SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended Commission file MARCH 31, 2001 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) (561) 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: Class A Common Stock, Par Value $.10 (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 31, 2001: Class A Common Stock, $.10 Par Value - 4,348,740 shares Class B Common Stock, $.10 Par Value - 358,710 shares
INDEX SEACOAST BANKING CORPORATION OF FLORIDA Part I FINANCIAL INFORMATION PAGE # Item 1 Financial Statements (Unaudited) Condensed consolidated balance sheets - March 31, 2001, December 31, 2000 and March 31, 2000 3 - 4 Condensed consolidated statements of income - Three months ended March 31, 2001 and 2000 5 - 6 Condensed consolidated statements of cash flows - Three months ended March 31, 2001 and 2000 7 - 9 Notes to condensed consolidated financial statements 10 - 11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 22 Part II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 23 SIGNATURES 24
Part I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries March 31, December 31, March 31, (Dollars in thousands) 2001 2000 2000 - -------------------------------------------------------------------------------- ASSETS Cash and due from banks $28,203 $33,505 $40,381 Federal funds sold 43,490 39,000 20,000 Securities: Held for sale (at market) 221,960 178,722 192,501 Held for investment (market values: $18,035 at March 31, 2001, $26,078 at December 31, 2000 & $20,762 at March 31, 2000) 17,723 25,942 20,597 ------- ------- ------- TOTAL SECURITIES 239,683 204,664 213,098 Loans available for sale 12,207 2,030 959 Loans 821,656 844,546 809,105 Less: Allowance for loan losses (7,224) (7,218) (7,004) ------- ------- ------- NET LOANS 814,432 837,328 802,101 Bank premises and equipment, net 16,315 16,633 16,773 Other assets 15,678 18,213 16,686 ---------- ---------- ---------- $1,170,008 $1,151,373 $1,109,998 ========== ========== ========== LIABILITIES Deposits $982,290 $957,089 $949,382 Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days 52,431 65,020 27,414 Other borrowings 40,000 40,000 49,970 Other liabilities 6,841 5,001 4,810 --------- --------- --------- 1,081,562 1,067,110 1,031,576
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries March 31, December 31, March 31, (Dollars in thousands) 2001 2000 2000 - -------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock 0 0 0 Class A common stock 482 482 482 Class B common stock 36 36 36 Additional paid-in capital 27,831 27,831 27,743 Retained earnings 74,423 72,562 67,458 Less: Treasury stock (14,879) (14,470) (12,089) ------ ------ ------ 87,893 86,441 83,630 Other Comprehensive Income (loss) 553 (2,178) (5,208) ------ ----- ----- TOTAL SHAREHOLDERS' EQUITY 88,446 84,263 78,422 ---------- ---------- ---------- $1,170,008 $1,151,373 $1,109,998 ========== ========== ========== - -------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries Three Months Ended March 31, - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2001 2000 - -------------------------------------------------------------------------------- Interest and dividends on securities $3,206 $3,396 Interest and fees on loans 16,863 15,498 Interest on federal funds sold 607 159 ------ ------ TOTAL INTEREST INCOME 20,676 19,053 Interest on deposits 2,349 2,167 Interest on time certificates 6,223 5,203 Interest on borrowed money 1,206 954 ------ ------ TOTAL INTEREST EXPENSE 9,778 8,324 ------ ------ NET INTEREST INCOME 10,898 10,729 Provision for loan losses 0 150 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,898 10,579 Noninterest income Securities gains 145 1 Other income 3,540 3,443 ------ ------ TOTAL NONINTEREST INCOME 3,685 3,444 TOTAL NONINTEREST EXPENSES 9,179 9,006 ------ ------ INCOME BEFORE INCOME TAXES 5,404 5,017 Provision for income taxes 2,126 1,910 ------ ------ NET INCOME $ 3,278 $ 3,107 ======= ======= - --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries Three Months Ended March 31, - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2001 2000 - -------------------------------------------------------------------------------- PER SHARE COMMON STOCK: Net income diluted $ 0.69 $ 0.64 Net income basic 0.69 0.64 CASH DIVIDENDS DECLARED: Class A 0.28 0.26 Class B 0.254 0.236 Average shares outstanding - Diluted 4,766,314 4,870,539 Average shares outstanding - Basic 4,729,106 4,832,118 - -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries Three Months Ended March 31, - -------------------------------------------------------------------------------- (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities Interest received $ 20,683 $ 18,753 Fees and commissions received 3,214 3,436 Interest paid (9,816) (8,146) Cash paid to suppliers and employees (8,832) (9,822) Income taxes paid (138) 0 -------- -------- Net cash provided by operating activities 5,111 4,221 Cash flows from investing activities Proceeds from maturity of securities held for sale 8,197 3,776 Proceeds from maturity of securities held for investment 1,610 1,839 Proceeds from sale of securities held for sale 65,927 120 Purchase of securities held for sale (100,233) (423) Purchase of securities held for investment (5,902) (5,000) Proceeds from sale of loans 21,652 7,119 Net new loans and principal repayments (8,572) (38,032) Proceeds from the sale of other real estate owned 212 220 Additions to bank premises and equipment (196) (710) Net change in other assets 590 150 ------ ------ Net cash used in investing activities (16,715) (30,941)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries Three Months Ended March 31, - -------------------------------------------------------------------------------- (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Cash flows from financing activities Net increase in deposits 25,208 43,449 Net decrease in federal funds purchased and repurchase agreements (12,589) (39,550) Net increase in other borrowings 0 25,000 Exercise of stock options 580 86 Treasury stock acquired (1,098) (577) Dividends paid (1,309) (1,249) ------ ------ Net cash provided by in financing activities 10,792 27,159 ------ ------ Net increase (decrease) in cash and cash equivalents (812) 439 Cash and cash equivalents at beginning of period 72,505 59,942 ------- ------- Cash and cash equivalents at end of period $71,693 $60,381 ======= ======= - --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(Unaudited) Seacoast Banking Corporation of Florida and Subsidiaries Three Months Ended March 31, - -------------------------------------------------------------------------------- (Dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------- Reconciliation of Net Income to Cash Provided by Operating Activities Net Income $ 3,278 $ 3,107 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 645 653 Provision for loan losses 0 150 Securities gains (145) (1) Gain on sale of loans (388) (65) Loss on sale and writedown of foreclosed assets 15 23 (Gain) loss on disposition of fixed assets (1) 11 Change in interest receivable 77 (244) Change in interest payable (38) 178 Change in prepaid expenses (15) (80) Change in accrued taxes 2,096 2,037 Change in other liabilities (413) (1,548) - -------------------------------------------------------------------------------- Total adjustments 1,833 1,114 ------ ------ Net cash provided by operating activities $5,111 $4,221 ====== ====== - -------------------------------------------------------------------------------- Supplemental disclosure of noncash investing activities: Transfers from loans to other real estate owned $ 27 $ 0 Market value adjustment to securities 4,397 (304) Transfers from securities held for investment to securities held for sale 12,510 0 Transfers from loans to securities held for sale 10,091 0 - -------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. NOTE B - COMPREHENSIVE INCOME Under FASB Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," the Company is required to report a measure of all changes in equity, not only reflecting net income but certain other changes as well. At March 31, 2001 and 2000, comprehensive income was as follows: Three Months Ended March 31, (Dollars in thousands) 2001 2000 ---------------------------- Net Income $3,278 $3,107 Unrealized gains (losses) on securities 2,731 (58) ------ ------ Comprehensive Income $6,009 $3,049 - -------------------------------------------------------------------------------- NOTE C - DERIVATIVE INSTRUMENTS Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts have not been components of the Company's past risk management profile. The Company monitors its sensitivity to changes in interest rates and may use derivative instruments to limit volatility of net interest income. Derivative instruments had no effect on net interest income in first quarter 2001 or the prior year. The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. There was no financial impact on earnings or other comprehensive income as a result of the adoption. However, the Company did reclassify $12.5 million of securities as available for sale which were previously classified as held to maturity in accordance with SFAS No. 115. NOTE D - OTHER BORROWINGS On July 31, 1998, the Company acquired $24,970,000 in other borrowings, $15,000,000 from the Federal Home Loan Bank (FHLB), principal payable on November 12, 2009 with interest payable quarterly at 6.10%, and $9,970,000 from Donaldson, Lufkin & Jenrette (DLJ), principal payable on July 31,2003 with interest payable quarterly at 5.40%. The DLJ boorowing was called on August 31, 2000. The FHLB debt is subject to early termination in accordance with the terms of the agreement as of November 12, 2004. On March 9, 2000, an additional borrowing from the FHLB for $25,000,000 was acquired, with a fixed term payable on March 9, 2002, and interest payable monthly at 6.99%. This borrowing was restructured to a 3-year term on December 1, 2000 at 6.55%. The FHLB debt is secured by residential mortgage loans totaling $40,000,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FIRST QUARTER 2001 The following discussion and analysis is designed to provide a better understanding of the significant factors related to the Company's results of operations and financial condition. Such discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the notes attached thereto. EARNINGS SUMMARY Net income for the first quarter of 2001 totaled $3,278,000 or $0.69 per share diluted, higher than the $2,936,000 or $0.62 per share diluted recorded in the fourth quarter of 2000 and higher than the $3,107,000 or $0.64 per share diluted reported in the first quarter of 2000. Return on average assets was 1.17 percent and return on average shareholders' equity was 15.06 percent for the first quarter of 2001, compared to fourth quarter 2000's performance of 1.05 percent and 13.40 percent, respectively, and the prior year's first quarter results of 1.15 percent and 14.75 percent, respectively. The increase in return on equity reflects improved earnings and, to a lesser extent, the impact of the Company's share repurchase program (See "Capital Resources"). NET INTEREST INCOME Net interest income (fully taxable equivalent) for 2001 totaled $10,959,000, $457,000 or 4.4 percent greater than for the fourth quarter of 2000 and $154,000 or 1.4 percent higher than for the first quarter of 2000. Net interest margin on a tax equivalent basis improved for the first quarter of 2001 compared to the fourth quarter of 2000. On a tax equivalent basis the margin increased 17 basis points to 4.10 percent during the first quarter of 2001 from 3.93 percent in the fourth quarter of 2000. The Federal Reserve's actions to decrease short term interest rates by 150 basis points, beginning in late December with a 50 basis point cut and subsequent cuts of an additional 50 basis points in January 2001 and March 2001 contributed to the improvement in margin. The cost of interest-bearing liabilities decreased 16 basis points to 4.42 percent from fourth quarter, with rates for savings deposits, certificates of deposit, short term borrowings (entirely composed of repurchase agreements during the first quarter of 2001), and other borrowings decreasing 37, 2, 126 and 18 basis points, respectively. The rate for savings accounts decreased less than what might be expected as a result of the Company continuing to successfully market two savings products called Grand Savings and Grand Savings Plus that earn a higher rate. The average balance for these two accounts during the first quarter of 2001 totaled $62,670,000 and $42,591,000, respectively, compared to $58,257,000 and $40,168,000, respectively, for fourth quarter 2000. The rate on certificates of deposit is expected to decline over the remainder of 2001 as $213,847,000 or 49.7 percent of outstanding certificates mature and re-price. The decrease in rate for other borrowings was due to the Company extending an existing fixed rate $25 million borrowing from the Federal Home Loan Bank (FHLB) to a term of 3 years at 6.55 percent (versus 6.99 percent prior to extension) in December 2000 (see Note D to the Financial Statements). The rate on NOW accounts increased during the quarter by 29 basis points to 2.24 percent and the rate on money market balances declined 3 basis points. In large part, this is due to the Company introducing a new product called Investor NOW in late 2000 which is index priced to be competitive with third party money market funds, but requires a minimum balance of $100,000. The average balance for this account during the first quarter of 2001 was $22,611,000, compared to $12,598,000 in the fourth quarter of 2000. Impacting the margin as well, the yield on earning assets decreased 6 basis points to 7.76 percent during the first quarter of 2001, compared to the fourth quarter. Increases in the yield on loans of 10 basis points to 8.20 percent and the yield on securities of 1 basis point to 6.30 percent were recorded during the first quarter of 2001, while the yield on federal funds sold declined 102 basis points to 5.55 percent. Average earning assets for the first quarter of 2001 are $20,730,000 or 1.9 percent higher when compared to prior year's fourth quarter. Average loan balances declined $1,563,000 or 0.2 percent to $835,472,000, average investment securities decreased $13,463,000 or 6.2 percent to $204,467,000, and average federal funds sold increased $37,756,000 to $44,358,000. Impacting loan growth during the first quarter of 2001 were securitizations and sales of residential mortgages totaling $24.5 million, reflecting the Company's new mortgage banking emphasis. Activity in the Company's securities portfolio was significant as well, with sales of securities of $65.9 million and purchases totaling $106.1 million transacted, reflecting a restructuring of the securities portfolio during the first quarter for better performance in a declining interest rate environment. For the first quarter a year ago, the net interest margin was 4.24 percent. The yield on average earning assets was 7.50 percent and rate on interest-bearing liabilities was 3.96 percent. The mix of earning assets and interest bearing liabilities impacts the margin. Loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 77.1 percent in the first quarter of 2001, compared to 77.2 percent a year ago. Average certificates of deposit (a higher cost component of interest-bearing liabilities) as a percentage of interest-bearing liabilities increased to 47.0 percent, compared to 46.4 percent in the first quarter of 2000, reflecting consumer desire to seek higher yielding alternative products over the last twelve months. Borrowings (including federal funds purchased, sweep repurchase agreements with customers of the Company's subsidiary, and other borrowings) totaled 10.3 percent of interest bearing liabilities in the first quarter, versus 8.4 percent a year ago. While average noninterest bearing demand deposits declined $2,914,000 or 2.0 percent to $145,427,000, growth in lower cost interest bearing core deposits (NOW, savings and money market deposits) of $1,167,000 or 0.3 percent to $383,121,000 favorably affected the Company's deposit mix. PROVISION FOR LOAN LOSSES No provisioning was recorded in the first quarter of 2001, reflecting the Company's exceptional credit quality, declining nonperforming assets, and slower loan growth. A provision of $150,000 was recorded in all quarters in 2000, $600,000 for the total year in 2000. Net recoveries for the first quarter of $6,000 compared to net charge-offs of $17,000 in 2000. Net charge-offs (recoveries) annualized as a percent of average loans were at zero percent for the first quarter of 2001, compared to 0.01 percent for the same quarter in 2000 and 0.03 percent for the total year in 2000. These ratios are much better than the banking industry as a whole. Management determines the provision for loan losses charged to operations by constantly analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge-offs, and by estimating losses inherent in its portfolio. While the Company's policies and procedures used to estimate the monthly provision for loan losses charged to operations are considered adequate by management and are reviewed from time to time by the Office of the Comptroller of the Currency (OCC), there exist factors beyond the control of the Company, such as general economic conditions both locally and nationally, which make management's judgment as to the adequacy of the provision necessarily approximate and imprecise. (See "Allowance for Loan Losses") NONINTEREST INCOME Noninterest income, excluding gains and losses from securities sales, totaled $3,540,000 for the first quarter of 2001, $97,000 or 2.8 percent higher than for the same period last year. Noninterest income was favorably impacted by growth in fee based businesses. Although brokerage commissions and fees declined $494,000 or 55.3 percent year over year to $400,000, other noninterest revenue sources on an aggregate basis increased $591,000 or 23.2 percent. Slower economic activity began to effect brokerage revenue late in 2000 and the trend continued in the first quarter of 2001 with consumers shifting from the purchase of investment products to more conservative deposit products. However, the Company continued its transition from a residential portfolio lender to a mortgage banking operation which it began in 2000. As a result, the Company increased noninterest income related to mortgage loan production by 153.7% to $449,000 in the first quarter of 2001 from $177,000 a year ago for the same period. In addition, increasing usage of check cards by the Company's core deposit customers increased interchange income to $166,000 for the first quarter, an increase of $74,000 or 80.4 percent from first quarter a year ago. Revenue from the sale of marine loans totaling $6.9 million by the Company's subsidiary bank's Seacoast Marine Finance division (which began operations in February 2000) totaled $124,000 in the first quarter of 2001, a $66,000 or 113.8 percent increase from last year in the first quarter. Also increasing in the first quarter of 2001 year over year, service charges on deposits grew $69,000 or 6.0 percent to $1,217,000 and trust income increased $26,000 or 3.8 percent to $703,000. Remaining noninterest revenue sources (principally other service charges and fees) increased $84,000 or 21.1 percent to $481,000, including a $29,000 or 52.0 percent increase in check charges and recognition of $20,000 (versus zero a year ago) for the cash surrender value of key man life insurance. Lower rates for fixed rate residential 15- and 30-year loan products during late 2000 and in 2001 have resulted in higher refinance activity and mortgage banking revenues are expected to remain strong over the remainder of 2001. Although financial markets are in turmoil, the Company intends to continue to emphasize investment products in 2001 and expects it will benefit from another new revenue source beginning in the second quarter of 2001, the sale of life insurance. Securities gains of $145,000 were recognized during the first quarter of 2001, compared to $1,000 a year ago (see "Securities"). NONINTEREST EXPENSES When compared to 2000, noninterest expenses for the first quarter increased by $173,000 or 1.9 percent to $9,179,000. The Company's overhead ratio has decreased over the past three years, from 69.6 percent in the first quarter of 1998 to 66.5 percent in 1999 to 63.2 percent a year ago. The overhead ratio was 63.5 percent in the first quarter of 2001. This is reflective of initiatives to reduce overhead costs, particularly staffing, and streamlined operational and procedural changes that have been implemented. Salaries and wages increased $32,000 or 0.9 percent to $3,402,000 compared to the prior year quarter. Commissions on revenue from brokerage activities were $201,000 lower year over year and contributed to the nominal increase in salaries. Employee benefits increased $60,000 or 6.9 percent to $928,000 from the first quarter of 2000. Higher group health insurance and incentive costs are the primary cause for the increase in benefit expenditures for 2001. Occupancy expenses and furniture and equipment expenses, on an aggregate basis, increased $24,000 or 1.8 percent to $1,377,000, versus first quarter results last year. A reduction in lease payments of $29,000 (closure of a St. Lucie County branch in July 2000 and lower common area maintenance costs) reduced occupancy expense. Outsourced data processing costs totaled $1,093,000 for the first quarter of 2001, an increase of $81,000 or 8.0 percent from a year ago. The Company's utilizes a third party for its core data processing system. Outsourced data processing costs are directly related to the number of transactions processed, which can be expected to increase as the Company's business volumes grow and new products such as bill pay, internet banking, etc. become more popular. Costs associated with foreclosed and repossessed asset management and disposition totaled only $25,000, a reflection of low nonperforming asset balances (see "Nonperforming Assets") in the first quarter 2001. Legal and professional costs increased $12,000 or 4.0 percent to $309,000 when compared to March 31, 2000. Marketing expenses, including sales promotion costs, ad agency production and printing costs, newspaper and radio advertising, and other public relations costs associated with the Company's efforts to market products and services, increased by $73,000 or 16.4 percent to $518,000 when compared to a year ago. Of this increase, $26,000 was a result of higher sales promotion costs, $34,000 for newspaper advertising and $11,000 for direct mail campaigns. INCOME TAXES Income taxes as a percentage of income before taxes were 39.3 percent for the first quarter of this year, compared to 38.1 percent in 2000. The rate reflects a higher rate of provisioning for state income taxes, a result of lower tax credit, lower tax-exempt interest income and the Company's effective federal tax rate increasing due to adjusted income before taxes expected to exceed $18 million. FINANCIAL CONDITION CAPITAL RESOURCES The Company's ratio of average shareholders' equity to average total assets during the first quarter of 2001 was 7.76 percent, compared to 7.82 percent during the first quarter of 2000. The Company manages the size of its equity through a program of share repurchases of outstanding Class A Common stock. In treasury stock at March 31, 2001, there were 475,676 shares totaling $14,879,000, compared to 372,983 shares or $12,089,000 a year ago. The risk-based capital minimum ratio for total capital to risk-weighted assets for "well-capitalized" financial institutions is 10%. At March 31, 2001, the Company's ratio was 12.23 percent. LOAN PORTFOLIO The Company's loan activity is principally with customers located within its defined market area known as the Treasure Coast of Florida. This area is located on the southeastern coast of Florida above Palm Beach County and extends north to Brevard County. Total loans (net of unearned income and excluding the allowance for loan losses) were $821,656,000 at March 31, 2001, $12,551,000 or 1.6 percent more than at March 31, 2000, and $22,890,000 or 2.7 percent less than at December 31, 2000. During the first quarter of 2001, $24.5 million in fixed rate residential mortgage loans and $6.9 million in marine loans (generated by Seacoast Marine Finance) were securitized or sold. In comparison, during the first quarter last year, $0.9 million in fixed rate residential mortgage loans and $6.2 million in marine loans were sold. Over the past twelve months, $36.9 million in fixed rate residential loans and $26.9 million in marine loans have been sold. At March 31, 2001, the Company's mortgage loan balances secured by residential properties amounted to $447,389,000 or 54.4 percent of total loans (versus $456,204,000 or 56.4 percent a year ago). The next largest concentration was loans secured by commercial real estate totaling $199,533,000 or 24.3 percent (versus $183,952,000 or 22.7 percent a year ago). The Company was also a creditor for consumer loans to individual customers totaling $93,723,000 (versus $80,918,000 a year ago), most secured with collateral and including marine loans totaling approximately $16.8 million generated by the Company's subsidiary bank's marine lending division, Seacoast Marine Finance, headquartered in Fort Lauderdale, Florida. Commercial loans of $36,913,000 (versus $35,919,000 last year), home equity lines of credit of $12,565,000 (compared to $13,630,000 for prior year), and construction loans of $31,389,000 (versus $38,239,000 a year ago) were outstanding as well at March 31, 2001. The Treasure Coast is a residential community with commercial activity centered in retail and service businesses serving the local residents. Therefore, real estate mortgage lending is an important segment of the Company's lending activities. Exposure to market interest rate volatility with respect to mortgage loans is managed by attempting to match maturities and re-pricing opportunities for assets against liabilities, when possible. At March 31, 2001, approximately $191 million or 43 percent of the Company's residential mortgage loan balances were adjustable, compared to $176 million or 39 percent a year ago. Of the approximate $31 million of new residential loans originated in 2001, $3 million were adjustable and $28 million were fixed rate. Loans secured by residential properties having fixed rates totaled approximately $257 million at March 31, 2001, of which 15- and 30-year mortgages totaled approximately $111 million and $106 million, respectively. Remaining fixed rate balances were comprised of home improvement loans with maturities less than 15 years. The majority of all loans and commitments for one-to-four family residential properties and commercial real estate are generally secured with first mortgages on property with the amount loaned at inception to the fair value of the property not to exceed 80 percent. A majority of residential real estate loans are made upon terms and conditions that would make such loans eligible for resale under Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. The Company's historical charge-off rates for residential real estate loans have been minimal, with $1,000 in net recoveries for the first quarter of 2001 compared to $43,000 in net charge-offs for all of 2000. The Company considers residential mortgages less susceptible to adverse effects from a downturn in the real estate market, especially given the area's large percentage of retired persons. Fixed rate and adjustable rate loans secured by commercial real estate totaled approximately $116 million and $84 million, respectively, at March 31, 2001, compared to $116 million and $68 million, respectively, a year ago. The Company attempts to reduce its exposure to the risk of the local real estate market by limiting the aggregate size of its commercial real estate portfolio and by making commercial real estate loans primarily on owner occupied properties. At March 31, 2001, the Company had commitments to make loans (excluding unused home equity lines of credit) of $75,511,000, compared to $73,513,000 at March 31, 2000. ALLOWANCE FOR LOAN LOSSES Net recoveries on residential real estate loans, commercial real estate loans, commercial loans and credit cards of $1,000, $1,000, $11,000 and $11,000, respectively, were recorded for the first three months of 2001. Net charge-offs of $18,000 occurred on installment loans for the same period. In comparison, net recoveries of $6,000 and $27,000, respectively, were recorded for residential real estate loans and commercial real estate loans in 2000. In the first quarter of 2000, net charge-offs for consumer loans of $104,000 were realized and net recoveries for commercial loans and credit card loans of $26,000 and $28,000, respectively, were recognized. As a result of the sale of the credit card portfolio in 1998, the Company eliminated its exposure to future credit card losses and continues to recover amounts on losses recorded prior to the sale. Current and historical credit losses arising from real estate lending transactions continue to compare favorably with the Company's peer group. The ratio of the allowance for loan losses to net loans outstanding was 0.88 percent at March 31, 2001. This ratio was 0.87 percent at March 31, 2000 and 0.85 percent at December 31, 2000. The allowance for loan losses as a percentage of nonaccrual loans and loans 90 days or more past due was 341.9 percent at March 31, 2001, compared to 191.4 percent at the same date in 2000. The model utilized to analyze the adequacy of the allowance for loan losses takes into account such factors as credit quality, internal controls, audit results, staff turnover, local market economics and loan growth. The resulting lower allowance level necessitated is also reflective of the subsidiary bank's favorable and consistent delinquency trends and historical loss performance. These performance results are attributed to conservative, long-standing and consistently applied loan credit policies and to a knowledgeable, experienced and stable staff. The size of the allowance also reflects the large amount of permanent residential loans held by the Company whose historical charge-offs and delinquencies have been superior by any comparison. Concentration of credit risk, discussed under "Loan Portfolio" of this discussion and analysis, may affect the level of the allowance. Concentrations typically involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. The Company's significant concentration of credit is a collateral concentration of loans secured by real estate. At March 31, 2001, the Company had 674 million in loans secured by real estate, representing 78.7 percent of total loans, down from 79 percent at March 31, 2000. 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 which 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 metholology 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. The unprecedented strong economic growth over the last five years has resulted in improved credit quality measures for the Company and the entire banking industry. At year-end 2000, the Company's allowance for loan losses equated to 8.8 times average charge-offs for the last three years. In contrast, the allowance equated to approximately two times charge-offs in the early 1990's when Florida experienced a real estate economic decline. NONPERFORMING ASSETS At March 31, 2001, the Company's ratio of nonperforming assets to loans outstanding plus other real estate owned ("OREO") was 0.27 percent, compared to 0.46 percent one year earlier. At March 31, 2001, there were $5,000 in accruing loans past due 90 days or more and OREO of $146,000 was outstanding. In 2000 on the same date, there were no accruing loans past due 90 days or more and OREO balances of $96,000 were outstanding. Nonaccrual loans totaled $2,108,000 at March 31, 2001, compared to a balance of $3,659,000 at March 31, 2000. Most of the nonaccrual loans outstanding at March 31, 2001 were performing with respect to payments, with the exception of 14 loans aggregating to $1,398,000. The performing loans were placed on nonaccrual status because the Company has determined that the collection of principal or interest in accordance with the terms of such loans is uncertain. Of the amount reported in nonaccrual loans at March 31, 2001, 95 percent is secured with real estate, the remainder by other collateral. Management does not expect significant losses for which an allowance for loan losses has not been provided associated with the ultimate realization of these assets. SECURITIES Debt securities that the Company has the intent and ability to hold to maturity are carried at amortized cost. All other securities are carried at market value and are available for sale. At March 31, 2001, the Company had $221,070,000 or 92.6 percent of total securities available for sale and securities held to maturity were carried at an amortized cost of $17,723,000, representing 7.4 percent of total securities. The Company's securities portfolio has increased $14,384,000 or 6.4 percent from March 31, 2000 and $30,621,000 or 14.7 percent from December 31, 2000. In the first quarter of 2001, proceeds from the sale of securities totaled $65,927,000, maturities totaled $9,807,000 and purchases aggregated $106,135,000. With the recent Federal Reserve policy shift to decreasing interest rates, the Company transacted sales of certain securities and realized net gains of $145,000 for the first quarter of 2001. Included in the sales was the divestiture of the Company's $23 million investment in mutual funds. As a result of the restructuring, Company management believes it has better positioned the securities portfolio to take advantage of the new rate environment. The Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. There was no financial impact on earnings or other comprehensive income as a result of the adoption. However, the Company did reclassify $12,510,000 of securities as available for sale which were previously classified as held to maturity in accordance with SFAS No. 115. Management controls the Company's interest rate risk by maintaining a low average duration for the securities portfolio and with securities returning principal monthly which can be reinvested. At March 31, 2001, the duration of the portfolio was 3.1 years, compared to 3.2 years a year ago. Unrealized net securities gains of $1,202,000 at March 31, 2001, compared to net losses of $8,214,000 at March 31, 2000 and $3,372,000 at December 31, 2000. The Federal Reserve increased rates 100 basis points in 2000 and decreased rates 150 basis points most recently, over the period December 2000 to March 2001. The increase in rates in 2000 did not affect rates for instruments with maturities over 2 years significantly, but recent rate declines did provide appreciation in the market value of the Company's securities portfolio. 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 / BORROWINGS Total deposits increased $32,908,000 or 3.5 percent to $982,290,000 at March 31, 2001, compared to one year earlier. Certificates of deposits increased $32,310,000 or 8.1 percent to $429,947,000 over the past twelve months, lower cost interest bearing deposits (NOW, savings and money markets deposits) decreased $5,034,000 or 1.3 percent to $390,075,000, and noninterest bearing demand deposits increased $5,632,000 or 3.6 percent to $162,268,000. Lower interest rates, an uncertain economic environment, and recent turmoil in financial markets have aided growth in deposits as customers seek the stability of bank products, particularly higher yielding certificates of deposit. Repurchase agreement balances increased $25,017,000 or 91.3 percent to $52,431,000 at March 31, 2001. 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. Other borrowings decreased $9,970,000,000 to $40,000,000 year over year, reflecting funding obtained through Donaldson, Lufkin and Jenerette (DLJ) at 5.40 percent being terminated (called) at the end of August 2000. INTEREST RATE SENSITIVITY Interest rate exposure is managed by monitoring the relationship between earning assets and interest bearing liabilities, focusing primarily on those that are rate sensitive. Rate sensitive assets and liabilities are those that re-price at market interest rates within a relatively short period, defined here as one year or less. The difference between rate sensitive assets and rate sensitive liabilities represents the Company's interest sensitivity gap, which may be either positive (assets exceed liabilities) or negative (liabilities exceed assets). Based on the Company's most recent ALCO modeling, the Company had a negative gap position based on contractual maturities and prepayment assumptions for the next twelve months, with a negative cumulative interest rate sensitivity gap as a percentage of total earning assets of 19.5 percent. The Company's ALCO uses model simulation to manage and measure its interest rate sensitivity. The Company has determined that an acceptable level of interest rate risk would be for net interest income to fluctuate no more than 6 percent given an immediate change in interest rates (up or down) of 200 basis points. The Company's most recent ALCO model simulation indicated net interest income would decline 2.6 percent if interest rates would immediately rise 200 basis points. It has been the Company's experience that non-maturity core deposit balances are stable and subjected to limited re-pricing when interest rates increase or decrease within a range of 200 basis points. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts have not been components of the Company's past risk management profile. The Company may use derivative instruments to limit the volatility of net interest income. Derivative instruments had no effect on net interest income in the first quarter of 2001 or the prior year. LIQUIDITY MANAGEMENT Contractual maturities for assets and liabilities are reviewed to adequately maintain current and expected future liquidity requirements. Sources of liquidity, both anticipated and unanticipated, are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, securities available for sale and federal funds sold. The Company has access to federal funds lines of credit and is able to provide short term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency securities not pledged to secure public deposits or trust funds. At March 31, 2001, the Company had available lines of credit of $130,500,000. The Company also had $128,200,000 of United States Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements. At March 31, 2000, the amount of securities available and not pledged was $109,142,000. Liquidity, as measured in the form of cash and cash equivalents (including federal funds sold), totaled $71,693,000 at March 31, 2001 as compared to $60,381,000 at March 31, 2000. Cash and cash equivalents vary with seasonal deposit movements and are generally higher in the winter than in the summer, and vary with the level of principal repayments and investment activity occurring in the Company's securities portfolio and loan portfolio. As is typical of financial institutions, cash flows from investing activities (primarily in loans and securities) and from financial activities (primarily through deposit generation and short term borrowings) exceeded cash flows from operations. In 2001, the cash flow from operations of $5,111,000 was $890,000 higher than during the same period of 2000. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the general level of inflation. However, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders' equity. Mortgage originations and refinancings tend to slow as interest rates increase, and likely will reduce the Company's earnings from such activities and the income from the sale of residential mortgage loans in the secondary market. SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS Certain of the matters discussed under the caption "Management's Discussion and Analysis" and elsewhere in this Quarterly Report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Seacoast Banking Corporation of Florida to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The Company's actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation: the effect of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risk of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate risks; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and computer and the Internet; the effect of the Year 2000 problem on the Company, including such problems at the Company's vendors, counter-parties and customers; and the failure of assumptions underlying the establishment of reserves for possible loan losses. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these Cautionary Statements.
Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed for the three-month period ended March 31, 2001.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEACOAST BANKING CORPORATION OF FLORIDA May 14, 2001 /s/ Dennis S. Hudson, III - ------------ ---------------------------------- DENNIS S. HUDSON, III President & Chief Executive Officer May 14, 2001 /s/ William R. Hahl - ------------ --------------------------------- WILLIAM R. HAHL Executive Vice President & Chief Financial Officer