. The Company reviewed the impact of this error in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99 “Materiality”, and determined that the error was not material to prior and current periods.

NOTE B — RECENT ACCOUNTING STANDARDS

ASU 2010-6 amends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. ASU 2010-6 provides additional guidance related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques. The amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activities on a gross basis which will be effective for fiscal years beginning after December 15, 2010. We adopted the new disclosure requirements for level 2 transfers and the adoption of level 3 requirements will not have any impact on our financial position or results of operations.

ASU 2010-20 expands disclosures about credit quality of the loan portfolio and its related allowance for loan losses. It requires providing information as to “portfolio segments” and “class of financing receivables” as well as disclosure of the nature of credit risk, how credit risk is analyzed and assessed in arriving at the allowance for loan losses and changes in the allowance for loan losses.

Descriptions and discussions of these items as well as accounting policies pertinent to the allowance for loan losses will need to be provided at the portfolio segment level. Additionally, existing disclosures about loans will need to be presented in more detail by including:

Further, the following new disclosures about loans will need to be presented:

ASU 2010-20 is effective for all periods ending on or after December 15, 2010. When adopted, these new disclosures will have no impact on financial position or results of operations.

NOTE C — SUBSEQUENT EVENTS

In preparing these condensed consolidated financial statements, subsequent events were evaluated through the time the condensed consolidated financial statements were issued. Condensed consolidated financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the condensed consolidated financial statements.

NOTE D — BASIC AND DILUTED LOSS PER COMMON SHARE

Equivalent shares of 1,139,623 and 1,147,623 related to stock options, stock settled appreciation rights and warrants for the periods ended September 30, 2010 and 2009, respectively, were excluded from the computation of diluted EPS because they would have been anti-dilutive.

NOTE E — FAIR VALUE INSTRUMENTS MEASURED AT FAIR VALUE

In certain circumstances, fair value enables the Company to more accurately align its financial performance with the market value of actively traded or hedged assets and liabilities. Fair values enable a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as, to more accurately portray the active and dynamic management of a company’s balance sheet. ASC 820 provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased. ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly. Under ASC 820, fair value measurements for items measured at fair value at September 30, 2010 and 2009 included:

When appraisals are used to determine fair value and the appraisals are based on a market approach, the related loan’s fair value is classified as Level 2 input. The fair value of loans based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, is classified as Level 3 input.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

During the first nine months of 2010 transfers into and out of level 2 fair value for available for sale securities consisted of investment purchases, sales, maturities and principal repayments.

For loans classified as level 2 the transfers in totaled $6.6 million consisting of loans that became impaired during the first nine months of 2010. Transfers out consisted of valuation write-downs of $96,000, foreclosures of $2,484,000 migrating to other real estate owned (“OREO”) and other reductions (including principal payments) totaling $312,000. No sales were recorded.

For OREO classified as level 2 during the first nine months of 2010 transfers out totaled $2,975,000 consisting of valuation write-downs of $133,000 and sales of $2,842,000 and transfers in consisted of foreclosed loans totaling $1,381,000.

The following table shows the carrying value and fair value of the Company’s financial assets and financial liabilities as of September 30, 2010:

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at September 30, 2010:

Cash and cash equivalents: The carrying amount was used as a reasonable estimate of fair value.

Securities: The fair value of U.S. Treasury and U.S. Government agency, mutual fund and mortgage backed securities are based on market quotations when available or by using a discounted cash flow approach. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.

Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers.

Deposit Liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.

Borrowings: The fair value of floating rate borrowings is the amount payable on demand at the reporting date. The fair value of fixed rate borrowings is estimated using the rates currently offered for borrowings of similar remaining maturities.

Subordinated debt: The fair value of the floating rate subordinated debt is estimated using discounted cash flow analysis and the Company’s current incremental borrowing rate for similar instruments.

NOTE F — IMPAIRED LOANS AND VALUATION ALLOWANCE FOR LOAN LOSSES

At September 30, 2010 and 2009, the Company’s recorded investments in impaired loans and the related valuation allowances were as follows:

Impaired loans also include loans that have been modified in troubled debt restructurings (“TDRs”) where concessions to borrowers who experienced financial difficulties have been granted. At September 30, 2010 and 2009, accruing TDRs totaled $64.4 million and $16.1 million, respectively.

The valuation allowance is included in the allowance for loan losses. Impaired loans were measured for impairment based on the value of underlying collateral or a forecast of future cash flows discounted at the loan’s original contractual interest rate.

Interest payments received on impaired loans are recorded as interest income, unless the collection of the remaining recorded investment is doubtful at that time, in which case, payments received are recorded as reductions to principal.

Nonaccrual loans and accruing loans past due 90 days or more were $69,519,000 and $17,000, respectively, at September 30, 2010 and $153,981,000 and $48,000, respectively, at September 30, 2009.

NOTE G: CONTINGENCIES

The Company and its subsidiaries, because of the nature of their businesses, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Company’s consolidated financial condition, operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation.

NOTE H: EQUITY CAPITAL

The Company is well capitalized for bank regulatory purposes. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth under “Capital Resources” in this Report. At September 30, 2010, the Company’s principal subsidiary, Seacoast National Bank, or “Seacoast National”, met the risk-based capital and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.

Seacoast National has agreed to maintain a Tier 1 capital (to adjusted average assets) ratio of at least 8.50% and a total risk-based capital ratio of at least 12.00% with its primary regulator, the Office of the Comptroller of the Currency (“OCC”). The agreement with the OCC as to minimum capital ratios does not change the Bank’s status as “well-capitalized” for bank regulatory purposes.

NOTE I: LETTERS OF CREDIT

During the first quarter of 2010, the Company’s banking subsidiary reduced by $33.0 million the letters of credit issued by the Federal Home Loan Bank (“FHLB”) used to satisfy a pledging requirement. Letters of credit outstanding with the FHLB sum to $43.0 million at September 30, 2010. The letters of credit have a term of one year with an annual fee equivalent to 5 basis points, or $21,500, amortized over the one year term of the letters. No interest cost is associated with the letters of credit.

NOTE J: SECURITIES

The amortized cost and fair value of securities available for sale and held for investment at September 30, 2010 and December 31, 2009 are summarized as follows:

Sales of securities for the nine month period ended September 30, 2010, were $107,521,000 with gross gains of $3,687,000 and no losses. Proceeds from sales of securities available for sale for the nine month period ended September 30, 2009, were $56,663,000 with gross gains of $3,211,000 and no losses.

Securities with a carrying value of $299,559,000 and $320,768,000 and a fair value of $299,604,000 and $320,775,000 at September 30, 2010 and December 31, 2009, respectively, were pledged as collateral for repurchase agreements, United States Treasury deposits, and other public and trust deposits.

The amortized cost and fair value of securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at September 30, 2010 and December 31, 2009, respectively.

The Company owned individual investment securities totaling $75.5 million with aggregate gross unrealized losses at September 30, 2010. Based on a review of each of the securities in the investment securities portfolio at September 30, 2010, the Company concluded that it expected to recover the amortized cost basis of its investment.

Approximately $904,000 of the unrealized losses at September 30, 2010 pertain to private label securities secured by collateral originated in 2005 and prior with a fair value of $43.4 million and were attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for investment securities in general. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgages loans with low loan to values, subordination and historically have had minimal foreclosures and losses. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality.

At September 30, 2010, the Company also had $164,000 of unrealized losses on mortgage-backed securities of government sponsored entities having a fair value of $31.7 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for investment securities in general. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

The unrealized losses on debt securities issued by states and political subdivisions amounted to $3,000 at September 30, 2010. The unrealized losses on state and municipal holdings included in this analysis are attributable to a combination of factors, including a general decrease in liquidity and an increase in risk premiums for credit-sensitive securities since the time of purchase. Based on its assessment of these factors, management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and liquidity and not changes in credit quality. Management expects to recover the entire amortized cast basis of these securities.

As of September 30, 2010, the Company does not intend to sell nor is it anticipated that it would be required to sell any of its investment securities that have losses. Therefore, management does not consider any investment to be other-than-temporarily impaired at September 30, 2010.

Included in other assets was $12.4 million at September 30, 2010 of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At September 30, 2010, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the fair value of the $12.4 million of cost method investment securities.

NOTE K: INCOME TAXES

The tax benefit for the net loss for the first, second and third quarters of 2010 totaled $0.6 million, $5.3 million and $2.8 million, respectively. A deferred tax valuation allowance was recorded in a like amount, and therefore there was no change in the carrying value of net deferred tax assets which are supported by tax planning strategies. Should the economy show improvement and the Company’s credit losses moderate in the future, increased reliance on management’s forecast of future taxable earnings could result in realization of additional future tax benefits from the net operating loss carryforwards. At September 30, 2010 the Company has approximately $44.0 million in its deferred tax valuation allowance related to its net operating loss carryforwards.

NOTE L — COMPREHENSIVE LOSS

At September 30, 2010 and 2009, comprehensive loss was as follows:

THIRD QUARTER 2010

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 related notes included in this report. For purposes of the following discussion, the words the “Company,” “we,” “us,” and “our” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.

EARNINGS SUMMARY

Net loss available to common shareholders for the third quarter of 2010 totaled $8,575,000 or $0.09 per average common diluted share, compared to second and first quarter 2010’s net losses of $14,733,000 or $0.25 per average common diluted share and $2,501,000 or $0.04 per average common diluted share, respectively, and significantly improved when compared to losses in 2009 for the fourth and third quarters of $39,086,000 or $0.73 per average common diluted share and $41,714,000 or $1.21 per average common diluted share, respectively. The better performance for 2010 reflects lower credit costs.

The net interest margin improved slightly, increasing 8 basis points during the third quarter of 2010 from the second quarter of 2010, and was 39 basis points lower than for the third quarter of 2009. While the Company has continued to benefit from lower rates paid for interest bearing liabilities due to the Federal Reserve’s reduction in interest rates, as well as, an improved mix of deposits, the impact of nonaccrual loans and a changing earning assets mix has been more than offsetting. The average cost of interest bearing liabilities was 8 basis points lower for the third quarter of 2010, compared to the second quarter of 2010, and was 8 basis points lower for the second quarter of 2010, compared to the first quarter of 2010, 13 basis points lower for the first quarter of 2010, compared to the fourth quarter of 2009, and 12 basis points lower for the fourth quarter of 2009, compared to the third quarter of 2009, a total reduction of 41 basis points over the last twelve months. Loans as a percentage of average earning assets declined and securities increased during the quarter. The yield on earning assets improved by one basis point during the third quarter of 2010, compared to the second quarter of 2010, but was 75 basis points lower than for the third quarter of 2009. Loan demand was better in the third quarter compared to the first half of 2010 with improved residential loan production but is expected to continue to be weak over the remainder of 2010, and possibly into 2011, which may impede further improvement to the yield on earning assets.

Noninterest income totaled $4.8 million for the third quarter of 2010, compared to $4.6 million for the first and second quarters of 2010 and $4.6 million for the third quarter of 2009. Signs of improved stability in home prices and greater transaction volumes resulted in fee income from residential real estate production higher than first and second quarter 2010’s results. Revenue from wealth management services were $37,000 lower and service charges on deposits were $221,000 lower when compared to third quarter 2009 but were more than offset by improved results in debit card income and mortgage banking fees for the third quarter of 2010. Consumer activity and spending has been adversely affected by economic conditions and directly affects many of the Company’s fee-based business activities. Service charges and fees derived from customer relationships increased as a result of more accounts and households as a result of the retail deposit growth strategy. Compared to the second quarter 2010 these revenues were up $59,000 or 4.1 percent in the third quarter 2010. Overdraft fees related to check card payments beginning in the third quarter were impacted by a requirement that customers elect to opt in for overdraft protection to be available for these types of payments, but the negative impacts were mostly offset by increased fees as a result of the growth in new deposit account households.

Noninterest expenses increased by $1.0 million versus second quarter 2010’s result and were $0.3 million lower when compared to the third quarter of 2009. Overhead related to salaries and wages, employee benefits, outsourced data processing costs, FDIC insurance assessments and marketing expenses were lower compared to second quarter 2010. Increases from the second quarter of 2010 were primarily a result of assets dispositions expense and losses on other real estate owned and repossessed assets increasing by $1.0 million on an aggregate basis, and legal and professional fees increasing by $0.9 million, over the period.

Our provision for loan losses was $7.9 million lower than in the second quarter of 2010 and was $36.5 lower than for the third quarter of 2009, and totaled $8.9 million for the third quarter of 2010 compared to $16.8 million and $45.4 million for the second quarter of 2010 and third quarter of 2009, respectively. A portion of net charge-offs during the third quarter of 2010 was related to the sale $5.2 million of nonperforming loans for net proceeds of $2.0 million. Provisions for loans losses were much higher during 2009 as a result of higher net charge-offs and the Company increasing its allowance for loan losses to loans outstanding ratio to 3.23 percent at December 31, 2009, up 148 basis points from December 31, 2008. The allowance for loan losses to loans outstanding ratio at September 30, 2010 was 3.04 percent.

CRITICAL ACCOUNTING ESTIMATES

Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are:

The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to us that could have a material effect on our reported financial information.

The information contained on pages 28-31 and 38-48 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 affect the Company’s accounting estimates related to our allowance for loan losses.

At September 30, 2010, outstanding securities designated as available for sale totaled $426,931,000. The fair value of the available for sale portfolio at September 30, 2010 was more than historical amortized cost, producing net unrealized gains of $8,181,000 that have been included in other comprehensive income (loss) as a component of shareholders’ equity (net of taxes). The Company made no change to the valuation techniques used to determine the fair values of securities during 2010 and 2009. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally, the Company obtains one price for each security. 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 or gains in the available for sale portfolio.

The credit quality of the Company’s securities holdings currently is investment grade. Any securities rated below investment grade are tested for other than temporary impairment, or “OTTI”. The Company’s investment securities, except for approximately $4.5 million of securities issued by states and their political subdivisions, as of September 30, 2010, generally are traded in liquid markets. U.S. Treasury and U.S. Government agency obligations totaled $331.8 million, or 78 percent of the total available for sale portfolio. The remainder of the portfolio primarily consists of private label securities secured by collateral originated in 2005 or prior with amortized loan to values below 70%, and current FICO scores above 700. Generally these securities have credit support exceeding 5%. The collateral underlying these mortgage investments are primarily 30- and 15-year fixed rate, 5/1 and 10/1 adjustable rate mortgage loans. Historically, the mortgage loans serving as collateral for those investments have had minimal foreclosures and losses.

These investments are reviewed quarterly for other than temporary impairment, by considering the following primary factors: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted. Based on our internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820. However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.

Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, 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 portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.

The Company also holds stock in the Federal Home Loan Bank of Atlanta (“FHLB”) totaling $6.6 million as of September 30, 2010, $0.5 million less than at year-end 2009. The FHLB had eliminated its dividend for the first quarter of 2009 but has since reinstated dividends. The FHLB also instituted quarterly rather than daily repurchases of FHLB activity-based stock in February 2009. The Company accounts for its FHLB stock based on the industry guidance in ASC 942, Financial Services—Depository and Lending, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We evaluated our holdings in FHLB stock at September 30, 2010 and believe our holdings in the stock are ultimately recoverable at par. We do not have operational or liquidity needs that would require redemption of the FHLB stock in the foreseeable future and, therefore, have determined that the stock is not other-than-temporarily impaired.

At September 30, 2010, the Company has net deferred tax assets of $16.9 million which are supported by tax planning strategies that could produce gains from transactions involving bank premises, investments, and other items that could be implemented during the NOL carry forward period.

As a result of the losses incurred in 2008, 2009, and 2010 the Company was and is in a three-year cumulative pretax loss position. A cumulative loss position is considered significant negative evidence in assessing the prospective realization of a DTA from a forecast of future taxable income. The use of the Company’s forecast of future taxable income was not considered positive evidence which could be used to offset the negative evidence at this time. Therefore, the Company has recorded deferred tax valuation allowances for its net operating loss carryforwards totaling approximately $44 million at September 30, 2010. Should the economy show signs of improvement and our credit costs continue to moderate, management anticipates that increased reliance on its forecast of future taxable earnings would result in tax benefits as the recording of valuation allowances would no longer be necessary.

The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for those claims. At September 30, 2010 and 2009, the Company had no significant accruals for contingent liabilities.

NET INTEREST INCOME

Net interest income (on a fully taxable equivalent basis) for the third quarter of 2010 totaled $16,532,000, increasing from 2010’s second quarter by $246,000 or 1.5 percent, and lower than third quarter 2009’s result by $2,569,000 or 13.4 percent. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters:

Fully taxable equivalent net interest income is a common term and measure used in the banking industry but is not a term used under generally accepted accounting principles (“GAAP”). We believe that these presentations of tax-equivalent net interest income and tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors’ understanding of the Company’s business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered an alternative to GAAP. The following information is provided to reconcile GAAP measures and tax equivalent net interest income and net interest margin on a tax equivalent basis.

Net interest margin on a tax equivalent basis increased 8 basis points to 3.35 percent for the third quarter of 2010 compared to the second quarter of 2010, and was lower by 39 basis points year over year. Increased nonaccrual loans and changes in the earnings assets mix have been the primary forces that have adversely affected our net interest income and net interest margin when comparing results for 2010 and 2009 to 2008 and prior periods.

The earning asset mix changed year over year impacting net interest income. For the third quarter of 2010, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 65.9 percent, compared to 77.6 percent a year ago. Average securities as a percent of average earning assets increased from 17.6 percent a year ago to 20.8 percent during the third quarter of 2010 and interest bearing deposits and other investments increased to 13.3 percent from 4.8 percent in 2009. In addition to decreasing average total loans as a percentage of earning assets, the mix of loans changed, with commercial real estate volumes representing 47.8 percent of total loans at September 30, 2010 (compared to 55.6 percent at September 30, 2009). This reflects our reduced exposure to commercial construction and land development loans on residential and commercial properties, which declined by $36.3 million and $93.3 million, respectively, from September 30, 2009 to September 30, 2010. Lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) represented 43.8 percent of total loans at September 30, 2010 (versus 39.9 percent a year ago) (see “Loan Portfolio”). It is expected that these trends in earning asset mix will continue through year-end 2010 when compared to prior periods.

The yield on earning assets for the third quarter of 2010 was 4.23 percent, 75 basis points lower than for 2009 in the third quarter, a reflection of the lower interest rate environment and earning asset mix. The Federal Reserve has indicated its intent to continue rates at their historical lows for an extended period. The following table details the yield on earning assets (on a tax equivalent basis) for the past five quarters:

The yield on loans increased 3 basis points to 5.29 percent over the last twelve months, with nonaccrual loans totaling $69.5 million or 5.5 percent of total loans at September 30, 2010 (versus $154.0 million or 10.2 percent of total loans a year ago), improving the yield on our loan portfolio. The yield on investment securities was lower, decreasing 156 basis points year over year to 3.37 percent for the third quarter of 2010, due primarily to purchases of securities at lower yields available in current markets, which diluted the overall portfolio yield year over year. The dilution in yield on investment securities was more severe than over the past three quarters, with the decline of 156 basis points for the third quarter of 2010 year over year, comparing to a decline of 140 basis points for the second quarter 2010 year over year, versus 78 basis points for first quarter 2010 year over year, and a decline of 69 basis points for the fourth quarter of 2009 year over year, versus 6 basis points for the third quarter of 2009 year over year. Interest bearing deposits and other investments yielded 0.39 percent for the third quarter of 2010, below third quarter 2009’s yield of 0.67 percent. The Company has approximately $100 million of excess cash liquidity it can invest in securities or loans at higher yields when management deems it appropriate.

Average earning assets for the third quarter of 2010 decreased $64.1 million or 3.2 percent compared to 2009’s third quarter. Average loan balances decreased $279.3 million or 17.8 percent to $1,291.9 million, while average investment securities were $52.9 million or 14.9 percent higher totaling $408.4 million and average interest bearing deposits and other investments increased $162.3 million or 166.9 percent to $259.5 million. The decline in average earning assets is consistent with reduced funding as a result of a planned reduction of brokered deposits (only $11.8 remain outstanding at September 30, 2010), the maturity of a $15.0 million advance from the FHLB in November 2009, and lower sweep repurchase arrangements (declining $6.3 million from third quarter a year ago, principally in public funds as a result of lower tax receipts).

Commercial and commercial real estate loan production for the first nine months of 2010 totaled approximately $6 million, compared to production for all of 2009 of $14 million. In comparison, commercial and commercial real estate loan production for 2008 totaled $117 million. Period-end total loans outstanding have declined by $241.2 million or 16.0 percent since September 30, 2009, and declined similarly during third quarter 2009 year over year, by $238.1 million or 13.7 percent. Economic conditions in the markets the Company serves are expected to continue to be challenging, and although we continue to make loans, these conditions are expected to have a negative impact on loan growth during the remainder of 2010, but possibly to a lessened degree if the consensus opinion that conditions will improve in late 2010 is realized. At September 30, 2010 the Company’s total commercial and commercial real estate loan pipeline was $32 million, versus $47 million at December 31, 2009 and $46 million at September 30, 2009.

A total of 37, 28 and 15 applications were received seeking restructured residential mortgages during the first, second and third quarters of 2010, respectively, compared to 93, 102, 73 and 48 in the first, second, third and fourth quarters of 2009, respectively. The Company continues to lend, and we have expanded our residential mortgage loan originations and seek to expand loans to small businesses in 2010. However, as consumers and businesses seek to reduce their borrowings, and the economy remains weak, opportunities to lend prudently to creditworthy borrowers are expected to remain a challenge.

Closed residential mortgage loan production for the first, second and third quarters of 2010 totaled $33 million, $33 million and $38 million, respectively, of which $22 million, $24 million and $28 million was sold servicing-released, respectively. In comparison, $36 million in residential loans were produced in the fourth quarter of 2009, of which $19 million was sold servicing-released $28 million in residential loans were produced in the third quarter of 2009, all of it sold servicing released, $43 million in residential loans were produced in the second quarter of 2009, of which $24 million was sold servicing-released, and $38 million in residential loans were produced in the first quarter of 2009, with $20 million sold servicing-released. Applications for residential mortgages totaled $186 million during the first nine months of 2010, compared to $206 million a year ago for the first nine months of 2009. Existing home sales and home mortgage loan refinancing activity in the Company’s markets have increased, but demand for new home construction is expected to remain soft for the remainder of 2010.

During the first, second and third quarters of 2010, proceeds from the sale of mortgage backed securities totaling $59.2 million, $27.9 million and $20.5 million, respectively, included securities gains of $2,100,000, $1,377,000 and $210,000, respectively. Because of historically tight spreads it was believed these securities had minimal opportunity to further increase in value. During the third and second quarters of 2010 maturities (primarily pay-downs) totaled $31.1 million and $33.2 million, respectively, and securities portfolio purchases totaled $106.9 million and $74.7 million, respectively. During the first quarter of 2010 maturities (entirely pay-downs) totaled $35.2 million and securities portfolio purchases totaled $56.8 million. Purchases in 2010 were conducted principally to reinvest funds from maturities and the sale of the mortgage backed securities. In comparison, during the third and second quarters of 2009, the sale of mortgage backed securities totaling $25.3 million and $29.5 million, respectively, resulted in securities gains of $1,425,000 and $1,786,000 for each quarter. During the third quarter of 2009, maturities (principally pay-downs) totaled $25.4 million and securities portfolio purchases totaled $47.3 million.

The cost of average interest-bearing liabilities in the third quarter of 2010 decreased 8 basis points to 1.09 percent from second quarter 2010 and was 41 basis points lower than for the third quarter of 2009, reflecting the lower interest rate environment and improved deposit mix. The following table details the cost of average interest bearing liabilities for the past five quarters:

During 2010, the Company’s retail core deposit focus continues to produce strong growth in core deposit customer relationships when compared to prior year results, and resulted in increased balances which offset most of the planned certificate of deposit runoff during the first and second quarters of 2010. A total of 2,018 new households were added during the third quarter of 2010, up from 1,939 in the second quarter 2010 and 1,900 in the first quarter 2010. A year ago, 1,818 new households were added in the third quarter of 2009. The improved deposit mix and lower rates paid on interest bearing deposits during 2010 (and last several quarters) reduced the overall cost of interest bearing deposits to 1.01 percent, 46 basis points lower than a year ago. A significant component favorably affecting the Company’s net interest margin, the average balances of lower cost interest bearing deposits (NOW, savings and money market) totaled 60.6 percent of total average interest bearing deposits for the third quarter of 2010, an improvement compared to the average of 52.7 percent a year ago. The average rate for lower cost interest bearing deposits for the third quarter of 2010 was 0.40 percent, down by 18 basis points from 2009’s rate. CD rates paid were also lower compared to 2009, lower by 51 basis points and averaging 1.94 percent for third quarter 2010. Average CDs (the highest cost component of interest bearing deposits) were 39.4 percent of interest bearing deposits for third quarter 2010, compared to 47.3 percent for 2009.

Average deposits totaled $1,690.5 million during the third quarter of 2010, and were $47.4 million lower compared to 2009, due primarily to a planned reduction of brokered deposits and single service time deposit customers. Total average sweep repurchase agreements for third quarter 2010 were $11.2 million lower versus a year ago, a result of public fund customers maintaining larger balances in repurchase agreements during the third quarter of 2009. Average aggregate amounts for NOW, savings and money market balances increased $84.4 million or 10.9 percent to $855.7 million for the third quarter of 2010 compared to 2009, noninterest bearing deposits increased $4.5 million or 1.6 percent to $278.4 million, and average CDs decreased by $136.2 million or 19.7 percent to $556.4 million. With the low interest rate environment and lower CD rate offerings available, customers have been more complacent and are leaving more funds in lower cost average balances in savings and other liquid deposit products that pay no interest or a lower interest rate. Average deposits in the Certificate of Deposit Registry program (“CDARs”) that began in mid-2008 that allow customers to have CDs safely insured beyond the FDIC deposit insurance limits, have declined $10.3 million from a year ago to $6.3 million for the third quarter 2010. The higher balance during the third quarter of 2009 reflects the deposit retention efforts that occurred during the financial market disruption a year ago and emphasis on safety at that time. The CDARs product continues to be a favored offering for homeowners’ associations concerned with FDIC insurance coverage.

FDIC deposit insurance has been permanently increased from $100,000 to $250,000 per depositor based on recent legislation passed by Congress. The increase had been temporarily in place since October 14, 2008 and was set to expire on December 31, 2013. Under the FDIC’s Temporary Liquidity Guarantee, or “TLG”, program, the entire amount in any eligible noninterest bearing transaction deposit account is guaranteed by the FDIC to the extent such balances are not covered by FDIC insurance. Seacoast National is participating in the TLG program to offer the best possible FDIC coverage to its customers. The TLG program expires December 31, 2010, but provisions under the recent Dodd-Frank legislation will provide coverage for all noninterest bearing transaction account balances at all financial institutions through December 31, 2012.

Average short-term borrowings have been principally comprised of sweep repurchase agreements with customers of Seacoast National, which decreased $11.2 million or 13.0 percent from the third quarter of 2009 and were lower by $11.8 million or 13.5 percent compared to second quarter 2010. Public fund clients with larger balances have the most significant influence on average sweep repurchase agreement balances outstanding during the year, with balances typically peaking during the fourth and first quarters each year. Other borrowings are comprised of subordinated debt of $53.6 million related to trust preferred securities issued by trusts organized by the Company, and advances from the FHLB of $50.0 million. Other than the maturity of a $15.0 million FHLB advance in November 2009, no other changes have occurred to other borrowings since year-end 2007.

Company management believes its market expansion, branding efforts and retail deposit growth strategies have produced new relationships and core deposits, which have assisted in maintaining a stable net interest margin. Reductions in nonperforming assets also are expected to be accretive to the Company’s future net interest margin.

PROVISION FOR LOAN LOSSES

Management determines the provision for loan losses charged to operations by continually 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, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses necessarily approximate and imprecise (see “Nonperforming Assets” and “Allowance for Loan Losses”).

The provision for loan losses is the result of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under FASB Accounting Standards Codification (“ASC”) 310 as well as, an analysis of homogeneous loan pools not individually evaluated as prescribed under ASC 450. For the first, second and third quarters of 2010, the provision for loan losses was $2.1 million, $16.7 million and $8.9 million, respectively, substantially lower than provisioning in 2009 for the first, second, third and fourth quarters of $11.7 million, $26.2 million, $45.4 million and $41.5 million, respectively. The provision for loan losses for the first, second and third quarters of 2010 was $1.4 million, $3.5 million and $1.8 million less than net charge-offs, respectively, which totaled $3.5 million or 1.03 percent (annualized) of average total loans, $20.2 million or 5.95 percent of average total loans, and $10.7 million or 3.29 percent of average total loans for each quarter, respectively. Delinquency trends show continued stability (see “Nonperforming Assets”).

Net charge-offs during 2008 and 2009 were higher than in prior years due to higher losses in the commercial construction and land development portfolio secured by residential land. The higher charge-offs reflected collateral property valuations declining and the Company reducing its commercial real estate (“CRE”) loan concentrations by selling $43.9 million of loans which accounted for $20.6 million of total net charge-offs during 2009. During 2010, the Company has sold $29.7 million of loans which accounted for $12.5 million of total net charge-offs. With timely and more aggressive collection efforts, loan sales, and charge-offs, the Company’s residential construction and land development loans have been reduced to $21.3 million or 1.7 percent of total loans at September 30, 2010 (see “Loan Portfolio”), down from approximately $57.6 million or 3.8 percent of total loans at September 30, 2009. Total CRE loans declined 21.7 percent from $770.8 million at September 30, 2009 to $603.6 million at September 30, 2010. Under regulatory guidelines for commercial real estate concentrations, Seacoast National’s total commercial real estate loans outstanding (as defined in the guidance) represented 217 percent of total risk based capital at September 30, 2010.

The Company has also reduced its concentrations of large individual loan relationships over the periods compared. The following table details the Company’s reduced exposure to large residential construction and land development loans over the past five quarters, as evidenced by loans in this portfolio with balances of $4 million or more declining from $17.8 million at September 30, 2009 to no outstanding balance at September 30, 2010. Of the remaining $21.3 million in loans less than $4 million, $5.7 million or 27 percent are classified as nonperforming.

QUARTERLY TRENDS — LOANS AT END OF PERIOD
(Dollars in Millions)

The Company’s other loan portfolios related to residential real estate are amortizing loans. The Company has never offered sub-prime, Alt A, Option ARM or any negative amortizing residential loans, programs or products, although it has originated and holds residential mortgage loans from borrowers with original or current FICO credit scores that are currently less than “prime” FICO credit scores. Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations.

The Company selectively adds residential mortgage loans to its portfolio, primarily loans with adjustable rates. Home equity loans (amortizing loans for home improvements with maturities of 10 to 15 years) totaled $74.4 million and home equity lines totaled $58.5 million at September 30, 2010, compared to $83.9 million and $60.0 million at September 30, 2009. Each borrower’s credit was fully documented as part of the Company’s underwriting of home equity lines. The Company never promoted home equity lines using solely credit scoring, and therefore believes this portfolio of loans, primarily to customers with other relationships to Seacoast National, will perform better than portfolios of peers. Charge-off ratios have been better than those nationally and for Florida during 2010 and 2009. Net charge-offs for the nine months ended 2010 totaled $1,469,000 for home equity lines, compared to $2,782,000 for all of 2009, and home equity lines past due 90 days or more and nonaccrual lines (aggregated) were $1,419,000 and $171,000 at September 30, 2010 and 2009, respectively.

Since year-end 2009, nonaccrual loans declined by $28.4 million to $69.5 million at September 30, 2010, and were $84.5 million lower than at September 30, 2009 (see “Nonperforming Assets”). Loans have declined $134.2 million or 9.6 percent since year-end 2009 and have declined $241.2 million or 16.0 percent since September 30, 2009 (see “Loan Portfolio”).

NONINTEREST INCOME

Noninterest income, excluding gains or losses from securities, totaled $4,801,000 for the third quarter of 2010, $174,000 or 3.8 percent higher than the third quarter of 2009 and $200,000 or 4.3 percent greater than the second quarter of 2010. Noninterest income accounted for 22.6 percent of total revenue (net interest income plus noninterest income, excluding securities gains or losses) in the third quarter of 2010 compared to 19.5 percent a year ago. Noninterest income for the third and second quarters of 2010, and the third quarter of 2009 is detailed as follows:

For the third quarter of 2010, revenues from the Company’s wealth management services businesses (trust and brokerage) decreased year over year, by $37,000 or 4.4 percent, but were higher than the second quarter of 2010 by $58,000 or 7.8 percent. Included in the $37,000 decrease, trust revenue was lower by $17,000 or 3.3 percent and brokerage commissions and fees were lower by $20,000 or 6.1 percent. Economic uncertainty is the primary issue affecting clients of the Company’s wealth management services. The Company completed a new strategic plan for wealth management services in 2009 and has been implementing it in 2010. It is expected that fees from wealth management will improve. For the nine months ended September 30, 2010, income from the company’s wealth management services was $334,000 or 12.6 percent lower compared to 2009.

Service charges on deposits for the third quarter of 2010 were $221,000 or 12.8 percent lower year over year versus third quarter 2009, but were $59,000 or 4.1 percent higher than service charges for the second quarter of 2010. Overdraft income was the primary cause, as this declined $196,000 in 2010 compared to third quarter 2009 but was $51,000 higher compared to second quarter 2010. Overdraft fees represented approximately 76 percent of total service charges on deposits for the third quarter of 2010, comparable with the average for all of 2009 and 74 percent and 76 percent for the first and second quarter of 2010, respectively. We are pleased with this result considering all financial institutions adopted procedures beginning on July 1, 2010 expected to result in a negative impact on overdraft fee income. The Company estimated that approximately 43% or $1.7 million of overdraft fee income related to the changed procedures would be impacted and could reduce fee income. The Company implemented a plan which it believes reduced the impact. Growth rates for remaining service charge fees on deposits have been nominal or declining, as the trend over the past few years is for customers to prefer deposit products which have no fees or where fees can be avoided by maintaining higher deposit balances. Year-to-date service charges on deposits for 2010 decreased $544,000 or 11.1 percent year over year to $4,335,000.

For third quarter 2010, fees from the non-recourse sale of marine loans originated by our Seacoast Marine Division of Seacoast National increased $81,000 or 32.5 percent compared to third quarter 2009, and compared to second quarter 2010 were higher by $20,000 or 6.5 percent. The Seacoast Marine Division originated $25 million, $17 million and $17 million in loans during the first, second and third quarters of 2010, respectively, compared to $20 million in loans originated in the first and second quarters of 2009, $15 million during the third quarter of 2009, and $15 million during the fourth quarter of 2009 (a total of $70 million for the total year 2009). These production levels are significantly lower than loan production of $143 million and $186 million during 2008 and 2007, respectively, and are reflective of the economic downturn. Of the loans originated during the first, second and third quarters of 2010, $20 million, $17 million and $17 million were sold (91.5 percent of year-to-date production). This compares to sales as a percentage of production of 97.1 percent, 99.3 percent, and 86.0 percent for all of 2009, 2008 and 2007, respectively. As economic conditions deteriorated over 2008, attendance at boat shows by consumers, manufacturers, and marine retailers was lower than in prior years, and as a result marine sales and loan volumes were lower and are expected to continue to be lower for 2010. The Seacoast Marine Division is headquartered in Ft. Lauderdale, Florida with lending professionals in Florida, California, Washington and Oregon.

Greater usage of check or debit cards over the past several years by core deposit customers and an increased cardholder base has increased our interchange income. For the third quarter of 2010, debit card income increased $136,000 or 20.2 percent from 2009’s third quarter. Debit card and other deposit-based EFT revenue is dependent upon business volumes transacted, as well as the fees permitted by VISA^® and MasterCard^®.

Merchant income was $49,000 or 13.2 percent lower for third quarter 2010, compared to one year earlier, and was $91,000 or 22.0 percent lower when compared to the second quarter of 2010. Merchant income as a source of revenue is dependent upon the volume of credit card transactions that occur with merchants who have business demand deposits with Seacoast National. Merchant income historically has been highest in the first quarter each year, reflecting seasonal sales activity. For the first nine months of 2010, merchant income was $155,000 or 11.4 percent lower than a year ago and was the result of lower volumes which also reduced processing expenses by $157,000 for the nine months.

The Company originates residential mortgage loans in its markets, with loans processed by commissioned employees of Seacoast National. Many of these mortgage loans are referred by the Company’s branch personnel. Mortgage banking fees in the third quarter of 2010 increased $317,000 or 94.1 percent from third quarter 2009, and were $190,000 higher than second quarter 2010’s result. Mortgage banking revenue as a component of overall noninterest income was 13.6 percent for the third quarter of 2010, improving from 10.1 percent and 9.2 percent for the first and second quarters of 2010, respectively, and 9.2 percent for all of 2009. Sales of residential loans for the third quarter of 2010 totaled $28 million, increasing from $22 million and $24 million in the first and second quarters of 2010, respectively. We are beginning to see some signs of stability for residential real estate sales and activity in our markets, with transactions increasing, prices firming and affordability improving. The Company had more opportunities in markets it serves during 2009 and this has continued in 2010. The Company also began offering FHA loans during the second quarter of 2009, a product previously not offered.

Other income for the third quarter of 2010 decreased $51,000 or 14.7 percent compared to a year ago. Operating income from check charges and letter of credit fees declined year over year by $19,000 and $10,000, and most other line items in other income were slightly lower, including wire transfer fees, income from sales of cashiers checks and money orders, and miscellaneous other fees.

NONINTEREST EXPENSES

When compared to third quarter 2009, total noninterest expenses for the third quarter of 2010 decreased by $262,000 or 1.3 percent to $20,244,000. Net losses on other real estate owned (OREO) and repossessed assets decreased by $996,000 from $1,845,000 for the third quarter of 2009 but were partially offset by an increase in asset disposition expenses of $367,000. For the first nine months ended September 30, 2010, excluding the impairment write-down of goodwill of $49,813,000 in the second quarter of 2009, noninterest expenses were $1,767,000 or 2.9 percent higher versus a year ago, totaling $62,833,000. The primary cause for this increase over 2009 was higher net losses on OREO and repossessed assets and asset disposition costs (aggregated) of $3,571,000 recorded in the first quarter of 2010, which together with second and third quarter 2010’s decreases in losses year over year of $1,025,000 and $629,000, respectively, summed to a $1,917,000 increase for the nine month period in this expense item.

Noninterest expenses for 2010 have been in line with our expectations. Salaries, wages and benefits were $38,000 or 0.5 percent lower for third quarter 2010 compared to the same period in 2009. Cost reductions were also achieved in communication costs, occupancy, and furniture and equipment expenses, and marketing expenditures, all of which declined when comparing the third quarter of 2010 to 2009 for the same period.

Salaries and wages for the third quarter of 2010 increased nominally to $6,631,000 compared to the prior year’s third quarter. For the first nine months of 2010, salaries and wages were $378,000 or 1.9 percent lower. Severance during the third quarter was $110,000 lower in 2010 than a year ago, and was $300,000 lower for the nine months ended September 30, 2010 versus 2009. Savings from the branch closures in 2009 and lower commission payments due to lower revenues generated from wealth management and weak lending production were also causes for the decrease for the nine months ended September 30, 2010, compared to 2009. Base salaries were 0.6 percent higher year over year for the third quarter, with full-time equivalent employees (“FTEs”) totaling 419 at September 30, 2010, compared to 413 FTEs at September 30, 2009.

Employee benefits costs increased by $5,000 to $1,367,000 from the third quarter of 2009, and were $317,000 or 6.5 percent lower for the first nine months of 2010 compared to a year ago. The Company recognized slightly higher claims experience in the third quarter of 2010 for its self-funded health care plan compared to 2009, an increase of $4,000 versus the third quarter a year ago. In addition, unemployment compensation costs were $3,000 higher year over year for the third quarter of 2010 due to the state of Florida increasing rates to replenish funding pools for compensation disbursements, and payroll taxes increased by $6,000. Partially offsetting, 401K costs were $8,000 lower for the same period.

Outsourced data processing costs totaled $1,772,000 for the third quarter of 2010, a decrease of $80,000 from the second quarter of 2010, but higher than the third quarter a year ago, by $67,000 or 3.9 percent. Year-to-date, outsourced data processing costs for 2010 increased slightly, by 1.8 percent. Seacoast National utilizes third parties for its core data processing systems and merchant services processing. Outsourced data processing costs are directly related to the number of transactions processed. Merchant income and merchant services processing costs were lower year over year, with fewer transactions occurring at local businesses reflecting the poor economy (see “Noninterest Income”). Merchant services processing expenses were $47,000 lower than a year ago for the third quarter of 2009. More than offsetting, core data processing and check card processing costs were $80,000 and $24,000 higher for the third quarter of 2010, versus a year ago. Outsourced data processing costs 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.

Telephone and data line expenditures, including electronic communications with customers and between branch locations and personnel, as well as third party data processors, decreased by $89,000 or 18.9 percent to $383,000 for the third quarter of 2010 when compared to 2009, and for the nine months ended September 30, 2010 were $231,000 or 16.3 percent lower than a year ago. Improved systems and monitoring of services utilized as well as reducing the number telephone lines (in part due to our branch consolidations) has reduced our communication costs, and these costs should continue to be lower prospectively when compared to prior year.

Total occupancy, furniture and equipment expenses for the third quarter of 2010 decreased $224,000 or 8.2 percent to $2,523,000, year over year, versus the same period in 2009. For the nine months ended September 30, 2010, these costs were 8.7 percent lower as well. Included in the $224,000 decrease during the third quarter of 2010 were lease payments for bank premises decreasing $57,000, and lower depreciation, utility costs (power, lights and water) and maintenance and repair expenditures, declining $102,000, $37,000 and $13,000, respectively. Office relocation costs were lower as well, by $10,000 during the third quarter of 2010, compared to 2009’s third quarter.

For the third quarter of 2010, marketing expenses, including sales promotion costs, ad agency production and printing costs, newspaper and radio advertising, and other public relations costs associated with the Company’s efforts to market products and services, decreased by $62,000 or 9.7 percent to $577,000 when compared to third quarter 2009. More importantly, year-to-date marketing expense for 2010 is $598,000 or 38.6 percent greater than a year ago, reflecting a focused campaign in our markets targeting the customers of competing financial institutions in our markets and promoting our brand. Television and radio advertising, direct mail activities, and sales promotions have been ramped up the most during the nine months ended September 30, 2010 versus a year ago, by $221,000, $230,000 and $127,000, respectively.

Legal and professional fees increased by $838,000 or 50.7 percent to $2,491,000 for the third quarter of 2010, compared to a year ago for 2009, and were $1,546,000 or 33.3 percent greater for the nine month period ended September 30, 2010, versus last year. Legal fees were $129,000 higher for the third quarter of 2010 year over year, primarily due to costs related to problem assets, principally OREO. Compared to third quarter 2009, regulatory examination fees and CPA fees on an aggregate basis were $9,000 lower for 2010, and professional fees were $716,000 higher reflecting ongoing strategic planning assistance. Professional fees have generally been higher during this period of increased regulatory compliance. The Company also uses the consulting services of a former bank regulator who also serves as a director of Seacoast National to assist it with its compliance with the formal agreement and regulatory examinations. For the nine months ended September 30, 2010 and 2009, Seacoast National paid $460,000 and $385,000, respectively, for these services.

The FDIC assessment for third quarter 2010 totaled $966,000, compared to first and second quarter 2010’s assessment of $1,006,000 and $1,039,000, respectively. FDIC assessments for the first, second, third and fourth quarters of 2009 totaled $877,000, $2,026,000, $1,007,000 and $1,042,000, respectively. In addition, on April 1, 2009 a higher base assessment went into effect as well as the FDIC’s implementation of a more complex risk-based formula to calculate assessments. The FDIC also mandated the prepayment of assessments for the next three years plus fourth quarter 2009’s assessment that was remitted on December 30, 2009. The amount of the prepayment totaled $14.8 million. The Company anticipates that FDIC insurance costs are likely to remain elevated, with assessments possibly increasing even more depending on the severity of bank failures and their impact to the FDIC’s Deposit Insurance Fund.

Net losses on other real estate owned (OREO) and repossessed assets, and asset disposition expenses associated with the management of OREO and repossessed assets (aggregated) totaled $4,073,000, $415,000 and $1,436,000 for the first, second and third quarters of 2010, respectively, compared to $502,000, $1,440,000 and $2,065,000 for the same periods in 2009. These costs moderated somewhat during the second and third quarters of 2010. Of the $1,436,000 total for the third quarter of 2010, assets disposition costs summed to $587,000 and net losses on OREO and repossessed assets totaled $849,000. These costs will likely continue to be higher over the remainder of 2010 and into 2011 as problem assets migrate toward liquidation.

Other noninterest expenses decreased $160,000 or 7.1 percent to $2,098,000 when comparing the third quarter of 2010 to the same quarter a year ago. Increasing year over year for the third quarter of 2010 were employee placement and relocation fees (up $31,000, including headhunter fees), insurance (up $105,000, including property and casualty as well as other liability coverage), credit information costs (up $23,000), and dealer referral fees (up $33,000, related to marine lending). More than offsetting, directors fees were lower (down $42,000), as were stationery and supplies expenditures (down $32,000), charge-offs related to robbery and customer fraud (down $49,000), memberships, books and publications (down $26,000), property appraisals (down $58,000) and amortization of intangibles (down $103,000). Other noninterest expenses for the nine month period ended September 30, 2010 were $150,000 or 2.2 percent above 2009 for the same period. One-time settlements regarding a branch lease terminated in 2009 and a customer dispute (each for $150,000) recorded in the first quarter of 2010 were the primary contributors to the increase year over year for the nine months.

INCOME TAXES

No income tax benefit was recorded for the first, second and third quarters of 2010, consistent with the third and fourth quarters of 2009. In comparison, an income tax benefit of $3.1 million and $8.7 million was recorded for the first and second quarters of 2009, respectively.

The tax benefit for the net loss for the first, second and third quarters of 2010 totaled $0.6 million, $5.3 million and $2.8 million, respectively. The deferred tax valuation allowance was increased by a like amount, and therefore there was no change in the carrying value of deferred tax assets which are supported by tax planning strategies (see “Critical Accounting Estimates - Deferred Tax Assets”). The tax benefit for the net loss for the third and fourth quarters of 2009 totaled $29.7 million, and also was offset by a valuation allowance of a like amount. As the economy shows signs of improvement and our credit costs moderate, we anticipate that we will be able to place increased reliance on our forecast of future taxable earnings, which would result in realization of future tax benefits.

FINANCIAL CONDITION

CAPITAL RESOURCES

The Company’s equity capital at September 30, 2010 totaled $179.6 million and the ratio of shareholders’ equity to period end total assets was 8.92 percent, compared with 7.06 percent at December 31, 2009, and 8.43 percent at September 30, 2009. Seacoast’s management uses certain “non-GAAP” financial measures in its analysis of the Company’s performance. Seacoast’s management uses this measure to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. This capital measure is not necessarily comparable to similar capital measures that may be presented by other companies. The Company and its banking subsidiary, Seacoast National, are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. As a result, the Company’s capital position remains strong, meeting the general definition of “well capitalized”, with a total risk-based capital ratio of 18.38 percent at September 30, 2010, higher than December 31, 2009’s ratio of 15.16 percent and higher than 16.21 percent at September 30, 2009. The Bank agreed to maintain a Tier 1 capital (to adjusted average assets) (“leverage ratio”) ratio of at least 8.50 percent and a total risk-based capital ratio of at least 12.00 percent with its primary regulator the Office of the Comptroller of the Current (the “OCC”). The agreement with the OCC as to minimum capital ratios does not change the Bank’s status as “well-capitalized” for bank regulatory purposes, to which the Bank is currently in compliance.

The Company and its banking subsidiary, Seacoast National, are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast National and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Prior OCC approval presently is required for any payments of dividends from Seacoast National to the Company.

The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast National or us, respectively. Under a recently adopted Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with the its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

As a result of our participation in the TARP CPP program, additional restrictions have been imposed on our ability to declare or increase dividends on shares of our common stock, including a restriction on paying quarterly dividends above $0.01 per share. Specifically, we are unable to declare dividend payments on our common, junior preferred or pari passu preferred shares if we are in arrears on the dividends on the Series A Preferred Stock. Further, without the Treasury’s approval, we are not permitted to increase dividends on our common stock above $0.01 per share until December 19, 2011 unless all of the Series A Preferred Stock has been redeemed or transferred by the Treasury. In addition, we cannot repurchase shares of common stock or use proceeds from the Series A Preferred Stock to repurchase trust preferred securities. The consent of the Treasury generally is required for us to make any stock repurchase until December 19, 2011 unless all of the Series A Preferred Stock has been redeemed or transferred by the Treasury to a third party. Further, our common, junior preferred or pari passu preferred shares may not be repurchased if we have not declared and paid all Series A Preferred Stock dividends.

The Company has suspended the payment of dividends on both the common stock and Series A Preferred Stock, as well as all distributions on its trust preferred securities, as a result of Federal Reserve policies related to dividends and other distributions. Dividends will be suspended until such time as dividends are allowed by the Federal Reserve.

As of September 30, 2010, our accumulated deferred dividend payments on Series A Preferred Stock was $4,215,000 and our accumulated deferred interest payment on trust preferred securities was $1,715,000.

At September 30, 2010, the capital ratios for the Company and its subsidiary, Seacoast National, were as follows:

LOAN PORTFOLIO

Total loans (net of unearned income) were $1,263,346,000 at September 30, 2010, $241,220,000 or 16.0 percent less than at September 30, 2009, and $134,157,000 or 9.6 percent less than at December 31, 2009. The following table details loan portfolio composition at September 30, 2010, December 31, 2009 and September 30, 2009:

Overall loan growth was negative when comparing outstanding balances at September 30, 2010 to prior year, as a result of the economic recession, including lower demand for commercial loans, and the Company’s successful divestiture of specific problem loans (including residential construction and land development loans) through loan sales. Total problem loans sold in 2010 totaled almost $30 million and for 2009 totaled $82 million, with the Company significantly reducing its exposure to construction and land development loans and improving the Company’s overall risk profile.

As shown in the table above, commercial real estate loans decreased $167,186,000 or 21.7 percent from September 30, 2009 to $603,628,000 at September 30, 2010 and residential real estate loans decreased $47,513,000 or 7.9 percent to $553,260,000. The primary cause for the decrease in commercial real estate loans was a reduction in construction and land development loans for residential and commercial properties of $36,362,000 or 63.1 percent and $93,226,000 or 72.5 percent, respectively. Total outstanding balances for these portfolios have been reduced to $21,301,000 and $35,410,000, respectively, at September 30, 2010. Also decreasing, commercial real estate mortgages were lower by $37,598,000 or 6.4 percent to $546,917,000. Construction and land development loans to individuals for personal residences included in residential real estate loans were lower as well, declining $6,374,000 or 15.2 percent to $35,438,000. In addition, adjustable rate residential mortgages were lower year over year, by $25,029,000 or 7.7 percent to $300,883,000. Fixed rate residential mortgages, home equity mortgages and home equity lines changed less significantly and totaled $84,056,000, $74,428,000 and $58,455,000 at September 30, 2010. Commercial and financial loans and consumer loans (principally installment loans to individuals) decreased $11,972,000 or 18.2 percent and $14,547,000 or 21.8 percent, respectively, from a year ago to $53,982,000 and $52,192,000 at September 30, 2010, reflecting the impact on lending of the economic downturn.

Construction and land development loans, including loans secured by commercial real estate, were comprised of the following types of loans at September 30, 2010 and 2009: