EX-13 2 0002.txt 2000 ANNUAL REPORT Financial Highlights (Dollars in thousands except per share data) FOR THE YEAR 2000 1999 1998 1997 1996 ------------ ---- ---- ---- ---- ---- Net interest income $42,095 $43,089 $40,213 $38,077 $36,223 Provision for loan losses 600 660 1,710 913 1,090 Noninterest income: Securities gains (losses) (12) 309 612 48 76 Other 13,150 12,148 11,775 10,896 10,331 Noninterest expenses 34,877 35,983 35,721 36,425 31,768 Income before income taxes 19,756 18,903 15,169 11,683 13,772 Provision for income taxes 7,668 7,119 5,606 4,251 4,933 Net income 12,088 11,784 9,563 7,432 8,839 Core earnings (1) 20,459 19,439 16,565 12,755 14,968 Per share data Net income: Diluted 2.51 2.40 1.84 1.42 1.71 Basic 2.53 2.43 1.88 1.45 1.73 Cash dividends paid: Class A common 1.06 0.98 0.90 0.82 0.65 Book value 17.87 15.96 15.87 15.75 15.08 Dividends to net income 41.6% 39.8% 47.4% 53.8% 30.9% AT YEAR END Assets $1,151,373 $1,081,032 $1,092,230 $943,037 $938,501 Securities 204,664 213,654 261,183 220,150 223,169 Net loans 837,328 771,294 695,207 608,567 570,667 Deposits 957,089 905,960 905,202 806,098 811,493 Shareholders' equity 84,263 77,111 78,442 81,064 76,995 Performance ratios: Return on average assets 1.09% 1.11% 0.98% 0.83% 1.04% Return on average equity 14.09 14.64 11.64 9.17 11.63 Net interest margin (2) 4.03 4.34 4.40 4.60 4.60 Average equity to average assets 7.76 7.57 8.39 9.09 8.96 --------------------------------- (1) Income before taxes excluding the provision for loan losses, securities gains (losses) and expenses associated with foreclosed and repossessed asset management and dispositions. (2) On a fully taxable equivalent basis. ================================================================================ FINANCIAL REVIEW ================================================================================ 2000 Management's Discussion and Analysis Net income for 2000 totaled $12,088,000 or $2.51 per share diluted, compared with $11,784,000 or $2.40 per share diluted in 1999 and $9,563,000 or $1.84 per share diluted in 1998. Return on average assets was 1.09 percent and return on average shareholders' equity was 14.09 percent for 2000, compared to the prior year's results of 1.11 percent and 14.64 percent, respectively, and 1998's results of 0.98 percent and 11.64 percent, respectively. Earnings in 1998 were impacted by net non-recurring gains of $330,000 ($209,000 after tax). This includes a gain of $616,000 on the sale of the Company's credit card portfolio and a charge of $286,000 taken to cancel an information systems contract for processing of the Company's trust business. --------------------- Results of Operations --------------------- Net Interest Income ------------------- Net interest income (on a fully tax equivalent basis) decreased $1,079,000 or 2.5 percent to $42,373,000 for 2000, compared to a year ago. For 2000, the net interest margin decreased to 4.03 percent from 4.34 percent for 1999. In 2000, the Federal Reserve increased short term rates 100 basis points, with increases of 25 basis points in both February and March 2000 and another 50 basis points in May 2000. The Company, along with most other banks, has seen its net interest margin decline over the last twelve months as a result of the Federal Reserve's actions. In the fourth quarter of 2000, the net interest margin (on a fully tax equivalent basis)of 3.93 percent was three basis points higher than in the third quarter of 2000, but was 15 basis points lower when compared to the second quarter of 2000 and 31 basis points lower when compared to the first quarter 2000's margin performance. If the Federal Reserve adopts a preference to ease short term interest rates, Company management believes that its net interest margin (stable at present)will likely improve during 2001. TABLE 1: Condensed Income Statement as a Percent of Average Assets (Tax equivalent basis) 2000 1999 1998 ---- ---- ---- Net interest income 3.83% 4.09% 4.14% Provision for loan losses 0.05 0.06 0.17 Noninterest income Securities gains 0.00 0.03 0.06 Other 1.19 1.14 1.20 Noninterest expenses 3.16 3.39 3.64 ---- ---- ---- Income before income taxes 1.81 1.81 1.59 Provision for income taxes including tax equivalent adjustment 0.72 0.70 0.61 ---- ---- ---- Net Income 1.09% 1.11% 0.98% ==== ==== ==== For the twelve months ended December 31, 2000 (compared to last year), the cost of interest bearing liabilities increased 70 basis points to 4.33 percent with rates for NOW, savings, money market, time deposits, short term borrowings (entirely composed of repurchase agreements with customers and federal funds purchased), and other borrowings increasing 26, 96, 14, 74, 107, and 72 basis points, respectively. The rate for NOW accounts increased as a result of the success of a new product called Investor NOW, which requires a minimum balance of $100,000, offered at a competitive market rate tied to an index. Rates for savings accounts increased as a result of the success of two savings products called Grand Savings and Grand Savings Plus which were offered at higher rates than the Company's regular savings account. The products increased $6.2 million and $33.7 million, respectively, during 2000. Certificates of deposit grew $13.2 million during 2000, reflecting higher interest rates paid and customer desire to shift deposit balances from lower interest bearing core deposits into higher yielding time deposits. The increase in rate for short term borrowings (all maturing overnight) reflects the impact of the Federal Reserve's actions during 2000. The termination (call) of a $10 million borrowing with a rate of 5.40 percent with Donaldson, Lufkin & Jenrette (DLJ) at the end of August 2000 and the addition of $25 million of two-year fixed rate borrowings from the Federal Home Loan Bank (FHLB) in March 2000 at 6.99 percent (subsequently renewed for a three-year term at 6.55 percent in December 2000) effected the increase in the cost of other borrowings. TABLE 2: Changes in Average Earning Assets (Dollars in thousands) Increase/(Decrease) Increase/(Decrease) 2000 vs 1999 1999 vs 1998 ------------ ------------ Securities: Taxable ($26,734) (11.1)% $16,476 7.3% Nontaxable (3,030) (28.7) (1,686) (13.8) Federal funds sold and other short term investments 506 6.5 (8,778) (53.1) Loans, net 77,419 10.4 73,593 11.0 ------- ------- Total $48,161 4.8% $79,605 8.6% ======= ======= With regards to interest earned, the yield on earning assets for 2000 increased 24 basis points to 7.62 percent, compared to 7.38 percent for 1999. Increases in the yield on loans of 15 basis points to 8.0 percent, the yield on securities of 22 basis points to 6.27 percent, and the yield on federal funds sold of 125 basis points to 6.07 percent was enhanced by a changing earning assets mix (with a $77.4 million growth in average loans during 2000). The growth in loans, larger as an amount in 2000 than for 1999, was slightly slower as a percentage year-over-year, 10.4 percent versus 11.0 percent, respectively. The slowing of the economy in the fourth quarter impacted loan growth and is likely to impact loan growth in 2001. ================================================================================ TABLE 3: Rate/Volume Analysis (On a Tax Equivalent Basis) Amount of Increase/(Decrease) (Dollars in thousands) 2000 vs 1999 Due to Change In: ----------------- Volume Rate Mix Total ------ ---- --- ----- Interest income Securities: Taxable ($1,591) $625 $(69) ($1,035) Nontaxable (253) (46) 13 (286) --- -- -- --- (1,844) 579 (56) (1,321) Federal funds sold and other short term investments 24 98 6 128 Loans 6,078 1,095 114 7,287 ----- ----- --- ----- Total Interest Income 4,258 1,772 64 6,094 Interest expense NOW (105) 162 (15) 42 Savings deposits 600 1,058 257 1,915 Money market accounts (438) 300 (32) (170) Time deposits 657 2,928 97 3,682 --- ----- -- ----- 714 4,448 307 5,469 Federal funds purchased and other short term borrowings 13 411 3 427 Long term borrowings 976 179 122 1,277 --- --- --- ----- Total Interest Expense 1,703 5,038 432 7,173 ----- ----- --- ----- Net Interest Income $2,555 ($3,266) ($368) ($1,079) ====== ======= ==== ====== --------------- Rate/Volume Analysis (On a Tax Equivalent Basis)(con't) Amount of Increase (Decrease) (Dollars in thousands) 1999 vs 1998 Due to Change In: ----------------- Volume Rate Mix Total ------ ---- --- ----- Interest income Securities: Taxable $996 ($212) ($16) $768 Nontaxable (141) (3) 0 (144) --- - - --- 855 (215) (16) 624 Federal funds sold and other short term investments (465) (80) 42 (503) Loans 6,009 (2,118) (231) 3,660 ----- ----- --- ----- Total Interest Income 6,399 (2,413) (205) 3,781 Interest expense NOW (28) (143) 3 (168) Savings deposits 407 210 47 664 Money market accounts 356 (400) (34) (78) Time deposits 238 (1,093) (12) (867) --- ----- -- --- 973 (1,426) 4 (449) Federal funds purchased and other short term borrowings 496 68 32 596 Long term borrowings 771 (1) (1) 769 --- - - --- Total Interest Expense 2,240 (1,359) 35 916 ----- ----- -- --- Net Interest Income $4,159 ($1,054) ($240) $2,865 ====== ====== ==== ====== Average earning assets in 2000 were $48,161,000 or 4.8 percent higher when compared to prior year. Average interest bearing liabilities were $29,523,000 or 3.5 percent higher year-over-year. Loans (the highest yielding component of earning assets) as a percentage of average earning assets increased to 78.1 percent compared to 74.1 percent a year ago, while average securities (a lower yielding component) declined to 21.1 percent from 25.1 percent. Average other borrowings (the highest cost component of interest bearing liabilities) as a percentage of average interest bearing liabilities increased to 4.8 percent in 2000 compared to 3.0 percent in 1999. Lower cost core interest bearing deposits (NOW, savings and money market deposits) decreased $1,005,000 or 0.3 percent to $377,429,000 during 2000 and declined from 45.1 percent to 43.4 percent as a component of average interest bearing liabilities. Favorably affecting the Company's deposit mix, average noninterest bearing demand deposits grew $7,620,000 or 5.6 percent to $144,362,000. TABLE 4: Changes in Average Interest Bearing Liabilities (Dollars in thousands) Increase/(Decrease) Increase/(Decrease) 2000 vs 1999 1999 vs 1998 ------------------- ------------------ NOW $(5,914) (9.6)% $(1,407) (2.2)% Savings deposits 26,870 24.3 20,345 22.6 Money market accounts (21,961) (10.7) 16,143 8.5 Time deposits 13,226 3.3 4,537 1.2 Federal funds purchased and other short term borrowings 297 0.8 12,530 48.4 Other borrowings 17,005 68.1 13,421 116.2 ------ ------ Total $29,523 3.5% $65,569 8.5% ======= ======= Net interest income (on a fully tax equivalent basis) increased $2,865,000 or 7.1 percent to $43,452,000 for 1999, compared to a year earlier. In 1999, the net interest margin decreased to 4.34 percent from 4.40 percent for 1998. The cost on interest bearing liabilities in 1999 declined 19 basis points to 3.63 percent. While the cost for savings account balances increased 23 basis points (a direct result of the Company successfully increasing balances with its Grand Savings product that offers a higher interest for larger deposit balances), rates paid for NOW accounts, money market accounts, and certificates of deposits declined. The Company extended the average maturity of its time certificate of deposit funding by offering longer terms in early 1999 and locked in attractive rates before the Fed began increasing interest rates. The yield on earning assets in 1999 declined 22 basis points year-over-year to 7.38 percent. Decreases in the yield on loans of 32 basis points, the yield on securities of 12 basis points and the yield on federal funds sold of 48 basis points were partially offset by a changing earning asset mix, with a $73,593,000 increase in average loans, accounting for nearly all of the $79,605,000 increase in earning assets. The yield on loans was affected by the full year impact of the sale of the credit card portfolio in July 1998 and the significant refinance activity that occurred in 1998. Average investment securities grew $14,790,000 or 6.3 percent, while average federal funds sold decreased $8,778,000 or 53.1 percent. The growth in loans and an increase in lower cost interest bearing liabilities mitigated the decline in the margin. Loans (the highest yielding component of earning assets) as a percentage of average earnings assets increased to 74.1 percent in 1999, versus 72.6 percent in 1998. Average certificates of deposit (a higher cost component of interest bearing deposits) as a percentage of interest bearing liabilities decreased to 47.4 percent in 1999, compared to 50.8 percent in 1998. Lower cost interest bearing core deposits (NOW, savings and money market deposits) grew $35,081,000 or 10.2 percent to $378,434,000. Also favorably affecting the mix of deposits was an increase in average noninterest bearing demand deposits of $18,562,000 or 15.7 percent. TABLE 5: Three-Year Summary Average Balances, Interest Income and Expenses, Yields and Rates (1) (Dollars in thousands) 2000 ---------- ---- Average Yield/ Balance Interest Rate ------- -------- ----- Assets Earning assets: Securities Taxable $214,096 $13,295 6.21% Nontaxable 7,521 596 7.92 ------ --- ---- Total Securities 221,617 13,891 6.27 Federal funds sold and other short term investments 8,251 501 6.07 Loans (2) 820,429 65,616 8.00 ------- ------ ---- Total Earning Assets 1,050,297 80,008 7.62 Allowance for loan losses (7,099) Cash and due from banks 30,258 Bank premises and equipment 17,024 Other assets 14,300 ------ $1,104,780 ========== Liabilities and Shareholders Equity Interest-bearing liabilities: NOW $55,926 $1,135 2.03% Savings deposits 137,347 4,380 3.19 Money market accounts 184,156 3,944 2.14 Time deposits 410,739 23,418 5.70 Federal funds purchased and other short term borrowings 38,735 2,048 5.29 Other borrowings 41,975 2,710 6.46 ------ ----- ---- Total Interest-Bearing liabilities 868,878 37,635 4.33 Demand deposits 144,362 Other liabilities 5,774 ----- 1,019,014 Shareholders' equity 85,766 ------ $1,104,780 ========== Interest expense as % of earning 3.58% assets Net interest income/yield on earning assets $42,373 4.03% ======= ==== ----------------------------- Three-Year Summary (con't) Average Balances, Interest Income and Expenses, Yields and Rates (1) (Dollars in thousands) 1999 ---------- ---- Average Yield/ Balance Interest Rate ------- -------- ---- Assets Earning assets: Securities Taxable $240,830 $14,330 5.95% Non Taxable 10,551 882 8.36 ------ --- ---- Total Securities 251,381 15,212 6.05 Federal funds sold and other short term investments 7,745 373 4.82 Loans (2) 743,010 58,329 7.85 ------- ------ ---- Total Earning Assets 1,002,136 73,914 7.38 Allowance for loan losses (6,713) Cash and due from banks 35,110 Bank premises and equipment 17,213 Other assets 14,589 ------ $1,062,335 ========= Liabilities and Shareholders Equity Interest-bearing liabilities: NOW $61,840 $1,093 1.77% Savings deposits 110,477 2,465 2.23 Money market accounts 206,117 4,114 2.00 Time deposits 397,513 19,736 4.96 Federal funds purchased and other short term borrowings 38,438 1,621 4.22 Other borrowings 24,970 1,433 5.74 ------ ----- ---- Total Interest Bearing Liabilities 839,355 30,462 3.63 Demand deposits 136,742 Other liabilities 5,767 ----- 981,864 Shareholders' equity 80,471 ------ $1,062,335 ========== Interest expense as % of earning assets 3.04% Net interest income/yield on earning assets $43,452 4.34% ======= ==== ------------------------------- Three-Year Summary (con't) Average Balances, Interest Income and Expenses, Yields and Rates (1) (Dollars in thousands) 1998 ---------- ---- Average Yield/ Balance Interest Rate ---------------- ---- Assets Earning assets: Securities Taxable $224,354 $13,562 6.04% Nontaxable 12,237 1,026 8.38 ------ ----- ---- Total Securities 236,591 14,588 6.17 Federal funds sold and other short term investments 16,523 876 5.30 Loans (2) 669,417 54,669 8.17 ------- ------ ---- Total Earning Assets 922,531 70,133 7.60 Allowance for loan losses (5,739) Cash and due from banks 29,244 Bank premises and equipment 18,620 Other assets 14,737 ------ $979,393 ======== Liabilities and Shareholders Equity Interest-bearing liabilities: NOW $63,247 $1,261 1.99% Savings deposits 90,132 1,801 2.00 Money market accounts 189,974 4,192 2.21 Time deposits 392,976 20,603 5.24 Federal funds purchased and other short term borrowings 25,908 1,025 3.96 Other borrowings 11,549 664 5.75 ------ --- ---- Total Interest Bearing Liabilities 773,786 29,546 3.82 Demand deposits 118,180 Other liabilities 5,277 ----- 897,243 Shareholders' equity 82,150 ------ $979,393 ======== Interest expense as % of earning assets 3.20% Net interest income/yield on earning assets $40,587 4.40% ======= ==== ------------- (1) The tax equivalent adjustment is based on a 34% tax rate. (2) Nonaccrual loans are included in loan balances. Fees on loans are included in interest on loans. Provision for Loan Losses ------------------------- The continued excellent credit quality in 2000 offset the impacts of the increase in average loans of $77.4 million and resulted in a decline in the provision for loan losses in 2000. Loan losses totaled $252,000 or 0.03 percent of average total loans in 2000 compared to $133,000 or 0.02 percent of average total loans in 1999. The provision for loan losses in 1998 was $1,710,000 and net charge offs totaled $730,000 or 0.11 percent of average total loans. The sale of the credit card portfolio in 1998 reduced the Company's exposure to losses from consumer bankruptcies and was partly responsible for the lower net charge offs in 2000 and 1999. Management determines the provision for loan losses which is charged to operations by constantly analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge offs, and by estimating losses inherent in its portfolio. While the Company's policies and procedures used to estimate the monthly provision for loan losses charged to operations are considered adequate by management, and are reviewed from time to time by the Office of the Comptroller of the Currency, there exist factors beyond the control of the Company, such as general economic conditions both locally and nationally, which make management's judgment as to the adequacy of the provision necessarily approximate and imprecise. See "Nonperforming Assets" and "Allowance for Loan Losses." Noninterest Income ------------------ Table 6 shows noninterest income for the years indicated. Noninterest income, excluding gains(losses) from sales of securities, totaled $13,150,000 in 2000, an increase of $1,002,000 or 8.2 percent from 1999. The Company intends to continue to diversify its sources of income. Noninterest income now makes up 23.8 percent of net revenue, compared with 21.8 percent in 1995. While service charges on deposits remained nearly unchanged in 2000 as compared to the prior year, reflecting the intense competition from savings banks, other commercial banks and non-banks, other sources of fees and commissions increased $1,013,000 or 13.9 percent. The Company added two new sources for fee-based income. Its new Seacoast Marine Finance division produced $42.5 million in loans, of which $16.3 million were added to the loan portfolio and the remainder were sold, increasing fee-based income by $361,000. Seacoast Marine Finance is headquartered in Fort Lauderdale, Florida and commenced operations in early February 2000 with an experienced, seasoned team of marine lending professionals. Seacoast Marine Finance's marketing emphasis is on marine loans of $200,000 and greater. Because the Company intends to continue expanding this business in 2001, it is believed that the growth in revenue will exceed the Company's other more traditional sources of fee income. During 2000, the Company reorganized its traditional residential real estate portfolio lending division into a mortgage banking business. By the fourth quarter of 2000, this business generated $245,000 in revenue, a 41.6 percent increase over $173,000 earned in the third quarter. The Company expects the revenue from this business to continue this growth in 2001. By moving to a mortgage banking emphasis, the Company's exposure to market interest rate volatility on residential real estate lending in 2001 should be further limited as sales of mortgages increase and are more efficiently transacted. Revenue from brokerage activities increased $92,000 or 3.9 percent and trust (fiduciary) income increased $215,000 or 8.6 percent in 2000 compared to a year ago. The financial markets during 2000 have been in turmoil as a result of an uncertain economic growth rate and fear of further Federal Reserve actions or increased inflation. While investment management revenue results were favorable and the Company hopes to see similar or improved results in 2001, economic uncertainties may impact growth in revenue from investment products. Noninterest income, excluding gains from sales of securities, totaled $12,148,000 in 1999, an increase of $373,000 or 3.2 percent from 1998. Included in noninterest income for 1998 was a non-recurring gain of $616,000 from the sale of the Company's $7.1 million credit card portfolio. Without this gain, noninterest income increased $989,000 or 8.9 percent year-over-year. During 1999, service charges on deposit accounts increased $517,000 or 11.9 percent, while other service charges and fees declined $264,000, primarily as a result of the loss of fees earned on the sold credit card portfolio. Income from brokerage services increased $224,000 or 10.6 percent and trust income increased $345,000 or 16.1 percent. The increased service charges resulted from growth in accounts for which fees are assessed and an increase in minimum balances required in order to avoid monthly service charges. Trust income increased due to higher fee schedules implemented in 1999 and increased fees from new trust management accounts. Proceeds from sales of securities in 2000, totaled $10,203,000 and resulted in $12,000 in net losses. Proceeds from sales of securities in 1999 and 1998 were much greater, totaling $60,106,000 and $105,989,000, respectively, including net gains of $309,000 and $612,000, respectively. Proceeds from sales in 1999 and 1998 were utilized to fund lending demand and manage seasonal funding declines. Declining interest rates in 1998 generated larger gains on sales of securitized fixed rate residential loans originated by the Company's subsidiary bank. Table 6: Noninterest Income (Dollars in thousands) Year Ended % Change ---------- -------- 2000 1999 1998 00/99 99/98 ---- ---- ---- ----- ----- Service charges on deposit accounts $4,865 $4,876 $4,359 (0.2)% 11.9% Trust fees 2,704 2,489 2,144 8.6 16.1 Other service charges and fees 1,225 1,204 1,468 1.7 (18.0) Brokerage commissions and fees 2,421 2,329 2,105 3.9 10.6 Debit card income 428 249 187 71.9 33.2 Marine finance fee 361 0 0 N/M 0 Mortgage banking fee 770 633 690 21.6 (8.3) Other 376 368 822 2.2 (55.2) --- --- --- 13,150 12,148 11,775 8.2 3.2 Securities gains(losses) (12) 309 612 (103.9) (49.5) -- --- --- Total $13,138 $12,457 $12,387 5.5% 0.6% ======= ======= ======= N/M = Not Meaningful NONINTEREST EXPENSES -------------------- Table 7 shows the Company's noninterest expenses for the years indicated. The Company's overhead ratio decreased from 68.2 percent in 1998 to 64.7 percent a year ago to 62.8 percent for 2000. This is reflective of initiatives to reduce overhead costs, particularly staffing, and streamlined operational and procedural changes implemented throughout 1999. The Company expects to continue to benefit from the lower operating overhead in future years and continue the process of realigning its systems and procedures to further improve operating efficiencies. Compared to 1999, salaries and wages decreased $805,000 or 5.8 percent and employee benefits declined $621,000 or 16.4 percent. Most of the decrease in wage and benefit costs is related to lower performance award incentive accruals for 2000 and lower group health claims in 2000. Occupancy expenses and furniture and equipment expenses on an aggregate basis increased $279,000 or 5.4 percent versus a year ago. Most of the increase resulted from higher lease payments for premises and additional computer equipment. In July 2000, the Company's bank subsidiary opened a branch on U.S. 1 in northern Martin County near the St. Lucie County line, at the same time closing a branch in St. Lucie County approximately one-half mile from the new branch. Enhanced exposure and higher traffic is expected at the new location on an out parcel in front of a major Florida grocery store. Overlap during the year of leasing the newly opened and closed branch offices, as well as costs associated with the new Seacoast Marine Finance office in Ft. Lauderdale, accounted for a portion of the increase. Increased computer hardware costs during the third and fourth quarter of 2000 included the installation of new imaging equipment in September 2000 to more efficiently handle transactional information, produce customer statements and perform research. It is anticipated that use of this technology will provide a reduction in staffing and postage, and will enhance customer service, further establishing the Company's banking subsidiary's image as the "SuperCommunity Bank." Outside data processing costs increased $410,000 or 11.1 percent in 2000, compared to a year ago. The Company utilizes a third party for its core data processing system. Outsourced data processing costs are directly related to the number of transactions processed, which can be expected to increase as the Company's business volumes grow and new products such as bill pay, internet banking, etc. become more popular and the number of customer accounts increases. Costs associated with foreclosed and repossessed asset management and disposition decreased $94,000 in 2000, a reflection of low nonperforming asset balances (see "Nonperforming Assets"). Legal and professional fees decreased $395,000 or 25.1 percent from last year. Most of this decrease was related to an expense in 1999 for hiring an outside consulting service to partner with the Company in assessing a number of internal processes for overhead improvement and revenue enhancement. A modest growth of $262,000 or 0.7 percent in noninterest expenses was recorded in 1999. Salary expenses declined 1.2 percent, but the decrease was much larger, as the Company exceeded certain profit performance measures which necessitated the payment of salary incentives. In addition, employee benefits were $679,000 or 21.8 percent higher, reflecting increased profit sharing benefits. Outsourced data processing expenses increased in 1999 by 28.3 percent as a result of the full-year impact of the complete outsourcing of the Company's main data processing systems in September 1998. Some of the decline in salaries in 1999 occurred due to the elimination of the in-house data processing department as a result of this decision. Marketing expenses declined in 1999 with the completion of the aggressive branch expansion started in 1997 and completed in 1998. Legal and professional fees increased $543,000 or 52.8 percent in 1999 and were related to the outside consulting services for overhead improvements and revenue enhancement. TABLE 7: Noninterest Expenses (Dollars in thousands) Year Ended % Change ---------- -------- 2000 1999 1998 00/99 99/98 ---- ---- ---- ----- ----- Salaries and wages $13,077 $13,882 $14,046 (5.8)% (1.2)% Pension and other employee benefits 3,177 3,798 3,119 (16.4) 21.8 Occupancy 3,343 3,135 3,129 6.6 0.2 Furniture and equipment 2,108 2,037 2,436 3.5 (16.4) Outsourced data processing Costs 4,106 3,696 2,881 11.1 28.3 Marketing 1,717 1,653 1,964 3.9 (15.8) Legal and professional fees 1,177 1,572 1,029 (25.1) 52.8 FDIC assessments 184 146 135 26.0 8.1 Foreclosed and repossessed asset management and dispositions 91 185 298 (50.8) (37.9) Amortization of intangibles 636 671 671 (5.2) 0.0 Other 5,261 5,208 6,013 1.0 (13.4) ----- ----- ----- Total $34,877 $35,983 $35,721 (3.1)% 0.7% ======= ======= ======= INCOME TAXES ------------ Income taxes as a percentage of income before taxes were 38.8 percent for 2000, 37.7 percent for 1999, and 37.0 percent for 1998. The increase in rates year-to-year can be attributed to higher state income taxes, a result of lower tax credit, lower tax exempt income, and the Company's effective federal tax rate increasing due to adjusted income before taxes exceeding $18 million. The Company has deferred tax assets, for which no valuation allowance is required, because the majority of the asset is deemed to be temporary and sufficient taxable income exists in the carry-back years to recover the asset. FINANCIAL CONDITION ------------------- Total assets increased $70,341,000 or 6.5 percent to $1,151,373,000 in 2000 after decreasing $11,198,000 or 1.0 percent to $1,081,032,000 in 1999. In part, the decrease in 1999 resulted from the Company allowing higher rate time deposits to decline as loan growth slowed in the second half of 1999. CAPITAL RESOURCES ----------------- Table 8 summarizes the Company's capital position and selected ratios. The Company's ratio of shareholders' equity to period end assets was 7.32 percent at December 31, 2000, compared with 7.13 percent one year earlier. The Company's practice of buying back outstanding shares of its Class A Common stock affects this ratio. The cost of repurchased shares totaled $3,242,000 for 2000, compared to $5,076,000 a year ago. TABLE 8: Capital Resources (Dollars in thousands) December 31 2000 1999 1998 --------------------------------------------------- -------- TIER 1 CAPITAL Common stock $ 518 $ 518 $ 518 Additional paid in capital 27,831 27,785 27,439 Retained earnings 72,562 66,174 59,738 Treasury stock (14,470) (11,640) (8,806) Valuation allowance (173) (849) (627) Intangibles (3,432) (4,021) (4,652) ----- ----- ----- TOTAL TIER 1 CAPITAL 82,836 77,967 73,610 TIER 2 CAPITAL Allowance for loan losses, as limited 7,218 6,870 6,343 ----- ----- ----- TOTAL TIER 2 CAPITAL 7,218 6,870 6,343 ----- ----- ----- TOTAL RISK-BASED CAPITAL $ 90,054 $ 84,837 $ 79,953 ======== ======= ======= Risk weighted assets $741,590 $693,016 $665,913 ======== ======== ======== Tier 1 risk based capital ratio 11.17% 11.25% 11.05% Total risk based capital ratio 12.14 12.24 12.01 Regulatory minimum 8.00 8.00 8.00 Tier 1 capital to adjusted total assets 7.44 7.32 7.10 Regulatory minimum 4.00 4.00 4.00 Shareholders' equity to assets 7.32 7.13 7.18 Average shareholders' equity to average total assets 7.76 7.57 8.39 LOAN PORTFOLIO -------------- Table 9 shows total loans (net of unearned income) by category outstanding at the indicated dates. Total loans increased $66,382,000 or 8.5 percent in 2000 compared to $76,614,000 or 10.9 percent in 1999. During 2000, the Company sold $13.3 million in fixed rate residential loans to manage interest rate risk, compared to $28.0 million in 1999 and $81.0 million in 1998. In addition, $26.2 million in marine loans produced by Seacoast Marine Finance (newly opened in 2000) were sold to other financial institutions. At December 31, 2000, the Company's mortgage loan balances secured by residential properties amounted to $467,437,000 or 55.3 percent of total loans. The next largest concentration was loans secured by commercial real estate totaling $190,348,000 or 22.5 percent. Most of the commercial real estate loans were made to local businesses and professionals and are secured by owner occupied properties. Loans and commitments for 1-4 family residential properties and commercial real estate are generally secured with first mortgages on property, with the loan to fair value of the property not exceeding 80 percent on the date the loan is made. The Company was also a creditor for consumer loans to individual customers (primarily secured by motor vehicles) totaling $90,744,000 and real estate construction loans totaling $42,633,000 (of which approximately $16.7 million was secured by residential properties). The Treasure Coast is a residential community with commercial activity centered in retail and service businesses serving the local residents and seasonal visitors. Therefore, real estate mortgage lending is an important segment of the Company's lending activities. Exposure to market interest rate volatility with respect to mortgage loans, is managed by attempting to match maturities and repricing opportunities for assets against liabilities, when possible. At December 31, 2000, approximately $193 million or 41 percent of the Company's mortgage loan balances secured by residential properties were adjustable. Of the approximate $90 million of new residential loans originated in 2000, $59 million were adjustable rate and $31 million were fixed rate. Loans secured by residential properties having fixed rates totaled approximately $274 million at December 31, 2000, of which 15- and 30-year mortgages totaled approximately $114 million and $110 million, respectively. Remaining fixed rate balances were comprised of home improvement loans with maturities less than 15 years. The Company's historical net charge offs for residential loans has been low, totaling $45,000 for the year 2000. The Company established new mortgage banking relationships in 2000 and expects to sell a larger portion of its residential mortgage production in 2001. Fixed rate and adjustable rate loans secured by commercial real estate total approximately $117 million and $74 million, respectively, at December 31, 2000. Commercial lending activities are directed principally towards businesses whose demand for funds are within the Company's lending limits, such as small to medium sized professional firms, retail and wholesale outlets, and light industrial and manufacturing concerns. Such businesses typically are smaller, often have short operating histories and do not have the sophisticated record keeping systems of larger entities. Most of such loans are secured by real estate used by such businesses, although certain lines are unsecured. Such loans are subject to the risks inherent to lending to small to medium sized businesses including the effects of a sluggish local economy, possible business failure, and insufficient cash flows. The Company's commercial loan portfolio totaled $39,465,000 at December 31, 2000 compared to $33,119,000 at December 31, 1999. The Company makes a variety of consumer loans, including installment loans, loans for automobiles, boats, home improvements, and other personal, family and household purposes, and indirect loans through dealers to finance automobiles. Most consumer loans are secured. Second mortgage loans and home equity lines are extended by the Company. No negative amortization loans or lines are offered at the present time. Terms of second mortgage loans include fixed rates for up to 10 years on smaller loans of $30,000 or less. Such loans are sometimes made for larger amounts, with fixed rates, but with balloon payments upon maturities, not exceeding five years. At December 31, 1999, the Company's mortgage loan balances secured by residential properties amounted to $445,468,000 or 57.2 percent of total loans. The next largest concentration was mortgages secured by commercial real estate totaling $178,004,000 or 22.9 percent. Consumer loans to individual customers (primarily secured by motor vehicles) totaled $78,013,000 in 1999 and real estate construction loans totaled $42,899,000 (of which approximately $20.8 million was secured by residential properties). Loans secured by residential properties having fixed rates totaled approximately $268 million at December 31, 1999, of which 15- and 30-year mortgages totaled approximately $125 million and $105 million, respectively. Remaining fixed rate balances were comprised of home improvement loans with maturities less than 15 years. TABLE 9: Loans Outstanding (Dollars in thousands) December 31 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Real estate mortgage $671,424 $623,472 $574,895 $492,410 $448,680 Real estate construction 42,633 42,899 22,877 16,363 18,458 Commercial and financial 39,465 33,119 31,908 31,239 35,459 Installment loans to individuals 90,744 78,013 71,506 73,673 73,224 Other loans 280 661 364 245 503 --- --- --- --- --- Total $844,546 $778,164 $701,550 $613,930 $576,324 ========= ======== ======== ======== ======== TABLE 10: Loan Maturity Distribution (Dollars in thousands) Commercial, Financial & Real Estate December 31, 2000 Agricultural Construction Total ----------------------- ------------- ------------- --------- In one year or less $12,231 $41,568 $53,799 After one year but within five years: Interest rates are floating or adjustable 4,636 678 5,314 Interest rates are fixed 13,927 387 14,314 In five years or more: Interest rates are floating or adjustable 1,778 0 1,778 Interest rates are fixed 6,893 0 6,893 ----- - ----- Total $39,465 $42,633 $82,098 ======= ======= ======= ALLOWANCE FOR LOAN LOSSES ------------------------- Table 11 provides certain information concerning the Company's allowance for loan losses for the years indicated. The allowance for loan losses totaled $7,218,000 at December 31, 2000, $348,000 higher than one year earlier. The allowance for loan losses as a percentage of nonaccrual loans was 343.9 percent at December 31, 2000, compared to 285.4 percent at December 31, 1999. The model utilized to analyze the adequacy of the allowance for loan losses takes into account such factors as credit quality, internal controls, audit results, staff turnover, local market economics and loan growth. The resulting lower allowance level necessitated is also reflective of the bank's favorable and consistent delinquency trends and historical loss performance. These performance results are attributed to conservative, long- standing and consistently applied loan credit policies and to a knowledgeable, experienced and stable staff. In 2000, net charge offs totaled only $252,000, compared to $133,000 a year ago. Table 12 summarizes the Company's allocation of the allowance for loan losses to each type of loan and information regarding the composition of the loan port- folio at the dates indicated. The allowance for loan losses represents management's estimate of an amount adequate in relation to the risk of future losses inherent in the loan portfolio. In its continuing evaluation of the allowance and its adequacy, management considers, among other factors, the Company's loan loss experience, the amount of past due and nonperforming loans, current and anticipated economic conditions, and the values of certain loan collateral, and other assets. The size of the allowance also reflects the large amount of permanent residential loans held by the Company whose historical charge offs and delinquencies have been superior by any comparison. Concentration of credit risk, discussed on pages 20-21 of this discussion and analysis, may affect the level of the allowance. Concentrations typically involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. The Company's significant concentration of credit is a collateral concentration of loans secured by real estate. At December 31, 2000, the Company had $700 million in loans secured by real estate, representing 82.9 percent of total loans, down from 85.6 percent at December 31, 1999. In addition, the Company is subject to a geographic concentration of credit because it operates in southeastern Florida. Although not material enough to constitute a significant concentration of credit risk, the Company has meaningful credit exposure to real estate developers and investors. Levels of exposure to this industry group, together with an assessment of current trends and expected future financial performance, are carefully analyzed in order to determine an adequate allowance level. Problem loan activity for this exposure needs to be evaluated over the long term to include all economic cycles when determining an adequate allowance level. While it is the Company's policy to charge off in the current period loans in which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy as well as conditions affecting individual borrowers, management's judgment of the allowance is necessarily approximate and imprecise. It is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the 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. The unprecedented strong economic growth over the last five years has resulted in improved credit quality measures for the Company and the entire banking industry. At December 31, 2000, the Company's allowance equated to 8.8 times average charge offs for the last three years. In contrast, the allowance equated to approximately two times charge offs in the early 1990's when Florida experienced a real estate economic decline. 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 which must be charged off and to assess the risk characteristics of the portfolio in the 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. TABLE 11: Summary of Loan Loss Experience (Dollars in thousands) Year Ended December 31 2000 1999 1998 1997 1996 ---------------------- ---- ---- ---- ---- ---- Allowance for loan losses Beginning balance $6,870 $6,343 $5,363 $5,657 $4,893 Provision for loan losses 600 660 1,710 913 1,090 Charge offs: Commercial and financial 98 2 112 443 80 Consumer 432 458 901 936 525 Commercial real estate 35 46 137 137 36 Residential real estate 78 120 42 38 84 -- --- -- -- -- Total Charge Offs 643 626 1,192 1,554 725 Recoveries: Commercial and financial 93 111 117 76 72 Consumer 226 230 211 197 236 Commercial real estate 39 136 109 63 91 Residential real estate 33 16 25 11 0 -- -- -- -- - Total Recoveries 391 493 462 347 399 --- --- --- --- --- Net loan charge offs 252 133 730 1,207 326 --- --- --- ----- --- Ending Balance $7,218 $6,870 $6,343 $5,363 $5,657 ====== ====== ====== ====== ====== Loans outstanding at end of year* $844,546 $778,164 $701,550 $613,930 $576,324 Ratio of allowance for loan losses to loans outstanding at end of year 0.85% 0.88% 0.90% 0.87% 0.98% Daily average loans outstanding* $820,429 $743,010 $669,417 $595,884 $538,330 Ratio of net charge offs to average loans outstanding 0.03% 0.02% 0.11% 0.20% 0.06% * Net of unearned income. -------------------------------------------------------- TABLE 12: ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) Allowance Amount December 31 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Commercial and financial loans $ 844 $ 677 $ 576 $ 363 $ 665 Real estate loans 4,970 4,913 4,464 3,347 3,681 Installment loans 1,404 1,280 1,303 1,653 1,311 ----- ----- ----- ----- ----- Total $7,218 $6,870 $6,343 $5,363 $5,657 ====== ====== ====== ====== ====== Percent of Loans in Each Category to Total Loans December 31 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Commercial and financial loans 4.7% 4.3% 4.6% 5.1% 6.2% Real estate loans 84.6 85.6 85.3 82.9 81.1 Installment loans 10.7 10.1 10.1 12.0 12.7 ---- ---- ---- ---- ---- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== NONPERFORMING ASSETS -------------------- Of the $2,099,000 in nonaccrual loans at December 31, 2000, a total of $775,000 were performing; however, the Company has determined that the collection of principal or interest in accordance with the original terms of such loans is uncertain and has placed such loans on nonaccrual status. Of the amount reported in nonaccrual loans at December 31, 2000, 93 percent is secured with real estate. Management does not expect significant losses, for which an allowance for loan losses has not been provided, associated with the ultimate realization of these assets. Other real estate owned at December 31, 2000 was comprised of three properties, totaling $346,000, representing 75 percent or less of their fair market value. Nonperforming assets are subject to changes in the economy, both nationally and locally, changes in monetary and fiscal policies, and changes in conditions affecting various borrowers from the Company's subsidiary bank. No assurance can be given that nonperforming assets will not in fact increase or otherwise change. A similar judgmental process is involved in the methodology used to estimate and establish the Company's allowance for loan losses. TABLE 13: Nonperforming Assets (Dollars in thousands) December 31 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Nonaccrual loans (1) $2,099 $2,407 $2,418 $2,254 $2,299 Renegotiated loans 0 0 0 0 0 Other real estate owned 346 339 288 536 1,064 --- --- --- --- ----- Total Nonperforming Assets $2,445 $2,746 $2,706 $2,790 $3,363 ====== ====== ====== ====== ====== Amount of loans outstanding at end of year (2) $844,546 $778,164 $701,550 $613,930 $576,324 Ratio of total nonperforming assets to loans outstanding and other real estate owned at end of period 0.29% 0.35% 0.39% 0.45% 0.58% Accruing loans past due 90 days or more $108 $498 $329 $478 $59 ----------------- (1) Interest income that could have been recorded during 2000 related to nonaccrual loans was $241, none of which was included in interest income or net income. All nonaccrual loans are secured. (2) Net of unearned income. LIQUIDITY MANAGEMENT Contractual maturities for assets and liabilities are reviewed to meet current and 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, investment securities, and federal funds sold. The Company has access to federal funds and FHLB lines of credit and is able to provide short term financing of its activities by selling, under agreement to repurchase, United States Treasury securities and securities of United States Government agencies and corporations not pledged to secure public deposits or trust funds. At December 31, 2000, the Company had available lines of credit of $130,500,000. At December 31, 2000, the Company had $63,195,000 of United States Treasury and Government agency securities and mortgage backed securities not pledged and available for use under repurchase agreements. At December 31, 1999, the amount of securities available and unpledged was $59,695,000. Liquidity, as measured in the form of cash and cash equivalents, totaled $72,505,000 at December 31, 2000, compared to $59,942,000 at December 31, 1999. Cash and 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 occurring in the Company's investment securities portfolio and loan portfolio. DEPOSITS AND BORROWINGS Total deposits increased $51,129,000 or 5.6 percent to $957,089,000 at December 31, 2000, compared to one year earlier. In comparison to 1998, deposits increased only $758,000 in 1999 to $905,960,000. During 2000, lower cost interest bearing deposits (NOW, savings and money market deposits) increased $1,653,000 or 0.4 percent to $380,791,000, while all other deposits (exclusively certificates of deposit) grew $30,238,000 or 7.8 percent to $416,523,000. This increase reflects the higher interest rate environment in 2000 and customer desire to invest in higher yielding certificates of deposit. Noninterest bearing demand deposits increased $19,238,000 or 13.7 percent to $159,775,000. Repurchase agreement balances declined $1,944,000 in 2000, compared to a decline of $10,794,000 in 1999. Repurchase agreements are offered by the Company's subsidiary bank to select customers who wish to sweep excess balances on a daily basis for investment purposes. Other borrowings increased $15,030,000 to $40,000,000 at December 31, 2000, reflecting funding of $25.0 million obtained through the FHLB for a term of two years at 6.99 percent in mid-March 2000 and the termination (call) of $9,970,000 at 5.40 percent by DLJ at the end of August 2000. In December 2000, the $25.0 million borrowing was restructured to a three year term at 6.55 percent. Table 14: Maturity of Certificates of Deposit of $100,000 or More (Dollars in thousands) % of % of December 31 2000 Total 1999 Total ------------------ --------- ---------- ------------------- Maturity Group: Under 3 months $13,840 15.0% $18,185 19.9% 3 to 6 months 17,973 19.5 18,343 20.0 6 to 12 months 24,395 26.4 31,911 34.8 Over 12 months 36,075 39.1 23,163 25.3 ------- ----- ------ ------ Total $92,283 100.0% $91,602 100.0% ======= ====== ======= ===== EFFECTS ON INFLATION AND CHANGING PRICES ---------------------------------------- The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the general levels of inflation. However, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and stockholders' equity. Mortgage originations and refinancings tend to slow as interest rates increase, and likely will reduce the Company's earnings from such activities and the income from the sale of residential mortgage loans in the secondary market. SECURITIES Information relating to yields, maturities, carrying values, market values and unrealized gains (losses) of the Company's securities is set forth in Table 15. At December 31, 2000, the Company had $182,230,000 of securities held for sale or 87.5 percent of total securities compared to $204,287,000 or 92.1 percent at December 31, 1999. Total securities decreased $13,554,000 or 6.1 percent in 2000. These proceeds were used to fund loan growth. Management controls the Company's interest rate risk by maintaining a low average duration for the securities portfolio and with securities returning principal monthly which can be reinvested. The average life of the portfolio at December 31, 2000 was 3.4 years compared to 2.9 years in 1999. At December 31, 2000, the Company had unrealized net losses of $3,372,000 or 1.6 percent of amortized cost. At December 31, 1999, unrealized net losses were $8,047,000. The Federal Reserve increased rates 75 basis points in 1999 and 100 basis points in 2000. The increases only effected short term rates, and the yield curve inverted, resulting in appreciation of market value. Company management considers the overall quality of the securities portfolio to be high. No securities are held which are not traded in liquid markets or that meet the Federal Financial Institution Examination Counsel (FFIEC) definition of a high risk investment. TABLE 15: Investment Securities Yield, Maturity and Market Value (Dollars in thousands) U.S. Treasury and U.S. Government Agencies -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31,2000 Held for Sale: Within one year $ 996 $ 995 6.26% One to five years 20,000 19,773 5.71% Five to ten years Over ten years No contractual maturity --------- -------- --------- Total Value $ 20,996 $ 20,768 5.73% ========= ======== ========= Held for Investment: Within one year One to five years Five to ten years Over ten years --------- -------- --------- Total Value $0 $0 0% ========= ======== ========= Maturity at December 31, 1999 Held for Sale $ 30,012 $ 28,678 5.76% ========= ======== ========= Held for Investment $ 0 $ 0 0% ========= ======== ========= ----------------------------------- Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Mortgage Backed Securities (Fixed) -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31, 2000 Held for Sale: Within one year $ 8,468 $ 8,405 5.64% One to five years 92,947 90,448 6.21% Five to ten years 20,385 20,131 6.82% Over ten years No contractual maturity --------- -------- --------- Total Value $121,800 $118,984 6.27% ========= ======== ========= Held for Investment Within one year $ 72 $ 75 6.92% One to five years 4,853 4,926 6.93% Five to ten years 170 174 8.39% Over ten years --------- -------- --------- Total Value $ 5,095 $ 5,175 6.98% ========== ======= ========= Maturity at December 31, 1999 Held for Sale $135,047 $129,016 6.05% ========== ======= ========= Held for Investment $ 6,358 $ 6,339 6.91% -------------------------- Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Mortgage Backed Securities (Adjustable) -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31, 2000 Held for Sale: Within one year $ 1,845 $ 1,832 6.49% One to five years 2,168 2,133 6.45% Five to ten years 3,331 3,186 5.13% Over ten years 475 485 7.81% No contractual maturity --------- -------- --------- Total Value $ 7,819 $ 7,636 5.98% ========= ======== ========= Held for Investment: Within one year One to five years $ 6,368 $ 6,319 7.76% Five to ten years 8,065 8,068 8.04% Over ten years --------- ------- ----- Total Value $14,433 $14,387 7.92% ========= ======= ===== Maturity at December 31, 1999 Held for Sale $ 8,275 $ 7,986 5.80% ======= ======= ===== Held for Investment $ 2,069 $ 2,046 5.93% -------------------------------- Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Obligations of States and Political Subdivisions (1) -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31, 2000 Held for Sale: Within one year One to five years Five to ten years Over ten years No contractual maturity ------- ------- --- Total Value $ 0 $ 0 0% ======= ======= ===== Held for Investment: Within one year $ 1,941 $ 1,949 8.35% One to five years 3,260 3,324 8.08% Five to ten years 1,213 1,243 7.72% Over ten years ------- ------- ----- Total Value $ 6,414 $ 6,516 8.09% ======= ======= ===== Maturity at December 31, 1999 Held for Sale $ 0 $0 0% ========== ======= ========= Held for Investment $ 8,912 $ 8,979 8.51% ========== ======= ========= -------------------------------- Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Mutual Funds -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31, 2000 Held for Sale: Within one year One to five years Five to ten years Over ten years No contractual maturity $23,881 $23,662 6.35% ------- ------- ---- Total Value $23,881 $23,662 6.35% ======= ======= ==== Held for Investment: Within one year One to five years Five to ten years Over ten years ------- ------- ---- Total Value $ 0 $ 0 0% ======= ======= ==== Maturity at December 31, 1999 Held for Sale $23,881 $23,477 5.25% ======= ======= ===== Held for Investment $ 0 $ 0 0% ======= ======= ===== (1) On a fully taxable equivalent basis. --------------------------------- Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Other (1) -------------------------------- ---------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------ --------- Maturity at December 31, 2000 Held for Sale: Within one year One to five years Five to ten years Over ten years No contractual maturity $7,734 $7,672 7.02% ------ ------ ---- Total Value $7,734 $7,672 7.02% ====== ====== ==== Held for Investment: Within one year One to five years Five to ten years Over ten years ------ ------ ---- Total Value $ 0 $ 0 0% ====== ====== ==== Maturity at December 31, 1999 Held for Sale $7,072 $7,058 6.82% ====== ====== ==== Held for Investment $ 100 $ 100 8.13% ====== ====== ==== (1) On a fully taxable equivalent basis. ------------------------------ Investment Securities Yield, Maturity and Market Value (con't) (Dollars in thousands) Total -------------------------------- ----------------------------- Amortized Market Weighted Cost Value Yield -------------------------------- ------------------- --------- Maturity at December 31, 2000 Held for Sale: Within one year $ 11,309 $ 11,232 5.83% One to five years 115,115 112,354 6.13% Five to ten years 23,716 23,317 6.58% Over ten years 475 485 7.81% No contractual maturity 31,615 31,334 6.51% -------- -------- ----- Total Value $182,230 $178,722 6.24% ======== ======== ===== Held for Investment: Within one year $ 2,013 $ 2,024 8.29% One to five years 14,481 14,569 7.56% Five to ten years 9,448 9,485 8.00% Over ten years ------- ------- ----- Total Value $25,942 $26,078 7.78% ======= ======= ===== Maturity at December 31, 1999 Held for Sale $204,287 $196,215 5.93% ======== ======== ===== Held for Investment $ 17,439 $ 17,464 7.62% ======== ======== ===== --------------------------------------------------------------- December 31, 2000 Gross Gross Amortized Unrealized Unrealized (Dollars in Thousands) Cost Gains Losses -------------------------- --------- ----------- ---------- Held for Sale: U.S. Treasury and U.S. Government agencies $ 20,996 $ 0 $ (228) Mortgage backed securities: Fixed 121,800 4 (2,820) Adjustable 7,819 14 (197) Mutual funds 23,881 0 (219) Other securities 7,734 0 (62) ----- - - $182,230 $18 $(3,526) ======== ===== ======== Held for Investment: Mortgage backed securities: Fixed $ 5,095 $ 84 (4) Adjustable 14,433 29 (75) Obligations of states and political subdivisions 6,414 102 0 Other securities 0 0 0 --- - - $25,942 $215 $(79) ======= ==== === ---(con't)--- December 31, 2000 Market Average Years (Dollars in Thousands) Value to Maturity -------------------------- ---------- ----------- Held for Sale: U.S. Treasury and U.S. Government agencies $ 20,768 2.94 Mortgage backed securities: Fixed 118,984 3.80 Adjustable 7,636 4.97 Mutual funds 23,662 ** Other securities 7,672 * ----- ---- $178,722 3.23 ========= ==== Held for Investment: U.S. Treasury and U.S. Government agencies $ 0 Mortgage backed securities: Fixed 5,175 3.39 Adjustable 14,387 5.88 Obligations of states and political subdivisions 6,516 2.74 Other securities 0 * --- --- $ 26,078 4.60 ======== ==== ---------- *Other Securities excluded from calculated average for total securities. **Contractual maturity assumed to be immediate for total average years to maturity calculation ----(con't)---- December 31, 1999 Gross Gross Amortized Unrealized Unrealized (Dollars in Thousands) Cost Gains Losses -------------------------- --------- ----------- ---------- Held for Sale: U.S. Treasury and U.S. Government agencies $ 30,012 $ 0 $ (1,334) Mortgage backed securities: Fixed 135,047 8 (6,039) Adjustable 8,275 10 (299) Mutual funds 23,881 0 (404) Other securities 7,072 0 (14) ----- - - $204,287 $ 18 $ (8,090) ======== ===== ======== Held for Investment: U.S. Treasury and U.S. Government agencies Mortgage backed securities: Fixed $ 6,358 $ 49 (68) Adjustable 2,069 6 (29) Obligations of states and political subdivisions 8,912 100 (33) Other securities 100 0 0 --- - - $17,439 $155 (130) ======= ==== ===== ---(con't)--- December 31, 1999 Market Average Years (Dollars in Thousands) Value to Maturity -------------------------- ---------- ----------- Held for Sale: U.S. Treasury and U.S. Government agencies $ 28,678 4.01 Mortgage backed securities: Fixed 129,016 3.00 Adjustable 7,986 5.88 Mutual funds 23,477 ** Other securities 7,058 * ----- ---- $196,215 2.90 ======== ==== Held for Investment: U.S. Treasury and U.S. Government agencies Mortgage backed securities: Fixed $ 6,339 3.31 Adjustable 2,046 3.31 Obligations of states and political subdivisions 8,979 3.33 Other securities 100 * --- --- $ 17,464 3.32 ======== ==== ---------- *Other Securities excluded from calculated average for total securities. **Contractual maturity assumed to be immediate for total average years to maturity calculation. INTEREST RATE SENSITIVITY Interest rate exposure is managed by monitoring the relationship between earning assets and interest bearing liabilities, focusing primarily on those that are rate sensitive. Rate sensitive assets and liabilities are those that re-price at market interest rates within a relatively short period, defined here as one year or less. The difference between rate sensitive assets and rate sensitive liabilities represents the Company's interest sensitivity gap, which may be either positive (assets exceed liabilities) or negative (liabilities exceed assets). On December 31, 2000, the Company had a negative gap position based on contractual maturities and prepayment assumptions for the next twelve months, with a negative cumulative interest rate sensitivity gap as a percentage of total earning assets of 25.9 percent. The Company's ALCO uses model simulations to estimate and manage its interest rate sensitivity. The Company has determined that an acceptable level of interest rate risk would be for net interest income to fluctuate no more than 6 percent, given a change in interest rates (up or down) of 200 basis points. Based on the Company's most recent ALCO model simulations, net interest income would decline 1.8 percent if interest rates would immediately rise 200 basis points. It has been the Company's experience that non-maturity core deposit balances are stable and subjected to limited repricing when interest rates increase or decrease within a range of 200 basis points. The Company does not presently use interest rate protection products in managing its interest rate sensitivity. Table 16 INTEREST RATE SENSITIVITY ANALYSIS (1) (Dollars in thousands) 0-3 4-12 1-5 Over 5 December 31, 2000 Months Months Years Years Total Federal funds sold $ 39,000 $ 0 $ 0 $ 0 $ 39,000 Securities (2) 36,184 22,775 133,133 16,080 208,172 Loans (3) 131,243 170,700 409,567 130,937 842,447 --------- -------- -------- -------- --------- Earning assets 206,427 193,475 542,700 147,017 1,089,619 Savings deposits (4) 380,791 0 0 0 380,791 Certificates of deposit 64,614 171,820 180,089 0 416,523 Borrowings 65,020 0 25,000 15,000 105,020 --------- --------- -------- -------- --------- Interest bearing liabilities 510,425 171,820 205,089 15,000 902,334 --------- --------- -------- -------- --------- Interest sensitivity gap $(303,998) $ 21,655 $337,611 $132,017 $ 187,285 --------- -------- -------- -------- ========= Cumulative gap $(303,998) $(282,343) $ 55,268 $187,285 ========= ========= ======== ======== Ratio of cumulative gap to (27.9) (25.9) 5.1 17.2 total earning assets (%) Ratio of earning assets to interest bearing 40.4 112.6 264.6 980.1 liabilities (%) 1. The repricing dates may differ from maturity dates for certain assets due to prepayment assumptions. 2. Securities are stated at amortized cost. 3. Excludes nonaccrual loans. 4. This category is comprised of NOW, savings, and money market deposits. If NOW and savings deposits (totaling $219,678) were deemed to be repriceable in "4-12 months," the interest sensitivity gap and cumulative gap would be $84,320, indicating 7.7% of earning assets and 71.0% of earning assets to interest bearing liabilities for the "0-3 months" category. ================================================================================ SELECTED QUARTERLY INFORMATION Quarterly Consolidated Income Statement ================================================================================ (Dollars in thousands, 2000 Quarters except per share data) ------------- Fourth Third Second First ------------------------------------ --------- --------- ---------- --------- Net interest income: Interest income $20,575 $20,206 $19,896 $19,053 Interest expense 10,136 9,920 9,255 8,324 --------- --------- ---------- --------- Net interest income 10,439 10,286 10,641 10,729 Provision for loan losses 150 150 150 150 --------- --------- ---------- --------- Net interest income after provision for losses 10,289 10,136 10,491 10,579 Noninterest income: Service charges on deposit accounts 1,283 1,269 1,165 1,148 Trust fees 672 686 669 677 Other service charges and fees 391 421 429 412 Brokerage commissions and fees 485 510 532 894 Other 423 335 437 312 Securities gains (losses) (16) 2 1 1 --------- --------- ---------- --------- Total noninterest income 3,238 3,223 3,233 3,444 Noninterest expenses: Salaries and wages 3,292 3,173 3,242 3,370 Employee benefits 747 694 868 868 Occupancy 849 834 827 833 Furniture and equipment 553 529 506 520 Outsourced data processing costs 1,006 1,032 1,056 1,012 Marketing 448 416 408 445 Legal and professional fees 321 287 272 297 FDIC assessments 46 47 46 45 Foreclosed and repossessed asset management and dispositions 1 42 (1) 49 Amortization of intangibles 138 162 168 168 Other 1,233 1,280 1,349 1,399 --------- --------- ----------- -------- Total noninterest expenses 8,634 8,496 8,741 9,006 --------- --------- ----------- -------- Income before income taxes 4,893 4,863 4,983 5,017 Provision for income taxes 1,957 1,881 1,920 1,910 --------- --------- ----------- -------- Net income $2,936 $2,982 $3,063 $3,107 ========= ========= =========== ======== PER COMMON SHARE DATA Net income diluted $ 0.62 $ 0.62 $ 0.63 $ 0.64 Net income basic 0.62 0.63 0.64 0.64 Cash dividends declared: Class A common stock 0.28 0.26 0.26 0.26 Market price Class A common stock: Low close 24 1/4 25 1/2 25 24 3/4 High close 26 5/8 27 1/8 27 1/4 28 3/4 Bid price at end of period 26 1/2 26 27 25 3/8 SELECTED QUARTERLY INFORMATION (con't) -------------------------------------- Quarterly Consolidated Income Statement 1999 Quarters ------------- (Dollars in thousands, except per share data) Fourth Third Second First ------------------------------------ --------- --------- -------- --------- Net interest income: Interest income $18,567 $18,489 $18,472 $18,023 Interest expense 7,955 7,661 7,473 7,373 --------- --------- -------- --------- Net interest income 10,612 10,828 10,999 10,650 Provision for loan losses 150 150 0 360 --------- --------- -------- --------- Net interest income after provision for losses 10,462 10,678 10,999 10,290 Noninterest income: Service charges on deposit accounts 1,268 1,221 1,189 1,198 Trust fees 649 635 608 597 Other service charges and fees 345 331 386 391 Brokerage commissions and fees 575 404 653 697 Other 298 229 230 244 Securities gains (losses) (19) 9 92 227 --------- --------- -------- --------- Total noninterest income 3,116 2,829 3,158 3,354 Noninterest expenses: Salaries and wages 3,271 3,362 3,772 3,477 Pension and other employee benefits 935 935 954 974 Occupancy 820 776 771 768 Furniture and equipment 500 495 514 528 Outsourced data processing costs 942 912 876 966 Marketing 394 397 411 451 Legal and professional fees 383 432 380 377 FDIC assessments 37 37 36 36 Foreclosed and repossessed asset management and dispositions 18 69 50 48 Amortization of intangibles 167 168 168 168 Other 1,231 1,238 1,307 1,432 --------- --------- ------- --------- Total noninterest expenses 8,698 8,821 9,239 9,225 --------- --------- ------- --------- Income before income taxes 4,880 4,686 4,918 4,419 Provision for income taxes 1,839 1,746 1,826 1,708 --------- --------- -------- --------- Net income $3,041 $2,940 $3,092 $2,711 ========= ========= ======== ========= PER COMMON SHARE DATA Net income diluted $ 0.62 $ 0.60 $ 0.63 $ 0.55 Net income basic 0.63 0.61 0.64 0.55 Cash dividends declared: Class A common stock 0.26 0.24 0.24 0.24 Market price Class A common stock: Low close 27 1/2 28 3/4 26 3/8 26 1/8 High close 30 3/8 32 1/2 34 1/2 28 1/4 Bid price at end of period 28 9/16 29 30 1/2 26 3/4 ================================================================================ SELECTED QUARTERLY INFORMATION Consolidated Quarterly Average Balances, Yields and Rates (1) ================================================================================ 2000 QUARTERS Fourth Third ------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Rate Balance Rate ------------------------------------------------------------------------------- Assets Earning Assets Securities Taxable $211,108 6.29% $214,467 6.25% Nontaxable 6,822 7.86 7,427 7.86 -------- ---- -------- ---- Total Securities 217,930 6.34 221,894 6.30 Federal funds sold and other short term investments 8,602 6.52 2,208 6.67 Loans (2) 837,035 8.10 830,947 8.01 -------- ---- -------- ---- Total Earning Assets 1,063,567 7.72 1,055,049 7.64 Allowance for loan losses (7,195) (7,168) Cash and due from banks 28,343 25,409 Bank premises and equipment 16,931 17,407 Other assets 14,753 14,140 --------- --------- $1,116,399 $1,104,837 ========== ========== Liabilities and Shareholders' Equity Interest bearing liabilities NOW $54,399 1.95% $50,210 2.20% Savings deposits 140,903 3.27 139,691 3.33 Money market accounts 172,646 2.26 182,605 2.24 Time deposits 419,613 6.00 423,163 5.84 Federal funds purchased and other short term borrowings 52,842 5.58 33,185 5.54 Other borrowings 40,000 6.60 46,611 6.55 ------ ---- ------ ---- Total Interest Bearing Liabilities 880,403 4.58 875,465 4.51 Demand deposits 142,591 137,097 Other liabilities 6,265 6,308 ----- ----- Total 1,029,259 1,018,870 Shareholders' equity 87,140 85,967 ------ ------ $1,116,399 $1,104,837 ========== ========== Interest expense as % of earning assets 3.79% 3.74% Net interest income as % of earning assets 3.93 3.90 ------------------------- Consolidated Quarterly Average Balances, Yields and Rates (1) (con't) 2000 QUARTERS Second First ------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Rate Balance Rate ------------------------------------------------------------------------------- Assets Earning Assets Securities Taxable $216,122 6.19% $214,715 6.11% Nontaxable 7,555 7.89 8,287 8.06 --------- ------- --------- ------ Total Securities 223,677 6.25 223,002 6.18 Federal funds sold and other short term investments 11,062 5.96 11,196 5.71 Loans (2) 821,854 7.98 791,580 7.89 --------- ------- --------- ------ Total Earning Assets 1,056,593 7.60 1,025,778 7.50 Allowance for loan losses (7,103) (6,930) Cash and due from banks 33,790 33,566 Bank premises and equipment 17,060 16,693 Other assets 13,999 14,310 --------- ----------- $1,114,339 $1,083,417 ========= ========== Liabilities and Shareholders' Equity Interest bearing liabilities NOW $57,674 1.98% $61,501 2.01% Savings deposits 139,477 3.28 129,252 2.84 Money market accounts 190,317 2.09 191,201 1.99 Time deposits 407,682 5.60 392,263 5.33 Federal funds purchased and other short term borrowings 28,950 5.20 39,870 4.75 Other borrowings 49,970 6.40 31,289 6.21 --------- ----- -------- ---- Total Interest Bearing Liabilities 874,070 4.26 845,376 3.96 Demand deposits 149,518 148,341 Other liabilities 5,519 4,993 --------- ------- Total 1,029,107 998,710 Shareholders' equity 85,232 84,707 --------- ---------- $1,114,339 $1,083,417 ========= ========== Interest expense as % of earning assets 3.52% 3.26% Net interest income as % of earning assets 4.08% 4.24% (1) The tax equivalent adjustment is based on a 34% tax rate. All yields/rates are calculated on an annualized basis. (2) Nonaccrual loans are included in loan balances. Fees on loans are included in interest on loans. ------------------------ Consolidated Quarterly Average Balances, Yields and Rates (1) (con't) 1999 QUARTERS Fourth Third ------------------------------------------------------------------------------- Average Yield Average Yield Balance /Rate Balance /Rate ------------------------------------------------------------------------------- Assets Earning Assets Securities Taxable $218,751 6.02% $235,767 6.00% Nontaxable 9,766 8.36 10,537 8.39 -------- ------- ------- ----- Total Securities 228,517 6.12 246,304 6.10 Federal funds sold and other short term investments 3,641 5.34 130 5.25 Loans (2) 770,054 7.78 754,462 7.79 -------- ------- ------- ----- Total Earning Assets 1,002,212 7.38 1,000,896 7.36 Allowance for loan losses (6,862) (6,733) Cash and due from banks 42,125 30,940 Bank premises and equipment 16,794 17,048 Other assets 14,403 15,038 --------- ---------- $1,068,672 $1,057,189 ========= ========== Liabilities and Shareholders' Equity Interest bearing liabilities NOW $59,254 1.87% $56,067 1.80% Savings deposits 116,949 2.44 110,156 2.21 Money market accounts 196,517 2.04 206,049 2.01 Time deposits 385,375 5.08 397,206 4.93 Federal funds purchased and other short term borrowings 56,419 4.54 40,094 4.55 Other borrowings 24,970 5.80 24,970 5.69 ------ ---- ------ ---- Total Interest Bearing Liabilities 839,484 3.76 834,542 3.64 Demand deposits 140,336 135,891 Other liabilities 6,007 5,727 ------- ------- Total 985,827 976,160 Shareholders' equity 82,845 81,029 --------- --------- $1,068,672 $1,057,189 ========= ========= Interest expense as % of earning assets 3.15% 3.04% Net interest income as % of earning assets 4.23 4.33 ------------------------ (1) The tax equivalent adjustment is based on a 34% tax rate. All yields/rates are calculated on an annualized basis. (2) Nonaccrual loans are included in loan balances. Fees on loans are included in interest on loans. ------------------------ Consolidated Quarterly Average Balances, Yields and Rates (1) (con't) 1999 QUARTERS Second First ---------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Rate Balance Rate ---------------------------------------------------------------------------- Assets Earning Assets Securities Taxable $256,076 5.88% $253,158 5.90% Nontaxable 10,606 8.33 11,312 8.35 Total Securities 266,682 5.98 264,470 6.01 ------- ---- -------- ---- Federal funds sold and other short term investments 5,413 4.74 22,084 4.74 Loans (2) 737,383 7.86 709,349 7.94 ------- ---- ------- ---- Total Earning Assets 1,009,478 7.35 995,903 7.38 Allowance for loan losses (6,775) (6,479) Cash and due from banks 34,138 33,185 Bank premises and equipment 17,355 17,665 Other assets 15,055 13,848 ------ ------ $1,069,251 $1,054,122 ========= ========== Liabilities and Shareholders' Equity Interest bearing liabilities NOW $63,726 1.72% $68,478 1.69% Savings deposits 108,047 2.16 106,647 2.09 Money market accounts 211,385 1.97 210,673 1.97 Time deposits 410,745 4.86 396,855 5.00 Federal funds purchased and other short term borrowings 25,161 3.86 31,789 3.50 Other borrowings 24,970 5.73 24,970 5.73 ------ ---- ------ ---- Total Interest Bearing Liabilities 844,034 3.55 839,412 3.56 Demand deposits 140,812 129,822 Other liabilities 5,455 5,876 ------- ------- Total 990,301 975,110 Shareholders' equity 78,950 79,012 --------- ------- $1,069,251 $1,054,122 ========= ========= Interest expense as % of earning assets 2.97% 3.00% Net interest income as % of earning assets 4.38 4.38% ------------ (1) The tax equivalent adjustment is based on a 34% tax rate. All yields/rates are calculated on an annualized basis. (2) Nonaccrual loans are included in loan balances. Fees on loans are included in interest on loans. -------------------------------------------------------------------------------- FINANCIAL STATEMENTS -------------------------------------------------------------------------------- MANAGEMENT'S REPORT ON RESPONSIBILITIES FOR FINANCIAL REPORTING --------------------------------------------------------------- Management is responsible for the preparation and content of the accompanying financial statements and the other information contained in this report. Management believes that the financial statements have been prepared in conformity with appropriate generally accepted accounting principles applied on a consistent basis and present fairly Seacoast Banking Corporation of Florida's consolidated financial condition and results of operations. Where amounts must be based on estimates and judgments, they represent the best estimates of management. Management maintains and relies upon an accounting system and related internal accounting controls to provide reasonable assurance that transactions are properly executed and recorded and that the company's assets are safeguarded. Emphasis is placed on proper segregation of duties and authorities, the development and dissemination of written policies and procedures and a complete program of internal audits and management follow-up. In recognition of cost-benefit relationships and inherent control limitations, some features of the control systems are designed to detect rather than prevent errors, irregularities and departures from approved policies and practices. Management believes the system of controls has prevented or detected on a timely basis any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate. The accompanying 2000 financial statements have been audited by Arthur Andersen LLP, certified public accountants. As part of their audit, Arthur Andersen LLP evaluated the accounting systems and related internal accounting controls only to the extent they deemed necessary to determine their auditing procedures. Their audit would not necessarily disclose all internal accounting control weaknesses because of the limited purpose of their evaluation. Although the scope of Arthur Andersen LLP's audit did not encompass a complete review of and they have not expressed an opinion on the overall system of internal accounting control, they reported that their evaluation disclosed no conditions which they consider to be material internal accounting control weaknesses. The Board of Directors pursues its oversight role for accounting and internal accounting control matters through an Audit Committee of the Board of Directors comprised entirely of outside Directors. The Audit Committee meets periodically with management, internal auditors and independent accountants. The independent accountants and internal auditors have full and free access to the Audit Committee and meet with it privately, as well as with management present, to discuss internal control accounting and auditing matters. /s/ Dennis S. Hudson, III ------------------------- Dennis S. Hudson, III President and Chief Executive Officer /s/ William R. Hahl ------------------- William R. Hahl Executive Vice President and Chief Financial Officer /s/ John R. Turgeon ------------------- John R. Turgeon Senior Vice President and Controller REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- Board of Directors and Shareholders Seacoast Banking Corporation of Florida Stuart, Florida We have audited the accompanying consolidated balance sheets of Seacoast Banking Corporation of Florida (a Florida corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial state- ment presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seacoast Banking Corporation of Florida and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP West Palm Beach, Florida, January 12, 2001. CONSOLIDATED STATEMENTS OF INCOME Seacoast Banking Corporation of Florida and Subsidiaries (Dollars in thousands, except share data) Year Ended December 31 2000 1999 1998 --------------------------------------------------------------------- Interest on securities Taxable $13,295 $14,330 $13,562 Nontaxable 413 605 704 Interest and fees on loans 65,521 58,243 54,617 Interest on federal funds sold 501 373 876 --- ----- ----- Total Interest Income 79,730 73,551 69,759 Interest on deposits 9,459 7,672 7,254 Interest on time certificates 23,418 19,736 20,603 Interest on borrowed money 4,758 3,054 1,689 ----- --- --- Total Interest Expense 37,635 30,462 29,546 ------ ------ ------ Net Interest Income 42,095 43,089 40,213 Provision for loan losses 600 660 1,710 ----- --- ----- Net Interest Income After Provision for Loan Losses 41,495 42,429 38,503 Noninterest income Securities gains (12) 309 612 Other 13,150 12,148 11,775 Noninterest expenses 34,877 35,983 35,721 ------ ------ ------ Income Before Income Taxes 19,756 18,903 15,169 Provision for income taxes 7,668 7,119 5,606 ----- ----- ----- Net Income $12,088 $11,784 $9,563 ======= ======= ======= --------------------------------------------------------------------- Net income per share common stock Diluted $2.51 $2.40 $1.84 Basic 2.53 2.43 1.88 Average shares outstanding Diluted 4,814,592 4,909,154 5,192,417 Basic 4,781,215 4,844,943 5,093,032 ---------- See notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS Seacoast Banking Corporation of Florida and Subsidiaries (Dollars in thousands) December 31 2000 1999 ----------- ---- ---- Assets Cash and due from banks $ 33,505 $ 39,992 Federal funds sold 39,000 19,950 Securities: Securities held for sale (at market) 178,722 196,215 Securities held for investment (market values: 2000 - $26,078 and 1999 - $17,464) 25,942 17,439 ------ ------ Total Securities 204,664 213,654 Loans 844,546 778,164 Less: Allowance for loan losses 7,218 6,870 ----- ----- Net Loans 837,328 771,294 Bank premises and equipment 16,633 16,557 Other real estate owned 346 339 Core deposit intangibles 654 969 Goodwill 2,682 2,982 Other assets 16,561 15,295 ------ ------ Total Assets $1,151,373 $1,081,032 ========== ======== Liabilities and Shareholders' Equity Liabilities Deposits Demand deposits (noninterest bearing) $159,775 $140,537 Savings deposits 380,791 379,138 Other time deposits 324,240 294,683 Time certificates of $100,000 or more 92,283 91,602 ------ ------ Total Deposits 957,089 905,960 Federal funds purchased and securities sold under agreement to repurchase, maturing within 30 days 65,020 66,964 Other borrowings 40,000 24,970 Other liabilities 5,001 6,027 ----- ----- 1,067,110 1,003,921 Commitments and Contingencies (Notes I and N) Shareholders' Equity Preferred stock, par value $1.00 per share - authorized 1,000,000 shares, none issued or outstanding. 0 0 Class A common stock, par value $.10 per share (liquidation preference of $2.50 per share) authorized 10,000,000 shares, issued 4,824,416 and outstanding 4,357,813 shares in 2000 and 4,822,538 and outstanding 4,469,819 shares in 1999. 482 482 Class B common stock, par value $.10 per share authorized 810,000 shares, issued and outstanding 358,710 in 2000 and 360,588 shares in 1999. 36 36 Additional paid-in capital 27,831 27,785 Retained earnings 72,562 65,598 Less: Treasury Stock (466,603 shares in 2000 and 352,719 shares in 1999), at cost. (14,470) (11,640) -------- ------- 86,441 82,261 Securities valuation allowance (2,178) (5,150) ------- ------- Total Shareholders' Equity 84,263 77,111 ------- ------ Total Liabilities and Shareholders' Equity $1,151,373 $1,081,032 ========== ========= ---------- See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries (Dollars in thousands)) Year Ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities Interest received $78,619 $73,526 $69,675 Fees and commissions received 12,838 12,541 11,385 Interest paid (37,341) (30,527) (29,389) Cash paid to suppliers and employees (34,261) (33,405) (31,534) Income taxes paid (7,566) (7,315) (5,074) ------ ------ ------ Net cash provided by operating activities 12,289 14,820 15,063 Cash flows from investing activities Maturities of securities held for sale 19,699 85,078 141,048 Maturities of securities held for investment 4,848 4,770 15,991 Proceeds from sale of securities held for sale 10,203 60,106 105,989 Purchase of securities held for sale (7,559) (110,258) (302,249) Purchase of securities held for investment (13,357) 0 (989) Proceeds from sale of loans 40,012 3,128 8,312 Net new loans and principal repayments (107,937) (77,597) (85,652) Proceeds from sale of other real estate owned 722 676 765 Additions to bank premises and equipment (2,054) (804) (1,636) Net change in other assets (627) 44 (943) -------- ------- -------- Net cash used in investing activities (56,050) (34,857) (119,364) Cash flows from financing activities Net increase in deposits 51,146 744 99,093 Net increase(decrease) in federal funds purchased and repurchase agreements (1,944) (10,794) 25,646 Net increase in other borrowings 15,030 0 24,970 Exercise of stock options 236 1,529 748 Treasury stock acquired (3,119) (4,243) (8,624) Dividends paid (5,025) (4,695) (4,530) ------- ------- ------- Net cash(used in) provided by financing activities 56,324 (17,459) 137,303 ------- ------ ------- Net increase (decrease) in cash and cash equivalents 12,563 (37,496) 33,002 Cash and cash equivalents at beginning of year 59,942 97,438 64,436 ------ ------- ------ Cash and cash equivalents at end of year $72,505 $59,942 $97,438 ======= ======= ======= ---------- See Note P for supplemental disclosures. See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity ----------------------------------------------- Seacoast Banking Corporation of Florida and Subsidiaries Common Stock ---------------------------- Additional Class A Class B Paid-in (Dollars in thousands) Stock Stock Capital ---------------------- ------- ------- ---------- Balance at December 31, 1997 $479 $38 $27,256 Comprehensive Income: Net Income Unrealized losses on securities Comprehensive Income Cash Dividends Declared Exchange of Class B common stock for Class A common stock 1 (1) Treasury stock acquired Common stock issued from Treasury: For employee benefit plans (2) For stock options and awards 2 Exercise of stock options and warrants 1 183 ------- ------- ---------- Balance at December 31, 1998 481 37 27,439 Comprehensive Income: Net Income Unrealized losses on securities Comprehensive Income Cash Dividends Declared Exchange of Class B common stock for Class A common stock 1 (1) Treasury stock acquired Common stock issued from Treasury: For employee benefit plans For stock options and awards 346 ------ ------ ------ Balance at December 31, 1999 482 36 27,785 Comprehensive Income: Net Income Unrealized gains on securities Comprehensive Income Cash Dividends Declared Exchange of Class B common stock for Class A common stock Treasury stock acquired Common stock issued from Treasury: For employee benefit plans For stock options and awards 46 Balance at December 31, 2000 $482 $36 $27,831 === === ======= ---------- See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity (con't) (In thousands of Retained Treasury dollars) Earnings Stock -------------------------- ---------- -------------- Balance at December 31, 1997 $54,673 $(1,289) Comprehensive Income: Net Income 9,563 Unrealized losses on securities Comprehensive Income Cash Dividends Declared (4,530) Exchange of Class B common stock for Class A common stock Treasury stock acquired (8,957) Common stock issued from Treasury: For employee benefit plans 130 For stock options and awards (544) 1,310 Exercise of stock options and warrants ------ ---- Balance at December 31, 1998 59,162 (8,806) Comprehensive Income: Net Income 11,784 Unrealized losses on securities Comprehensive Income Cash Dividends Declared (4,695) Exchange of Class B common stock for Class A common stock Treasury stock acquired (5,076) Common stock issued from Treasury: For employee benefit plans 125 For stock options and awards (653) 2,117 ------ ------ Balance at December 31, 1999 65,598 (11,640) Comprehensive Income: Net Income 12,088 Unrealized losses on securities Comprehensive Income Cash Dividends Declared (5,025) Exchange of Class B common stock for Class A common stock Treasury stock acquired (3,242) Common stock issued from Treasury: For employee benefit plans 72 For stock options and awards (99) 340 ------- ------ Balance at December 31, 2000 $72,562 $(14,470) ====== ====== ---------- See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity (con't) ------------------------------------------------------- Securities Valuation (In thousands of Equity Comprehensive dollars) (Allowance) Income -------- ----------- ------ Balance at December 31, 1997 $ (93) Comprehensive Income: Net Income $9,563 Unrealized gains on securities 222 222 ----- Comprehensive Income 9,785 Cash Dividends Declared Exchange of Class B common stock for Class A common stock Treasury stock acquired Common stock issued from Treasury: For employee benefit plans For stock options and awards Exercise of stock options and warrants ------ Balance at December 31, 1998 129 Comprehensive Income: Net Income 11,784 Unrealized losses on securities (5,279) (5,279) ------ Comprehensive Income 6,505 Cash Dividends Declared Exchange of Class B common stock for Class A common stock Treasury stock acquired Common stock issued from Treasury: For employee benefit plans For stock options and awards Exercise of stock options and warrants ---- Balance at December 31, 1999 (5,150) Comprehensive Income: Net Income 12,088 Unrealized gains on securities 2,972 2,972 ------ Comprehensive Income 15,060 Cash Dividends Declared Exchange of Class B common stock for Class A common stock Treasury stock acquired Common stock issued from Treasury: For employee benefit plans For stock options and awards Exercise of stock options and warrants Balance at December 31, 2000 $(2,178) ======== ---------------------------------------------- See notes to consolidated financial statements. ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Seacoast Banking Corporation of Florida and Subsidiaries Note A SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Nature of Operations: The company is a single segment bank holding company whose operations and locations are more fully described on page 13 of this annual report. Use of Estimates: The preparation of these financial statements required the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Securities: Securities that may be sold as part of the Company's asset/liability management or in response to, or in anticipation of changes in interest rates and resulting prepayment risk, or for other factors are stated at market value. Such securities are held for sale with unrealized gains of losses reflected as a component of Shareholders' Equity net of tax. Debt securities that the Company has the ability and intent to hold to maturity are carried at amortized cost. Interest income on securities, including amortization of premiums and accretion of discounts is recognized using the interest method. The Company generally anticipates prepayments of principal in the calculation of the effective yield for collateralized mortgage obligations and mortgage backed securities. The adjusted cost of each specific security sold is used to compute gains or losses on the sale of securities. Other Real Estate Owned: Other real estate owned consists of real estate acquired in lieu of unpaid loan balances. These assets are carried at an amount equal to the loan balance prior to foreclosure plus costs incurred for improvements to the property, but no more than the estimated fair value of the property. Bank Premises and Equipment: Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method, over the estimated useful lives as follows: building - 25-40 years, furniture and equipment - 3-12 years. Purchase Method of Accounting: Net assets of companies acquired in purchase transactions are recorded at fair value at date of acquisition. Core deposit intangibles are amortized on a straight line basis over estimated periods benefited, not exceeding 10 years. Goodwill is amortized on a straight line basis over 15 years. Mortgage Servicing Rights: The Company acquires mortgage servicing rights through the origination of mortgage loans, and the Company may sell or securitize those loans with servicing rights retained. Under Statement of Financial Accounting Standards No. 122, the Company allocates the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The Company assesses its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The portfolio is stratified by two predominant risk characteristics: loan type and fixed versus variable interest rate. Impairment, if any, is recognized through a valuation allowance for each impaired stratum. Mortgage servicing rights are amortized in proportion to, and over the period of, the estimated net future servicing income. Revenue Recognition: Interest on loans is accrued based upon the principal amount outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Provision for Loan Losses: The provision for loan losses is management's judgment of the amount necessary to increase the allowance for loan losses to a level sufficient to cover losses in the collection of loans. Net Income Per Share: Net income per share is based upon the weighted average number of shares of both Class A and Class B common stock (Basic) and equivalents (Diluted) outstanding during the respective years. Cash Flow Information: For the purposes of the consolidated statements of cash flows, the Company considers cash and due from banks and federal funds sold as cash and cash equivalents. Derivative Financial Instruments: In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. In June of 1999, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 137, which delays the effective date of implementation until fiscal years beginning after June 15, 2000. In June of 2000, SFAS No. 133 was amended by Statement of Financial Accounting Standards No. 138, which addresses issues related to implementation difficulties. The Company will adopt SFAS No. 133 effective January 1, 2001. The Company has completed an in-depth analysis and determined it has no derivative instruments as defined under SFAS No. 133. ---------- NOTE B CASH, DIVIDEND AND LOAN RESTRICTIONS In the normal course of business, the Company and its subsidiary bank enter into agreements, or are subject to regulatory agreements, that result in cash, debt and dividend restrictions. A summary of the most restrictive items follows: The Company's subsidiary bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 2000 was approximately $3,700,000. Under Federal Reserve regulation, the Company's subsidiary bank is limited as to the amount it may loan to its affiliates, including the Company, unless such loans are collateralized by specified obligations. At December 31, 2000, the maximum amount available for transfer from the subsidiary bank to the Company in the form of loans approximated 20 percent of consolidated net assets. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's profits, as defined, for that year combined with its retained net profits for the preceding two calendar years. Under this restriction the Company's subsidiary bank can distribute as dividends to the Company in 2001, without prior approval of the Comptroller of the Currency, approximately $9,400,000. ---------- NOTE C SECURITIES The amortized cost and market value of securities at December 31, 2000, 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 Held for Sale ----------------------------------- Amortized Market Amortized Market (Dollars in thousands) Cost Value Cost Value --------------------------------------------------------------- Due in less than one year $ 1,941 $ 1,949 $ 996 $ 995 Due after one year through five years 3,260 3,324 20,000 19,773 Due after five years through ten years 1,213 1,243 0 0 Due after ten years 0 0 0 0 ------- ------ ------ ------ 6,414 6,516 20,996 20,768 Mortgage backed securities 19,528 19,562 129,619 126,620 No contractual maturity 0 0 31,615 31,334 - - ------ ------ $25,942 $26,078 $182,230 $178,722 ======= ======= ======== ======== Proceeds from sales of securities during 2000 were $10,203,000 with gross gains of $10,000 and gross losses of $22,000. During 1999, proceeds from sales of securities were $60,106,000 with gross gains of $332,000 and gross losses of $66,000. During 1998, proceeds from sales of securities were $105,989,000 with gross gains of $737,000 and gross losses of $125,000. Securities with a carrying value of $103,755,000 at December 31, 2000, were pledged to secure United States Treasury deposits, other public deposits and trust deposits. The amortized cost and market value of securities follow: Gross Gross Gross Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Gains Losses Value -------------------------- --------- ----------- ---------- --------- SECURITIES HELD FOR SALE-2000: U.S. Treasury and U.S. Government agencies $20,996 $(228) $20,768 Mortgage Backed Securities: 129,619 $18 (3,017) 126,620 Mutual funds 23,881 0 (219) 23,662 Other securities 7,734 0 (62) 7,672 -------- ------ -------- -------- $182,230 $18 $(3,526) $178,722 ======== ====== ======== ======== SECURITIES HELD FOR INVESTMENT-2000: Mortgage Backed Securities $19,528 $113 $(79) $19,562 Obligations of States and Political Subdivisions 6,414 102 0 6,516 ------- ---- ---- ------- $25,942 $215 $(79) $26,078 ======= ==== ==== ======= SECURITIES HELD FOR SALE-1999: U.S. Treasury and U.S. Government agencies $30,012 $0 $(1,334) $28,678 Mortgage Backed Securities 143,322 18 (6,338) 137,002 Mutual Funds 23,881 0 (404) 23,477 Other Securities 7,072 0 (14) 7,058 -------- --- ------- -------- $204,287 $18 $(8,090) $196,215 ======== === ======= ======== SECURITIES HELD FOR INVESTMENT-1999: Mortgage Backed Securities $8,427 $55 $(97) $8,385 Obligations of States and Political Subdivisions 8,912 100 (33) 8,979 Other Securities 100 0 0 100 ------- ---- ---- ------- $17,439 $155 $(130) $17,464 ======= ==== ===== ======= NOTE D LOANS An analysis of loans at December 31, follows: (Dollars in thousands) 2000 1999 ----------------------- -------- -------- Real estate construction $ 42,633 $ 42,899 Real estate mortgage 671,424 623,472 Commercial and financial 39,465 33,119 Installment loans to individuals 90,744 78,013 Other 280 661 -------- -------- $844,546 $778,164 ======== ======== One of the sources of the Company's business is loans to directors, officers and other members of management. These loans are made on the same terms as all other loans and do not involve more than normal risk of collectability. The aggregate dollar amount of these loans was approximately $5,042,000 and $5,226,000 at December 31, 2000 and 1999, respectively. During 2000, $565,000 of new loans were made and repayments totaled $749,000. See Page 20 of Management's Discussion and Analysis for information about concentrations of credit risk of all financial instruments. ---------- NOTE E IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES Certain impaired loans are measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. The Company's recorded investment in impaired loans and related valuation allowance are as follows: 2000 1999 -------------------- -------------------- Recorded Valuation Recorded Valuation (Dollars in thousands) Investment Allowance Investment Allowance ------------------------- -------------------- -------------------- Impaired loans: Valuation allowance required $10 $10 $ 0 $0 No valuation allowance required 0 0 37 0 -- -- -- - TOTAL $10 $10 $37 $0 === === === == The valuation allowance is included in the allowance for loan losses. The average recorded investment in impaired loans for the years ended December 31, 2000 and 1999 were $23,000 and $58,000 respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions to principal. The Company recognized interest income on impaired loans of $6,000 and $1,000 for the years ended December 31, 2000 and 1999, respectively. Transactions in the allowance for loan losses for the two years ended December 31, are summarized as follows: (Dollars in thousands) 2000 1999 ------------------------- ---- ---- Balance, beginning of year $6,870 $6,343 Provision charged to operating expense 600 660 Charge offs (643) (626) Recoveries 391 493 --- --- Balance, end of year $7,218 $6,870 ====== ====== ---------- NOTE F BANK PREMISES AND EQUIPMENT Bank premises and equipment are summarized as follows: Accumulated Depreciation Net & Carrying (Dollars in thousands) Cost Amortization Value ------------------------------------------------------------------- December 31, 2000 Premises (including land of $2,967) $20,985 $8,107 $12,878 Furniture and equipment 13,545 9,790 3,755 ---------- ----------------------- $34,530 $17,897 $16,633 ========== ======================= December 31, 1999 Premises (including land of $20,331 $7,576 $12,755 $2,967) Furniture and equipment 14,352 10,550 3,802 ---------- ----------------------- $34,683 $18,126 $16,557 ========== ======================= ---------- NOTE G BORROWINGS All of the Company's short-term borrowings were comprised of federal funds purchased and securities sold under agreements to repurchase with maturities primarily from overnight to seven days: (Dollars in thousands) 2000 1999 1998 ------------------------- ---- ---- ---- Maximum amount outstanding at any month end $68,352 $72,172 $77,758 Average interest rate outstanding at end of year 5.37% 4.24% 3.44% Average amount outstanding $38,735 $38,438 $25,908 Weighted average interest rate 5.29% 4.22% 3.96% ---------------------------------------------------------------- On July 31, 1998, the Company acquired $24,970,000 in other borrowings, $15,000,000 from the Federal Home Loan Bank (FHLB), principal payable on November 12, 2009 with interest payable quarterly at 6.10% and $9,970,000 from Donaldson, Lufkin & Jenrette (DLJ), principal payable on July 31, 2003, with interest payable quarterly at 5.40%. The DLJ borrowing was called on August 31, 2000. On March 9, 2000 the Company acquired $25,000,000 in additional borrowings from FHLB, principal payable on March 9, 2002 with interest payable quarterly at 6.99%; the borrowing was restructured to a 3 year term on December 1, 2000 at 6.55%. The FHLB $15,000,000 debt is subject to early termination on November 12, 2004 in accordance with the terms of the agreement. The FHLB debt is secured by residential mortgage loans totaling $40,000,000. The Company's subsidiary bank has unused lines of credit of $130,500,000 at December 31, 2000. ---------- NOTE H EMPLOYEE BENEFITS The Company's profit sharing plan which covers substantially all employees after one year of service includes a matching benefit feature for employees electing to defer the elective portion of their profit sharing compensation. In addition, amounts of compensation contributed by employees are matched on a percentage basis under the plan. The profit sharing contributions charged to operations were $1,034,000 in 2000, $1,355,000 in 1999, and $859,000 in 1998. The Company's stock option and stock appreciation rights plans were approved by the Company's shareholders on April 25, 1991, April 25, 1996 and April 20, 2000. The number of shares of Class A common stock that may be purchased pursuant to the 1991 and 1996 plans shall not exceed 300,000 shares for each plan and pursuant to the 2000 plan shall not exceed 400,000 shares. The Company has granted options on 250,000 shares and 286,000 shares for the 1991 and 1996 plans, respectively, through December 31, 2000;no options have been granted under the 2000 plan. Under the plans, the option exercise price equals the Class A common stock's market price on the date of grant. All options have a vesting period of four years and a contractual life of ten years. The following table presents a summary of stock option activity for 1998, 1999 and 2000: Weighted Weighted Average Average Number Fair Option Price Exercise of Shares Value Per Share Price ---------- --------- --------------------------- Options outstanding, January 1, 1998 285,000 $11.00 - 25.50 $19.33 Exercised (40,000) 11.75 - 21.75 18.10 Granted 156,000 $10.05 29.00 29.00 Cancelled (23,000) 17.50 - 25.50 23.73 --------------------------------------------- Options outstanding, December 31, 1998 378,000 11.00 - 29.00 23.14 Exercised (68,000) 11.75 - 21.75 16.99 --------------------------------------------- Options outstanding, December 31, 1999 310,000 11.75 - 29.00 24.51 Exercised (11,000) 11.75 - 19.00 17.42 Granted 7,000 6.98 24.63 - 27.13 25.70 Canceled (5,000) 29.00 29.00 Options outstanding, December 31, 2000 301,000 11.75 - 29.00 24.72 ============================================= Options exercisable, December 31, 2000 282,000 $24.66 ====================================================================== The following table summarizes information about stock options outstanding at December 31, 2000: Options Outstanding Options Exercisable ------------------------------------------------------------------------ Weighted Average Number of Remaining Weighted Number of Weighted Range of Shares Contrac- Average Shares Average Exercise Outstand- tual Life Exercise Exercis- Exercise Prices ing in Years Price able Price ------------------------------------------------------------------------ $11.75 5,000 1.17 $11.75 5,000 $11.75 17.50 23,000 4.17 17.50 23,000 17.50 17.75 19,000 2.92 17.75 19,000 17.75 19.00 34,000 2.17 19.00 34,000 19.00 21.75 33,000 5.50 21.75 33,000 21.75 24.63 4,000 9.22 24.63 0 24.63 25.50 35,000 6.58 25.50 23,000 25.50 27.13 3,000 9.62 27.13 0 27.13 29.00 145,000 7.54 29.00 145,000 29.00 ------------------------------------------------------------------------ 301,000 5.99 $24.72 282,000 $24.66 ======================================================================== The three stock option plans are accounted for under APB Opinion No. 25, and therefore no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: (Dollars in thousands, except per share data) 2000 1999 1998 -------------- ---- ---- ---- Net Income: As Reported $12,088 $11,784 $9,563 Pro Forma 11,771 11,427 9,164 Per Share: (Diluted): As Reported 2.51 2.40 1.84 Pro Forma 2.44 2.33 1.76 Because the statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2000 and 1998; risk-free interest rates of 5.65 percent for 2000 and 1998; expected dividend yield of 3.5 percent for the 2000 issue and 3.4 percent for the 1998 issue; expected lives of 7 years; expected volatility of 28.5 percent for 2000 and 38.6 percent for 1998. ---------- NOTE I LEASE COMMITMENTS The Company is obligated under various noncancelable operating leases for equipment, buildings and land. At December 31, 2000, future minimum lease payments under leases with initial or remaining terms in excess of one year are as follows: (Dollars in thousands) ------------------------------- 2001 $ 1,648 2002 1,325 2003 1,173 2004 1,164 2005 948 Thereafter 7,761 ----- $ 14,019 ======== Rent expense charged to operations was $1,739,000 in 2000, $1,471,000 in 1999, and $1,474,000 in 1998. Certain leases contain provisions for renewal and change with the consumer price index. Certain property is leased from related parties of the Company at prevailing rental rates. Lease payments to these individuals were $255,000 in 2000, $229,000 in 1999 and $227,000 in 1998. ---------- NOTE J INCOME TAXES The provision for income taxes including tax effects of security transaction gains(losses)(2000 - ($5,000); 1999 - $115,000; 1998 - $224,000) are as follows: (Dollars in thousands) Year Ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Current Federal $6,666 $6,495 $5,417 State 1,149 821 664 Deferred Federal (121) (138) (423) State (26) (59) (52) ---- ---- ---- $7,668 $7,119 $5,606 ====== ====== ====== Temporary differences in the recognition of revenue and expense for tax and financial reporting purposes resulted in deferred income taxes as follows: (Dollars in thousands) Year ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Depreciation $(180) $(144) $(68) Allowance for loan losses (78) (329) (420) Interest and fee income 98 215 80 Other real estate owned 11 75 (57) Other 2 (14) (10) --- -- -- TOTAL $(147) $(197) $(475) ===== ===== ===== The difference between the total expected tax expense (computed by applying the U.S. Federal tax rate of 35% to pretax income in 2000, 34.4 percent to pretax income in 1999 and 34 percent to pretax income in 1998) and the reported income tax expense relating to income taxes is as follows: (Dollars in thousands) Year Ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Tax rate applied to income before income taxes $6,915 $6,503 $5,157 Increase (decrease) resulting from the effects of: Tax-exempt interest on obligations of states and political subdivisions (182) (235) (239) State income taxes (393) (262) (208) Dividend exclusion (8) (8) (8) Amortization of intangibles 201 202 200 Other 12 157 92 -- -- --- Federal tax provision 6,545 6,357 4,994 State tax provision 1,123 762 612 --- --- --- Applicable income taxes $7,668 $7,119 $5,606 ====== ====== ====== The net deferred tax assets (liabilities) are comprised of the following: (Dollars in thousands) Year Ended December 31 2000 1999 ---------------------- ---- ---- Allowance for loan losses $2,452 $2,374 Other real estate owned 3 14 Net unrealized securities losses 1,702 3,302 Other 87 81 -- -- Gross deferred tax assets 4,244 5,771 Depreciation (525) (705) Interest and fee income (896) (798) Other (37) (29) --- --- Gross deferred tax liabilities (1,458) (1,532) Deferred tax asset valuation allowance 0 0 - - Net deferred tax assets $2,786 $4,239 ===== ===== The tax effects of unrealized gains (losses) included in the calculation of comprehensive income as presented in the statements of shareholder's equity for the three years ended December 31, are as follows: 2000 $1,600 1999 $3,044 1998 $ 152 ---------- NOTE K NONINTEREST INCOME AND EXPENSES Details of noninterest income and expenses follow: (Dollars in thousands) Year Ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Noninterest income Service charges on deposit accounts $4,865 $4,876 $4,359 Trust fees 2,704 2,489 2,144 Other service charges and fees 1,653 1,453 1,655 Brokerage commissions and fees 2,421 2,329 2,105 Other 1,507 1,001 1,512 --------- ---------- --------- 13,150 12,148 11,775 Securities gains(losses) (12) 309 612 --------- ---------- --------- $13,138 $12,457 $12,387 ========= ========== ========= Noninterest expenses Salaries and wages $13,077 $13,882 $14,046 Employee benefits 3,177 3,798 3,119 Occupancy 3,343 3,135 3,129 Furniture and equipment 2,108 2,037 2,436 Outsourced data processing costs 4,106 3,696 2,881 Marketing 1,717 1,653 1,964 Legal and professional fees 1,177 1,572 1,029 FDIC assessments 184 146 135 Foreclosed and repossessed asset management and dispositions 91 185 298 Amortization of intangibles 636 671 671 Other 5,261 5,208 6,013 --------- ---------- --------- $34,877 $35,983 $35,721 ========= ========== ========= ---------- NOTE L SHAREHOLDERS' EQUITY The Company has reserved 100,000 Class A common shares for issuance in connection with an employee stock purchase plan and 150,000 Class A common shares for issuance in connection with an employee profit sharing plan. At December 31, 2000, an aggregate of 35,236 shares and 52,422 shares, respectively, have been issued as a result of employee participation in these plans. Holders of Class A common stock are entitled to one vote per share on all matters presented to shareholders. Holders of Class B common stock are entitled to 10 votes per share on all matters presented to shareholders. Class A and Class B common stock vote together as a single class on all matters, except as required by law or as provided otherwise in the Company's Articles of Incorporation. Each share of Class B common stock is convertible into one share of Class A common stock at any time prior to a vote of shareholders authorizing a liquidation or dissolution of the Company. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2000, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2000, the most recent notification from the Company's regulator categorized the Company as well capitalized under the regulatory framework for prompt corrective action. 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 below. There are no conditions or events since that notification that management believes have changed the institution's category. Minimum for Capital Adequacy Purposes --------------------- (Dollars in thousands) Amount Ratio Amount Ratio ---------------------- ------ ----- ------ ----- At December 31, 2000: Total Capital (to risk- weighted assets) $90,054 12.14% $59,327 >=8.00% Tier 1 Capital (to risk-weighted assets) 82,836 11.17 29,664 >=4.00% Tier 1 Capital (to adjusted average assets) 82,836 7.44 44,511 >=4.00% At December 31, 1999: Total Capital (to risk- weighted assets) 84,837 12.24% $55,441 >=8.00% Tier 1 Capital (to risk-weighted assets) 77,967 11.25 27,721 >=4.00% Tier 1 Capital (to adjusted average assets) 77,967 7.32 42,598 >=4.00% -------(con't)------ Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions --------------------- (Dollars in thousands) Amount Ratio 2000 Total Capital (to risk- weighted assets) $74,159 >=10.00% Tier 1 Capital (to risk-weighted assets) 44,495 >= 6.00% Tier 1 Capital (to adjusted average assets) 55,639 >= 5.00% 1999 Total Capital (to risk- weighted assets) 69,302 >=10.00% Tier 1 Capital (to risk-weighted assets) 41,581 >= 6.00% Tier 1 Capital (to adjusted average assets) 53,247 >= 5.00% ---------- The above ratios are comparable for the Company's wholly owned banking subsidiary. NOTE M SEACOAST BANKING CORPORATION OF FLORIDA (PARENT COMPANY ONLY) FINANCIAL INFORMATION BALANCE SHEETS (Dollars in thousands) December 31 2000 1999 ---------------------- ---- ---- Assets Cash $ 10 $ 10 Securities purchased under agreement to resell with subsidiary bank, maturing within 30 days 785 2,881 Securities held for sale 425 473 Investment in subsidiaries 82,920 74,151 Other assets 291 195 --- --- $84,431 $77,710 ======= ======= Liabilities and Shareholders' Equity Liabilities $ 168 $ 599 Shareholders' Equity 84,263 77,111 ------ ------ $84,431 $77,710 ======= ======= STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31 2000 1999 1998 ---------------------- ---- ---- ---- Increase (Decrease) in Cash Cash flows from operating activities Interest received $ 106 $ 149 $ 187 Dividends received 6,682 11,140 7,148 Income taxes received 186 139 565 Cash paid to suppliers (1,162) (596) (534) ---- ------ ---- Net cash provided by operating activities 5,812 10,832 7,366 Cash flows from investing activities Decrease (increase) in securities purchased under agreement to resell, maturing in 30 days 2,096 (2,881) 3,498 Maturities of securities held for sell 0 1,000 0 ------ ------ ----- Net cash provided by (used in) investing activities 2,096 (1,881) 3,498 Cash flows from financing activities Advance (to)from subsidiary 0 (1,542) 1,542 Exercise of stock options 236 1,529 748 Treasury stock acquired (3,119) (4,243) (8,624) Dividends paid (5,025) (4,695) (4,530) ------ ------ ------ Net cash used in financing activities (7,908) (8,951) (10,864) ------- ------ ------ Net change in cash 0 0 0 Cash at beginning of year 10 10 10 -- -- -- Cash at end of year $ 10 $ 10 $ 10 ==== ===== ===== RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES Net income $12,088 $11,784 $9,563 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (5,768) (977) (2,659) Other net (508) 25 462 --- ---- ---- Net cash provided by operating activities $5,812 $10,832 $7,366 ====== ======= ====== STATEMENTS OF INCOME (Dollars in thousands) Year Ended December 31 2000 1999 1998 ------------------------- ---- ---- ---- Income Dividends Subsidiary $6,650 $11,100 $7,123 Other 32 32 33 Interest 106 124 182 --- --- --- 6,788 11,256 7,338 Expenses 686 635 573 --- --- --- Income before income tax credit and equity in undistributed income of subsidiaries 6,102 10,621 6,765 Income tax credit 218 186 139 --- --- --- Income before equity in undistributed income of subsidiaries 6,320 10,807 6,904 Equity in undistributed income of subsidiaries 5,768 977 2,659 ----- ----- ----- Net income $12,088 $11,784 $9,563 ====== ====== ====== ---------- NOTE N CONTINGENT LIABILITIES AND COMMITMENTS WITH OFF BALANCE SHEET RISK The Company and its subsidiary bank, because of the nature of their business, are at all times subject to numerous legal actions, threatened or filed. Management, based upon advice of legal counsel, does not expect that the final outcome of threatened or filed suits will have a materially adverse effect on its results of operations or financial condition. The Company's subsidiary bank is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The subsidiary bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contract or notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and standby letters of credit as it does for on balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, equipment, and commercial and residential real estate. Of the $88,513,000 in outstanding commitments at December 31, 2000, $43,372,000 is secured by 1/4 family residential properties. Contract or Notional Amount (Dollars in thousands) Year Ended December 31 2000 1999 ---------------------- ---- ---- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 88,513 $ 91,154 Standby letters of credit and financial guarantees written: Secured 1,256 844 Unsecured 558 498 Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank holds collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for the above secured standby letters of credit at December 31, 2000 and 1999 amounted to $6,193,000 and $7,266,000, respectively. ---------- NOTE O MORTGAGE SERVICING RIGHTS, NET The following is an analysis of the mortgage servicing rights, net at December 31: (Dollars in Thousands) 2000 1999 ---------------------- ---- ---- Unamortized Balance at beginning of year $1,529 $1,701 Origination of mortgage servicing rights 0 272 Amortization (233) (444) ------ ------ 1,296 1,529 Less: Reserves (126) (126) ------ ------ TOTAL $1,170 $1,403 ====== ====== (Dollars in Thousands) Year Ended December 31 2000 1999 ---------------------- ---- ---- Unpaid principal balance of serviced loans for which mortgage servicing rights are capitalized $ 123,391 $ 140,271 ========= ======= Unpaid principal balance of serviced loans for which there are no servicing rights capitalized. $ 26,773 $ 31,334 ========= ======= The fair value of capitalized mortgage servicing rights was estimated using a discounted cash flow model. Prepayment speed projections and market assumptions regarding discount rate, servicing cost, escrow earnings credits, payment float and advance cost interest rates were determined from guidelines provided by a third-party mortgage servicing rights broker. ---------- NOTE P SUPPLEMENTAL DISCLOSURES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS Reconciliation of Net Income to Net Cash Provided by Operating Activities for three years ended: (Dollars in thousands) Year Ended December 31 2000 1999 1998 ------------------------------------ ------------------------------ Net Income $12,088 $11,784 $9,563 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2,559 2,925 3,020 Provision for loan losses 600 660 1,710 Credit for deferred taxes (147) (197) (475) Gain (loss)on sale of securities 12 (309) (612) Gain on sale of loans (546) (29) (683) Loss on sale and write down of foreclosed assets 16 77 185 Loss on disposition of equipment 14 25 105 Change in interest receivable (836) 128 (47) Change in interest payable 294 (65) 157 Change in prepaid expenses (677) (1) (814) Change in accrued taxes 251 (25) 1,029 Change in other liabilities (1,339) (153) 1,925 ----- ----- ---- TOTAL ADJUSTMENTS 201 3,036 5,500 ----- ----- ----- Net cash provided by operating activities $12,289 $14,820 $15,063 ======= ======= ======= Supplemental disclosure of non-cash investing activities: Market value adjustment to securities $4,564 $(8,297) $178 Transfers from loans to other real estate owned 745 804 702 ---------- NOTE Q FAIR VALUE OF FINANCIAL INSTRUMENTS 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 December 31: 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 estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. 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 mortgage, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk 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 adjusted to reflect differences in servicing and credit costs. Deposit Liabilities The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the present credit-worthiness of the counterparties. 2000 1999 ---------------------------------------- (Dollars in thousands) Carrying Fair Carrying Fair Year Ended December 31 Amount Value Amount Value ---------------------- ------ ----- ------ ----- Financial Assets Cash and cash equivalents $ 72,505 $ 72,505 $ 59,942 $ 59,942 Securities 204,664 204,800 213,654 213,679 Loans, net 837,328 837,915 771,294 755,220 Financial Liabilities Deposits 957,089 959,056 905,960 902,043 Borrowings 105,020 105,894 91,934 92,808 Contingent Liabilities Commitments to extend credit 0 787 0 842 Standby letters of credit 0 19 0 16 ---------- NOTE R EARNINGS PER SHARE Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share were determined by including assumptions of stock option conversions. Year ended December 31 (Dollars in thousands except Net Per-share per share data) Income Shares Amount ---------------------- ------ ------ ------ 2000 Basic Earnings Per Share Income available to common shareholders $12,088 4,781,215 $2.53 ===== Options issued to executives (See Note H) 33,377 ----- ------- Diluted Earnings Per Share Income available to common shareholders plus assumed conversions $12,088 4,814,592 $2.51 ====== ========= ===== 1999 Basic Earnings Per Share Income available to common shareholders $11,784 4,844,943 $2.43 ===== Options issued to executives (See Note H) 64,211 ----- ------- Diluted Earnings Per Share Income available to common shareholders plus assumed conversions $11,784 4,909,154 $2.40 ====== ========= ===== 1998 Basic Earnings Per Share Income available to common shareholders $ 9,563 5,093,032 $1.88 ===== Options issued executives (See Note H) 99,385 ----- ------- Diluted Earnings Per Share Income available to common shareholders plus assumed conversions $ 9,563 5,192,417 $1.84 ====== ========= =====