Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 0-13660
Seacoast Banking Corporation of Florida
(Exact Name of Registrant as Specified in its Charter)
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Florida
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59-2260678 |
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(State or Other Jurisdiction of Incorporation or
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(I.R.S. Employer Identification No.) |
Organization) |
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815 COLORADO AVENUE, STUART FL
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34994 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(772) 287-4000
(Registrants Telephone Number, Including Area Code)
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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a
smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer þ
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Small Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Common Stock, $.10 Par Value 58,913,722 shares as of March 31, 2010
INDEX
SEACOAST BANKING CORPORATION OF FLORIDA
2
Part I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
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March 31, |
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December 31, |
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(Dollars in thousands, except share amounts) |
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2010 |
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2009 |
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ASSETS |
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Cash and due from banks |
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$ |
58,153 |
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$ |
32,200 |
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Interest bearing deposits with other banks |
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216,550 |
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182,900 |
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Total cash and cash equivalents |
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274,703 |
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215,100 |
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Securities: |
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Available for sale (at fair value) |
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365,986 |
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393,648 |
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Held for investment (fair values: $
10,385 at March 31, 2010 and $17,210
at December 31, 2009) |
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10,228 |
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17,087 |
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TOTAL SECURITIES |
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376,214 |
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410,735 |
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Loans held for sale |
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3,609 |
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18,412 |
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Loans |
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1,373,278 |
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1,397,503 |
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Less: Allowance for loan losses |
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(43,719 |
) |
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(45,192 |
) |
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NET LOANS |
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1,329,559 |
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1,352,311 |
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Bank premises and equipment, net |
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38,409 |
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38,932 |
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Other real estate owned |
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19,076 |
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25,385 |
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Other intangible assets |
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3,806 |
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4,121 |
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Other assets |
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74,590 |
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86,319 |
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$ |
2,119,966 |
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$ |
2,151,315 |
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LIABILITIES |
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Deposits |
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$ |
1,759,433 |
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$ |
1,779,434 |
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Federal funds purchased and securities
sold under agreements to repurchase,
maturing within 30 days |
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95,708 |
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105,673 |
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Borrowed funds |
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50,000 |
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50,000 |
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Subordinated debt |
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53,610 |
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53,610 |
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Other liabilities |
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10,032 |
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10,663 |
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1,968,783 |
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1,999,380 |
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3
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
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March 31, |
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December 31, |
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(Dollars in thousands, except share amounts) |
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2010 |
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2009 |
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SHAREHOLDERS EQUITY |
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Preferred stock, par value $0.10 per
share, authorized 4,000,000 shares,
issued and outstanding 2,000 shares of
Series A |
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45,311 |
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44,999 |
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Warrant for purchase of shares of common
stock at $6.36 per share |
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3,123 |
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3,123 |
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Common stock, par value $0.10 per share,
authorized 130,000,000 shares, issued
58,938,221 and outstanding 58,913,722
shares at March 31, 2010, and issued
58,921,668 and outstanding 58,867,229
shares at December 31, 2009 |
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5,891 |
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5,887 |
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Other shareholders equity |
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96,858 |
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97,926 |
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TOTAL SHAREHOLDERS EQUITY |
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151,183 |
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151,935 |
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$ |
2,119,966 |
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$ |
2,151,315 |
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See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
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Three Months Ended |
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March 31, |
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(Dollars in thousands, except per share data) |
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2010 |
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2009 |
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Interest and fees on loans |
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$ |
18,377 |
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$ |
23,160 |
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Interest and dividends on securities |
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3,796 |
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4,004 |
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Interest on federal funds sold and other investments |
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239 |
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148 |
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TOTAL INTEREST INCOME |
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22,412 |
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27,312 |
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Interest on deposits |
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4,467 |
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7,987 |
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Interest on borrowed money |
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732 |
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1,151 |
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TOTAL INTEREST EXPENSE |
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5,199 |
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9,138 |
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NET INTEREST INCOME |
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17,213 |
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18,174 |
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Provision for loan losses |
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2,068 |
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11,652 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES |
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15,145 |
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6,522 |
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Noninterest income |
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Other income |
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4,560 |
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4,982 |
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Securities gains |
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2,100 |
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0 |
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TOTAL NONINTEREST INCOME |
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6,660 |
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4,982 |
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TOTAL NONINTEREST EXPENSES |
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23,369 |
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19,335 |
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LOSS BEFORE INCOME TAXES |
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(1,564 |
) |
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(7,831 |
) |
Benefit for income taxes |
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0 |
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(3,071 |
) |
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NET LOSS |
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(1,564 |
) |
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(4,760 |
) |
Preferred stock dividends and accretion of
preferred stock discount |
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937 |
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937 |
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NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
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$ |
(2,501 |
) |
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$ |
(5,697 |
) |
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PER SHARE COMMON STOCK: |
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Net loss diluted |
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$ |
(0.04 |
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$ |
(0.30 |
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Net loss basic |
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(0.04 |
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(0.30 |
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Cash dividends declared |
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0.00 |
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0.01 |
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Average shares outstanding diluted |
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58,845,822 |
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19,069,437 |
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Average shares outstanding basic |
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58,845,822 |
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19,069,437 |
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See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
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Three Months Ended |
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March 31, |
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(Dollars in thousands) |
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2010 |
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2009 |
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Increase (decrease) in cash and cash equivalents |
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Cash flows from operating activities |
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Interest received |
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$ |
22,594 |
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$ |
27,129 |
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Fees and commissions received |
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4,634 |
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4,795 |
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Interest paid |
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(5,185 |
) |
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(9,648 |
) |
Cash paid to suppliers and employees |
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(18,136 |
) |
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(19,542 |
) |
Income taxes received |
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20,797 |
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0 |
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Origination of loans held for sale |
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(35,750 |
) |
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(45,936 |
) |
Proceeds from loans held for sale |
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50,553 |
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39,905 |
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Net change in other assets |
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(291 |
) |
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131 |
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Net cash provided by (used in) operating activities |
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39,216 |
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(3,166 |
) |
Cash flows from investing activities |
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Maturities of securities available for sale |
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33,794 |
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9,485 |
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Maturities of securities held for investment |
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1,454 |
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1,217 |
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Proceeds from sale of securities available for sale |
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43,481 |
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|
250 |
|
Proceeds from sale of securities held for investment |
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5,452 |
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0 |
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Purchases of securities available for sale |
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(56,751 |
) |
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(35,967 |
) |
Net new loans and principal repayments |
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17,288 |
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27,314 |
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Proceeds from sale of loans |
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700 |
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0 |
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Proceeds from the sale of other real estate owned |
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5,162 |
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|
603 |
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Proceeds from sale of Federal Home Loan Bank and
Federal Reserve Bank stock |
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0 |
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181 |
|
Additions to bank premises and equipment |
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(264 |
) |
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(429 |
) |
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Net cash provided by investing activities |
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50,316 |
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2,654 |
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Cash flows from financing activities |
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Net increase (decrease) in deposits |
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(20,003 |
) |
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3,876 |
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Net decrease in federal funds purchased and
repurchase agreements |
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(9,966 |
) |
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(4,549 |
) |
Stock based employee benefit plans |
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40 |
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|
64 |
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Dividends paid |
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0 |
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(580 |
) |
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Net cash used in financing activities |
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(29,929 |
) |
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(1,189 |
) |
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Net increase (decrease) in cash and cash equivalents |
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59,603 |
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(1,701 |
) |
Cash and cash equivalents at beginning of period |
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215,100 |
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151,192 |
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Cash and cash equivalents at end of period |
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$ |
274,703 |
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$ |
149,491 |
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6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries
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Three Months Ended |
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March 31, |
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(Dollars in thousands) |
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2010 |
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2009 |
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Reconciliation of net loss to net cash provided by
(used in) operating activities |
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Net loss |
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$ |
(1,564 |
) |
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$ |
(4,760 |
) |
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
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Depreciation |
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790 |
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|
886 |
|
Amortization (accretion) of premiums and
discounts on securities, net |
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13 |
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(147 |
) |
Other amortization and accretion |
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134 |
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|
265 |
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Change in loans held for sale, net |
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14,803 |
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(6,031 |
) |
Provision for loan losses |
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2,068 |
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|
11,652 |
|
Gains on sale of securities |
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(2,100 |
) |
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0 |
|
Gains on sale of loans |
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(87 |
) |
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(153 |
) |
Losses on sale and write-downs of other real
estate owned |
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3,825 |
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183 |
|
Losses (gains) on disposition of fixed assets |
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1 |
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(20 |
) |
Change in interest receivable |
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350 |
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15 |
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Change in interest payable |
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14 |
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(510 |
) |
Change in prepaid expenses |
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|
981 |
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|
193 |
|
Change in accrued taxes |
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20,975 |
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(2,874 |
) |
Change in other assets |
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(291 |
) |
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|
131 |
|
Change in other liabilities |
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(696 |
) |
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(1,996 |
) |
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Net cash provided by (used in) operating activities |
|
$ |
39,216 |
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|
$ |
(3,166 |
) |
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Supplemental disclosures of non-cash investing
activities: |
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Fair value adjustment to available for sale
securities |
|
$ |
1,049 |
|
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$ |
4,610 |
|
Transfer of loans to other real estate owned |
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|
2,678 |
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|
8,279 |
|
See notes to condensed consolidated financial statements.
7
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 three-month period ended March 31, 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 Companys annual report on Form 10-K for the year ended December 31, 2009.
Use of Estimates
The preparation of these condensed consolidated financial statements required the use of certain
estimates by management in determining the Companys 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.
NOTE B RECENT ACCOUNTING STANDARDS
Accounting Standards Update No. 2010-6, Topic 820 Fair Value Measurements and Disclosures
Improving Disclosures about Fair Value Measurements (ASU 2010-6)
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.
8
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 1,140,000 and 1,773,000 related to stock options, stock settled appreciation
rights and warrants for the periods ended March 31, 2010 and 2009, respectively, were excluded from
the computation of diluted EPS because they would have been anti-dilutive.
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|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands, except per share data) |
|
2010 |
|
|
2009 |
|
Basic: |
|
|
|
|
|
|
|
|
Net loss available to common shareholders |
|
$ |
(2,501 |
) |
|
$ |
(5,697 |
) |
Average shares outstanding |
|
|
58,845,822 |
|
|
|
19,069,437 |
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
(0.04 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net loss available to common shareholders |
|
$ |
(2,501 |
) |
|
$ |
(5,697 |
) |
Average shares outstanding |
|
|
58,845,822 |
|
|
|
19,069,437 |
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
(0.04 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
9
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 companys 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 March 31, 2010 and 2009 included:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
(Dollars in thousands) |
|
Measurements |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
securities (3) |
|
$ |
365,986 |
|
|
$ |
|
|
|
$ |
365,986 |
|
|
$ |
|
|
Loans held for sale |
|
|
3,609 |
|
|
|
|
|
|
|
3,609 |
|
|
|
|
|
Loans (1) |
|
|
38,472 |
|
|
|
|
|
|
|
6,513 |
|
|
|
31,959 |
|
Other real estate owned (2) |
|
|
19,076 |
|
|
|
|
|
|
|
341 |
|
|
|
18,735 |
|
Long-lived assets held for
sale (2) |
|
|
1,676 |
|
|
|
|
|
|
|
1,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
securities (3) |
|
$ |
349,181 |
|
|
$ |
|
|
|
$ |
349,181 |
|
|
$ |
|
|
Loans held for sale |
|
|
8,196 |
|
|
|
|
|
|
|
8,196 |
|
|
|
|
|
Loans (1) |
|
|
42,404 |
|
|
|
|
|
|
|
11,840 |
|
|
|
30,564 |
|
Other real estate owned (2) |
|
|
12,684 |
|
|
|
|
|
|
|
12,684 |
|
|
|
|
|
Long-lived assets held for
sale (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note F. Nonrecurring fair value adjustments to loans identified as impaired reflect full
or partial write-downs that are based on the loans observable market price or current
appraised value of the collateral in accordance with ASC 310. |
|
(2) |
|
Fair value is measured on a nonrecurring basis in accordance with ASC 360. |
|
(3) |
|
See Note J for further detail of fair value of individual investment categories. |
When appraisals are used to determine fair value and the appraisals are based on a market approach,
the related loans 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 Companys monthly
and/or quarterly valuation process.
During the first quarter 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 $2.4 million consisting of loans that
became impaired during the first quarter. Transfers out consisted of valuation write-downs of
$135,000, foreclosures of $100,000 migrating to other real estate owned (OREO) and other
reductions (including principal payments) totaling $115,000. No sales were recorded.
For OREO classified as level 2 during the first quarter transfers out totaled $2,628,000 consisting
of valuation write-downs of $72,000 and sales of $2,556,000 and transfers in consisted of
foreclosed loans totaling $131,000.
10
The following table shows the carrying value and fair value of the Companys financial assets and
financial liabilities as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Carrying |
|
|
|
|
(Dollars in thousands) |
|
Value |
|
|
Fair Value |
|
Financial Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
274,703 |
|
|
$ |
274,703 |
|
Securities |
|
|
376,214 |
|
|
|
376,371 |
|
Loans, net |
|
|
1,329,559 |
|
|
|
1,338,252 |
|
Loans held for sale |
|
|
3,609 |
|
|
|
3,609 |
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
Deposit liabilities |
|
|
1,759,433 |
|
|
|
1,768,987 |
|
Borrowings |
|
|
145,708 |
|
|
|
148,680 |
|
Subordinated debt |
|
|
53,610 |
|
|
|
17,200 |
|
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 March 31, 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.
11
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 Companys current incremental borrowing rate for similar
instruments.
NOTE F IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
At March 31, 2010 and 2009, the Companys recorded investments in impaired loans and the related
valuation allowances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Recorded |
|
|
Valuation |
|
|
Recorded |
|
|
Valuation |
|
(Dollars in thousands) |
|
Investment |
|
|
Allowance |
|
|
Investment |
|
|
Allowance |
|
Impaired loans
without an
allowance |
|
$ |
57,225 |
|
|
$ |
0 |
|
|
$ |
66 |
|
|
$ |
0 |
|
Impaired loans with
an allowance |
|
|
99,290 |
|
|
|
12,358 |
|
|
|
116,706 |
|
|
|
6,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156,515 |
|
|
$ |
12,358 |
|
|
$ |
116,772 |
|
|
$ |
6,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March
31, 2010 and 2009, accruing TDRs totaled $60.0 million and $3.3 million, respectively.
The valuation allowance is included in the allowance for loan losses. The impaired loans were
measured for impairment based primarily on the value of underlying collateral.
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 $96,321,000 and $163,000,
respectively, at March 31, 2010 and $109,381,000 and $4,484,000, respectively, at March 31, 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
Companys 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.
12
The Company has evaluated events from the date of the condensed consolidated financial
statements on March 31, 2010 through the issuance of those condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q on May 10, 2010. No material events were
identified requiring recognition and/or disclosure in the condensed consolidated financial
statements.
NOTE H EQUITY CAPITAL
A stock offering was completed during April of 2010 adding $50 million of Series B Mandatorily
Convertible Noncumulative Nonvoting Preferred Stock (Series B Preferred Stock) as permanent
capital, resulting in approximately $46.9 million in additional Tier 1 risk-based equity, net of
issuance costs. Approximately $14.1 million of the sale is unfunded pending approval by the
Federal Reserve Bank. The shares of Series B Preferred Stock are mandatorily convertible into
common shares upon Shareholder approval.
The following presentation provides proforma information for selected financial data reflecting the
effect of the stock offering:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
(Dollars in thousands) |
|
As Stated |
|
|
Pro Forma(1) |
|
Total assets |
|
$ |
2,119,966 |
|
|
$ |
2,166,842 |
|
Total shareholders equity |
|
|
151,183 |
|
|
|
198,059 |
|
Common shareholders equity |
|
|
105,872 |
|
|
|
152,748 |
|
Book value per common share |
|
|
1.80 |
|
|
|
1.64 |
|
Tier 1 capital ratio |
|
|
13.83 |
|
|
|
17.47 |
|
Total risk-based capital ratio |
|
|
15.29 |
|
|
|
18.75 |
|
Tier 1 leverage ratio |
|
|
8.86 |
|
|
|
10.95 |
|
Common shares outstanding |
|
|
58,913,722 |
|
|
|
93,396,480 |
|
|
|
|
(1) |
|
Pro Forma information assumes the Series B Preferred Stock is converted to
common stock and the unfunded investment is approved by the Federal Reserve Bank. |
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 March 31, 2010, the
Companys 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 Banks status as well-capitalized for bank regulatory purposes.
NOTE I LETTERS OF CREDIT
During the first quarter of 2010, the Companys 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 March 31,
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.
13
NOTE J SECURITIES
The amortized cost and fair value of securities available for sale and held for investment at March
31, 2010 and December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In thousands) |
|
SECURITIES
AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities and
obligations of
U.S. Government
Sponsored
Entities |
|
$ |
4,191 |
|
|
$ |
2 |
|
|
$ |
(1 |
) |
|
$ |
4,192 |
|
Mortgage-backed
securities of
Government
Sponsored
Entities |
|
|
57,495 |
|
|
|
408 |
|
|
|
(15 |
) |
|
|
57,888 |
|
Collateralized
mortgage
obligations of
Government
Sponsored
Entities |
|
|
229,104 |
|
|
|
6,467 |
|
|
|
(3 |
) |
|
|
235,568 |
|
Private
collateralized
mortgage
obligations |
|
|
65,821 |
|
|
|
133 |
|
|
|
(2,717 |
) |
|
|
63,237 |
|
Obligations of
state and
political
subdivisions |
|
|
2,021 |
|
|
|
48 |
|
|
|
(3 |
) |
|
|
2,066 |
|
Other |
|
|
3,035 |
|
|
|
|
|
|
|
|
|
|
|
3,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
361,667 |
|
|
$ |
7,058 |
|
|
$ |
(2,739 |
) |
|
$ |
365,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES HELD FOR
INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
collateralized
mortgage
obligations |
|
$ |
5,996 |
|
|
$ |
105 |
|
|
$ |
|
|
|
$ |
6,101 |
|
Obligations of
state and
political
subdivisions |
|
|
4,232 |
|
|
|
56 |
|
|
|
(4 |
) |
|
|
4,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,228 |
|
|
$ |
161 |
|
|
$ |
(4 |
) |
|
$ |
10,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(In thousands) |
|
SECURITIES
AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities and
obligations of
U.S. Government
Sponsored
Entities |
|
$ |
3,689 |
|
|
$ |
2 |
|
|
$ |
(3 |
) |
|
$ |
3,688 |
|
Mortgage-backed
securities of
Government
Sponsored
Entities |
|
|
60,154 |
|
|
|
719 |
|
|
|
(325 |
) |
|
|
60,548 |
|
Collateralized
mortgage
obligations of
Government
Sponsored
Entities |
|
|
250,762 |
|
|
|
5,219 |
|
|
|
(733 |
) |
|
|
255,248 |
|
Private
collateralized
mortgage
obligations |
|
|
70,719 |
|
|
|
569 |
|
|
|
(2,220 |
) |
|
|
69,068 |
|
Obligations of
state and
political
subdivisions |
|
|
2,021 |
|
|
|
49 |
|
|
|
(7 |
) |
|
|
2,063 |
|
Other |
|
|
3,033 |
|
|
|
|
|
|
|
|
|
|
|
3,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390,378 |
|
|
$ |
6,558 |
|
|
$ |
(3,288 |
) |
|
$ |
393,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SECURITIES HELD FOR
INVESTMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
mortgage
obligations of
Government
Sponsored
Entities |
|
$ |
288 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
289 |
|
Private
collateralized
mortgage
obligations |
|
|
12,565 |
|
|
|
73 |
|
|
|
(1 |
) |
|
|
12,637 |
|
Obligations of
state and
political
subdivisions |
|
|
4,234 |
|
|
|
55 |
|
|
|
(5 |
) |
|
|
4,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,087 |
|
|
$ |
129 |
|
|
$ |
(6 |
) |
|
$ |
17,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of securities for the
three month period ended March 31, 2010, were $59,167,000 with gross
gains of $2,100,000 and no losses. Of the $59,167,000, proceeds of $10,234,000 settled in April
2010. Proceeds from sales of securities available for sale for the three-month period ended March
31, 2009, were $250,000 with no gross gains or losses.
Securities with a carrying value of $298,644,000 and $320,768,000 and a fair value of $298,650,000
and $320,775,000 at March 31, 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 March 31, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Investment |
|
|
Available for Sale |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
|
(In thousands) |
|
Due in less than one year |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,693 |
|
|
$ |
3,695 |
|
Due after one year
through five years |
|
|
1,673 |
|
|
|
1,685 |
|
|
|
498 |
|
|
|
497 |
|
Due after five years
through ten years |
|
|
2,559 |
|
|
|
2,599 |
|
|
|
1,771 |
|
|
|
1,814 |
|
Due after ten years |
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,232 |
|
|
|
4,284 |
|
|
|
6,212 |
|
|
|
6,258 |
|
Mortgage-backed
securities of Government
Sponsored Entities |
|
|
|
|
|
|
|
|
|
|
57,495 |
|
|
|
57,888 |
|
Collateralized mortgage
obligations of
Government Sponsored
Entities |
|
|
|
|
|
|
|
|
|
|
229,104 |
|
|
|
235,568 |
|
Private collateralized
mortgage obligations |
|
|
5,996 |
|
|
|
6,101 |
|
|
|
65,821 |
|
|
|
63,237 |
|
No contractual maturity |
|
|
|
|
|
|
|
|
|
|
3,035 |
|
|
|
3,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,228 |
|
|
$ |
10,385 |
|
|
$ |
361,667 |
|
|
$ |
365,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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 March 31, 2010 and December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In thousands) |
|
U.S. Treasury
securities and
obligations of U.S.
Government
Sponsored Entities |
|
$ |
497 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
497 |
|
|
$ |
(1 |
) |
Mortgage-backed
securities of
Government
Sponsored Entities |
|
|
20,064 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
20,064 |
|
|
|
(15 |
) |
Collateralized
mortgage
obligations of
Government
Sponsored Entities |
|
|
7,856 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
7,856 |
|
|
|
(3 |
) |
Private
collateralized
mortgage
obligations |
|
|
28,516 |
|
|
|
(751 |
) |
|
|
15,386 |
|
|
|
(1,966 |
) |
|
|
43,902 |
|
|
|
(2,717 |
) |
Obligations of
state and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
1,146 |
|
|
|
(7 |
) |
|
|
1,146 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities |
|
$ |
56,933 |
|
|
$ |
(770 |
) |
|
$ |
16,532 |
|
|
$ |
(1,973 |
) |
|
$ |
73,465 |
|
|
$ |
(2,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In thousands) |
|
U.S. Treasury
securities and
obligations of U.S.
Government
Sponsored Entities |
|
$ |
2,489 |
|
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,489 |
|
|
$ |
(3 |
) |
Mortgage-backed
securities of
Government
Sponsored Entities |
|
|
32,519 |
|
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
32,519 |
|
|
|
(325 |
) |
Collateralized
mortgage
obligations of
Government
Sponsored Entities |
|
|
57,438 |
|
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
57,438 |
|
|
|
(733 |
) |
Private
collateralized
mortgage
obligations |
|
|
18,211 |
|
|
|
(115 |
) |
|
|
18,498 |
|
|
|
(2,106 |
) |
|
|
36,709 |
|
|
|
(2,221 |
) |
Obligations of
state and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
1,542 |
|
|
|
(12 |
) |
|
|
1,542 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities |
|
$ |
110,657 |
|
|
$ |
(1,176 |
) |
|
$ |
20,040 |
|
|
$ |
(2,118 |
) |
|
$ |
130,697 |
|
|
$ |
(3,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company owned 16 individual investment securities totaling $73.5 million with aggregate gross
unrealized losses at March 31, 2010. Based on a review of each of the securities in the investment
securities portfolio at March 31, 2010, the Company concluded that it expected to recover the
amortized cost basis of its investment.
Approximately $2.7 million of the unrealized losses at March 31, 2010 pertain to private label
securities secured by collateral originated in 2005 and prior with a fair value of $43.9 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 March 31, 2010, the Company also had $18,000 of unrealized losses on mortgage-backed securities
of government sponsored entities having a fair value of $27.9 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.
17
The unrealized losses on debt securities issued by states and political subdivisions amounted to
$7,000 at March 31, 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 March 31, 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 March 31, 2010.
Included in other assets was $14.9 million at March 31, 2010 and December 31, 2009 of Federal Home
Loan Bank and Federal Reserve Bank stock stated at par value. At March 31, 2010, the Company has
not identified events or changes in circumstances which may have a significant adverse effect on
the fair value of the $14.9 million of cost method investment securities.
NOTE K INCOME TAXES
The tax benefit for the net loss for the first quarter of 2010 totaled $0.6 million. 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 Companys credit losses moderate in the future, increased
reliance on managements forecast of future taxable earnings could result in realization of
additional future tax benefits from the net operating loss carryforwards. At March 31, 2010 the
Company has approximately $36 million in its deferred tax valuation allowance related to its net
operating loss carryforwards.
NOTE L COMPREHENSIVE LOSS
At March 31, 2010 and 2009, comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Net loss |
|
$ |
(1,564 |
) |
|
$ |
(4,760 |
) |
Unrealized gains on securities available
for sale (net of tax) |
|
|
1,614 |
|
|
|
2,826 |
|
Net reclassification adjustment |
|
|
(970 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(920 |
) |
|
$ |
(1,934 |
) |
|
|
|
|
|
|
|
18
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
FIRST QUARTER 2010
The following discussion and analysis is designed to provide a better understanding of the
significant factors related to the Companys results of operations and financial condition. Such
discussion and analysis should be read in conjunction with the Companys 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.
NEW OFFICES / CLOSURES / RELOCATIONS
Seacoast National consolidated and opened a number of branch offices during 2009. A new branch
office was opened on January 20, 2009 in the same shopping plaza as our existing Wedgewood branch
in Martin County. This new branch has better ingress and egress on a corner of U.S. Highway One.
Our office on Northlake Boulevard in northern West Palm Beach was closed on June 2, 2009 and our
Middle River office in Ft. Lauderdale was closed on December 1, 2009, to reduce overhead and
rationalize cost with future growth opportunities. Customers of these offices are now served by
our PGA Boulevard office.
Additions to bank premises and equipment over the past 12 months have been more than offset by
depreciation of $3.4 million over the same period and $1.7 million for closed offices (net of $0.9
million in write-downs in fair value) transferred to other assets, resulting in a net decrease of
$5,276,000 in bank premises and equipment at March 31, 2010, compared to March 31, 2009.
EARNINGS SUMMARY
Net loss available to common shareholders for the first quarter of 2010 totaled $2,501,000 or $0.04
per average common diluted share, significantly improved when compared to losses in 2009 for the
fourth, third, second and first quarters of $39,086,000 or $0.73 per average common diluted share,
$41,714,000 or $1.21 per average common diluted share, $63,937,000 or $3.35 per average common
diluted share, and $5,697,000 or $0.30 per average common diluted share, respectively. The better
performance for the first quarter of 2010 reflects lower credit costs.
As forecast, the net interest margin was improved slightly, increasing 11 basis points during the
first quarter of 2010 from the fourth quarter of 2009, and 4 basis higher than for the first
quarter of 2009. The Company has continued to benefit from lower rates paid for interest bearing
liabilities due to the Federal Reserves reduction in interest rates, as well as, an improved mix
of deposits. The average cost of interest bearing liabilities was 13 basis points lower for the
first quarter of 2010, compared to fourth quarter 2009, and was 12 basis points lower for the
fourth quarter of 2009, compared to the third quarter of 2009, 15 basis points lower for the third
quarter of 2009, compared to second quarter 2009, and 40 basis points lower for the second quarter
of 2009, compared to first quarter 2009, a total reduction of 80 basis points over the last twelve
months. The improved mix of deposits reflects the continued success of our retail deposit growth
initiatives.
19
Noninterest income totaled $4.6 million for the first quarter of 2010, compared to $4.6 million for
the fourth quarter of 2009 and $5.0 million for the first quarter of 2009. Signs of improved
stability in home prices and greater transaction volumes kept fee income from residential real
estate production close to fourth quarter 2009s result. Revenue from wealth management services
were $0.1 million lower and service charges on deposits were $0.2 million lower when compared to
first quarter 2009 and were offset by improved results in marine finance fees, and both debit card
and merchant income for the first quarter of 2010. Consumer activity and spending has been
adversely affected by economic conditions and directly affects many of the Companys fee-based
business activities.
Noninterest expenses increased by $2.5 million versus the prior years fourth quarter result, and
were up $4.0 million compared to the first quarter of 2009. Overhead related to salaries and
wages, employee benefits, outsourced data processing costs, occupancy and furniture and equipment
expenses, and marketing expenses have been relatively stable year over year. The increase for both
periods was primarily a result of losses on other real estate owned and other asset dispositions,
increasing by $2.7 million and $3.6 million over each of the periods compared, respectively,
reflecting stressed economic conditions.
Our provision for loan losses was substantially lower than in the fourth and first quarters of
2009, with $2.1 million of provisioning for loan losses for the first quarter of 2010 compared to
$41.5 million and $11.7 million for the fourth and first quarter of 2009, respectively. Provisions
for loans losses were 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 March 31, 2010 was 3.18 percent.
CRITICAL ACCOUNTING ESTIMATES
Management, after consultation with the Companys Audit Committee, believes the most critical
accounting estimates and assumptions that involve the most difficult, subjective and complex
assessments are:
|
|
|
the allowance and the provision for loan losses; |
|
|
|
the fair value and other than temporary impairment of securities; |
|
|
|
realization of deferred tax assets; and |
|
|
|
contingent liabilities. |
The following is a discussion of the critical accounting policies intended to facilitate a readers
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.
20
Allowance and Provision for Loan Losses
The information contained on pages 27-29 and 37-44 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 Companys accounting
estimates related to our allowance for loan losses.
Fair Value and Other than Temporary Impairment of Securities Classified as Available for
Sale
At March 31, 2010, outstanding securities designated as available for sale totaled $365,986,000.
The fair value of the available for sale portfolio at March 31, 2010 was more than historical
amortized cost, producing net unrealized gains of $4,319,000 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 Companys securities holdings currently is investment grade. These
securities, except for approximately $6.3 million of securities issued by states and their
political subdivisions, as of March 31, 2010, generally are traded in liquid markets. U.S.
Treasury and U.S. Government agency obligations totaled $297.6 million, or 81 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. The collateral underlying these
mortgage investments are primarily 30- and 15-year fixed rate 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, or OTTI, 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.
21
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 Companys 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 $7.1
million as of March 31, 2010, the same as 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
ServicesDepository 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 March 31, 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.
Realization of Deferred Tax Assets
At March 31, 2010, the Company has net deferred tax assets of $18.4 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 and 2009, 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 Companys forecast of future taxable income was not considered positive
evidence which could be used to offset the negative evidence at this time, given the uncertain
economic conditions. Therefore, the Company has recorded deferred tax valuation allowances for its
net operating loss carryforwards totaling approximately $36 million at March 31, 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.
Contingent Liabilities
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 March 31, 2010 and 2009, the Company had $150,000 and $0, respectively, accrued for
contingent liabilities.
22
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income (on a fully taxable equivalent basis) for the first quarter of 2010 totaled
$17,288,000, decreasing from 2009s fourth quarter by $230,000 or 1.3 percent, and lower than first
quarter 2009s result by $953,000 or 5.2 percent. The following table details net interest income
and margin results (on a tax equivalent basis) for the past five quarters:
|
|
|
|
|
|
|
|
|
|
|
Net Interest |
|
|
Net Interest |
|
|
|
Income |
|
|
Margin |
|
(Dollars in thousands) |
|
(tax equivalent) |
|
|
(tax equivalent) |
|
First quarter 2009 |
|
$ |
18,241 |
|
|
|
3.44 |
% |
Second quarter 2009 |
|
|
18,987 |
|
|
|
3.65 |
|
Third quarter 2009 |
|
|
19,101 |
|
|
|
3.74 |
|
Fourth quarter 2009 |
|
|
17,518 |
|
|
|
3.37 |
|
First quarter 2010 |
|
|
17,288 |
|
|
|
3.48 |
|
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 Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
|
(Dollars in thousands) |
|
Non-taxable interest income |
|
$ |
148 |
|
|
$ |
145 |
|
|
$ |
105 |
|
|
$ |
135 |
|
|
$ |
139 |
|
Tax Rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
Net interest income (TE) |
|
$ |
17,288 |
|
|
$ |
17,518 |
|
|
$ |
19,101 |
|
|
$ |
18,987 |
|
|
$ |
18,241 |
|
Total net interest income
(not TE) |
|
|
17,213 |
|
|
|
17,444 |
|
|
|
19,051 |
|
|
|
18,920 |
|
|
|
18,174 |
|
Net interest margin (TE) |
|
|
3.48 |
% |
|
|
3.37 |
% |
|
|
3.74 |
% |
|
|
3.65 |
% |
|
|
3.44 |
% |
Net interest margin (not TE) |
|
|
3.46 |
|
|
|
3.35 |
|
|
|
3.73 |
|
|
|
3.64 |
|
|
|
3.43 |
|
23
Net interest margin on a tax equivalent basis improved 11 basis points to 3.48 percent for the
first quarter of 2010 compared to the fourth quarter of 2009, and was higher by 4 basis points year
over year. During 2009 and for the first quarter of 2010, net interest income and net interest
margin have stabilized despite the challenging lending environment and the reduction of interest
due to nonaccrual loans. Increased nonaccrual loans have been the primary force that has 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 and also impacted net interest income. For 2010,
average loans (the highest yielding component of earning assets) as a percentage of average earning
assets totaled 69.1 percent, compared to 77.7 percent a year ago. Average securities as a percent
of average earning assets increased from 16.7 percent a year ago to 20.7 percent during the first
quarter of 2010 and federal funds sold and other investments increased to 10.2 percent from 5.6
percent in 2009. In addition to decreasing average total loans as a percentage of earning assets,
the mix of loans changed, with commercial and commercial real estate volumes representing 49.9
percent of total loans at March 31, 2010 (compared to 53.0 percent at March 31, 2009). This
reflects our reduced exposure to commercial construction and land development loans on residential
and commercial properties, which declined by $76.1 million and $128.8 million, respectively, from
March 31, 2009 to March 31, 2010. Lower yielding residential loan balances with individuals
(including home equity loans and lines, and personal construction loans) represented 41.1 percent
of total loans at March 31, 2010 (versus 38.0 percent a year ago) (see Loan Portfolio). It is
expected that these trends in earning asset mix will continue throughout 2010 when compared to
prior periods.
The yield on earning assets for the first quarter of 2010 was 4.52 percent, 64 basis points lower
than for 2009 in the first 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st |
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Yield |
|
|
4.52 |
% |
|
|
4.51 |
% |
|
|
4.98 |
% |
|
|
5.03 |
% |
|
|
5.16 |
% |
The yield on loans declined 27 basis points to 5.36 percent over the last twelve months for the
same reasons noted above. Nonaccrual loans totaling $96.3 million or 7.0 percent of total loans at
March 31, 2010, versus $109.4 million or 6.7 percent of total loans a year ago, have reduced the
yield on our loan portfolio. The yield on investment securities was lower as well, decreasing 78
basis points year over year to 3.73 percent for the first 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 has been more
severe over the past two quarters, with the decline of 78 basis points for first quarter 2010
comparing to 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 and 22 basis points for second quarter 2009 year over
year. Federal funds sold and other investments yielded 0.47 percent for the first quarter of 2010,
consistent with first quarter 2009s yield of 0.49 percent. With the Federal Reserve maintaining
the target federal funds rate to 0 to 25 basis points there will be limited opportunities to
improve the margin.
24
Average earning assets for the first quarter of 2010 decreased $134.6 million or 6.3 percent
compared to 2009s first quarter. Average loan balances decreased $276.5 million or 16.6 percent
to $1,393.8 million, while average investment securities were $58.0 million or 16.2 percent higher,
totaling $417.0 million and average federal funds sold and other investments increased $83.9
million or 69.0 percent to $205.6 million. The decline in average earning assets is consistent
with reduced funding as a result of a planned reduction of brokered deposits (only $24.6 remain
outstanding at March 31, 2010), the maturity of a $15.0 million advance from the FHLB in November
2009, and lower sweep repurchase arrangements (declining $50.5 million from first quarter a year
ago, principally in public funds as a result of lower tax receipts).
Commercial and commercial real estate loan production for 2010 totaled $1.8 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
$259.3 or 15.9 percent in 2010, and declined similarly during first quarter 2009 year over year, by
$245.4 million or 13.1 percent. Loan demand remains weak. Economic conditions in the markets the
Company serves are expected to continue to be challenging, and although we continue to make loans
generally, these conditions are expected to have a negative impact on loan growth during 2010, but
possibly to a lessened degree if the consensus opinion that conditions will improve in late 2010 is
realized. At March 31, 2010 the Companys total commercial and commercial real estate loan
pipeline was $32 million, versus $47 million at December 31, 2009 and $76 million at March 31,
2009.
A total of 37 applications were received seeking restructured mortgages during the first quarter of
2010, 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 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 quarter of 2010 totaled $33 million, of
which $22 million was sold servicing-released. 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 $52 million during the first quarter of 2010, compared to $92 million a year ago
for the first quarter of 2009. Existing home sales and home mortgage loan refinancing activity in
the Companys markets have increased, but demand for new home construction is expected to remain
soft in 2010.
During the first quarter of 2010, the sale of mortgage backed securities totaling $59.2 million
resulted in securities gains of $2,100,000. Because of historically tight spreads it was believed
these securities had minimal opportunity to further increase in value. During the first quarter of
2010 maturities (entirely pay-downs) totaled $35.2 million and securities portfolio purchases
totaled $56.8 million. In comparison, during the first quarter of 2009 maturities (principally
pay-downs) totaled $10.5 million and securities portfolio purchases totaled $36.0 million.
25
The cost of average interest-bearing liabilities in the first quarter of 2010 decreased 13 basis
points to 1.25 percent from fourth quarter 2009 and was 80 basis points lower than for the first
quarter of 2009, reflecting the lower interest rate environment. The following table details the
cost of average interest bearing liabilities for the past five quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st |
|
|
4th |
|
|
3rd |
|
|
2nd |
|
|
1st |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Rate |
|
|
1.25 |
% |
|
|
1.38 |
% |
|
|
1.50 |
% |
|
|
1.65 |
% |
|
|
2.05 |
% |
During 2010, the Companys 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 quarter of
2010. A total of 1,900 new households were added in 2010, up 8.4 percent compared to fourth
quarter 2009 and 1,874 new households in the first 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 1.22 percent, 89 basis points lower than a year ago.
A significant component favorably affecting the Companys net interest margin, the average balances
of lower cost interest bearing deposits (NOW, savings and money market) totaled 57.2 percent of
total average interest bearing deposits for the first quarter of 2010, an improvement compared to
the average of 53.3 percent a year ago. The average rate for lower cost interest bearing deposits
for the first quarter of 2010 was 0.59 percent, down by 52 basis points from 2009s rate. CD rates
paid were also lower compared to 2009, lower by 119 basis points and averaging 2.06 percent for
first quarter 2010. Average CDs (the highest cost component of interest bearing deposits) were
42.8 percent of interest bearing deposits for first quarter 2010, compared to 46.7 percent for
2009.
Average deposits totaled $1,757.0 million during the first quarter of 2010, and were $53.4 million
lower compared to 2009, due primarily to a planned reduction of brokered deposits. Total average
sweep repurchase agreements for first quarter 2010 were $50.5 million lower versus a year ago, a
result of public fund customers maintaining larger balances in repurchase agreements during the
first quarter of 2009. Average aggregate amounts for NOW, savings and money market balances
increased $31.4 million or 3.8 percent to $849.4 million for the first quarter of 2010 compared to
2009, noninterest bearing deposits decreased $2.2 million or 0.8 percent to $272.1 million, and
average CDs decreased by $82.5 million or 11.5 percent to $635.5 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 $11.1 million from a year ago to $9.8 million for the
first quarter 2010. The higher balance during the first 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.
26
FDIC deposit insurance has been temporarily increased from $100,000 to $250,000 per depositor from
October 14, 2008 through December 31, 2013. Under the FDICs 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.
Average short-term borrowings have been principally comprised of sweep repurchase agreements with
customers of Seacoast National, which decreased $50.5 million or 32.8 percent from the first
quarter of 2009 but were higher by $11.2 million or 12.1 percent compared to fourth quarter 2009.
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 Companys 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 Companys 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 managements
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
quarter of 2010, the provision for loan losses was $2.1 million, lower than first quarter 2009s
provision for loan losses of $11.7 million, and substantially lower than provisioning in the
second, third and fourth quarters of 2009 of $26.2 million, $45.4 million and $41.5 million,
respectively. The provision for loan losses for the first quarter of 2010 was $1.4 million less
than net charge-offs, which totaled $3.5 million or 1.03 percent (annualized) of average total
loans. Delinquency trends show continued stability (see Nonperforming Assets).
27
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. With timely and more aggressive
collection efforts, loan sales, and charge-offs, the Companys residential construction and land
development loans have been reduced to $41.1 million or 3.0 percent of total loans at March 31,
2010 (see Loan Portfolio), down from approximately $117.2 million or 7.2 percent of total loans
at March 31, 2009. Total CRE loans declined 20.9 percent from $865.6 million at March 31, 2009 to
$684.7 million at March 31, 2010. Under regulatory guidelines for commercial real estate
concentrations, Seacoast Nationals total commercial real estate loans outstanding (as defined in
the guidance) represented 267 percent of total risk based capital at March 31, 2010. These
remaining lending relationships are monitored and the value of the underlying real estate is
evaluated using current appraisals, and where appropriate, discounted cash flow analysis using
estimated holding periods and prospective future sales values discounted at rates that we believe
appropriate. The reduction in the Companys exposure to residential construction and development
loans should reduce earnings volatility as a result of net charge-offs.
The Company has reduced its concentrations of large individual loan relationships over the periods
compared. The following table details the Companys 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 almost 72 percent from $44.6 million at
March 31, 2009 to $12.5 million at March 31, 2010. All of the remaining $12.5 million in loans
greater than $4 million are classified as nonperforming, and of the $28.6 million in loans less
than $4 million, $9.3 million or 33 percent are nonperforming:
QUARTERLY TRENDS LOANS AT END OF PERIOD
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
Nonperforming |
|
|
|
|
|
|
|
1st Qtr |
|
|
2nd Qtr |
|
|
3rd Qtr |
|
|
4th Qtr |
|
|
1st Qtr |
|
|
1st Qtr |
|
|
No. |
|
Residential
Construction and
Land Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominiums |
|
>$4 mil |
|
$ |
8.4 |
|
|
$ |
7.9 |
|
|
$ |
5.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
<$4 mil |
|
|
7.9 |
|
|
|
8.8 |
|
|
|
3.7 |
|
|
|
6.1 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
1 |
|
Town homes |
|
>$4 mil |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<$4 mil |
|
|
4.2 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Family
Residences |
|
>$4 mil |
|
|
6.6 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<$4 mil |
|
|
13.9 |
|
|
|
10.3 |
|
|
|
7.1 |
|
|
|
4.1 |
|
|
|
3.9 |
|
|
|
0.6 |
|
|
|
5 |
|
Single Family Land
& Lots |
|
>$4 mil |
|
|
21.8 |
|
|
|
21.8 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
1 |
|
|
|
<$4 mil |
|
|
29.6 |
|
|
|
21.5 |
|
|
|
19.5 |
|
|
|
16.6 |
|
|
|
15.7 |
|
|
|
4.9 |
|
|
|
16 |
|
Multifamily |
|
>$4 mil |
|
|
7.8 |
|
|
|
7.8 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
6.6 |
|
|
|
1 |
|
|
|
<$4 mil |
|
|
17.0 |
|
|
|
9.8 |
|
|
|
9.5 |
|
|
|
8.3 |
|
|
|
8.1 |
|
|
|
2.9 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
>$4 mil |
|
|
44.6 |
|
|
|
44.0 |
|
|
|
17.8 |
|
|
|
12.5 |
|
|
|
12.5 |
|
|
|
12.5 |
|
|
|
2 |
|
TOTAL |
|
<$4 mil |
|
|
72.6 |
|
|
|
52.7 |
|
|
|
39.8 |
|
|
|
35.1 |
|
|
|
28.6 |
|
|
|
9.3 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GRAND TOTAL |
|
|
|
|
|
$ |
117.2 |
|
|
$ |
96.7 |
|
|
$ |
57.6 |
|
|
$ |
47.6 |
|
|
$ |
41.1 |
|
|
$ |
21.8 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The Companys 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 10-year loans for home improvements) totaled $89.1
million and home equity lines totaled $60.1 million at March 31, 2010, compared to $85.5 million
and $60.3 million at March 31, 2009. Each borrowers credit was fully documented as part of the
Companys 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. Both
charge-offs and past due ratios have been better than those nationally and for Florida during 2010
and 2009. Net charge-offs for the quarter ended 2010 totaled $156,000 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 were $384,000 and $19,000 at March 31, 2010 and 2009, respectively. Other Florida
peer banks have experienced higher losses and delinquencies for their home equity lines.
Congress and bank regulators encouraged recipients of Troubled Asset Relief Program (TARP)
capital to use such capital to make loans and the Company continues to successfully produce
residential mortgages. A total of 259 mortgage applications were taken during the first quarter of
2010 for $52 million with $33 million closed. In addition, a total of 37 applications were
received seeking restructured mortgages, compared to 93 in the first quarter of 2009. Existing
home sales and home mortgage loan refinancing activity in the Companys markets has improved,
however demand for new home construction is expected to remain soft in 2010.
Since year-end 2009, nonaccrual loans declined by $1.6 million to $96.3 million at March 31, 2010,
and were $13.1 million lower than at March 31, 2009 (see Nonperforming Assets). Loans have
declined $24.2 million or 1.7 percent since year-end 2009 and have declined $259.3 million or 15.9
percent since March 31, 2009 (see Loan Portfolio). For the remainder of 2010, the Companys loan
portfolio is expected to experience further declines, but to a lesser degree than 2009.
29
NONINTEREST INCOME
Noninterest income, excluding gains or losses from securities, totaled $4,560,000 for the first
quarter of 2010, $422,000 or 8.5 percent lower than the first quarter of 2009 and $41,000 or 0.9
percent lower than the fourth quarter of 2009. Noninterest income accounted for 20.9 percent of
total revenue (net interest income plus noninterest income, excluding securities gains or losses)
in the first quarter of 2010 compared to 21.5 percent a year ago. Noninterest income for the first
quarter of 2010, and the fourth quarter and first quarters of 2009 is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Qtr |
|
|
4th Qtr |
|
|
1st Qtr |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Service charges on deposits |
|
$ |
1,372 |
|
|
$ |
1,612 |
|
|
$ |
1,585 |
|
Trust income |
|
|
476 |
|
|
|
543 |
|
|
|
558 |
|
Mortgage banking fees |
|
|
421 |
|
|
|
422 |
|
|
|
499 |
|
Brokerage commissions and fees |
|
|
286 |
|
|
|
321 |
|
|
|
381 |
|
Marine finance fees |
|
|
339 |
|
|
|
228 |
|
|
|
345 |
|
Debit card income |
|
|
717 |
|
|
|
658 |
|
|
|
608 |
|
Other deposit-based EFT fees |
|
|
93 |
|
|
|
79 |
|
|
|
94 |
|
Merchant income |
|
|
465 |
|
|
|
409 |
|
|
|
536 |
|
Other income |
|
|
391 |
|
|
|
329 |
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,560 |
|
|
$ |
4,601 |
|
|
$ |
4,982 |
|
|
|
|
|
|
|
|
|
|
|
For the first quarter of 2010, revenues from the Companys wealth management services businesses
(trust and brokerage) decreased year over year, by $177,000 or 18.8 percent, and were lower than
the fourth quarter of 2009 by $102,000 or 11.8 percent. Of the $177,000 decrease, trust revenue
was lower by $82,000 or 14.7 percent and brokerage commissions and fees were lower by $95,000 or
24.9 percent. Included in the $95,000 decline in brokerage commissions and fees was a decline of
$102,000 in revenue from insurance annuity sales year over year, reflecting the lower interest rate
environment. Lower estate and agency fees were the primary cause for the decline in trust income,
as these decreased $73,000 and $16,000, respectively, from first quarter 2009s results. Economic
uncertainty is the primary issue affecting clients of the Companys wealth management services.
The Company completed a new strategic plan for wealth management services in 2009 and is
implementing it in 2010. Therefore, it is expected that fees from wealth management will begin to
grow as the year progresses.
Service charges on deposits for the first quarter of 2010 were $213,000 or 13.4 percent lower year
over year versus first quarter 2009, and were $240,000 or 14.9 percent lower than service charges
for the fourth quarter of 2009. Overdraft income was the primary cause, as this declined $159,000
in 2010 compared to first quarter 2009 and $222,000 compared to fourth quarter 2009. Overdraft
fees represented approximately 74 percent of total service charges on deposits for the first
quarter of 2010, compared to 76 percent for all of 2009. 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. Beginning July 1, 2010 all financial institutions must adopt procedures
which may have a negative impact on overdraft fee income. The Company estimates that approximately
43% or $1.7 million of overdraft fee income related to the changed procedures will be impacted
which could reduce fee income. The Company has a plan which it believes will reduce the impact,
but believes overdraft fee income will be reduced.
30
For 2010, fees from the non-recourse sale of marine loans originated by our Seacoast Marine
Division of Seacoast National decreased nominally compared to first quarter 2009, by $6,000, but,
compared to fourth quarter 2009 were higher by $111,000 or 48.7 percent. The Seacoast Marine
Division originated $25 million during the first quarter of 2010. $20 million in loans were
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 quarter of 2010, $20 million (79.5 percent) were sold. 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 in 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 first quarter of 2010,
debit card income increased $109,000 or 17.9 percent from 2009s first quarter, and was $59,000 or
9.0 percent higher than fourth quarter 2009s income. Other deposit-based electronic funds
transfer (EFT) income decreased nominally, by $1,000 for 2010 compared to first quarter 2009, and
increased $14,000 compared to fourth quarters 2009s revenue. 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 $71,000 or 13.2 percent lower for first quarter 2009, compared to one year
earlier, and was $56,000 or 13.7 percent higher when compared to the fourth quarter of 2009.
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. Over the past
few years, expansion into new markets favorably impacted our merchant income, but continued
economic weakness and related effects on consumer spending have more than offset our geographic
expansion. Merchant income historically has been highest in the first quarter each year,
reflecting seasonal sales activity.
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
Companys branch personnel. Mortgage banking fees in 2010 decreased $78,000 or 15.6 percent from
first quarter 2009, but were nominally lower than fourth quarter 2009s result, by $1,000.
Mortgage banking revenue as a component of overall noninterest income was 9.2 percent for the first
quarter of 2010, the same as for all of 2009. Sales of residential loans for the first quarter of
2010 totaled $22 million, versus $20 million in 2009s first quarter. Mortgage revenues are
dependent upon favorable interest rates, as well as good overall economic conditions, including the
volume of new and used home sales. 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
hopes to continue to take advantage in 2010 of tighter credit and reduced capital limiting the
ability of some of our competitors. The Company also began offering FHA loans during the second
quarter of 2009, a product previously not offered.
Other income for the first quarter of 2010 increased $15,000 or 4.0 percent compared to a year ago.
Operating income from an investment in a limited partnership formed under the auspices of the
Community Reinvestment Act improved year over year by $29,000, but most other line items in other
income were slightly lower, including check charges, wire transfer fees, and miscellaneous other
fees.
31
NONINTEREST EXPENSES
When compared to first quarter 2009, total noninterest expenses for 2010 increased by $4,034,000 or
20.9 percent to $23,369,000. The primary cause for the increase was net losses on other real
estate owned (OREO) and other asset dispositions, increasing by $3,571,000 from $502,000 for the
first quarter of 2009 to $4,073,000 for the first quarter of 2010. In addition, other legal and
professional fees were $709,000 higher, versus a year ago, and totaled $2,101,000. While these
increases are significant, noninterest expenses for 2010 have been in line with our expectations.
Salaries, wages and benefits were $430,000 or 5.0 percent lower for first quarter 2010 compared to
the same period in 2009. The elimination of bonus compensation for most positions and profit
sharing contributions for all associates, reductions in matching contributions associated with
salary savings plans, job eliminations, and branch consolidation(s), as well as the freezing of
executive salaries, and reduced salary increases for other associates remain in place, thereby
containing salary and wage costs. Cost reductions were also achieved in data processing,
communication costs, occupancy, and furniture and equipment expenses, all of which declined when
comparing the first quarter of 2010 to 2009 for the same period.
Salaries and wages for the first quarter of 2010 decreased by $426,000 or 6.2 percent to $6,462,000
compared to the prior years first quarter. Reduced headcount (including the branch closures in
2009), limited accruals for severance payments as compared to a year ago, and lower commission
payments due to lower revenues generated from wealth management and weak lending production were
the primary causes of the decrease in 2010 compared to first quarter 2009. As noted in prior
management discussions, the Company has eliminated incentive payouts for senior officers and
limited 401K contributions by the Company, cost savings that will remain in effect until the
Company produces meaningful earnings improvements. Severance payments during the first quarter of
2009 totaled $241,000, compared to only $5,000 for the first quarter of this year. Base salaries
were 5.4 percent lower year over year for the first quarter, with full-time equivalent employees
(FTEs) totaling 428 at March 31, 2010, 2.1 percent less than the 437 FTEs at March 31, 2009.
As a recipient of funding from the U.S. Treasurys TARP Capital Purchase Program (CPP), the
Company is subject to various limitations on senior executive officers compensation pursuant the
U.S. Treasurys standards for executive compensation and corporate governance for the period during
which the U.S. Treasury holds equity pursuant to the TARP CPP, including common stock which may be
issued pursuant to the Warrant issued by the Company to the U.S. Treasury. These standards
generally apply to the Companys chief executive officer, chief financial officer and the three
next most highly compensated senior executive officers.
Employee benefits costs decreased nominally, by $4,000 to $1,778,000 from the first quarter of
2009. The Company recognized lower claims experience in the first three months of 2010 for its
self-funded health care plan compared to 2009, a decrease of $28,000 versus the first quarter a
year ago. In addition, payroll taxes were $30,000 lower due to lower FTEs for 2010. Offsetting,
unemployment compensation costs were $60,000 higher year over year for the first quarter of 2010
due to the state of Florida increasing rates to replenish funding pools for compensation
disbursements.
32
Outsourced data processing costs totaled $1,876,000 for the first quarter of 2010, a decrease of
$15,000 or 0.8 percent from a year ago. 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 $70,000
lower than a year ago for the first quarter of 2009. Partially offsetting, core data processing
and software maintenance costs were $39,000 and $15,000 higher for the first quarter of 2010,
versus a year ago. Outsourced data processing costs can be expected to increase as the Companys
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
$85,000 or 17.5 percent to $399,000 for the first quarter of 2010 when compared to 2009. 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 first quarter of 2010 decreased $254,000
or 9.1 percent to $2,551,000, year over year, versus the same period in 2009. Included in the
$254,000 decrease during 2010 were lease payments for bank premises decreasing $88,000, and lower
depreciation and repair and maintenance costs, declining $95,000 and $25,000, respectively. Utility
costs (power, lights and water) were reduced as well, lower by $54,000 during the first quarter of
2010, compared to 2009s first quarter.
For 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
Companys efforts to market products and services, increased by $168,000 or 34.4 percent to
$656,000 when compared to first quarter 2009. Agency production, donations, and public relations
expenses were lower by $18,000, $28,000 and $83,000, respectively, during the first quarter of
2010, compared to 2009. Media costs (including newspaper, radio and television) and direct mail
costs were more than offsetting, increasing $166,000 and $122,000, respectively, compared to the
first quarter of 2009. A focused campaign in our markets targeting the customers of competing
financial institutions in our markets and promoting our brand has been underway, thereby causing
the increases indicated.
Legal and professional fees increased $709,000 or 50.9 percent, to $2,101,000 for the first quarter
of 2010, compared to a year ago for 2009. Legal fees were $195,000 lower in 2010 year over year,
primarily due to lower problem assets. Compared to first quarter 2009, regulatory examination fees
and CPA fees on an aggregate basis were $14,000 higher for 2010, and professional fees were
$890,000 higher reflecting 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 three months
ended March 31, 2010 and 2009, Seacoast National paid $121,000 and $106,000, respectively, for
these services. We expect legal fees will continue to be lower for 2010 as a result of fewer new
nonperforming loans.
33
The FDIC assessment for first quarter 2010 totaled $1,006,000. 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. The second quarter 2009 assessment included a special assessment of $976,000, based
upon 5 basis points of total assets less Tier 1 risk-based capital. In addition, on April 1, 2009
a higher base assessment went into effect as well as the FDICs 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 2009s 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 FDICs Deposit Insurance Fund.
Net losses on other real estate owned and other asset dispositions totaled $4,073,000 for the first
quarter of 2010, and totaled $502,000 for the same period in 2009. Other real estate owned
increased during 2009 and while growth in nonaccrual loans is expected to moderate and decline,
costs associated with the management of other real estate owned and other repossessed assets will
likely continue to be higher in 2010 as problem assets migrate toward liquidation.
Remaining noninterest expenses increased $241,000 or 12.6 percent to $2,152,000 when comparing the
first quarter of 2010 to the same quarter a year ago. Increasing year over year for the first
three months of 2010 were employee placement fees (up $47,000, principally headhunter fees),
origination fees for marine loan production (up $32,000), and one-time cash settlements regarding a
branch lease terminated in 2009 and a trade in Seacoast Nationals brokerage subsidiary (each for
$150,000). Partially offsetting were decreases in expenditures for stationery and supplies (down
$34,000), reduced charge-offs related to robbery and customer fraud (down $42,000), and appraisal
fees regarding real estate (down $33,000, for bank directed activity).
INCOME TAXES
No income tax benefit was recorded for the first three month of 2010, consistent with the third and
fourth quarters of 2009. In comparison, an income tax benefit of $3.1 million was recorded for the
first three months of 2009.
The tax benefit for the net loss for the first quarter of 2010 totaled $0.6 million. 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 show 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.
34
FINANCIAL CONDITION
CAPITAL RESOURCES
The Companys equity capital at March 31, 2010 totaled $151.2 million and the ratio of
shareholders equity to period end total assets was 7.13 percent, compared with 7.06 percent at
December 31, 2009, and 9.25 percent at March 31, 2009. Seacoasts management uses certain
non-GAAP financial measures in its analysis of the Companys performance. Seacoasts 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 Companys capital position remains strong, meeting the general
definition of well capitalized, with a total risk-based capital ratio of 15.29 percent at March
31, 2010, higher than December 31, 2009s ratio of 15.16 percent and higher than 14.00 percent at
March 31, 2009. The Bank agreed to maintain a Tier 1 capital (to adjusted average assets)
(leverage ratio) ratio of at least 7.50 percent and a total risk-based capital ratio of at least
12.00 percent as of March 31, 2009 with its primary regulator the Office of the Comptroller of the
Current (the OCC). Subsequently, as of January 31, 2010, following our capital raise, the Bank
agreed to maintain a leverage ratio minimum of 8.50 percent. The agreement with the OCC as to
minimum capital ratios does not change the Banks 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 Companys 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
organizations 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 companys
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.
35
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 Treasurys
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.
Beginning in the third quarter of 2008, the Company reduced the dividend per share on common stock
to $0.01 and, on May 19, 2009, 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 March 31, 2010, our accumulated deferred interest payments on Series A Preferred Stock was
$2,883,000 and our accumulated deferred interest payment on trust preferred securities was
$1,183,000.
At March 31, 2010, the capital ratios for the Company and its subsidiary, Seacoast National, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seacoast |
|
|
Seacoast |
|
|
Minimum to be |
|
|
|
(Consolidated) |
|
|
National |
|
|
Well Capitalized* |
|
March 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital ratio |
|
|
13.83 |
% |
|
|
13.38 |
% |
|
|
6 |
% |
Total risk-based
capital ratio |
|
|
15.29 |
% |
|
|
14.65 |
% |
|
|
10 |
% |
Tier 1 leverage ratio |
|
|
8.86 |
% |
|
|
8.56 |
% |
|
|
5 |
% |
|
|
|
* |
|
For subsidiary bank only |
During April 2010, the Company enhanced capital by issuing Mandatorily Convertible Noncumulative
Nonvoting Preferred Stock for total gross proceeds of approximately $50.0 million, including
additional shares to CapGen Capital Group III LP (CapGen), a Delaware limited partnership. The
Company expects to receive total proceeds of approximately $46.9 million from the sale, net of
issuance costs (see Note H Equity Capital). Approximately $33 million has been received on
April 10, 2010 and approximately $14 million is expected to be issued upon Federal Reserve
approval.
36
LOAN PORTFOLIO
Total loans (net of unearned income) were $1,373,278,000 at March 31, 2010, $259,299,000 or 15.9
percent less than at March 31, 2009, and $24,225,000 or 1.7 percent less than at December 31, 2009.
The following table details loan portfolio composition at March 31, 2010, December 31, 2009 and
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Dec. 31, |
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Commercial real estate |
|
$ |
684,673 |
|
|
$ |
709,285 |
|
|
$ |
865,552 |
|
Residential real estate |
|
|
564,858 |
|
|
|
562,660 |
|
|
|
619,896 |
|
Commercial and financial |
|
|
62,134 |
|
|
|
61,058 |
|
|
|
75,448 |
|
Consumer |
|
|
61,422 |
|
|
|
64,024 |
|
|
|
71,440 |
|
Other loans |
|
|
191 |
|
|
|
476 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,373,278 |
|
|
$ |
1,397,503 |
|
|
$ |
1,632,577 |
|
|
|
|
|
|
|
|
|
|
|
Overall loan growth was negative when comparing outstanding balances at March 31, 2010 to prior
year, as a result of the economic recession, including lower demand for commercial loans, and the
Companys successful divestiture of specific problem loans (including residential construction and
land development loans) through loan sales. Total problem loans sold in 2009 totaled $82 million,
with the Company significantly reducing its exposure to construction and land development loans and
improving the Companys overall risk profile.
As shown in the table above, commercial real estate loans decreased $180,879,000 or 20.9 percent
from March 31, 2009 to $684,673,000 at March 31, 2010 and residential real estate loans decreased
$55,038,000 or 8.9 percent to $564,858,000. 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 $76,159,000 or 65.0 percent and $128,790,000 or 64.0 percent,
respectively, to outstanding balances of $41,088,000 and $72,562,000 at March 31, 2010. Partially
offsetting, commercial real estate mortgages were higher, increasing by $24,070,000 or 4.4 percent
to $571,023,000. Construction and land development loans to individuals included in residential
real estate loans were lower as well, declining $12,626,000 or 25.1 percent to $37,607,000. In
addition, adjustable rate residential mortgages were lower year over year, by $42,602,000 or 12.8
percent to $290,520,000. Fixed rate residential mortgages, home equity mortgages and home equity
lines changed less significantly and totaled $87,608,000, $89,050,000 and $60,073,000 at March 31,
2010. Commercial and financial loans and consumer loans (principally installment loans to
individuals) decreased $13,314,000 or 17.6 percent and $10,018,000 or 14.0 percent, respectively,
from a year ago to $62,134,000 and $61,422,000 at March 31, 2010, reflecting the impact on lending
of the economic downturn.
37
Construction and land development loans, including loans secured by commercial real estate, were
comprised of the following types of loans at March 31, 2010 and March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
2010 |
|
|
2009 |
|
(In millions) |
|
Funded |
|
|
Unfunded |
|
|
Total |
|
|
Funded |
|
|
Unfunded |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominiums |
|
$ |
0.9 |
|
|
$ |
|
|
|
$ |
0.9 |
|
|
$ |
16.3 |
|
|
$ |
0.4 |
|
|
$ |
16.7 |
|
Town homes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
4.2 |
|
Single Family Residences |
|
|
3.9 |
|
|
|
1.3 |
|
|
|
5.2 |
|
|
|
20.5 |
|
|
|
1.2 |
|
|
|
21.7 |
|
Single Family Land & Lots |
|
|
21.6 |
|
|
|
0.1 |
|
|
|
21.7 |
|
|
|
51.4 |
|
|
|
0.4 |
|
|
|
51.8 |
|
Multifamily |
|
|
14.7 |
|
|
|
|
|
|
|
14.7 |
|
|
|
24.8 |
|
|
|
0.5 |
|
|
|
25.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.1 |
|
|
|
1.4 |
|
|
|
42.5 |
|
|
|
117.2 |
|
|
|
2.5 |
|
|
|
119.7 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office buildings |
|
|
13.7 |
|
|
|
|
|
|
|
13.7 |
|
|
|
17.4 |
|
|
|
0.6 |
|
|
|
18.0 |
|
Retail trade |
|
|
3.9 |
|
|
|
|
|
|
|
3.9 |
|
|
|
70.0 |
|
|
|
4.5 |
|
|
|
74.5 |
|
Land |
|
|
45.7 |
|
|
|
0.1 |
|
|
|
45.8 |
|
|
|
60.9 |
|
|
|
0.3 |
|
|
|
61.2 |
|
Industrial |
|
|
2.5 |
|
|
|
0.1 |
|
|
|
2.6 |
|
|
|
9.0 |
|
|
|
0.8 |
|
|
|
9.8 |
|
Healthcare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7 |
|
|
|
4.0 |
|
|
|
9.7 |
|
Churches & educational facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lodging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
Convenience Stores |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marina |
|
|
6.8 |
|
|
|
|
|
|
|
6.8 |
|
|
|
31.6 |
|
|
|
2.8 |
|
|
|
34.4 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.2 |
|
|
|
|
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.6 |
|
|
|
0.2 |
|
|
|
72.8 |
|
|
|
201.4 |
|
|
|
13.0 |
|
|
|
214.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113.7 |
|
|
|
1.6 |
|
|
|
115.3 |
|
|
|
318.6 |
|
|
|
15.5 |
|
|
|
334.1 |
|
Individuals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lot loans |
|
|
28.9 |
|
|
|
|
|
|
|
28.9 |
|
|
|
34.0 |
|
|
|
|
|
|
|
34.0 |
|
Construction |
|
|
8.7 |
|
|
|
5.6 |
|
|
|
14.3 |
|
|
|
16.2 |
|
|
|
7.2 |
|
|
|
23.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.6 |
|
|
|
5.6 |
|
|
|
43.2 |
|
|
|
50.2 |
|
|
|
7.2 |
|
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
151.3 |
|
|
$ |
7.2 |
|
|
$ |
158.5 |
|
|
$ |
368.8 |
|
|
$ |
22.7 |
|
|
$ |
391.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Reassessment of collateral assigned to a particular loan over time may result in amounts
being reassigned to a more appropriate loan type representing the loans intended purpose, and
for comparison purposes prior period amounts have been restated to reflect the change. |
The Companys ten largest commercial real estate funded and unfunded loan relationships at March
31, 2010 aggregated to $163.8 million (versus $202.9 million a year ago) and for the top 36
commercial real estate relationships in excess of $5 million the aggregate funded and unfunded
totaled $361.9 million (compared to 46 relationships aggregating to $498.0 million a year ago).
Commercial real estate mortgage loans, excluding construction and development loans, were comprised
of the following loan types at March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
2010 |
|
|
2009 |
|
(In millions) |
|
Funded |
|
|
Unfunded |
|
|
Total |
|
|
Funded |
|
|
Unfunded |
|
|
Total |
|
Office buildings |
|
$ |
131.1 |
|
|
$ |
1.2 |
|
|
$ |
132.3 |
|
|
$ |
140.6 |
|
|
$ |
2.8 |
|
|
$ |
143.4 |
|
Retail trade |
|
|
163.5 |
|
|
|
|
|
|
|
163.5 |
|
|
|
109.1 |
|
|
|
0.8 |
|
|
|
109.9 |
|
Industrial |
|
|
81.7 |
|
|
|
1.2 |
|
|
|
82.9 |
|
|
|
95.3 |
|
|
|
1.9 |
|
|
|
97.2 |
|
Healthcare |
|
|
29.1 |
|
|
|
0.1 |
|
|
|
29.2 |
|
|
|
28.3 |
|
|
|
0.6 |
|
|
|
28.9 |
|
Churches and
educational
facilities |
|
|
29.1 |
|
|
|
|
|
|
|
29.1 |
|
|
|
34.8 |
|
|
|
|
|
|
|
34.8 |
|
Recreation |
|
|
3.0 |
|
|
|
0.4 |
|
|
|
3.4 |
|
|
|
1.7 |
|
|
|
0.4 |
|
|
|
2.1 |
|
Multifamily |
|
|
25.3 |
|
|
|
|
|
|
|
25.3 |
|
|
|
27.2 |
|
|
|
0.7 |
|
|
|
27.9 |
|
Mobile home parks |
|
|
5.3 |
|
|
|
|
|
|
|
5.3 |
|
|
|
3.0 |
|
|
|
|
|
|
|
3.0 |
|
Lodging |
|
|
23.5 |
|
|
|
|
|
|
|
23.5 |
|
|
|
26.3 |
|
|
|
0.4 |
|
|
|
26.7 |
|
Restaurant |
|
|
4.7 |
|
|
|
|
|
|
|
4.7 |
|
|
|
6.1 |
|
|
|
|
|
|
|
6.1 |
|
Agriculture |
|
|
11.4 |
|
|
|
0.5 |
|
|
|
11.9 |
|
|
|
8.2 |
|
|
|
0.5 |
|
|
|
8.7 |
|
Convenience Stores |
|
|
22.3 |
|
|
|
|
|
|
|
22.3 |
|
|
|
23.3 |
|
|
|
|
|
|
|
23.3 |
|
Other |
|
|
41.0 |
|
|
|
0.3 |
|
|
|
41.3 |
|
|
|
43.0 |
|
|
|
0.6 |
|
|
|
43.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
571.0 |
|
|
$ |
3.7 |
|
|
$ |
574.7 |
|
|
$ |
546.9 |
|
|
$ |
8.7 |
|
|
$ |
555.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Fixed rate and adjustable rate loans secured by commercial real estate, excluding construction
loans, totaled approximately $347 million and $224 million, respectively, at March 31, 2010,
compared to $327 million and $220 million, respectively, a year ago.
At March 31, 2010, approximately $291 million or 55 percent of the Companys residential mortgage
balances were adjustable, compared to $333 million or 58 percent a year ago. Loans secured by
residential properties having fixed rates totaled approximately $177 million at March 31, 2010, of
which 15- and 30-year mortgages totaled approximately $30 million and $58 million, respectively.
The remaining fixed rate balances were comprised of home improvement loans, most with maturities of
10 years or less. In comparison, loans secured by residential properties having fixed rates
totaled approximately $176 million at March 31, 2009, with 15- and 30-year fixed rate residential
mortgages totaling approximately $33 million and $58 million, respectively. The Company also has a
small home equity line portfolio totaling approximately $60 million at March 31, 2010, the same
amount that was outstanding at March 31, 2009.
Commercial loans decreased and totaled $62,134,000 at March 31, 2010, compared to $75,448,000 a
year ago. Commercial lending activities are directed principally towards businesses whose demand
for funds are within the Companys lending limits, such as small- to medium-sized professional
firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such
businesses are smaller and subject to the risks of lending to small to medium sized businesses,
including, but not limited to, the effects of a downturn in the local economy, possible business
failure, and insufficient cash flows.
The Company also provides consumer loans (including installment loans, loans for automobiles,
boats, and other personal, family and household purposes, and indirect loans through dealers to
finance automobiles) which totaled $61,422,000 (versus $71,440,000 a year ago), real estate
construction loans to individuals secured by residential properties which totaled $8,689,000
(versus $16,236,000 a year ago), and residential lot loans to individuals which totaled $28,918,000
(versus $33,997,000 a year ago).
At March 31, 2010, the Company had commitments to make loans of $95 million, compared to $151
million at March 31, 2009.
Loan Concentrations
Over the past two years and into 2010, the Company has been pursuing an aggressive program to
reduce exposure to loan types that have been most impacted by stressed market conditions in order
to achieve lower levels of credit loss volatility. The program included aggressive collection
efforts, loan sales and early stage loss mitigation strategies focused on the Companys largest
loans. Successful execution of this program has significantly reduced our exposure to larger
balance loan
relationships (including multiple loans to a single borrower or borrower group). Commercial loan
relationships greater than $10 million were reduced by $401.6 million to $195.9 million at March
31, 2010 compared with year-end 2007.
39
Commercial Relationships Greater than $10 Million (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Performing |
|
$ |
139,750 |
|
|
$ |
145,797 |
|
|
$ |
374,241 |
|
|
$ |
592,408 |
|
Performing TDR* |
|
|
28,623 |
|
|
|
31,152 |
|
|
|
|
|
|
|
|
|
Nonaccrual |
|
|
27,567 |
|
|
|
28,525 |
|
|
|
14,873 |
|
|
|
5,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
195,940 |
|
|
$ |
205,474 |
|
|
$ |
389,114 |
|
|
$ |
597,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 10 Customer Loan
Relationships |
|
$ |
163,849 |
|
|
$ |
173,162 |
|
|
$ |
228,800 |
|
|
$ |
266,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
TDR = Troubled debt restructures |
Commercial loan relationships greater than $10 million as a percent of tier 1 capital and the
allowance for loan losses was reduced to 84.6 percent at March 31, 2010, compared with 85.9 percent
at year-end 2009, 162.1 percent at the end of 2008 and 258.1 percent at the end of 2007.
On a proforma basis including the additional $46.9 million from the April 2010 capital offering the
ratio declines to approximately 66 percent.
Concentrations in total construction and development loans and total commercial real estate (CRE)
loans have also been substantially reduced. As shown in the table below, under regulatory guidance
for construction and land development and commercial real estate loan concentrations as a
percentage of total risk based capital, Seacoast Nationals loan portfolio in these categories (as
defined in the guidance) have improved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Construction & Land
Development Loans
to Total Risk Based
Capital |
|
|
76 |
% |
|
|
81 |
% |
|
|
206 |
% |
|
|
265 |
% |
CRE Loans to Total
Risk Based Capital |
|
|
267 |
% |
|
|
274 |
% |
|
|
389 |
% |
|
|
390 |
% |
40
The following is the geographic location of the Companys construction and land development loans
(excluding loans to individuals) totaling $113,650,000 at March 31, 2010 and $318,599,000 at March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
Construction |
|
|
|
and Land Development |
|
|
|
Loans |
|
Florida County |
|
2010 |
|
|
2009 |
|
|
Palm Beach |
|
|
23.2 |
|
|
|
14.7 |
|
Indian River |
|
|
15.7 |
|
|
|
11.6 |
|
St. Lucie |
|
|
11.1 |
|
|
|
18.5 |
|
Brevard |
|
|
10.8 |
|
|
|
6.7 |
|
Volusia |
|
|
10.6 |
|
|
|
7.9 |
|
Miami-Dade |
|
|
8.2 |
|
|
|
3.0 |
|
Martin |
|
|
7.0 |
|
|
|
9.1 |
|
Orange |
|
|
3.3 |
|
|
|
6.6 |
|
Okeechobee |
|
|
2.9 |
|
|
|
2.1 |
|
Collier |
|
|
2.2 |
|
|
|
0.9 |
|
Marion |
|
|
1.3 |
|
|
|
1.1 |
|
Hendry |
|
|
1.3 |
|
|
|
0.5 |
|
Charlotte |
|
|
1.0 |
|
|
|
0.8 |
|
Lake |
|
|
0.7 |
|
|
|
0.2 |
|
Pinellas |
|
|
0.4 |
|
|
|
0.0 |
|
Highlands |
|
|
0.2 |
|
|
|
4.9 |
|
Broward |
|
|
0.0 |
|
|
|
2.5 |
|
Bradford |
|
|
0.0 |
|
|
|
0.9 |
|
Dade |
|
|
0.0 |
|
|
|
2.7 |
|
Osceola |
|
|
0.0 |
|
|
|
3.5 |
|
Lee |
|
|
0.0 |
|
|
|
1.5 |
|
Hillsborough |
|
|
0.0 |
|
|
|
0.2 |
|
Other |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES
Management continuously monitors the quality of the loan portfolio and maintains an allowance for
loan losses it believes sufficient to absorb probable losses inherent in the loan portfolio. The
allowance for loan losses totaled $43,719,000 at March 31, 2010, $11,219,000 greater than at March
31, 2009 and $1,473,000 lower than at December 31, 2009. The allowance for loan losses framework
has two basic elements: specific allowances for loans individually evaluated for impairment, and a
formula-based component for pools of homogeneous loans within the portfolio that have similar risk
characteristics, which are not individually evaluated.
41
The first element of the ALLL analysis involves the estimation of allowance specific to
individually evaluated impaired loans including accruing and nonaccruing restructured commercial
and consumer loans. In this process, a specific allowance is established for impaired loans based
on an analysis of the most probable sources of repayment, including discounted cash
flows, liquidation of collateral, or the market value of the loan itself. It is the Companys
policy to charge off any portion of the loan deemed a loss. Restructured consumer loans are also
evaluated in this element of the estimate. As of March 31, 2010, the specific allowance related to
impaired loans individually evaluated totaled $12.4 million.
The second element of the ALLL, the general allowance for homogeneous loan pools not individually
evaluated, is determined by applying allowance factors to pools of loans within the portfolio that
have similar risk characteristics. The general allowance factors are determined using a baseline
factor that is developed from an analysis of historical net charge-off experience and qualitative
factors designed and intended to measure expected losses. These baseline factors are developed and
applied to the various loan pools. Adjustments may be made to baseline reserves for some of the
loan pools based on an assessment of internal and external influences on credit quality not fully
reflected in the historical loss. These influences may include elements such as changes in
concentration risk, macroeconomic conditions, and/or recent observable asset quality trends.
In addition, our analyses of the adequacy of the allowance for loan losses also takes into account
qualitative factors such as credit quality, loan concentrations, internal controls, audit results,
staff turnover, local market conditions and loan growth.
The Companys independent Credit Administration Department assigns all loss factors to the
individual internal risk ratings based on an estimate of the risk using a variety of tools and
information. Its estimate includes consideration of the level of unemployment which is
incorporated into the overall allowance. In addition, the portfolio is segregated into a graded
loan portfolio, residential, installment, home equity, and unsecured signature lines, and loss
factors are calculated for each portfolio. The loss factors assigned to the graded loan portfolio
are based on historical migration of actual losses by grade and a range of losses over various
periods. Loss factors for the other portfolios are based on historical losses over the prior 12
months and prospective factors that consider loan type, delinquencies, loan to value, purpose of
the loan, and type of collateral.
Our charge-off policy meets or exceeds regulatory minimums. Secured loans may be charged-down to
the estimated value of the collateral with previously accrued unpaid interest reversed. Subsequent
charge-offs may be required as a result of changes in the market value of collateral or other
repayment prospects. Initial charge-off amounts are based on valuation estimates derived from
appraisals, broker price opinions, or other market information. Generally, new appraisals are not
received until the foreclosure process is completed; however, collateral values are evaluated
periodically based on market information and incremental charge-offs are recorded if it is
determined that collateral values have declined from their initial estimates.
In general, collateral values for residential real estate have declined since 2006, with values
being more stable over the last 12 months. Loans originated from 2005 through 2007 have seen
property values decline approximately 50 percent from their original appraised values, more than
the decline on loans originated in other years. Declining residential collateral value has
affected our actual loan losses over the last two and half years, but values appear to have
stabilized over the last nine months. Residential loans that become 90 days past due are placed on
nonaccrual. A specific allowance is made for any loan that becomes 120 days past due. Residential
loans are
subsequently written down if they become 180 days past due and such write-downs are supported by a
current appraisal, consistent with current banking regulations.
42
Our Loan Review unit is independent, and performs loan reviews and evaluates a representative
sample of credit extensions after the fact for appropriate individual internal risk ratings. Loan
Review has the authority to change internal risk ratings and is responsible for assessing the
adequacy of credit underwriting. This unit reports directly to the Directors Loan Committee of
Seacoast Nationals Board of Directors.
The allowance as a percentage of loans outstanding was 3.18 percent at March 31, 2010, compared to
1.99 percent at March 31, 2009 and 3.23 percent at December 31, 2009. The allowance for loan
losses represents managements estimate of an amount adequate in relation to the risk of losses
inherent in the loan portfolio.
During the first quarter of 2010, net charge-offs totaled $3,541,000. This compares to $8,540,000
in the first quarter of 2009, $15,109,000 in the second quarter of 2009, $40,142,000 in the third
quarter of 2009 and $45,172,000 in the fourth quarter of 2009. Some of the increase in charge-offs
during 2009 were related to loan sales to reduce risk in the loan portfolio. Although there is no
assurance that we will not have elevated charge-offs in the future, we believe that we have
significantly reduced the risks in our loan portfolio and that with stabilizing market conditions,
future charge-offs would decline. Net charge-offs for March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Three Months Ended |
|
Charge- |
|
|
|
|
|
|
|
|
|
|
Charge- |
|
|
|
|
|
|
|
(In thousands) |
|
Offs |
|
|
Recoveries |
|
|
Net |
|
|
Offs |
|
|
Recoveries |
|
|
Net |
|
Commercial real estate |
|
$ |
1,902 |
|
|
$ |
745 |
|
|
$ |
1,157 |
|
|
$ |
3,920 |
|
|
$ |
122 |
|
|
$ |
3,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
1,593 |
|
|
|
154 |
|
|
|
1,439 |
|
|
|
3,473 |
|
|
|
65 |
|
|
|
3,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & financial |
|
|
55 |
|
|
|
50 |
|
|
|
5 |
|
|
|
561 |
|
|
|
15 |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
1,059 |
|
|
|
119 |
|
|
|
940 |
|
|
|
819 |
|
|
|
31 |
|
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,609 |
|
|
$ |
1,068 |
|
|
$ |
3,541 |
|
|
$ |
8,773 |
|
|
$ |
233 |
|
|
$ |
8,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations of credit risk, discussed under Loan Portfolio of this discussion and analysis,
can affect the level of the allowance and may 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 Companys most significant concentration
of credit is a portfolio of loans secured by real estate. At March 31, 2010, the Company had
$1.250 billion in loans secured by real estate, representing 91.0 percent of total loans, unchanged
from March 31, 2009. In addition, the Company is subject to a geographic concentration of credit
because it only operates in central and southeastern Florida. Included in real estate loans, the
Company has a credit exposure to commercial real estate developers and investors with total
commercial real estate construction and land development loans of $113.7 million or 8.3 percent of
total loans at March 31, 2010, down from $318.6 million or 19.5 percent at March 31, 2009. The
Companys exposure to these credits is secured by project assets and personal guarantees. The
exposure to this industry group, together with an assessment of current trends and expected future
financial performance, are considered in our evaluation of the adequacy of the allowance for loan
losses.
43
While it is the Companys policy to charge off in the current period loans in which a loss is
considered probable, there are additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these risks include the
state of the economy, borrower payment behaviors and local market conditions as well as conditions
affecting individual borrowers, managements judgment of the allowance is necessarily approximate
and imprecise. It is also subject to regulatory examinations and determinations as to adequacy,
which may take into account such factors as the methodology used to calculate the allowance for
loan losses and the size of the allowance for loan losses in comparison to a group of peer
companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on its ongoing review
of the loan portfolio, which is undertaken both to ascertain whether there are probable losses that
must be charged off and to assess the risk characteristics of the portfolio in aggregate. This
review considers the judgments of management, and also those of bank regulatory agencies that
review the loan portfolio as part of their regular examination process. Our bank regulators have
generally agreed with our credit assessments, however the regulators could seek additional
provisions to our allowance for loan losses.
Seacoast National entered into a formal agreement with the OCC on December 16, 2008 to improve its
asset quality. Under the formal agreement, Seacoast Nationals board of directors appointed a
compliance committee to monitor and coordinate Seacoast Nationals performance under the formal
agreement. The formal agreement provides for the development and implementation of written
programs to reduce Seacoast Nationals credit risk, monitor and reduce the level of criticized
assets, and manage commercial real estate loan (CRE) concentrations in light of current adverse
CRE market conditions. The Company believes it has complied with this formal agreement.
NONPERFORMING ASSETS
Nonperforming assets at March 31, 2010 totaled $115,397,000 and are comprised of $96,321,000 of
nonaccrual loans and $19,076,000 of other real estate owned (OREO), compared to $122,065,000 at
March 31, 2009 (comprised of $109,381,000 in nonaccrual loans and $12,684,000 of OREO). At March
31, 2010, virtually all nonaccrual loans were secured with real estate. See the table below for
details about nonaccrual loans. At March 31, 2010, nonaccrual loans have been written down by
approximately $37.0 million or 29.4 percent of the original loan balance (including specific
impairment reserves). OREO has increased as problem loans have migrated to foreclosure and then
liquidation.
44
During the first quarter 2010 loan sales have been nominal, compared to all of 2009 when sales
totaled $82 million, at an average price of approximately 56 percent of the outstanding balance of
the loan sold. Prospectively, the Company anticipates loan sales will likely play a lesser role in
connection with liquidation efforts, since we have substantially reduced our largest borrower
concentrations. The Company pursues loan restructurings in selected cases where it expects to
realize better values than may be expected through traditional collection activities. The Company
has worked with retail mortgage customers, when possible, to achieve lower payment structures in an
effort to avoid foreclosure. Troubled debt restructurings (TDRs) are part of the Companys loss
mitigation activities and can include rate reductions, payment extensions and
principal deferrals.
Company policy requires TDRs be classified as nonaccrual loans until (under
certain circumstances) performance can be verified, which usually requires six months of
performance under the restructured loan terms. Some TDRs that have never been past due continue as
accruing loans. TDRs included in nonperforming loans totaled $35.5 million at March 31, 2010, of
which $13.8 million were performing in accordance with their restructured terms. Accruing
restructured loans totaled $60.0 million at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans |
|
|
Accruing |
|
March 31, 2010 |
|
Non- |
|
|
Per- |
|
|
|
|
|
|
Restructured |
|
(In thousands) |
|
Current |
|
|
forming |
|
|
Total |
|
|
Loans |
|
Construction & land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
21,754 |
|
|
$ |
54 |
|
|
$ |
21,808 |
|
|
$ |
4,823 |
|
Commercial |
|
|
29,800 |
|
|
|
0 |
|
|
|
29,800 |
|
|
|
487 |
|
Individuals |
|
|
2,468 |
|
|
|
0 |
|
|
|
2,468 |
|
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,022 |
|
|
|
54 |
|
|
|
54,076 |
|
|
|
6,565 |
|
Residential real estate mortgages |
|
|
8,806 |
|
|
|
3,297 |
|
|
|
12,103 |
|
|
|
14,203 |
|
Commercial real estate mortgages |
|
|
14,557 |
|
|
|
13,639 |
|
|
|
28,196 |
|
|
|
38,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans |
|
|
77,385 |
|
|
|
16,990 |
|
|
|
94,375 |
|
|
|
59,595 |
|
Commercial and financial |
|
|
61 |
|
|
|
328 |
|
|
|
389 |
|
|
|
0 |
|
Consumer |
|
|
151 |
|
|
|
1,406 |
|
|
|
1,557 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
77,597 |
|
|
$ |
18,724 |
|
|
$ |
96,321 |
|
|
$ |
60,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, loans totaling $156,515,000 were considered impaired (comprised of total
nonaccural and TDRs)(see Note F Impaired Loans and Allowance for Loan Losses).
Over the past 24 months, management has maintained an intensive focus on the commercial real estate
portfolio given the general economic stress in the Companys markets. The majority of these
credits have been reviewed using current financial information and were appropriately risk graded.
During the third and fourth quarters of 2009, additional reviews of all internally classified CRE
loans was conducted. This included tests of cash flows against current outlook, the borrowers
current condition and borrower financial trends. As a result of the reviews conducted,
nonperforming loans increased and may have peaked in the third quarter.
SECURITIES
At March 31, 2010, the Company had $365,986,000 in securities available for sale (representing 97.3
percent of total securities), and securities held for investment carried at $10,228,000 (2.7
percent of total securities). The Companys securities portfolio increased $378,000 from March 31,
2009, and declined $34,521,000 or 8.4 percent from December 31, 2009.
As part of the Companys interest rate risk management process, an average duration for the
securities portfolio is targeted. In addition, securities are acquired which return principal
monthly that can be reinvested. Agency and private label mortgage backed securities and
collateralized mortgage obligations comprise $362,689,000 of total securities, approximately 96
percent of the portfolio. Remaining securities are largely comprised of U.S. Treasury, U.S.
Government agency securities and tax-exempt bonds issued by states, counties and municipalities.
45
Federal funds sold and interest bearing deposits (aggregated) totaled $216,550,000 at March 31,
2010, compared to $110,231,000 at March 31, 2009 and $182,900,000 at December 31, 2009, which
reflects the decline in the loan portfolio and funds from the capital raise during 2009. The
Company has maintained additional liquidity during the uncertain environment and may use these
funds to increase loans and investments as the economy continues to improve.
At March 31, 2010, available for sale securities had gross losses of $2,739,000 and gross gains of
$7,058,000, compared to gross losses of $2,576,000 and gross gains of $10,531,000 at March 31,
2009. All of the securities with unrealized losses are reviewed for other-than-temporary
impairment at least quarterly. As a result of these reviews during the first quarters of 2010 and
2009, it was determined that the unrealized losses were not other than temporarily impaired and the
Company has the intent and ability to retain these securities until recovery over the periods
presented (see discussion under Critical Accounting Estimates Fair Value and Other than
Temporary Impairment of Securities Classified as Available for Sale).
Company management considers the overall quality of the securities portfolio to be high. The
Company has no exposure to securities with subprime collateral and had no Fannie Mae or Freddie Mac
preferred stock when these entities were placed in conservatorship. The Company holds no interests
in trust preferred securities.
DEPOSITS AND BORROWINGS
Total deposits decreased $54,875,000 or 3.0 percent to $1,759,433,000 at March 31, 2010 compared to
one year earlier, reflecting declining brokered deposits. Since March 31, 2009, interest bearing
deposits (NOW, savings and money markets deposits) increased $38,658,000 or 4.7 percent to
$865,909,000, noninterest bearing demand deposits decreased $3,604,000 or 1.3 percent to
$278,205,000, and CDs decreased $89,929,000 or 12.8 percent to $615,319,000. Included in CDs,
brokered time deposits decreased $48,232,000 to $24,640,000 at March 31, 2010 from prior year, of
which $8,411,000 are attributable to CDARs. Funds deposited under the CDARs program are required
to be classified as brokered deposits. The Company has been and continues to be more cautious with
regards to the pricing of CDs. The Company continues to utilize a focused retail deposit growth
strategy that has successfully generated core deposit relationships and increased services per
household since its implementation in the first quarter of 2008.
Securities sold under repurchase agreements decreased over the past twelve months by $57,239,000 or
37.4 percent to $95,708,000 at March 31, 2010. Repurchase agreements are offered by Seacoast
National to select customers who wish to sweep excess balances on a daily basis for investment
purposes. Public fund depositors switching to sweep repurchase agreements comprised a significant
amount of the outstanding balance a year ago, when safety was a major concern for these customers.
At March 31, 2010, the number of sweep repurchase accounts was 186, compared to 228 a year ago.
No federal funds purchased were outstanding at March 31, 2010 and 2009.
OFF-BALANCE SHEET TRANSACTIONS
In the normal course of business, we engage in a variety of financial transactions that, under
generally accepted accounting principles, either are not recorded on the balance sheet or are
recorded on the balance sheet in amounts that differ from the full contract or notional amounts.
These transactions involve varying elements of market, credit and liquidity risk.
46
The two primary off-balance sheet transactions the Company has engaged in are:
|
|
|
to manage exposure to interest rate risk (derivatives); and |
|
|
|
to facilitate customers funding needs or risk management objectives (commitments to
extend credit and standby letters of credit). |
Derivative transactions are often measured in terms of a notional amount, but this amount is not
recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the
risk profile of the instruments. The notional amount is not usually exchanged, but is used only as
the basis upon which interest or other payments are calculated.
The derivatives the Company uses to manage exposure to interest rate risk are interest rate swaps.
All interest rate swaps are recorded on the balance sheet at fair value with realized and
unrealized gains and losses included either in the results of operations or in other comprehensive
income, depending on the nature and purpose of the derivative transaction.
The credit risk of these transactions is managed by establishing a credit limit for counterparties
and through collateral agreements. The fair value of interest rate swaps recorded in the balance
sheet at March 31, 2010 included derivative product assets of $47,000. In comparison, at March 31,
2009 net derivative product assets of $239,000 were outstanding.
Lending commitments include unfunded loan commitments and standby and commercial letters of credit.
A large majority of loan commitments and standby letters of credit expire without being funded,
and accordingly, total contractual amounts are not representative of our actual future credit
exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to
credit risk in the event that the customer draws on the commitment and subsequently fails to
perform under the terms of the lending agreement.
Loan commitments to customers are made in the normal course of our commercial and retail lending
businesses. For commercial customers, loan commitments generally take the form of revolving credit
arrangements. For retail customers, loan commitments generally are lines of credit secured by
residential property. These instruments are not recorded on the balance sheet until funds are
advanced under the commitment. For loan commitments, the contractual amount of a commitment
represents the maximum potential credit risk that could result if the entire commitment had been
funded, the borrower had not performed according to the terms of the contract, and no collateral
had been provided. Loan commitments were $95 million at March 31, 2010, and $151 million at March
31, 2009.
INTEREST RATE SENSITIVITY
Fluctuations in interest rates may result in changes in the fair value of the Companys financial
instruments, cash flows and net interest income. This risk is managed using simulation modeling to
calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The
objective is to optimize the Companys financial position, liquidity, and net interest income while
limiting their volatility.
47
Senior management regularly reviews the overall interest rate risk position and evaluates
strategies to manage the risk. The Companys most recent Asset and Liability Management Committee
(ALCO) model simulation indicates net interest income would increase 11.3 percent if interest
rates are shocked 200 basis points up over the next 12 months and 5.3 percent if interest rates are
shocked up 100 basis points. Prior discussions focused on rates gradually increasing over the
projected period, however recent regulatory guidance has placed more emphasis on rate shocks.
The Company had a positive gap position based on contractual and prepayment assumptions for the
next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total
earning assets of 7.7 percent, based on its most recent ALCO modeling. This result includes new
assumptions for core deposit re-pricing recently validated for the Company by an independent third
party consulting group.
The computations of interest rate risk do not necessarily include certain actions management may
undertake to manage this risk in response to changes in interest rates. Derivative financial
instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may
be utilized as components of the Companys risk management profile.
LIQUIDITY MANAGEMENT
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and
rate-based liability, as well as the risk of not being able to meet unexpected cash needs.
Liquidity planning and management are necessary to ensure the ability to fund operations cost
effectively and to meet current and future potential obligations such as loan commitments and
unexpected deposit outflows.
Funding sources primarily include customer-based core deposits, collateral-backed borrowings, cash
flows from operations, and asset securitizations and sales.
Cash flows from operations are a significant component of liquidity risk management and consider
both deposit maturities and the scheduled cash flows from loan and investment maturities and
payments. Deposits are a primary source of liquidity. The stability of this funding source is
affected by numerous factors, including returns available to customers on alternative investments,
the quality of customer service levels, safety and competitive forces. We routinely use securities
and loans as collateral for secured borrowings. In the event of severe market disruptions, we have
access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta.
Contractual maturities for assets and liabilities are reviewed to meet 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 held for sale and federal funds sold. The Company also has access to borrowed funds
such as FHLB lines of credit and the Federal Reserve Bank of Atlanta under its borrower-in-custody
program.
The Company is also 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, 2010, Seacoast National had
available lines of credit under current lendable collateral value, which are subject to change, of
$339 million. Seacoast National had $56 million of United States Treasury and Government agency
securities and mortgage backed securities not pledged and available for use under repurchase
agreements, and had an additional $225 million in residential and commercial real estate loans
available as collateral.
48
Liquidity, as measured in the form of cash and cash equivalents (including federal funds sold and
interest bearing deposits), totaled $274,703,000 on a consolidated basis at March 31, 2010 as
compared to $149,491,000 at March 31, 2009. The composition of cash and cash equivalents has
changed from a year ago. Over the past twelve months, cash and due from banks increased
$18,893,000 to $58,153,000 and federal funds sold decreased by $4,919,000 to zero, while interest
bearing deposits grew to $216,550,000 from $105,312,000. The interest bearing deposits are
maintained in Seacoast Nationals account at the Federal Reserve Bank of Atlanta. 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
Seacoast Nationals securities and loan portfolios.
The Company is a legal entity separate and distinct from Seacoast National and its other
subsidiaries. Various legal limitations, including Section 23A of the Federal Reserve Act and
Federal Reserve Regulation W, restrict Seacoast National from lending or otherwise supplying funds
to the Company or its non-bank subsidiaries. The Company has traditionally relied upon dividends
from Seacoast National and securities offerings to provide funds to pay the Companys expenses, to
service the Companys debt and to pay dividends upon Company common stock. In 2008 and 2007,
Seacoast National paid dividends to the Company that exceeded its earnings in those years.
Seacoast National cannot currently pay dividends to the Company without prior OCC approval. At
March 31, 2010, the Company had cash and cash equivalents at the parent of approximately $10
million, comprised of remaining proceeds from our common stock offering which was consummated in
the third quarter of 2009 and a private placement of common stock completed in the fourth quarter
of 2009. The Company has suspended all dividends upon its Series A preferred stock and its common
stock, and has deferred distributions on its subordinated debt related to trust preferred
securities issued through affiliated trusts. Additional losses could prolong Seacoast Nationals
inability to pay dividends to its parent without regulatory approval (see Financial Condition -
Capital Resources).
EFFECTS OF INFLATION AND CHANGING PRICES
The condensed consolidated financial statements and related financial data presented herein have
been prepared in accordance with U. S. 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 institutions performance than the general level of inflation. However, inflation affects
financial institutions by increasing their cost of goods and services purchased, as well as the
cost of salaries and benefits, occupancy expense, and similar items. Inflation and related
increases in
interest rates generally decrease the market value of investments and loans held and may adversely
affect liquidity, earnings, and shareholders equity. Mortgage originations and re-financings tend
to slow as interest rates increase, and higher interest rates likely will reduce the Companys
earnings from such activities and the income from the sale of residential mortgage loans in the
secondary market.
49
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Various of the statements made herein under the captions Managements Discussion and Analysis of
Financial Condition and Results of Operations, Quantitative and Qualitative Disclosures about
Market Risk, Risk Factors and elsewhere, are forward-looking statements within the meaning and
protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act).
Forward-looking statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and
involve known and unknown risks, uncertainties and other factors, which may be beyond our control,
and which may cause the actual results, performance or achievements of Seacoast to be materially
different from future results, performance or achievements expressed or implied by such
forward-looking statements. You should not expect us to update any forward-looking statements.
All statements other than statements of historical fact are statements that could be
forward-looking statements. You can identify these forward-looking statements through our use of
words such as may, will, anticipate, assume, should, indicate, would, believe,
contemplate, expect, estimate, continue, further, plan, point to, project, could,
intend, target and other similar words and expressions of the future. These forward-looking
statements may not be realized due to a variety of factors, including, without limitation:
|
|
the effects of future economic, business and market conditions and changes, domestic and
foreign, including seasonality; |
|
|
governmental monetary and fiscal policies; |
|
|
legislative and regulatory changes, including changes in banking, securities and tax laws and
regulations and their application by our regulators, and changes in the scope and cost of FDIC
insurance and other coverage; |
|
|
changes in accounting policies, rules and practices; |
|
|
the risks of changes in interest rates on the levels, composition and costs of deposits, loan
demand, and the values and liquidity of loan collateral, securities, and interest sensitive
assets and liabilities; |
|
|
changes in borrower credit risks and payment behaviors; |
|
|
changes in the availability and cost of credit and capital in the financial markets; |
50
|
|
changes in the prices, values and sales volumes of residential and commercial real estate; |
|
|
the effects of competition from a wide variety of local, regional, national and other
providers of financial, investment and insurance services; |
|
|
the failure of assumptions and estimates underlying the establishment of reserves for
possible loan losses and other estimates; |
|
|
the risks of mergers, acquisitions and divestitures, including, without limitation, the
related time and costs of implementing such transactions, integrating operations as part of
these transactions and possible failures to achieve expected gains, revenue growth and/or
expense savings from such transactions; |
|
|
changes in technology or products that may be more difficult, costly, or less effective than
anticipated; |
|
|
the effects of war or other conflicts, acts of terrorism or other catastrophic events that
may affect general economic conditions; |
|
|
the failure of assumptions and estimates, as well as differences in, and changes to,
economic, market and credit conditions, including changes in borrowers credit risks and
payment behaviors from those used in our loan portfolio stress test; |
|
|
the risks that our deferred tax assets could be reduced if estimates of future taxable income
from our operations and tax planning strategies are less than currently estimated, and sales
of our capital stock could trigger a reduction in the amount of net operating losses
carryforwards that we may be able to utilize for income tax purposes; and |
|
|
other risks and uncertainties described herein and in our annual report on Form 10-K for the
year ended December 31, 2009 and otherwise in our Securities and Exchange Commission, or
SEC, reports and filings. |
All written or oral forward-looking statements that are made by us or are attributable to us are
expressly qualified in their entirety by this cautionary notice. We have no obligation and do not
undertake to update, revise or correct any of the forward-looking statements after the date of this
report, or after the respective dates on which such statements otherwise are made.
51
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Managements discussion and analysis Interest Rate Sensitivity.
Market risk refers to potential losses arising from changes in interest rates, and other relevant
market rates or prices.
Interest rate risk, defined as the exposure of net interest income and Economic Value of Equity, or
EVE, to adverse movements in interest rates, is the Companys primary market risk, and mainly
arises from the structure of the balance sheet (non-trading activities). The Company is also
exposed to market risk in its investing activities. The Companys Asset/Liability Committee, or
ALCO, meets regularly and is responsible for reviewing the interest rate sensitivity position of
the Company and establishing policies to monitor and limit exposure to interest rate risk. The
policies established by the ALCO are reviewed and approved by the Companys Board of Directors.
The primary goal of interest rate risk management is to control exposure to interest rate risk,
within policy limits approved by the Board. These limits reflect the Companys tolerance for
interest rate risk over short-term and long-term horizons.
The Company also performs valuation analyses, which are used for evaluating levels of risk present
in the balance sheet that might not be taken into account in the net interest income simulation
analyses. Whereas net interest income simulation highlights exposures over a relatively short time
horizon, valuation analysis incorporates all cash flows over the estimated remaining life of all
balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the
discounted present value of asset cash flows minus the discounted value of liability cash flows,
the net result of which is the EVE. The sensitivity of EVE to changes in the level of interest
rates is a measure of the longer-term re-pricing risks and options risks embedded in the balance
sheet. In contrast to the net interest income simulation, which assumes interest rates will change
over a period of time, EVE uses instantaneous changes in rates. EVE values only the current
balance sheet, and does not incorporate the growth assumptions that are used in the net interest
income simulation model. As with the net interest income simulation model, assumptions about the
timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly
important are the assumptions driving prepayments and the expected changes in balances and pricing
of the indeterminate life deposit portfolios. Based on our most recent modeling, an instantaneous
100 basis point increase in rates is estimated to decrease the EVE 6.4 percent versus the EVE in a
stable rate environment, while a 200 basis point increase in rates is estimated to decrease the EVE
17.5 percent.
While an instantaneous and severe shift in interest rates is used in this analysis to provide an
estimate of exposure under an extremely adverse scenario, a gradual shift in interest rates would
have a much more modest impact. Since EVE measures the discounted present value of cash flows over
the estimated lives of instruments, the change in EVE does not directly correlate to the degree
that earnings would be impacted over a shorter time horizon, i.e., the next fiscal year. Further,
EVE does not take into account factors such as future balance sheet growth, changes in product mix,
change in yield curve relationships, and changing product spreads that could mitigate the adverse
impact of changes in interest rates.
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Item 4. |
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CONTROLS AND PROCEDURES |
The Companys management, with the participation of its chief executive officer and chief financial
officer has evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of March 31, 2010 and
concluded that those disclosure controls and procedures are effective. There have been no changes
to the Companys internal control over financial reporting that occurred since the beginning of the
Companys first quarter of 2010 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
While the Company believes that its existing disclosure controls and procedures have been effective
to accomplish these objectives, the Company intends to continue to examine, refine and formalize
its disclosure controls and procedures and to monitor ongoing developments in this area.
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Part II OTHER INFORMATION
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Legal Proceedings |
The Company and its subsidiaries are subject, in the ordinary course, to litigation incident to the
business in which they are engaged. Management presently believes that none of the legal
proceedings to which the Company or any of its subsidiaries is a party or of which any of their
property is the subject are materially likely to have a material adverse effect on the Companys
consolidated financial position, or operating results or cash flows, although no assurance can be
given with respect to the ultimate outcome of any such claim or litigation.
Any of the following risks could harm our business, results of operations and financial condition
and an investment in our stock. The risks discussed below also include forward-looking statements,
and our actual results may differ substantially from those discussed in these forward-looking
statements.
Risks Related to Our Business
There can be no assurance that recent or future legislation and administrative actions
authorizing the U.S. government to take direct actions within the financial services industry will
help stabilize the U.S. financial system or how such actions will impact the Company.
Numerous actions have been taken by the U.S. Congress, the Federal Reserve, the Treasury, the
FDIC, the SEC and others to address the liquidity and credit crisis that followed the sub-prime
mortgage crisis that commenced in 2007. These actions include the Financial Stability Program
adopted by the Treasury, the Emergency Economic Stabilization Act of 2008 (or EESA), which was
enacted on October 3, 2008 and the American Recovery and Reinvestment Act of 2009 (or ARRA),
which was enacted on February 17, 2009. Additional regulatory reform measures have also been
proposed and are currently under consideration by Congress, the Executive branch and the various
regulatory authorities.
We cannot predict the continued effects of EESA, the ARRA, any new proposed regulatory reform
measures that become law and various other governmental, regulatory, monetary and fiscal
initiatives which have been and may be proposed or adopted on the economy, the financial markets,
on us and on Seacoast National. The terms and costs of these measures, or the failure of these
actions to help stabilize the financial markets, asset prices, market liquidity and a continuation
or worsening of current financial market and economic conditions could materially and adversely
affect our business, financial condition, results of operations, and the trading prices of our
securities. In addition, a number of the programs enacted in 2008 and 2009 are in the process of
winding down and the effects of the wind-down on us and Seacoast National can not be predicted.
54
Difficult market conditions have adversely affected and may continue to affect our industry.
We are exposed to downturns in the U.S. economy, and particularly the local markets in which
we operate in Florida. Declines in the housing markets over the past two years, including falling
home prices and sales volumes, and increasing foreclosures, have negatively affected the credit
performance of mortgage loans and resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and investment banks, as
well as Seacoast National. These write-downs have caused many financial institutions to seek
additional capital, to merge with larger and stronger institutions and, in some cases, to fail.
Many lenders and institutional investors have reduced or ceased providing funding to borrowers,
including other financial institutions. This market turmoil and the tightening of credit have led
to increased levels of commercial and consumer delinquencies, lack of consumer confidence,
increased market volatility and reductions in business activity generally. The resulting economic
pressure on consumers and lack of confidence in the financial markets has adversely affected our
business, financial condition and results of operations. We do not expect that the difficult
conditions in the financial markets are likely to improve in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market conditions on us
and other financial institutions. In particular:
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We expect to face increased regulation of our industry, including as a result
of proposed regulatory reform initiatives by the U.S. government. Compliance with such
regulations may increase our costs and limit our ability to pursue business
opportunities. |
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Market developments, government programs and the winding down of various government
programs may continue to adversely affect consumer confidence levels and may cause
adverse changes in borrower behaviors and payment rates, resulting in further increases
in delinquencies and default rates, which could affect our loan charge-offs and our
provisions for credit losses. |
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Our ability to assess the creditworthiness of our customers or to estimate the
values of our assets and collateral for loans will be reduced if the models and
approaches we use become less predictive of future behaviors, valuations, assumptions
or estimates. We estimate losses inherent in our credit exposure, the adequacy of our
allowance for loan losses and the values of certain assets by using estimates based on
difficult, subjective, and complex judgments, including estimates as to the effects of
economic conditions and how these economic conditions might affect the ability of our
borrowers to repay their loans or the value of assets. |
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Our ability to borrow from other financial institutions on favorable terms or at
all, or to raise capital, could be adversely affected by further disruptions in the
capital markets or other events, including, among other things, deterioration in
investor expectations and changes in the FDICs resolution authority or practices. |
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Failures of other depository institutions in our markets and increasing
consolidation of financial services companies as a result of current market conditions
could increase our deposits and assets, necessitating additional capital, and may have
unexpected adverse effects upon our ability to compete effectively. |
55
We are not paying dividends on our preferred stock or common stock and are deferring distribution
on our trust preferred securities, and we are restricted in otherwise paying cash dividends on our
common stock. The failure to resume paying dividends on our preferred stock and trust preferred
securities may adversely affect us.
We historically paid cash dividends before we suspended dividend payments on our preferred and
common stock and distributions on our trust preferred securities on May 19, 2009, pursuant to the
request of the Federal Reserve, because, as a matter of policy, the Federal Reserve indicated that
bank holding companies should not pay dividends or make distributions on trust preferred securities
using funds from the TARP Capital Purchase Program (or CPP).
There is no assurance that we will
receive approval to resume paying cash dividends. Even if we are allowed to resume paying
dividends again by the Federal Reserve, future payment of cash dividends on our common stock, if
any, will be subject to the prior payment of all unpaid dividends and deferred distributions on our
Series A Preferred Stock and trust preferred securities. Further, we need prior Treasury approval
to increase our quarterly cash dividends above $0.01 per common share through the earliest of
December 19, 2011, the date we redeem all shares of Series A Preferred Stock or the Treasury has
transferred all shares of Series A Preferred Stock to third parties. All dividends are declared
and paid at the discretion of our board of directors and are dependent upon our liquidity,
financial condition, results of operations, capital requirements and such other factors as our
board of directors may deem relevant.
Further, dividend payments on our Series A Preferred Stock and distributions on our trust preferred
securities are cumulative and therefore unpaid dividends and distributions will accrue and compound
on each subsequent dividend payment date. In the event of any liquidation, dissolution or winding
up of the affairs of our Company, holders of the Series A Preferred Stock shall be entitled to
receive for each share of Series A Preferred Stock the liquidation amount plus the amount of any
accrued and unpaid dividends. If we miss six quarterly dividend payments, whether or not
consecutive, the Treasury will have the right to appoint two directors to our board of directors
until all accrued but unpaid dividends have been paid. We cannot pay dividends on our outstanding
shares of Series A Preferred Stock or our common stock until we have paid in full all deferred
distributions on our trust preferred securities, which will require prior approval of the Federal
Reserve.
Nonperforming assets take significant time and adversely affect our results of operations and
financial condition.
At March 31, 2010 and 2009, our nonperforming loans (which consist of nonaccrual loans)
totaled $96.3 million and $109.4 million, or 7.0 percent and 6.7 percent of the loan portfolio,
respectively. At March 31, 2010 and 2009, our nonperforming assets (which include foreclosed real
estate) were $115.4 million and $122.1 million, or 5.4 percent and 5.3 percent of assets,
respectively. In addition, we had approximately $163,000 and $4.5 million in accruing loans that
were 90 days or more delinquent at March 31, 2010 and 2009, respectively. Our nonperforming assets
adversely affect our net income in various ways. Until economic and market conditions improve, we
may incur additional losses relating to an increase in nonperforming loans. We do not record
interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our
income, and increasing our loan administration costs. When we take collateral in foreclosures and
similar proceedings, we are required to mark the related loan to the then fair market value of the
collateral, which may result in a loss. These loans and other real estate owned also increase our
risk profile and the capital our regulators believe is appropriate in light of such risks.
Seacoast National has adopted and implemented a written program to ensure Bank adherence to a
process designed to eliminate the basis of criticism of criticized assets as required by the OCC
pursuant to the formal agreement that Seacoast National entered into with the OCC. While we have
reduced our problem assets through loan sales, workouts, restructurings and otherwise, decreases in
the value of these remaining assets, or the underlying collateral, or in these borrowers
performance or financial conditions, whether or not due to economic and market conditions beyond
our control, could adversely affect our business, results of operations and financial condition.
In addition, the
resolution of nonperforming assets requires significant commitments of time from management and our
directors, which can be detrimental to the performance of their other responsibilities. There can
be no assurance that we will not experience further increases in nonperforming loans in the future,
or that nonperforming assets will not result in further losses in the future.
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Our allowance for loan losses may prove inadequate or we may be adversely affected by credit
risk exposures.
Our business depends on the creditworthiness of our customers. We periodically review our
allowance for loan losses for adequacy considering economic conditions and trends, collateral
values and credit quality indicators, including past charge-off experience and levels of past due
loans and nonperforming assets. We cannot be certain that our allowance for loan losses will be
adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes
in the economy, market conditions or events adversely affecting specific customers, industries or
markets, or borrower behaviors towards repaying their loans. The credit quality of our borrowers
has deteriorated as a result of the economic downturn in our markets. If the credit quality of our
customer base or their debt service behavior materially decreases further, if the risk profile of a
market, industry or group of customers declines further or weaknesses in the real estate markets
and other economics persist or worsen, or if our allowance for loan losses is not adequate, our
business, financial condition, including our liquidity and capital, and results of operations could
be materially adversely affected.
All of our loan portfolios have been affected by the sustained economic weakness of our
markets and the effects of higher unemployment rates. Our commercial and residential real estate
and real estate-related portfolios have been especially affected by adverse market conditions,
including reduced real estate prices and sales levels.
Our commercial and residential real estate and real estate-related loans, especially
construction and development loans, have been affected adversely by the on-going correction in real
estate prices, reduced levels of sales during the recessions, and the economic weakness of our
Florida markets and the effects of higher unemployment rates. We may have to increase our
allowance for loan losses through additional provisions for loan losses because of continued
adverse changes in the economy, market conditions, and events that adversely affect our customers
or markets. Our business, financial condition, liquidity, capital (especially tangible common
equity), and results of operations could be materially adversely affected by additional provisions
for loan losses.
Weaknesses in the real estate markets, including the secondary market for residential mortgage
loans, have adversely affected us and may continue to adversely affect us.
The effects of ongoing mortgage market challenges, combined with the correction in residential
real estate market prices and reduced levels of home sales, could result in further price
reductions in single family home values, further adversely affecting the liquidity and value of
collateral securing commercial loans for residential land acquisition, construction and
development, as well as residential mortgage loans and residential property collateral securing
loans that we hold, mortgage loan originations and gains on sale of mortgage loans. Declining real
estate prices have caused higher delinquencies and losses on certain mortgage loans, generally,
particularly second lien mortgages and home equity lines of credit. Significant ongoing
disruptions in the secondary market for residential mortgage loans have limited the market for and
liquidity of most residential mortgage loans other than conforming Fannie Mae and Freddie Mac
loans.
These trends could continue,
notwithstanding various government programs to boost the residential mortgage markets and stabilize
the housing markets. Declines in real estate values, home sales volumes and financial stress on
borrowers as a result of job losses, interest rate resets on adjustable rate mortgage loans or
other factors could have further adverse effects on borrowers that result in higher delinquencies
and greater charge-offs in future periods, which would adversely affect our financial condition,
including capital and liquidity, or results of operations. In the event our allowance for loan
losses is insufficient to cover such losses, our earnings, capital and liquidity could be adversely
affected.
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Our real estate portfolios are exposed to weakness in the Florida housing market and the
overall state of the economy.
The declines in home prices and the volume of home sales in Florida, along with the reduced
availability of certain types of mortgage credit, have resulted in increases in delinquencies and
losses in our portfolios of home equity lines and loans, and commercial loans related to
residential real estate acquisition, construction and development. Further declines in home prices
coupled with the continued economic recession in our markets and continued high or increased
unemployment levels could cause additional losses which could adversely affect our earnings and
financial condition, including our capital and liquidity.
Our concentration of commercial real estate loans could result in further increased loan
losses.
CRE is cyclical and poses risks of loss to us due to concentration levels and similar risks of
the asset, especially since we had 49.9 percent and 53.0 percent of our portfolio in CRE loans at
March 31, 2010 and 2009, respectively. The banking regulators continue to give CRE lending greater
scrutiny, and banks with higher levels of CRE loans are expected to implement improved
underwriting, internal controls, risk management policies and portfolio stress testing, as well as
higher levels of allowances for possible losses and capital levels as a result of CRE lending
growth and exposures. During the first quarter of 2010, we added $2.1 million of provisioning for
loan losses, in addition to provisioning of $124.8 million for the entire year in 2009, $88.6
million in 2008 and $12.7 million in 2007, in part reflecting collateral evaluations in response to
changes in the market values of land collateralizing acquisition and development loans.
Pursuant to the formal agreement that Seacoast National entered into with the OCC, Seacoast
National adopted and implemented a written commercial real estate concentration risk management
program. However, there is no guarantee that the program will effectively reduce our concentration
of commercial real estate.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
FDIC insurance premiums increased substantially in 2009 and we expect to pay significantly
higher FDIC premiums in the future. Market developments have significantly depleted the insurance
fund of the FDIC and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised
risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit
insurance premiums. On May 22, 2009, the FDIC implemented a five basis point special assessment of
each insured depository institutions assets minus Tier 1 capital as of June 30, 2009, but no more
than 10 basis points times the institutions assessment base for the second quarter of 2009,
collected on September 30, 2009. The FDIC also required all FDIC-insured institutions to prepay
their estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012,
which was paid on December 30, 2009.
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We also participate in the FDICs TLG for noninterest-bearing transaction deposit accounts. Banks
that participate in the TLGs noninterest-bearing transaction account guarantee paid the FDIC an
annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by
FDIC deposit insurance. TLGs noninterest-bearing transaction deposit account guarantee program
was scheduled to expire on December 31, 2009, but has been extended to December 31, 2010. Our
management has decided that we will participate in the extended program. Institutions that
participate in the extended program are required to pay an annualized fee of 15 to 25 basis points
in accordance with their risk category rating assigned by the FDIC. To the extent that these TLG
assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC
is authorized to impose an emergency special assessment on all FDIC-insured depository
institutions. The FDIC has authority to impose charges for the TLG program upon depository
institution holding companies, as well. The increased premiums and TLG assessments charged by the
FDIC increased our noninterest expense for the first quarter of 2010 and may continue to increase
our noninterest expense prospectively.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than
two years. In some cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers underlying financial condition or
performance. If current levels of market disruption and volatility continue or worsen, we may
experience adverse effects, which may be material, on our ability to maintain or access capital and
on our business, financial condition and results of operations.
Liquidity risks could affect operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial negative effect on our
liquidity. Our funding sources include federal funds purchases, securities sold under repurchase
agreements, non-core deposits, and short- and long-term debt. We are also members of the Federal
Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta, where we can obtain advances
collateralized with eligible assets. We maintain a portfolio of securities that can be used as a
secondary source of liquidity. There are other sources of liquidity available to us or Seacoast
National should they be needed, including our ability to acquire additional non-core deposits, the
issuance and sale of debt securities, and the issuance and sale of preferred or common securities
in public or private transactions. Our access to funding sources in amounts adequate to finance or
capitalize our activities or on terms which are acceptable to us could be impaired by factors that
affect us specifically or the financial services industry or economy in general. Our liquidity, on
a parent only basis, is adversely affected by our current inability to receive dividends from
Seacoast National without prior regulatory approval. However, we held approximately $10 million of
cash and short-term investments at March 31, 2010, largely due to the receipt of proceeds from our
common stock offering, which was consummated in the third quarter of 2009 and a private placement
of common stock completed in the fourth quarter of 2009. We expect an additional $46.9 million in
proceeds from a convertible preferred stock offering in the second quarter of 2010. We invested
all of the $50.0 million of the TARP CPP proceeds and an additional $73.0 million of proceeds from
our offerings in Seacoast National to meet the OCC capital requirements. Our ability to borrow
could
also be impaired by factors that are not specific to us, such as further disruption in the
financial markets or negative views and expectations about the prospects for the financial services
industry in light of recent turmoil faced by banking organizations and the continued deterioration
in credit markets.
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We could encounter difficulties as a result of our growth.
Our loans, deposits, fee businesses and employees have increased as a result of our organic
growth and acquisitions. Our failure to successfully manage and support this growth with
sufficient human resources, training and operational, financial and technology resources in
challenging markets and economic conditions could have a material adverse effect on our operating
results and financial condition. We may not be able to sustain our historical growth rates.
We are required to maintain capital to meet regulatory requirements, and if we fail to
maintain sufficient capital, whether due to losses, an inability to raise additional capital or
otherwise, our financial condition, liquidity and results of operations, as well as our regulatory
requirements, would be adversely affected.
Both we and Seacoast National must meet regulatory capital requirements and maintain
sufficient liquidity and our regulators may modify and adjust such requirements in the future.
Seacoast National agreed to an informal letter agreement with the OCC to maintain a Tier 1 leverage
capital ratio of 8.50 percent and a total risk-based capital ratio of 12.00 percent at Seacoast
National, which are higher than the regulatory minimum capital ratios. We also face significant
regulatory and other governmental risk as a financial institution and a participant in the TARP
CPP.
Our ability to raise additional capital, when and if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, including investor perceptions
regarding the banking industry and market condition, and governmental activities, many of which are
outside our control, and on our financial condition and performance. Accordingly, we cannot assure
you that we will be able to raise additional capital if needed or on terms acceptable to us. If we
fail to meet these capital and other regulatory requirements, our financial condition, liquidity
and results of operations would be materially and adversely affected.
Although we currently comply with all capital requirements, we may be subject to more stringent
regulatory capital ratio requirements in the future and we may need additional capital in order to
meet those requirements. Our failure to remain well capitalized for bank regulatory purposes
could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs,
our ability to pay dividends on common and preferred stock, make distributions on our trust
preferred securities, our ability to make acquisitions, and our business, results of operation and
financial conditions, generally. Under FDIC rules, if Seacoast National ceases to be a well
capitalized institution for bank regulatory purposes, its ability to accept brokered deposits may
be restricted and the interest rates that it pays may be restricted.
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Our ability to realize our deferred tax assets may be reduced in the future if our estimates
of future taxable income from our operations and tax planning strategies do not support our
deferred tax amount, and the amount of net operating loss carry-forwards and certain other tax
attributes realizable for income tax purposes may be reduced under Section 382 of the Internal
Revenue Code by sales of our capital securities.
As of March 31, 2010, we had net deferred tax assets of $18.4 million after we recorded a
$35.8 million of valuation allowance based on managements estimation of the likelihood of those
deferred tax assets being realized. These and future deferred tax assets may be further reduced in
the future if our estimates of future taxable income from our operations and tax planning
strategies do not support the amount of our deferred tax asset.
The amount of net operating loss carry-forwards and certain other tax attributes realizable
annually for income tax purposes may be reduced by an offering and/or other sales of our capital
securities, including transactions in the open market by 5% or greater sharesholders, if an
ownership change is deemed to occur under Section 382 of the Internal Revenue Code. The
determination of whether an ownership change has occurred under Section 382 is highly fact specific
and can occur through one or more acquisitions of capital stock (including open market trading) if
the result of such acquisitions is that the percentage of our outstanding common stock held by
shareholders or groups of shareholders owning at least 5% of our common stock at the time of such
acquisition, as determined under Section 382, is more than 50 percentage points higher than the
lowest percentage of our outstanding common stock owned by such shareholders or groups of
shareholders within the prior three-year period. Our sales of common stock in April 2010 increase
the risk of a possible future change in control under Section 382.
Our cost of funds may increase as a result of general economic conditions, FDIC insurance
assessments, interest rates and competitive pressures.
Our cost of funds may increase as a result of general economic conditions, FDIC insurance
assessments, interest rates and competitive pressures. We have traditionally obtained funds
principally through local deposits and we have a base of lower cost transaction deposits.
Generally, we believe local deposits are a cheaper and more stable source of funds than other
borrowings because interest rates paid for local deposits are typically lower than interest rates
charged for borrowings from other institutional lenders and reflect a mix of transaction and time
deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds
and our profitability and liquidity are likely to be adversely affected if, and to the extent, we
have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan
demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our
profitability and the ability to expand our loan portfolio.
Our profitability and liquidity may be affected by changes in interest rates and economic
conditions.
Our profitability depends upon net interest income, which is the difference between interest
earned on assets, and interest expense on interest-bearing liabilities, such as deposits and
borrowings. Net interest income will be adversely affected if market interest rates change such
that the interest we pay on deposits and borrowings and our FDIC deposit insurance assessments
increase faster than the interest earned on loans and investments. Interest rates, and
consequently our results of operations, are affected by general economic conditions (domestic and
foreign) and fiscal and monetary policies may materially affect the level and direction of interest
rates. From June 2004 to
mid-2006, the Federal Reserve raised the federal funds rate from 1.0 percent to
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5.25 percent. Since then, beginning in September 2007, the Federal Reserve decreased the federal funds rates by
100 basis points to 4.25 percent over the remainder of 2007, and has since reduced the target
federal funds rate by an additional 400 basis points to a range between zero and 25 basis points
beginning in December 2008. Decreases in interest rates generally increase the market values of
fixed-rate, interest-bearing investments and loans held, and increase the values of loan sales and
mortgage loan activities. However, the production of mortgages and other loans and the value of
collateral securing our loans, are dependent on demand within the markets we serve, as well as
interest rates. The levels of sales, as well as the values of real estate in our markets, have
declined. Declining rates reflect efforts by the Federal Reserve to stimulate the economy, but may
not be effective, and thus may negatively affect our results of operations and financial condition,
liquidity and earnings.
On February 18, 2010, the Federal Reserve raised the discount rate from 0.5 percent to 0.75%.
Increases in interest rates generally decrease the market values of fixed-rate, interest-bearing
investments and loans held and the production of mortgage and other loans and the value of
collateral securing our loans, and therefore may adversely affect our liquidity and earnings.
The TARP CPP and the ARRA impose, and other proposed rules may impose additional, executive
compensation and corporate governance requirements that may adversely affect us and our business,
including our ability to recruit and retain qualified employees.
The purchase agreement we entered into in connection with our participation in the TARP CPP
required us to adopt the Treasurys standards for executive compensation and corporate governance
while the Treasury holds the equity issued pursuant to the TARP CPP, including the common stock
which may be issued pursuant to the warrant to purchase 589,623 shares of common stock (or the
Warrant) which we refer to as the TARP Assistance Period. These standards generally apply to our
chief executive officer, chief financial officer and the three next most highly compensated senior
executive officers. The standards include:
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ensuring that incentive compensation for senior executives does not encourage
unnecessary and excessive risks that threaten the value of the financial institution; |
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required clawback of any bonus or incentive compensation paid to a senior executive
based on statements of earnings, gains or other criteria that are later proven to be
materially inaccurate; |
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prohibition on making golden parachute payments to senior executives; and |
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agreement not to deduct for tax purposes executive compensation in excess of
$500,000 for each senior executive. |
In particular, the change to the deductibility limit on executive compensation may increase
the overall cost of our compensation programs in future periods.
The ARRA imposed further limitations on compensation during the TARP Assistance Period including:
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a prohibition on making any golden parachute payment to a senior executive
officer or any of our next five most highly compensated employees; |
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a prohibition on any compensation plan that would encourage manipulation of the
reported earnings to enhance the compensation of any of its employees; and |
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a prohibition of the five highest paid executives from receiving or accruing any
bonus, retention award or incentive compensation, or bonus except for long-term
restricted stock
with a value not greater than one-third of the total amount of annual compensation
of the employee receiving the stock. |
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The Treasury released an interim final rule on TARP standards for compensation and corporate
governance on June 10, 2009, which implemented and further expanded the limitations and
restrictions imposed on executive compensation and corporate governance by the TARP CPP and ARRA.
The new Treasury interim final rules also prohibit any tax gross-up payments to senior executive
officers and the next 20 highest paid executives; require a say on pay vote in annual
shareholders meetings; and restrict stock or units that may vest or become transferable granted to
executives.
The Federal Reserve has proposed guidelines on executive compensation. The FDIC also has proposed
a rule to incorporate employee compensation factors into the risk assessment system which would
adjust risk-based deposit insurance assessment rates if the design of certain compensation programs
does not satisfy certain FDIC goals to prevent executive compensation from encouraging undue
risk-taking.
These provisions and any future rules issued by the Treasury, the Federal Reserve and the FDIC or
any other regulatory agencies could adversely affect our ability to attract and retain management
capable and motivated sufficiently to manage and operate our business through difficult economic
and market conditions. If we are unable to attract and retain qualified employees to manage and
operate our business, we may not be able to successfully execute our business strategy.
Changes in accounting and tax rules applicable to banks could adversely affect our financial
conditions and results of operations.
From time to time, the FASB and SEC change the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can be hard to predict and can
materially impact how we record and report our financial condition and results of operations. In
some cases, we could be required to apply a new or revised standard retroactively, resulting in us
restating prior period financial statements.
TARP lending goals may not be attainable.
Congress and the bank regulators have encouraged recipients of TARP capital to use such
capital to make loans and it may not be possible to safely, soundly and profitably make sufficient
loans to creditworthy persons in the current economy to satisfy such goals. Congressional demands
for additional lending by recipients of TARP capital, and regulatory demands for demonstrating and
reporting such lending, are increasing. On November 12, 2008, the bank regulatory agencies issued
a statement encouraging banks to, among other things, lend prudently and responsibly to
creditworthy borrowers and to work with borrowers to preserve homeownership and avoid preventable
foreclosures. We continue to lend and have expanded our mortgage loan originations, and to report
our lending to the Treasury. The future demands for additional lending are unclear and uncertain,
and we could be forced to make loans that involve risks or terms that we would not otherwise find
acceptable or in our shareholders best interest. Such loans could adversely affect our results of
operation and financial condition, and may be in conflict with bank regulations and requirements as
to liquidity and capital. The profitability of funding such loans using deposits may be adversely
affected by increased FDIC insurance premiums.
63
Changes of TARP program and future rules applicable to banks generally or to TARP recipients
could adversely affect our operations, financial condition, and results of operations.
The rules and policies applicable to recipients of capital under the TARP CPP continue to
evolve and their scope, timing and effect cannot be predicted. Any redemption of the securities
sold to the Treasury to avoid these restrictions would require prior Federal Reserve and Treasury
approval. Based on recently issued Federal Reserve guidelines, institutions seeking to redeem TARP
CPP preferred stock must demonstrate an ability to access the long-term debt markets without
reliance on the FDICs TLG, successfully demonstrate access to public equity markets and meet a
number of additional requirements and considerations before we can redeem any securities sold to
the Treasury. Therefore, it is uncertain if we will be able to redeem such securities even if we
have sufficient financial resources to do so.
In addition, the government is contemplating potential new programs under TARP, including programs
to promote small business lending, among other initiatives. It is uncertain whether we will qualify
for those new programs and whether those new programs may impose additional restrictions on our
operation and affect our financial condition in the future.
Our future success is dependent on our ability to compete effectively in highly competitive
markets.
We operate in the highly competitive markets of Martin, St. Lucie, Brevard, Indian River and
Palm Beach Counties in southeastern Florida, the Orlando, Florida metropolitan statistical area, as
well as in more rural competitive counties in the Lake Okeechobee, Florida region. Our future
growth and success will depend on our ability to compete effectively in these markets. We compete
for loans, deposits and other financial services in geographic markets with other local, regional
and national commercial banks, thrifts, credit unions, mortgage lenders, and securities and
insurance brokerage firms. Many of our competitors offer products and services different from us,
and have substantially greater resources, name recognition and market presence than we do, which
benefits them in attracting business. Larger competitors may be able to price loans and deposits
more aggressively than we can, and have broader customer and geographic bases to draw upon.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding and other transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. As a result, defaults by, or even rumors or questions about, one or more financial
services institutions, or the financial services industry generally, have led to market-wide
liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to
losses or defaults by us or by other institutions. We could experience increases in deposits and
assets as a result of other banks difficulties or failure, which would increase the capital we
need to support such growth.
We operate in a heavily regulated environment.
We and our subsidiaries are regulated by several regulators, including the Federal Reserve,
the OCC, the SEC, the FDIC and FINRA, and since December 2008, the Treasury. Our success is
affected by state and federal regulations affecting banks and bank holding companies, and the
securities markets and securities and insurance regulators. Banking regulations are primarily
intended to protect depositors, not shareholders.
The financial services industry also is subject
to
frequent legislative and regulatory changes and proposed changes, the effects of which cannot be
predicted. Federal bank regulatory agencies and the Treasury, as well as the Congress and the
President, are evaluating and have proposed numerous significant changes in the regulation of
banks, other financial services providers and the financial markets. These changes, if adopted,
could require us to maintain more capital, liquidity and risk controls which could adversely affect
our growth, profitability and financial condition.
64
We are subject to internal control reporting requirements that increase compliance costs and
failure to comply timely could adversely affect our reputation and the value of our securities.
We are required to comply with various corporate governance and financial reporting
requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the
SEC, the Public Company Accounting Oversight Board and Nasdaq. In particular, we are required to
include management and independent registered public accounting firm reports on internal controls
as part of our annual report on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act. We
are also subject to a number of disclosure and reporting requirements as a result of our
participation in TARP CPP. The SEC also has proposed a number of new rules or regulations
requiring additional disclosure, such as lower-level employee compensation. We expect to continue
to spend significant amounts of time and money on compliance with these rules. Our failure to
track and comply with the various rules may materially adversely affect our reputation, ability to
obtain the necessary certifications to financial statements, and the value of our securities.
Technological changes affect our business, and we may have fewer resources than many
competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to serving clients
better, the effective use of technology may increase efficiency and may enable financial
institutions to reduce costs. Our future success will depend, in part, upon our ability to use
technology to provide products and services that provide convenience to customers and to create
additional efficiencies in operations. We may need to make significant additional capital
investments in technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many competitors have substantially greater resources to
invest in technological improvements.
The anti-takeover provisions in our Articles of Incorporation and under Florida law may make
it more difficult for takeover attempts that have not been approved by our board of directors.
Florida law and our Articles of Incorporation include anti-takeover provisions, such as
provisions that encourage persons seeking to acquire control of us to consult with our board, and
which enable the board to negotiate and give consideration on behalf of us and our shareholders and
other constituencies to the merits of any offer made. Such provisions, as well as supermajority
voting and quorum requirements and a staggered board of directors, may make any takeover attempts
and other acquisitions of interests in us, by means of a tender offer, open market purchase, a
proxy fight or otherwise, that have not been approved by our board of directors more difficult and
more expensive. These provisions may discourage possible business combinations that a majority of
our shareholders may believe to be desirable and beneficial. As a result, our board of directors
may decide not to pursue transactions that would otherwise be in the best interests of holders of
our common stock.
65
Hurricanes or other adverse weather events would negatively affect our local economies or
disrupt our operations, which would have an adverse effect on our business or results of
operations.
Our market areas in Florida are susceptible to hurricanes and tropical storms and related
flooding and wind damage. Such weather events can disrupt operations, result in damage to
properties and negatively affect the local economies in the markets where they operate. We cannot
predict whether or to what extent damage that may be caused by future hurricanes will affect our
operations or the economies in our current or future market areas, but such weather events could
result in a decline in loan originations, a decline in the value or destruction of properties
securing our loans and an increase in the delinquencies, foreclosures or loan losses. Our business
or results of operations may be adversely affected by these and other negative effects of future
hurricanes or tropical storms, including flooding and wind damage. Many of our customers have
incurred significantly higher property and casualty insurance premiums on their properties located
in our markets, which may adversely affect real estate sales and values in our markets.
Future acquisitions and expansion activities may disrupt our business, dilute existing
shareholders and adversely affect our operating results.
We regularly evaluate potential acquisitions and expansion opportunities. To the extent that
we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably
manage this growth. Acquiring other banks, branches or businesses, as well as other geographic and
product expansion activities, involve various risks including:
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risks of unknown or contingent liabilities; |
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unanticipated costs and delays; |
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risks that acquired new businesses do not perform consistent with our growth and
profitability expectations; |
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risks of entering new markets or product areas where we have limited experience; |
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risks that growth will strain our infrastructure, staff, internal controls and
management, which may require additional personnel, time and expenditures; |
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exposure to potential asset quality issues with acquired institutions; |
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difficulties, expenses and delays of integrating the operations and personnel of
acquired institutions, and start-up delays and costs of other expansion activities; |
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potential disruptions to our business; |
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possible loss of key employees and customers of acquired institutions; |
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potential short-term decreases in profitability; and |
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diversion of our managements time and attention from our existing operations and
business. |
66
We may engage in FDIC-assisted transactions, which could present additional risks to our business.
We may have opportunities to acquire the assets and liabilities of failed banks in
FDIC-assisted transactions, which present the risks of acquisitions, although generally, as well as
some risks specific to these transactions. Although these FDIC-assisted transactions typically
provide for FDIC assistance to an acquirer to mitigate certain risks, which may include
loss-sharing, where the FDIC absorbs most losses on covered assets and provides some indemnity, we
would be subject to many of the same risks we would face in acquiring another bank in a negotiated
transaction, without FDIC assistance, including risks associated with pricing such transactions,
the risks of loss of deposits and maintaining customer relationships and failure to realize the
anticipated acquisition benefits in the amounts and within the timeframes we expect. In addition,
because these acquisitions provide for limited diligence and negotiation of terms, these
transactions may require additional resources and time, servicing acquired problem loans and costs
related to integration of personnel and operating systems, the establishment of processes to
service acquired assets, require us to raise additional capital, which may be dilutive to our
existing shareholders. If we are unable to manage these risks, FDIC-assisted acquisitions could
have a material adverse effect on our business, financial condition and results of operations.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, as our earnings and capital position improve, we may
consider the acquisition of other businesses. We expect that other banking and financial
companies, many of which have significantly greater resources, will compete with us to acquire
financial services businesses. This competition could increase prices for potential acquisitions
that we believe are attractive. Also, acquisitions are subject to various regulatory approvals.
If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an
acquisition that we believe is in our best interests. Among other things, our regulators consider
our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles
when considering acquisition and expansion proposals. Any acquisition could be dilutive to our
earnings and shareholders equity per share of our common stock.
Risks Related to our Common Stock
We may issue additional shares of common or preferred stock securities, which may dilute the
interests of our shareholders and may adversely affect the market price of our common stock.
We are currently authorized to issue up to 130 million shares of common stock, of which
58,913,722 shares were outstanding as of March 31, 2010, and up to 4 million shares of preferred
stock, of which 2,000 shares are outstanding. Since March 31, 2010, the Company issued Series B
convertible preferred stock raising $46.9 million in capital, with additional common stock of
34,465,517 shares expected at conversion. Our board of directors has authority, without action or
vote of the shareholders, to issue all or part of the remaining authorized but unissued shares and
to establish the terms of any series of preferred stock. These authorized but unissued shares
could be issued on terms or in circumstances that could dilute the interests of other shareholders.
67
The Series A Preferred Stock diminishes the net income available to our common shareholders
and earnings per common share, and the Warrant we issued to Treasury may be dilutive to holders of
our common stock.
The dividends accrued and the accretion on discount on the Series A Preferred Stock reduce the
net income available to common shareholders and our earnings per common share. The Series A
Preferred Stock is cumulative, which means that any dividends not declared or paid will accumulate
and will be payable when we resume paying dividends. Shares of Series A Preferred Stock will also
receive preferential treatment in the event of liquidation, dissolution or winding up of Seacoast.
Additionally, the ownership interest of the existing holders of our common stock will be diluted to
the extent the Warrant is exercised. The shares of common stock underlying the Warrant represent
approximately 1.0 percent of the shares of our common stock outstanding as of March 31, 2010
(including the shares issuable upon exercise of the Warrant in our total outstanding shares).
Although Treasury has agreed not to vote any of the shares of common stock it receives upon
exercise of the Warrant, a transferee of any portion of the Warrant or of any shares of common
stock acquired upon exercise of the Warrant is not bound by this restriction.
Holders of the Series A Preferred Stock have certain voting rights that may adversely affect
our common shareholders, and the holders of shares of our Series A Preferred Stock may have
different interests from, and vote their shares in a manner deemed adverse to, our common
shareholders.
In the event that we fail to pay dividends on the Series A Preferred Stock for an aggregate of
at least six quarterly dividend periods (whether or not consecutive) the Treasury will have the
right to appoint two directors to our board of directors until all accrued but unpaid dividends
have been paid; otherwise, except as required by law, holders of the Series A Preferred Stock have
limited voting rights. So long as shares of the Series A Preferred Stock are outstanding, in
addition to any other vote or consent of shareholders required by law or our amended and restated
charter, the vote or consent of holders owning at least 66 2/3 percent of the shares of Series A
Preferred Stock outstanding is required for:
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any authorization or issuance of shares ranking senior to the Series A
Preferred Stock; |
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any amendment to the rights of the Series A Preferred Stock so as to adversely
affect the rights, preferences, privileges or voting power of the Series A Preferred
Stock; or |
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consummation of any merger, share exchange or similar transaction unless the shares
of Series A Preferred Stock remain outstanding, or if we are not the surviving entity
in such transaction, are converted into or exchanged for preference securities of the
surviving entity and the shares of Series A Preferred Stock remaining outstanding or
such preference securities have such rights, preferences, privileges and voting power
as are not materially less favorable to the holders than the rights, preferences,
privileges and voting power of the shares of Series A Preferred Stock. Holders of
Series A Preferred Stock could block the foregoing transitions, even where considered
desirable by, or in the best interests of, holders of our common stock. |
68
The holders of Series A Preferred Stock, including the Treasury, may have different interests
from the holders of our common stock, and could vote to disapprove transactions that are favored
by, or are in the best interests of, our common shareholders.
The anti-takeover provisions in our articles of incorporation and under Florida law may make
it more difficult for takeover attempts that have not been approved by our board of directors.
Florida law and our articles of incorporation include anti-takeover provisions, such as
provisions that encourage persons seeking to acquire control of us to consult with our board, and
which enable the board to negotiate and give consideration on behalf of us and our shareholders and
other constituencies to the merits of any offer made. Such provisions, as well as supermajority
voting and quorum requirements and a staggered board of directors, may make any takeover attempts
and other acquisitions of interests in us that have not been approved by our board of directors
more difficult and more expensive. These provisions may discourage possible business combinations
that a majority of our shareholders may believe to be desirable and beneficial.
69
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer purchases of equity securities during the first quarter of 2010 were as follows:
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Maximum |
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Total |
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Total Number of |
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Number of |
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Number of |
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Shares Purchased |
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Shares that May |
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Shares |
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Average Price |
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as Part of Public |
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yet be Purchased |
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Period |
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Purchased |
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Paid Per Share |
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Announced Plan* |
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Under the Plan |
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1/1/10 to 1/31/10 |
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0 |
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$ |
0 |
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668,657 |
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156,343 |
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2/1/10 to 2/28/10 |
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0 |
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0 |
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668,657 |
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156,343 |
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3/1/10 to 3/31/10 |
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0 |
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0 |
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668,657 |
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156,343 |
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Total 1st Quarter |
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0 |
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0 |
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668,657 |
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156,343 |
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* |
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The plan to purchase equity securities totaling 825,000 was approved on September 18, 2001,
with no expiration date. |
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Item 3. |
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Defaults upon Senior Securities |
On May 19, 2009, the Companys Board of Directors voted to suspend quarterly dividends on the
Companys common and preferred stock and interest payments on subordinated debt associated with
trust preferred securities. Therefore, the Company is currently in arrears with the dividend
payments on Series A Preferred Stock and interest payments on subordinated debt. As of the date of
filing this Report, the amount of the arrearage on the dividend payments of Series A Preferred
Stock is $2,883,000 and the amount of the arrearage on the payments on the subordinated debt
associated with trust preferred securities is $1,183,000. The total arrearage on both securities
is $4,066,000 as of March 31, 2010.
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
None.
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Item 5. |
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Other Information |
During the period covered by
this report, there was no information required to be disclosed by us
in a Current Report on Form 8-K that was not so reported, nor were there any material changes to
the procedures by which our security holders may recommend nominees to our Board of Directors.
70
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Exhibit 31.1
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
Exhibit 31.2
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Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
Exhibit 32.1
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Statement of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
Exhibit 32.2
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Statement of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
71
SIGNATURE
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.
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SEACOAST BANKING CORPORATION OF FLORIDA
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May 13, 2010 |
/s/ Dennis S. Hudson, III
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DENNIS S. HUDSON, III |
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Chairman & Chief Executive Officer |
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May 13, 2010 |
/s/ William R. Hahl
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WILLIAM R. HAHL |
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Executive Vice President & Chief Financial Officer |
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72