UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-13660

Seacoast Banking Corporation of Florida

(Exact Name of Registrant as Specified in its Charter)

Florida		59-2260678
(State or Other Jurisdiction of Incorporation or		(I.R.S. Employer Identification No.)
Organization

815 Colorado Avenue
Stuart, Florida		34994
(Address of Principal Executive Offices)		(Zip Code)

(772) 287-4000

(Registrant’s Telephone Number, Including Area Code)

(Former name, Former Address and Former Fiscal Year, If Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

INDEX

SEACOAST BANKING CORPORATION OF FLORIDA

		PAGE #
Part I            FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets — June 30, 2009 and December 31, 2008			3–4
Condensed consolidated statements of income — Three months and six months ended June 30, 2009 and 2008			5
Condensed consolidated statements of cash flows — Six months ended June 30, 2009 and 2008			6–7
Notes to condensed consolidated financial statements			8–15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16–57
Item 3. Quantitative and Qualitative Disclosures about Market Risk			58
Item 4. Controls and Procedures			59
Part II            OTHER INFORMATION
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			74–75
Item 3. Defaults upon Senior Securities			75
Item 4. Submission of Matters to a Vote of Security Holders			75–76
Item 5. Other Information			77
Item 6. Exhibits			77
SIGNATURES			78
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

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

		June 30,				December 31,
(Dollars in thousands, except share amounts)		2009				2008
ASSETS
Cash and due from banks		$	32,020			$	46,002
Interest bearing deposits with other banks			43,632				100,585
Federal funds sold			0				4,605
Total cash and cash equivalents			75,652				151,192
Securities:
Available for sale (at fair value)			337,746				318,030
Held for investment (fair values: $21,709 at June 30, 2009 and $26,109 at December 31, 2008)			22,299				27,871
TOTAL SECURITIES			360,045				345,901
Loans held for sale			16,454				2,165
Loans			1,584,340				1,676,728
Less: Allowance for loan losses			(43,618	)			(29,388	)
NET LOANS			1,540,722				1,647,340
Bank premises and equipment, net			42,879				44,122
Other real estate owned			23,259				5,035
Goodwill and other intangible assets			4,751				55,193
Other assets			72,973				63,488
		$	2,136,735			$	2,314,436
LIABILITIES
Deposits		$	1,756,422			$	1,810,441
Federal funds purchased and securities sold under agreements to repurchase, maturing within 30 days			101,849				157,496
Borrowed funds			65,172				65,302
Subordinated debt			53,610				53,610
Other liabilities			11,127				11,586
			1,988,180				2,098,435

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

		June 30,				December 31,
(Dollars in thousands, except share amounts)		2009				2008
SHAREHOLDERS’ EQUITY
Preferred stock, par value $0.10 per share, authorized 4,000,000 shares, issued and outstanding 2,000 shares of Series A			44,412				43,787
Warrant for purchase of shares of common stock at $6.36 per share			5,588				6,245
Common stock, par value $0.10 per share, authorized 65,000,000 shares, issued 19,261,888 and outstanding 19,170,788 shares at June 30, 2009, issued 19,283,841 and outstanding 19,171,779 shares at December 31, 2008			1,917				1,928
Other shareholders’ equity			96,638				164,041
TOTAL SHAREHOLDERS’ EQUITY			148,555				216,001
		$	2,136,735			$	2,314,436

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Seacoast Banking Corporation of Florida and Subsidiaries

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share data)		2009				2008				2009				2008
Interest and fees on loans		$	21,638			$	28,197			$	44,798			$	59,379
Interest and dividends on securities			4,375				3,621				8,379				7,297
Interest on federal funds sold and other investments			109				455				257				752
TOTAL INTEREST INCOME			26,122				32,273				53,434				67,428
Interest on deposits			6,194				10,634				14,181				23,212
Interest on borrowed money			1,008				1,477				2,159				3,569
TOTAL INTEREST EXPENSE			7,202				12,111				16,340				26,781
NET INTEREST INCOME			18,920				20,162				37,094				40,647
Provision for loan losses			26,227				42,237				37,879				47,737
NET INTEREST LOSS AFTER PROVISION FOR LOAN LOSSES			(7,307	)			(22,075	)			(785	)			(7,090	)
Noninterest income
Other income			3,928				5,842				8,684				12,004
Securities gains, net			1,786				355				1,786				355
TOTAL NONINTEREST INCOME			5,714				6,197				10,470				12,359
Noninterest Expenses
Goodwill impairment			49,813				0				49,813				0
Other noninterest expenses			20,348				19,240				39,457				37,924
TOTAL NONINTEREST EXPENSES			70,161				19,240				89,270				37,924
LOSS BEFORE INCOME TAXES			(71,754	)			(35,118	)			(79,585	)			(32,655	)
Benefit for income taxes			(8,754	)			(13,802	)			(11,825	)			(13,102	)
NET LOSS			(63,000	)			(21,316	)			(67,760	)			(19,553	)
Preferred stock dividends and accretion of preferred stock discount			937				0				1,874				0
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS		$	(63,937	)		$	(21,316	)		$	(69,634	)		$	(19,553	)
PER SHARE COMMON STOCK:
Net loss diluted		$	(3.35	)		$	(1.12	)		$	(3.65	)		$	(1.03	)
Net loss basic			(3.35	)			(1.12	)			(3.65	)			(1.03	)
Cash dividends declared			0.00				0.16				0.01				0.32
Average shares outstanding — diluted			19,088,759				18,986,163				19,079,151				18,957,269
Average shares outstanding — basic			19,088,759				18,986,163				19,079,151				18,957,269

See notes to condensed consolidated financial statements.

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

		Six Months Ended
		June 30,
(Dollars in thousands)		2009				2008
(Decrease) increase in cash and cash equivalents
Cash flows from operating activities
Interest received		$	53,479			$	68,004
Fees and commissions received			9,646				12,254
Interest paid			(16,569	)			(27,407	)
Cash paid to suppliers and employees			(36,271	)			(34,718	)
Income taxes paid			(13	)			(3,472	)
Trading securities activity			0				14,000
Origination of loans held for sale			(96,731	)			(130,036	)
Proceeds of loans held for sale			82,442				135,253
Net change in other assets			806				503
Net cash (used in) provided by operating activities			(3,211	)			34,381
Cash flows from investing activities
Maturities of securities available for sale			52,509				18,937
Maturities of securities held for investment			5,578				1,985
Proceeds from sale of securities available for sale			31,376				13,391
Purchases of securities available for sale			(100,170	)			(32,609	)
Net new loans and principal repayments			43,594				28,768
Proceeds from sale of loans			3,763				13,773
Proceeds from the sale of other real estate owned			2,308				295
Proceeds from sale of Federal Home Loan Bank Stock and Federal Reserve Bank stock			181				0
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock			(821	)			(165	)
Additions to bank premises and equipment			(531	)			(3,484	)
Net cash provided by investing activities			37,787				40,891
Cash flows from financing activities
Net decrease in deposits			(54,007	)			(96,907	)
Net decrease in federal funds purchased and repurchase agreements			(55,647	)			(1,270	)
Stock based employee benefit plans			118				817
Dividends paid			(580	)			(6,100	)
Net cash used in financing activities			(110,116	)			(103,460	)
Net decrease in cash and cash equivalents			(75,540	)			(28,188	)
Cash and cash equivalents at beginning of period			151,192				98,475
Cash and cash equivalents at end of period		$	75,652			$	70,287

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

		Six Months Ended
		June 30,
(Dollars in thousands)		2009				2008
Reconciliation of net loss to cash (used in) provided by operating activities
Net loss		$	(67,760	)		$	(19,553	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss on write down of goodwill			49,813				0
Depreciation			1,768				1,659
Amortization (accretion) of premiums and discounts on securities			(652	)			(307	)
Other amortization and accretion			518				206
Trading securities activity			0				14,000
Change in loans held for sale, net			(14,289	)			5,217
Provision for loan losses			37,879				47,737
Gains on sale of securities			(1,786	)			(355	)
Gains on sale of loans			(172	)			(38	)
Losses on sale and write-downs of other real estate owned			1,129				232
Losses (gains) on disposition of fixed assets			6				(97	)
Change in interest receivable			808				1,305
Change in interest payable			(230	)			(625	)
Change in prepaid expenses			634				329
Change in accrued taxes			(11,173	)			(16,166	)
Change in other assets			806				503
Change in other liabilities			(510	)			334
Net cash (used in) provided by operating activities		$	(3,211	)		$	34,381
Supplemental disclosure of non-cash investing activities:
Fair value adjustment to available for sale securities		$	839			$	57
Transfer of loans to other real estate owned			21,542				4,339

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

Use of Estimates

The preparation of these condensed consolidated financial statements required the use of certain estimates by management in determining the Company’s assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

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

We test goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. We engage external valuation specialists to assist in our goodwill assessments. The Company completed an annual test of goodwill for impairment for the year ended December 31, 2008. Management updated the test for impairment of goodwill at March 31, 2009 due to the decline in the price of the Company’s common stock and net earnings in the first quarter of 2009. The results of these tests indicated that none of the Company’s goodwill was impaired. Due to the further decline in the price of our common stock and our net loss in the second quarter of 2009, we again tested for impairment of goodwill as of June 30, 2009. The fair value of our enterprise was determined using two methods, the discounted cash flow and change in control valuation methods. These two methods provided a range of valuations of $2.43 to $7.00 per share that we used in evaluating goodwill for possible impairment. As of June 30, 2009, we determined that the carrying amount of the Company exceeds its fair value. Accordingly, we have determined preliminarily that the goodwill impairment loss is equal to the full amount of our goodwill — $49,813,000. This is an estimate and we will disclose in the third quarter any adjustments after completing the second step analysis. This requires the Company to allocate the estimated fair value of the Company to all of its assets and liabilities. The fair values of the assets and liabilities, primarily loans and deposits, are determined using current market interest rates, projections of future cash flows, and where available, quoted market prices of similar instruments. Any unallocated fair value represents the implied fair value of goodwill, which is then compared to its corresponding carrying value.

NOTE B — RECENT ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS No. 141R”). SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes that affect how the Company will account for business combinations under this Statement include:

•		the acquisition date will be date the acquirer obtains control;
•		all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date;
•		assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date;
•		adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year;
•		acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred;
•		transaction costs will be expensed as incurred;
•		reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and
•		the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51. SFAS No. 160 requires noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside of equity. Disclosure requirements include the display of net income and comprehensive income for both the controlling and noncontrolling interests and a separate schedule that shows the effects of any transactions with the noncontrolling interests on the equity attributable to the controlling interest. The provisions of this statement are effective for fiscal years beginning after December 15, 2008. This statement is applied prospectively except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. The adoption of SFAS No. 160 did not have a material impact on the consolidated financial statements of the Company.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The required disclosures include the fair value of derivative instruments and their gains or losses in tabular format, information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and the Company’s strategies and objectives for using derivative instruments. This statement expands the current disclosure framework in SFAS No. 133. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008. The adoption of SRAS No. 161 has not had a material impact on the consolidated financial statements of the Company.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This FSP applies to all intangible assets, whether acquired in a business combination or otherwise and was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. It is applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company adopted the provisions of FSP No. SFAS 142-3 in the first quarter of 2009, as required, and the adoption did not have a material effect on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures About Fair Value of Financial Instruments, and Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, to require disclosures about fair values of financial instruments in all interim financial statements. Once adopted, the disclosures required by the FSP are to be provided prospectively. The FSP’s requirements are effective as of June 30, 2009, with early adoption permitted as of March 31, 2009. The Company did not elect to early-adopt the FSP, and has provided the required disclosures as of June 30, 2009.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP amends and clarifies the provisions of SFAS No. 141(R), Business Combinations, with respect to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies associated with a business combination. The provisions of the FSP are effective for business combinations occurring after January 1, 2009, and have been adopted by the Company. The effects of adoption of this FSP on the Company’s consolidated financial statements will depend on the nature, terms and size of future business combinations. The Company has not made any business combinations since January 1, 2009.

NOTE C — COMPREHENSIVE INCOME

At June 30, 2009 and 2008, comprehensive income was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2009				2008				2009				2008
Net loss		$	(63,000	)		$	(21,316	)		$	(67,760	)		$	(19,553	)
Unrealized gains (losses) on securities available for sale (net of tax)			(994	)			(1,258	)			1,193				161
Net reclassification adjustment			(1,325	)			(138	)			(686	)			(138	)
Comprehensive loss		$	(65,319	)		$	(22,712	)		$	(67,253	)		$	(19,530	)

NOTE D — BASIC AND DILUTED EARNINGS PER COMMON SHARE

Equivalent shares of 566,000 and 801,000 related to stock options and stock settled appreciation rights for the periods ended June 30, 2009 and 2008, respectively, were excluded from the computation of diluted EPS because they would have been anti-dilutive.

		Three Months Ended								Six Months Ended
(Dollars in thousands,		June 30,								June 30,
except per share data)		2009				2008				2009				2008
Basic:
Net loss available to common shareholders		$	(63,937	)		$	(21,316	)		$	(69,634	)		$	(19,553	)
Average shares outstanding			19,088,759				18,986,163				19,079,151				18,957,269
Basic EPS		$	(3.35	)		$	(1.12	)		$	(3.65	)		$	(1.03	)
Diluted:
Net loss available to common shareholders		$	(63,937	)		$	(21,316	)		$	(69,634	)		$	(19,553	)
Average shares outstanding			19,088,759				18,986,163				19,079,151				18,957,269
Net effect of employee restricted stock, stock options and stock settled appreciation rights			0				0				0				0
TOTAL			19,088,759				18,986,163				19,079,151				18,957,269
Diluted EPS		$	(3.35	)		$	(1.12	)		$	(3.65	)		$	(1.03	)

NOTE E — FAIR VALUE INSTRUMENTS MEASURED AT FAIR VALUE

In certain circumstances, fair value enables the Company to more accurately align its financial performance with the market value of actively traded or hedged assets and liabilities. Fair values enable a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as to more accurately portray the active and dynamic management of a company’s balance sheet. The FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active on October 10, 2008 to amend and clarify SFAS 157. In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (FAS 157-4) to amend SFAS No. 157, Fair Value Measurements. FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability has significantly decreased. In addition, FAS 157-4 includes guidance on identifying circumstances that indicate a transaction is not orderly. Under SFAS 157, Fair Value Measurements, and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, fair value measurements for items measured at fair value at June 30, 2009 and 2008 included:

						Quoted Prices
						in Active				Significant				Significant
						Markets for				Other				Unobservable
		Fair Value				Identical Assets				Observable Inputs				Inputs
(Dollars in thousands)		Measurements				(Level 1)				(Level 2)				(Level 3)
June 30, 2009
Available for sale securities		$	337,746							$	337,746
Loans held for sale			16,454								16,454
Loans (1)			52,464								4,556			$	47,908
Derivative product assets			201								201
Other real estate owned (2)			23,259								23,259
June 30, 2008
Available for sale securities		$	255,798							$	255,798
Loans held for sale			3,643							$	3,643
Loans (1)			44,028								2,899			$	41,129
Derivative product assets			85								85
Other real estate owned (2)			4,547								4,547

For trading securities, derivative product assets and liabilities and loans held for sale, the realized and unrealized gains and losses are included in earnings in noninterest income or net interest

income, as appropriate, and were not material for the six-month periods ended June 30, 2009 and 2008.

In April 2009, the FASB issued FASB FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, (FAS 107-1) to amend SFAS No. 107, Disclosures about Fair Value of Financial Instruments and APB 28, Interim Financial Reporting. FAS 107-1 changed the reporting requirements on certain fair value disclosures of financial instruments to include interim reporting periods.

The following shows the carrying value and fair value of the Company’s financial assets and financial liabilities as of June 30, 2009.

		June 30, 2009
		Carrying
(Dollars in thousands)		Value				Fair Value
Financial Assets
Cash and cash equivalents		$	75,652			$	75,652
Securities			360,045				359,455
Loans, net			1,540,722				1,554,496
Loans held for sale			16,454				16,454
Derivative product assets			201				201
Financial Liabilities
Deposit liabilities			1,756,422				1,765,978
Borrowings			167,021				164,038
Subordinated debt			53,610				13,000

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 June 30, 2009:

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

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

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources.

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

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

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

Subordinated debt: The fair value of the floating rate subordinated debt is estimated using a market rate currently observed for similar securities of comparable credit quality.

Derivative product assets and liabilities: Quoted market prices or valuation models that incorporate current market data inputs are used to estimate the fair value of derivative product assets and liabilities.

NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2009 and 2008, the Company’s recorded investments in impaired loans and the related valuation allowances were as follows:

		2009								2008
		Recorded				Valuation				Recorded				Valuation
(Dollars in thousands)		Investment				Allowance				Investment				Allowance
Impaired loans without an allowance		$	80,828			$	0			$	27,394			$	0
Impaired loans with an allowance			62,103				9,639				48,676				3,851
Impaired loans		$	142,931			$	9,639			$	76,070			$	3,851

Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted.

The valuation allowance is included in the allowance for loan losses. The impaired loans were measured for impairment based primarily on the value of underlying collateral. The majority of impaired loans are to residential real estate developers for construction and land development. These relationships, including the impaired balances, have been and continue to be assessed and evaluated to determine the probable loan loss. This evaluation includes obtaining current appraisal values for the properties held as collateral and assessing the value of personal guarantees, and requires significant management judgment. Depending on changes in circumstances involving each exposure, future assessments of probable losses may yield materially different results, which may result in a material increase or decrease in the allowance for loan losses through provisions for loan losses on our income statements.

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

Nonaccrual loans and accruing loans past due 90 days or more at June 30, 2009 and 2008 were $126,758,000 and $1,383,000, respectively, for 2009 and $76,224,000 and $317,000, respectively for 2008.

NOTE G: CONTINGENCIES

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

NOTE H: REGULATORY CAPITAL

The Company is well capitalized for bank regulatory purposes. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth under “Capital Resources” in this Report. At June 30, 2008, the Company’s principal subsidiary, Seacoast National Bank, or “Seacoast National”, met the risk-based capital and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.

The Bank has agreed to maintain a Tier 1 capital (to adjusted average assets) ratio of at least 7.50% and a total risk-based capital ratio of at least 12.00% as of March 31, 2009 with its primary regulator, the Office of the Comptroller of the Currency (“OCC”). The agreement with the OCC as to minimum capital ratios does not change the Bank’s status as “well-capitalized” for bank regulatory purposes.

NOTE I: LETTERS OF CREDIT

During the second quarter of 2009, the Company’s banking subsidiary utilized $43.0 million in letters of credit issued by the Federal Home Loan Bank (“FHLB”) to satisfy a portion of its pledging requirement to transact business as a qualified public depository within the state of Florida. The letters of credit have a term of one year with an annual fee equivalent to 5 basis points, or $21,500, amortized over the one year term of the letters. No interest cost is associated with the letters of credit.

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2009

The following discussion and analysis is designed to provide a better understanding of the significant factors related to the Company’s results of operations and financial condition. Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report.

NEW OFFICES / CLOSURES / RELOCATIONS

The Company’s banking subsidiary has consolidated, improved and opened a number of branch offices during 2009 and 2008. Most recently, a new branch office was opened on January 20, 2009 in the same shopping plaza as our existing Wedgewood branch in Martin County. This new branch has better ingress and egress on a corner of U.S. Highway One. Our office on Northlake Boulevard in northern West Palm Beach was closed on June 2, 2009, to reduce overhead and rationalize cost with future growth opportunities. Customers of this office are now served by our PGA Boulevard office.

During 2008, the Company’s banking subsidiary consolidated three branch locations in the first quarter:

•		the Ft. Pierce Wal-Mart branch office in St. Lucie County was merged with an existing full service branch and closed on February 28, 2008; and
•		the Mariner Square branch in Martin County and the Juno Beach branch in Palm Beach County were consolidated with newer branches serving the same markets and were closed on March 31, 2008.

A new branch in western Port St. Lucie, Florida in an area with major retail development on Gatlin Boulevard, was opened in March 2008. The Company also upgraded its Arcadia branch location in DeSoto County, significantly increasing this location’s size in April 2008. A second branch in Brevard County on Murrell Road and a new, more accessible office replacing the Rivergate branch in St. Lucie County were constructed and opened on April 28, 2008 and June 9, 2008, respectively. In addition, a new, more visible Ft. Pierce branch opened on October 22, 2008, replacing our prior location in Ft. Pierce, which was sold. Lastly, branch personnel at the Beachland office in Indian River County, which we leased, moved in November 2008 to nearby Cardinal, which is in a separate leased facility, which then became a branch office of Seacoast National.

Branch additions to bank premises and equipment over the past twelve months have been more than offset by depreciation of $3.6 million over the same period, resulting in a decrease in bank premises and equipment (net) of $9,000 at June 30, 2009, compared to June 30, 2008.

EARNINGS SUMMARY

Net loss available to common shareholders for the second quarter of 2009 totaled $(63,937,000) or $(3.35) per average common diluted share, as a result of the write-off of $49.8 million of all the Company’s goodwill (see “Goodwill Impairment” under “Critical Accounting Estimates”) and continued increased credit costs. This compares to $(5,697,000) or $(0.30) per average

common diluted share in the first quarter of 2009 and $(21,316,000) or ($1.12) per average common diluted share in the second quarter of 2008.

As forecasted at the end of 2008, the net interest margin continued to improve, increasing by 21 basis points during the second quarter of 2009 from the first quarter of 2009. Our net interest margin improved 12 basis points during the first quarter of 2009 from the fourth quarter of 2008. The Company has continued to benefit from lower rates paid for interest bearing liabilities due to the Federal Reserve’s reduction in interest rates by 400 basis points since September 2007, and its continuance of historically low interest rates. The average cost of interest bearing liabilities was 40 basis points lower for the second quarter of 2009, compared to first quarter 2009, and was 46 basis points lower for the first quarter of 2009, compared to fourth quarter 2008, a total reduction of 86 basis points.

Our results also reflect the continued success of our retail deposit growth initiatives, signs of improved stability and greater transaction volumes in residential real estate in our markets during the first and second quarters of 2009.

Noninnterest expenses increased by $50.9 million versus the prior year second quarter as a result of our write-off of $49.8 million of goodwill (see “Goodwill Impairment” under “Critical Accounting Estimates”) and higher credit cost. We have reduced our overhead. Noninterest expenses excluding our write-off of goodwill increased by $1.1 million versus the prior year second quarter as a result of higher Federal Deposit Insurance Corporation (“FDIC”) insurance costs (up $1.6 million). Excluding FDIC assessments and our write-off of goodwill, noninterest expenses were $526,000 or 2.8 percent lower for the second quarter of 2009 year over year, and $919,000 or 2.5 percent lower for the six months ended June 30, 2009, compared to 2008. Most of the reduction in overhead occurred in salaries and wages, outsourced data processing costs, furniture and equipment expenses and marketing expenses, but these were partially offset by higher legal and professional fees and costs to manage foreclosed and repossessed property, reflecting economic conditions.

Our provision for loan losses was substantially higher than in the first quarter of 2009, with $26.2 million of provision for loan losses for the second quarter of 2009 compared to $11.6 million for the first quarter of 2009. Provisions for loans losses was lower year over year for the first six-months of 2009 as result of lower net charge-offs in 2009, and the Company has increased its allowance for loan losses to loans outstanding ratio to 2.75 percent, or 100 basis points since June 30, 2008.

CRITICAL ACCOUNTING ESTIMATES

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

	•		the allowance and the provision for loan losses;
	•		the fair value and other than temporary impairment of securities;
	•		realization of deferred tax assets;
	•		goodwill impairment; and
	•		contingent liabilities.

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

Allowance and Provision for Loan Losses

The information contained on pages 26-29 and 36-43 related to the “Provision for Loan Losses”, “Loan Portfolio”, “Allowance for Loan Losses” and “Nonperforming Assets” is intended to describe the known trends, events and uncertainties which could materially affect the Company’s accounting estimates related to our allowance for loan losses.

Fair Value and Other than Temporary Impairment of Securities Classified as Trading and Available for Sale

At June 30, 2009, available for sale securities totaled $337,746,000. The fair value of the available for sale portfolio at June 30, 2009 was more than historical amortized cost, producing net unrealized gains of $4,180,000 that have been included in other comprehensive income as a component of shareholders’ equity. The Company made no change to the valuation techniques used to determine the fair values of securities during the first or second quarters of 2009. The fair value of each security available for sale or trading was obtained from independent pricing sources utilized by many financial institutions. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio.

The credit quality of the Company’s securities holdings is investment grade and higher. These securities, except for approximately $2.0 million of states and their political subdivision’s securities, as of June 30, 2008, generally are traded in highly liquid markets. Obligations of U.S. Treasury and U.S. Government agencies total $271 million, or 80.1 percent of the total portfolio. The remainder of the portfolio consists of super senior AAA private label securities secured by collateral originated prior to 2005, and obligations of state and political subdivisions. The collateral underlying these mortgage investments are 30- and 15-year fixed rate and 10/1 adjustable rate mortgage loans. Historically, these mortgage loans have had minimal foreclosures and losses.

These investments are reviewed quarterly for other than temporary impairment, or “OTTI”, by considering the following primary factors: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Prices obtained from pricing services are usually not adjusted; however, for two securities (both super-senior AAA private label securities) we noted that the pricing provided by the pricing services was not consistent with other observed prices in the market for similar securities. Using observable market inputs, which included interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, we validated the observed prices using a discounted cash flow model and used the observed prices for similar securities to determine the fair value of these two securities.

Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company’s other sources of liquidity, as well as the cash flow from principal and interest payments from the securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.

The Company also holds stock in the Federal Home Loan Bank of Atlanta (“FHLB”) totaling $7.1 million as of June 30, 2009, slightly less than at year-end 2008. The FHLB eliminated its dividend for the first quarter of 2009, and instituted quarterly rather than daily repurchases of FHLB activity-based stock in February 2009. The Company accounts for the stock based on the industry guidance in SOP 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We evaluated our holdings in FHLB stock at June 30, 2009 totaling $7.1 million and believe our holdings in the stock are ultimately recoverable at par. We do not have operational or liquidity needs that would require redemption of the FHLB stock in the foreseeable future and, therefore, have determined that the stock is not other-than-temporarily impaired.

Realization of Deferred Tax Assets

Our wholly-owned subsidiary, Seacoast National, had a state deferred tax asset (“DTA”) of $5.5 million at December 31, 2008 reflecting the benefit of $101.3 million in net operating loss (“NOL”) carry-forwards, which will expire between 2027 and 2028. This deferred state tax asset resulted from a large provision for loan losses in 2008 related to Seacoast National’s residential construction and land development loan portfolio. Early recognition of and aggressive responses to unprecedented economic conditions have resulted in substantially higher loan loss provisions and losses for Seacoast National during 2008 and 2009. Our recognition of market conditions allowed for realignment of resources early in 2008 and significant reductions in residential construction and land development loan exposures which at June 30, 2009 continue to decline, totaling 6.1 percent of total loans compared to 7.8 percent at December 31, 2008 and 20.2 percent at their peak during 2007. Management believes that loan loss provisions will likely be much lower in the future over the 20-year carry-forward period for state NOLs. Seacoast National has been through other similar economic cycles in the past where provisioning for loan losses has been elevated followed by periods of lower risk and where little to no loan loss provisions were needed. It is management’s opinion that Seacoast National’s future taxable income will allow the recovery of the NOL, and the utilization of its deferred tax assets.

As a result of the losses incurred in 2008, the Company was in a three-year cumulative pretax loss position at December 31, 2008. A cumulative loss position is considered significant negative evidence in assessing the prospective realization of a DTA. The use of the Company’s forecast of future taxable income was not considered positive evidence which could be used to offset the negative evidence at this time given the uncertain economic conditions. Therefore, a valuation allowance of $5.5 million was recorded related to the Company’s state deferred tax asset at December 31, 2008. There was no change to the valuation allowance recorded at June 30, 2009.

Goodwill Impairment

As disclosed in Note A to our audited consolidated financial statements, the Company is a single segment bank holding company with one operating subsidiary bank. With the assistance of an external valuation firm, our management reviews the results and assumptions utilized in the valuation firm’s analysis, including the use of discounted cash flows and change in control valuation methods. Determining the fair value using discounted cash flow analysis requires assumptions regarding our short- and long-term net cash flow growth rates, as well as discount rates. As part of the analysis, the external valuation firm considers the makeup of assets and

liabilities (including both loan and deposit compositions), scarcity value, capital ratios, market share, credit quality (asset quality), control premiums, the type of financial institution, our overall size and the various markets we serve, as well as profitability ratios.

Growth Assumptions

Multi-year financial forecasts were developed considering key business drivers such as new business initiatives, market share, anticipated loan and deposit growth, interest rates, historical performance, and industry and economic trends, among other considerations.

Discount Rate Assumptions

Discount rates are estimated based on the capital asset pricing model, which considers the risk-free interest rate, market risk premium, and beta. For the June 30, 2009 goodwill impairment evaluation, the discount rate used to develop the estimated fair value was 17%.

Change in Control Assumptions

A total of 16 bank acquisition transactions since November 2005 were used. Comparable target financial performance measures were considered in selecting the deals to be examined. The transactions’ multiples were examined as announced and then adjusted using the price performance of the KBW Regional Banking Index (KRX) since announcement of the transaction.

Market Capitalization

The market capitalization is analyzed in relation to numerous market and historical factors, including current economic and market conditions, recent, historical, and implied stock price volatility, marketplace dynamics such as the level of short selling, company-specific growth opportunities, and an implied control premium. In the current unprecedented market environment, the size of the implied control premium can vary significantly based on the economic and market conditions which may cause increased volatility in a company’s stock price, resulting in a temporary decline in market capitalization; therefore, current market capitalization may not be an accurate indication of a market participant’s estimate of entity-specific value measured over a more reasonable period of time.

Fair Value Results (per share) June 30, 2009
Discounted Cash Flow:		$	6.44
Comparable Transactions Analysis:		$	7.00
Market Capitalization:		$	2.43

We have determined that the carrying amount of the Company exceeds its fair value as of June 30, 2009; however, we were unable to complete a second step analysis to estimate the implied fair value of the Company’s goodwill. The results of a second step analysis is required to support the carrying amount of goodwill; therefore, we have preliminarily determined that the goodwill impairment loss is the full amount of goodwill — $49,813,000. This is an estimate and we will disclose in the third quarter any adjustments after completing the second step analysis. This requires the Company to allocate the estimated fair value of the Company to all of its assets and liabilities. The fair values of the assets and liabilities, primarily loans and deposits, are determined using current market interest rates, projections of future cash flows, and where

available, quoted market prices of similar instruments. Any unallocated fair value represents the implied fair value of goodwill, which is then compared to its corresponding carrying value.

Contingent Liabilities

The Company is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of our business activities. These proceedings include actions brought against the Company and/or our subsidiaries with respect to transactions in which the Company and/or our subsidiaries acted as a lender, a financial advisor, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or our advisors may learn of additional information that can affect our assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for those claims.

During the first quarter of 2008, the Company reversed $130,000 of a $275,000 charge it had recorded as of year-end 2007 for its portion of Visa® credit card litigation and settlement costs. Visa’s initial public offering was successfully completed during the first quarter of 2008, eliminating the need for this accrual.

Management is not aware of any other probable losses.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income (on a fully taxable equivalent basis) for the first quarter of 2009 totaled $18,987,000, increasing from 2009’s first quarter by $746,000 or 4.1 percent, but lower than second quarter 2008’s result by $1,247,000 or 6.2 percent. The following table details net interest income and margin results (on a tax equivalent basis) for the past five quarters:

		Net Interest Income				Net Interest Margin
(Dollars in thousands)		(tax equivalent)				(tax equivalent)
Second quarter 2008		$	20,234				3.69	%
Third quarter 2008			19,186				3.57
Fourth quarter 2008			17,535				3.32
First quarter 2009			18,241				3.44
Second quarter 2009			18,987				3.65

Fully taxable equivalent net interest income is a common term and measure used in the banking industry but is not a term used under U.S. generally accepted accounting principles (“GAAP”). We believe that these presentations of tax-equivalent net interest income tax equivalent net interest margin aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. We further believe these non-GAAP measures enhance investors’ understanding of the Company’s business and performance, and facilitate an understanding of performance trends and comparisons with the performance of other financial institutions. The limitations associated with these measures are the risk that persons might disagree

as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently, including as a result of using different assumed tax rates. These disclosures should not be considered an alternative to GAAP. The following information is provided to reconcile GAAP measures and tax equivalent net interest income and net interest margin on a tax equivalent basis.

		Second				First				Fourth				Third				Second
		Quarter 2009				Quarter 2009				Quarter 2008				Quarter 2008				Quarter 2008
						(Dollars in thousands)
Non-taxable interest income		$		135		$		139		$		141		$		145		$		151
Tax Rate				35	%			35	%			35	%			35	%			35	%
Net interest income (TE)		$		18,987		$		18,241		$		17,535		$		19,186		$		20,234
Total net interest income (not TE)				18,920				18,174				17,467				19,117				20,162
Net interest margin (TE)				3.65	%			3.44	%			3.32	%			3.57	%			3.69	%
Net interest margin (not TE)				3.64				3.43				3.31				3.56				3.67

Net interest margin on a tax equivalent basis improved 21 basis points to 3.65 percent for the second quarter of 2009 compared to the first quarter of 2009, but was lower by 4 basis points year over year. Net interest income and net interest margin have improved quarter over quarter during 2009, despite the challenging lending environment and the reduction of interest due to nonaccrual loans. Nonaccrual loans have been the primary forces adversely affecting our net interest income and net interest margin when comparing these returns for 2009 to the same periods in 2008.

The earning asset mix changed year over year. For the second quarter of 2009, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 78.2 percent, compared to 84.0 percent a year ago. Average securities as a percent of average earning assets increased from 13.1 percent a year ago to 17.4 percent during second quarter 2009 and federal funds sold and other investments increased to 4.4 percent from 2.9 percent over the same period in 2008. In addition to decreasing average total loans as a percentage of earning assets, the mix of loans changed, with commercial and commercial real estate volumes representing 57.3 percent of total loans at June 30, 2009 (compared to 61.0 percent a year ago at June 30, 2008). This reflects our reduced exposure to commercial construction and land development loans on residential properties, which declined by $149.4 million from June 30, 2008 to June 30, 2009. Lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) represented 38.3 percent of total loans at June 30, 2009 (versus 34.8 percent a year ago) (see “Loan Portfolio”).

The yield on earning assets for the second quarter 2009 was 5.03 percent, 86 basis points lower than for second quarter 2008, a reflection of the lower interest rate environment, as well as higher nonperforming loans. The following table details the yield on earning assets (on a tax equivalent basis) for the past five quarters:

		2nd Quarter				1st Quarter				4th Quarter				3rd Quarter				2nd Quarter
		2009				2009				2008				2008				2008
Yield			5.03	%			5.16	%			5.45	%			5.78	%			5.89	%

The yield on loans declined 79 basis points to 5.33 percent over the last twelve months. Nonaccrual loans totaling $126.8 million or 8.0 percent of total loans at June 30, 2009, versus $76.2 million or 4.2 percent of total loans a year ago, reduced our yield on our loan portfolio. The yield on investment securities was lower as well, decreasing 22 basis points year over year to 4.86 percent, due primarily to purchases of securities at lower yields available in current markets, which diluted

the overall portfolio yield year over year. The decline in yield on investment securities was less severe than the decline of 64 basis points reported year over year for first quarter 2009, reflecting recent securities purchases at higher yields that improved the overall yield for the second quarter by 35 basis points from first quarter 2009. Federal funds sold and other investments yielded 0.47 percent for the second quarter 2009, lower when compared to 2.83 percent a year ago for the same period. The dramatic reduction in interest rates during 2008, with the Federal Reserve lowering the target federal funds rate to 0 to 25 basis points and the Treasury yield curve shifting lower, is expected to continue to limit opportunities to invest at higher interest rates prospectively.

Average earning assets for the second quarter of 2009 decreased $63.4 million or 2.9 percent compared to the first quarter of 2009. While average loan balances decreased $38.6 million or 2.3 percent to $1,631.7 million and average federal funds sold and other investments decreased $29.5 million or 24.2 percent to $92.2 million, average investment securities were $4.7 million or 1.3 percent higher, totaling $363.6 million. These declines are consistent with reduced funding as a result of seasonal declines and the planned runoff of $36 million of brokered deposits we sold in July and August, 2008 as a test of this source of liquidity.

Commercial and commercial real estate loan production for the first six months of 2009 totaled $9 million. In comparison, commercial and commercial real estate loan production for 2008 totaled $117 million, with $8 million in the fourth quarter, $33 million in the third quarter, $19 million in the second quarter and $57 million for the first quarter a year ago. Although we continue to make loans generally, economic conditions in the markets the Company serves are expected to result in negative loan growth in 2009. At June 30, 2009 the Company’s total commercial and commercial real estate loan pipeline was $72 million, versus $290 million at June 30, 2008.

Closed residential mortgage loan production for the second quarter of 2009 totaled $43 million, of which $24 million was sold servicing-released. In comparison, $38 million in residential loans were produced in the first quarter of 2009, with $20 million sold servicing-released, and $30 million was produced in the second quarter of 2008, with $18 million sold servicing released. Applications for residential mortgages totaled $71 million during the second quarter of 2009 compared to $92 million for the first quarter of 2009. Fourth quarter 2008’s residential mortgage loan applications totaled $38 million. Existing home sales and home mortgage loan refinancing activity in the Company’s markets have increased in 2009. Demand for new home construction is expected to remain soft in 2009.

During the second quarter of 2009, the sale of two mortgage backed securities totaling $29.5 million resulted in securities gains of $1,786,000. Management believed these securities had minimal opportunity to further increase in value. During the second quarter of 2009 maturities (principally pay-downs and one large maturity of $20 million) totaled $47.4 million and securities portfolio purchases totaled $64.2 million. In comparison, during the first quarter of 2009, maturities (principally pay-downs) of securities totaled $10.5 million and securities portfolio purchases totaled $36.0 million. Purchases were conducted principally to reinvest funds from loan principal repaid, for pledging requirements, and to reinvest proceeds from the sales of the mortgage backed securities. For 2008, a single security sale transacted during the second quarter provided a $355,000 gain. No losses on securities sales were incurred in the first six months of 2009 or 2008.

The cost of average interest-bearing liabilities in the second quarter of 2009 decreased 40 basis points to 1.65 percent from first quarter 2009 and was 103 basis points lower than for the second quarter of 2008, reflecting the lower interest rate environment. The following table details the cost of average interest bearing liabilities for the past five quarters:

		2nd Quarter				1st Quarter				4th Quarter				3rd Quarter				2nd Quarter
		2009				2009				2008				2008				2008
Rate			1.65	%			2.05	%			2.52	%			2.64	%			2.68	%

The Company’s retail core deposit focus has produced strong growth in core deposit customer relationships when compared to the prior year’s results, and resulted in increased balances which offset planned certificate of deposit runoff during the first and second quarter of 2009. We have gained customers. A total of 7,072 new households have added 8,928 new checking accounts over the past twelve months. The improved deposit mix and lower rates paid on interest bearing deposits during the second quarter of 2009 reduced the overall cost of interest bearing deposits to 1.67 percent, 44 basis points lower than in the first quarter of 2009 and 99 basis points lower than in the second quarter a year ago. Still a significant component favorably affecting the Company’s net interest margin, the average balances of lower cost interest bearing deposits (NOW, savings and money market) increased from 53.3 percent in the first quarter of 2009 to 54.2 percent of average total interest bearing deposits during the second quarter of 2009, although this was lower than the average of 60.1 percent a year ago. The average rate for lower cost interest bearing deposits for the second quarter of 2009 was 0.71 percent, down by 39 basis points from the first quarter of 2009 and down 107 basis points from the second quarter of 2008. Certificate of deposit (“CD”) rates paid were also lower compared to the first quarter of 2009 and second quarter of 2008, lower by 45 basis points and 119 basis points, respectively, and averaged 2.80 percent for the second quarter of 2009. Average CDs (the highest cost component of interest bearing deposits) decreased to 45.8 percent of interest bearing deposits from 46.7 percent for first quarter 2009, but remained a higher percentage than a year ago.

Average deposits totaled $1,773.1 million during the second quarter of 2009, and were $37.3 million lower compared to first quarter 2009, due primarily to lower average customer balances as a the result of normal seasonal declines and a planned reduction of brokered deposits of $36 million. Total average sweep repurchase agreements for the second quarter were $17.4 million lower as a result of normal seasonal funding trends for public fund customers. Total average deposits plus sweep repurchase agreements totaled $1,909.9 million during the second quarter of 2009, down $54.6 million or 2.8 percent from first quarter 2009. Average total deposits declined $149.4 million or 7.8 percent compared to the same period in 2008, principally as a result of deposit declines in the Company’s central Florida region (resulting from slower economic growth affecting the second half of 2008. The average aggregate amounts of NOW, savings and money market balances decreased $156.4 million or 16.2 percent to $808.4 million for second quarter 2009 compared to second quarter 2008, noninterest bearing deposits decreased $34.9 million or 11.0 percent to $281.7 million, and average CDs increased by $41.9 million or 6.5 percent to $683.0 million. As a result of the low interest rate environment, customers have deposited more funds into CDs, while maintaining lower average balances in savings and other liquid deposit products that pay no interest or a lower interest rate. In addition, Seacoast National joined the Certificate of Deposit Registry program (“CDARs”) on July 1, 2008, which permits our customers to have CDs safely insured beyond the FDIC deposit insurance limits. This benefited our deposit retention efforts during the recent financial market disruption and provided a new product offering to homeowners’ associations concerned with FDIC insurance coverage.

FDIC deposit insurance has been temporarily increased from $100,000 to $250,000 per depositor from October 14, 2008 through December 31, 2013. Under the FDIC’s Temporary Liquidity Guarantee, or “TLG”, program, the entire amount in any eligible noninterest bearing transaction

deposit account is guaranteed by the FDIC to the extent such balances are not covered by FDIC insurance. Seacoast National is participating in the TLG program to offer the best possible FDIC coverage to its customers. The TLG noninterest bearing transaction account guarantee is backed by the full faith and credit of the United States, and unless extended, will expire December 31, 2009. The FDIC has proposed extending the TLG for qualifying noninterest bearing transaction accounts to June 30, 2010, subject to banks that elect to participate in this extended TLG paying a higher fee for the FDIC guarantee.

Average federal funds purchased have been nominal with none outstanding during 2009, compared to an average of $4.0 million for all of 2008. Average short-term borrowings have been principally comprised of sweep repurchase agreements with customers of the Company’s bank subsidiary, which decreased $17.4 million or 11.3 percent from the first quarter of 2009 but increased $46.7 million or 51.8 percent from the second quarter of 2008. Most of the increase in average sweep repurchase agreement balances was due to efforts to reduce FDIC insurance costs by migrating public fund deposits beginning late in the fourth quarter of 2008. Other borrowings are comprised of subordinated debt of $53.6 million related to trust preferred securities issued by trusts organized by the Company, and advances from the FHLB of $65.2 million that have not changed since year-end 2007.

Company management believes its market expansion, branding efforts and retail deposit growth strategies have produced new relationships and core deposits. Reductions in nonperforming assets also are expected to favorably affect future net interest margin.

PROVISION FOR LOAN LOSSES

Management determines the provision for loan losses charged to operations by continually analyzing and monitoring delinquencies, nonperforming loans and the level of outstanding balances for each loan category, as well as the amount of net charge-offs, and by estimating losses inherent in its portfolio. While the Company’s policies and procedures used to estimate the provision for loan losses charged to operations are considered adequate by management, factors beyond the control of the Company, such as general economic conditions, both locally and nationally, make management’s judgment as to the adequacy of the provision and allowance for loan losses necessarily approximate and imprecise (see “Nonperforming Assets” and “Allowance for Loan Losses”).

The provision for loan losses is the result of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under SFAS No. 114 Accounting by Creditors for Impairment of a Loan, and SFAS No. 118 Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures, as well as, an analysis of homogeneous loan pools not individually evaluated as prescribed under SFAS No. 5, Accounting for Contingencies. For the second quarter ended June 30, 2009, the provision for loan losses was $26.2 million, lower than 2008’s second quarter provision for loan losses of $42.2 million but higher than the $11.7 million provision for first quarter of 2009.

The provision for loan losses was $11.1 million more than net charge-offs of $15.1 million or 3.71 percent of average total loans in the second quarter of 2009. In the first quarter of 2009, provisions for loan losses were $3.1 million more than net charge-offs of $8.5 million, or 2.07 percent of average total loans. In comparison, net charge-offs for 2008 were $4.4 million and $33.5 million in the first and second quarters of 2008, respectively, and $81.1 million for the entire year. Net charge-offs during 2008 and 2009 were primarily due to higher net charge-offs

of commercial construction and land development loans financing residential development, which reflected housing market declines. A downturn in residential real estate prices and sales has negatively affected the entire industry since mid-2006 and the Company began a comprehensive effort to reduce its exposure in early 2007. With timely and more aggressive collection efforts, loan sales, and charge-offs, residential construction and land development loans declined $149 million from June 30, 2008 and now represent 6.1 percent of total loans at June 30, 2009. The performing loans in this portfolio total approximately $33 million and are represented by 41 customer relationships and an average loan size of approximately $0.8 million. We continue to monitor and update regularly our credit evaluations of these borrowers, and the collateral values as sales volumes and prices change in our markets. The reduction in the Company’s exposure should reduce earnings volatility from this portfolio in the future.

The following table details the Company’s exposure to large residential construction and land development loans over the past six quarters, as evidenced by loans in this portfolio with balances of $4 million or more declining by almost 68 percent from $136.7 million, or 66 percent of risk-based capital at June 30, 2008, to $44.0 million, or approximately 20 percent of risk-based capital, at June 30, 2009. Of the remaining $44.0 million in loans greater than $4 million, $37.5 million or 85.2 percent are classified as nonperforming, and of the $52.7 million in loans less than $4 million, $26.1 million or 49.5 percent are nonperforming:

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

																												2009
				2008																2009								Nonperforming
				1st Qtr				2nd Qtr				3rd Qtr				4th Qtr				1st Qtr				2nd Qtr				2nd Qtr				No.
Residential Construction and Land Development
Condominiums		>$4 mil		$	30.6			$	26.3			$	19.6			$	8.6			$	8.4			$	7.9			$	7.9				1
		<$4 mil			26.6				21.1				13.0				8.8				7.9				8.8				5.2				3
Town homes		>$4 mil			19.4				17.1				17.1				—				—				—				—				—
		<$4 mil			4.4				2.9				4.6				6.1				4.2				2.3				2.3				1
Single Family Residences		>$4 mil			20.8				21.2				13.5				11.9				6.6				6.5				—				—
		<$4 mil			35.9				28.3				23.7				14.9				13.9				10.3				5.0				10
Single Family Land & Lots		>$4 mil			85.1				64.3				40.3				22.1				21.8				21.8				21.8				3
		<$4 mil			27.0				30.8				29.9				30.7				29.6				21.5				9.2				19
Multifamily		>$4 mil			7.8				7.8				7.8				7.8				7.8				7.8				7.8				1
		<$4 mil			24.8				26.2				22.9				19.0				17.0				9.8				4.4				5
TOTAL		>$4 mil			163.7				136.7				98.3				50.4				44.6				44.0				37.5				5
TOTAL		<$4 mil			118.7				109.3				94.1				79.5				72.6				52.7				26.1				38
GRAND TOTAL				$	282.4			$	246.0			$	192.4			$	129.9			$	117.2			$	96.7			$	63.6				43

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

Past due residential loans totaled 5.86 percent at June 30, 2009 compared to 15.50% for Florida as of March 31, 2009, the latest available figure. In addition, the commercial real estate mortgage portfolio not related to residential construction and development has not had significant credit quality deterioration.

Since year-end 2008, nonaccrual loans increased by $39.8 million to $126.8 million at June 30, 2009, and were $50.5 million higher than at June 30, 2008. See “Nonperforming Assets”. Loans declined $221.7 million or 11.7 percent during 2008 and have declined an additional $92.4 million or 5.5 percent since year-end 2008. See “Loan Portfolio”. For 2009, the Company’s loan portfolio is expected to experience further declines, however the Company’s loan loss provisions should be less volatile as problem loans related to the residential real estate market and valuations are expected to be more limited than realized during 2008.

The Congress and bank regulators are encouraging recipients of TARP capital to use such capital to make loans and the Company has successfully increased its residential mortgage production. Congressional demands for additional lending by TARP capital recipients and regulatory demands for demonstrating and reporting such lending are increasing. On November 12, 2008, the bank regulatory agencies issued a statement encouraging banks to, among other things, “lend prudently and responsibly to creditworthy borrowers” and to “work with borrowers to preserve homeownership and avoid preventable foreclosures.” A total of 320 applications were accepted in the second quarter of 2009 for total residential mortgage loans of $71 million, and 721 applications were taken in the first six months for $165 million. Closed residential mortgage loans totaled $43 million for the quarter, up $5 million from the first quarter of 2009. In addition, a total of 102 applications were received seeking restructured mortgages, compared to 93 in the first quarter of 2009. The Company continues to lend, and we have expanded our mortgage loan originations. However, as consumers and businesses seek to reduce their borrowings, and the economy remains weak, opportunities to lend prudently to creditworthy borrowers are expected to be limited.

NONINTEREST INCOME

Noninterest income, excluding gains or losses from securities, totaled $3,928,000 for the second quarter of 2009, $828,000 or 17.4 percent lower than the first quarter of 2009 and $1,914,000 or 32.8 percent lower than the second quarter of 2008. Noninterest income accounted for 17.2 percent of total revenue (net interest income plus noninterest income, excluding securities gains or losses) in the second quarter of 2009 compared to 22.5 percent a year ago. Noninterest income for the second quarter of 2009, the first quarter of 2009, and second quarter of 2008 is detailed as follows:

		2nd Qtr				1st Qtr				2nd Qtr
		2009				2009				2008
Service charges on deposits		$	1,562			$	1,585			$	1,812
Trust income			480				558				591
Mortgage banking fees			488				499				350
Brokerage commissions and fees			388				381				515
Marine finance fees			331				345				930
Debit card income			673				608				648
Other deposit-based EFT fees			85				94				86
Merchant income			448				536				667
Other income (expense)			(527	)			150				243
Total		$	3,928			$	4,756			$	5,842

For 2009, second quarter revenues from the Company’s wealth management services businesses (trust and brokerage) decreased year over year, by $238,000 or 21.5 percent, and were $71,000 or 7.6 percent below first quarter 2009’s result. Of the $238,000 decrease, trust revenue was lower by $111,000 or 18.8 percent and brokerage commissions and fees were lower by $127,000 or 24.7

percent. Included in the $127,000 decline in brokerage commissions and fees was a decline of $39,000 in revenue from insurance annuity sales year over year reflecting the lower interest rate environment, and a $90,000 reduction in mutual fund commissions. Lower inter vivos trust and agency fees were the primary cause for the decline in trust income, as these decreased $22,000 and $82,000, respectively, from 2008, as well as lower testamentary fee income, which decreased $8,000. Economic uncertainty and declines in asset values were the primary issue affecting clients of the Company’s wealth management services during 2008 and has continued to affect these services in 2009. For the six months ended June 30, 2009, income from the Company’s wealth management services was $564,000 or 23.8 percent lower compared to 2008.

Service charges on deposits for second quarter 2009 are $250,000 or 13.8 percent lower year over year versus second quarter 2008, and $23,000 or 1.5 percent below first quarter 2009’s service charges. Decreased overdraft income was the primary cause, as this declined $222,000 compared to the second quarter of 2008. Overdraft fees represented approximately 75 percent of total service charges on deposits for the second quarter and year-to-date 2009, compared to 78 percent for all of 2008. Growth rates for remaining service charge fees on deposits have been nominal or declining, as the trend over the past few years is for customers to prefer deposit products which have no fees or where fees can be avoided by maintaining higher deposit balances. Year-to-date service charges on deposits for 2009 decreased $515,000 year over year to $3,147,000.

For the second quarter of 2009, fees from the non-recourse sale of marine loans originated by our Seacoast Marine Division of Seacoast National decreased $599,000, or 64.4 percent, compared to the second quarter of 2008, but were slightly lower (by $14,000) compared to first quarter 2009. Year to date marine finance fees are $939,000 or 58.1 percent lower when compared to results for the first six months of 2008. The Seacoast Marine Division originated $20 million in loans during the first and second quarters of 2009 (a total of $40 million year-to-date), compared to $44 million and $55 million in each of the first and second quarters of 2008, respectively, and $99 million for the first six months of 2009. As economic conditions deteriorated significantly during 2008, attendance at boat shows by consumers, manufacturers, and marine retailers was lower than in prior years, and as a result marine sales and loan volumes were lower and are predicted to continue to be lower in 2009. The boating industry is contracting, with a number of manufacturers consolidating or predicted to consolidate. The Seacoast Marine Division is headquartered in Ft. Lauderdale, Florida with lending professionals in Florida and California. The California office serves California, Washington and Oregon.

Greater usage of check or debit cards over the past several years by core deposit customers and an increased cardholder base has increased our interchange income. For second quarter 2009, debit card income increased $25,000 or 3.9 percent from second quarter a year ago, and was $65,000 or 10.7 percent higher than first quarter 2009’s income. Other deposit-based electronic funds transfer (“EFT”) income decreased $1,000 or 1.2 percent in 2009, compared to second quarter 2008, and decreased $9,000 or 9.6 percent from first quarter 2009’s revenue. Debit card and other deposit-based EFT revenue is dependent upon business volumes transacted, as well as the fees permitted by VISA^® and MasterCard^®. During 2009, our other deposit-based EFT income was adversely affected by lower fees from non-customers utilizing Seacoast National’s automatic teller machines (“ATMs”) which likely reflected the economic recession and tourist and vacation activity.

Merchant income was $219,000 or 32.8 percent lower for the second quarter of 2009, compared to one year earlier, and $88,000 or 16.4 percent lower than for the first quarter of 2009. Merchant income as a source of revenue is dependent upon the volume of credit card transactions that occur with merchants who have business demand deposits with Seacoast National. Over the past few

years, expansion into new markets favorably impacted our merchant income, but continued economic weakness and related effects on consumer spending have more than offset our geographic expansion. Merchant income historically has been highest in the first quarter each year, reflecting seasonal sales activity. For the first six months of 2009, merchant income was $418,000 or 29.8 percent lower than a year ago.

The Company originates residential mortgage loans in its markets, with loans processed by commissioned employees of Seacoast National. Many of these mortgage loans are referred by the Company’s branch personnel. Mortgage banking fees in the second quarter of 2009 increased $138,000 or 39.4 percent from the second quarter of 2008, and were $11,000 less than in the first quarter of 2009. Mortgage banking fees year-to-date were $269,000 or 37.5 percent higher than for the first six months of 2008. Mortgage banking revenue as a component of overall noninterest income was diminished during 2008. We are beginning to see some signs of stability for residential real estate sales and activity in our markets, with transactions increasing, prices firming and affordability improving. The Company may have opportunities in markets it serves in 2009 as tighter credit and reduced capital have limited the ability of some of our competitors. The Company also recently began offering FHA loans, a product previously not offered.

Other income for the second quarter of 2009 included losses of $946,000 on the sale of OREO, compared to $98,000 of these losses a year ago for the second quarter and $183,000 in losses for the first quarter of 2009. Losses on OREO for the first quarter of 2008 totaled $134,000. Partially offsetting these losses, rental income of $80,000 was recognized on OREO for the first time during the second quarter of 2009. For the first six months of 2009, other income declined $1,160,000 from 2008, including the second quarter’s losses of $946,000 on OREO. The comparison of other income between the first six months of 2009 and the same period of 2008, was also affected by the $305,000 of additional income we realized upon the redemption of Visa^®, Inc. shares, in the first quarter of 2008 as part of Visa’s initial public offering.

NONINTEREST EXPENSES

When compared to the second quarter of 2008 excluding the impairment write-down of goodwill of $49,813,000, total noninterest expenses increased by $1,108,000 or 5.8 percent to $20,348,000, and were $1,239,000 or 6.5 percent higher than first quarter 2009’s expenses. For the six months ended June 30, 2009 excluding the impairment write-down of goodwill of $49,813,000, noninterest expenses were $1,533,000 or 4.0 percent higher versus a year ago, totaling $39,457,000. Noninterest expenses during the second quarter of 2009 included a special assessment imposed by the Federal Deposit Insurance Corporation (“FDIC”) totaling $996,000, and deposit insurance premiums that were $673,000 higher due to the FDIC’s deposit insurance premium rates more than doubling. Noninterest expenses in 2009 have been in line with our expectations and have included $5.0 million of annual expenses reductions implemented and effective as of January 1, 2009. Salaries, wages and benefits (excluding one-time severance payments) declined $765,000 or 8.4 percent from a year ago for the second quarter, and were $2.3 million lower for the first six months compared to the same period in 2008, a result of consolidating branches and centralization of management by combining markets. Cost reductions were also achieved in data processing, communications, occupancy, and furniture and equipment expenses, all of which declined compared to the prior year.

Salaries and wages for the second quarter of 2009 decreased by $667,000 or 9.0 percent to $6,761,000 compared to the prior year same period, and for the six month period ended June 30, 2009, were $1,714,000 or 11.2 percent lower. Reduced headcount (including the branch

consolidations in 2008), and limited accruals for incentive payments due to lower revenues generated from wealth management and weak lending production were the primary causes of these decreases in 2009 compared to 2008. As noted in prior management discussions, the Company has eliminated incentive payouts for senior officers and limited 401K contributions by the Company, cost savings that will remain in effect until the Company produces meaningful earnings improvements. Severance payments during the second quarter of 2009 totaled $152,000, which were $121,000 more than the same period of 2008. Base salaries were $666,000 lower year over year, and 9.7 percent lower than in the second quarter of 2008. Full-time equivalent employees (“FTEs”) totaled 420 at June 30, 2009, 12.7 percent less than the 481 FTEs at June 30, 2008.

Employee benefit costs increased $23,000 or 1.3 percent to $1,737,000 from the second quarter of 2008, but were $220,000 or 5.9 percent lower for the six months ended June 30, 2009. The Company recognized higher claims experience in the second quarter 2009 for its self-funded health care plan compared to the second quarter of 2008; however, the Company expects employee benefit costs to be lower in future periods due to lower FTE’s resulting in fewer participants in the plan for 2009 and larger discounts on services under a more comprehensive network of doctors, hospitals, etc. Higher claims experience resulted in an increase of $285,000 year over year for the second quarter in group health insurance. Partially offsetting these benefit cost increases, we achieved a $30,000 reduction in payroll taxes year over year and profit sharing accruals for the Company’s 401K plan were reduced by $232,000.

Outsourced data processing costs totaled $1,806,000 for the second quarter of 2009, a decrease of $177,000 or 8.9 percent from a year ago. For the latest six months, outsourced data processing costs were 7.5 percent lower year over year. Seacoast National utilizes third parties for its core data processing systems and merchant services processing. Outsourced data processing costs are directly related to the number of transactions processed. Merchant income and merchant services processing costs were lower year over year, with fewer transactions occurring at local businesses reflecting the poorer economy. See “Noninterest Income”. Merchant services processing expenses were $171,000 lower than a year ago for the first quarter and second quarters of 2009, an aggregate decline of $342,000. Outsourced data processing costs can be expected to increase as the Company’s business volumes grow and new products such as bill pay, internet banking, etc. become more popular.

Total occupancy, furniture and equipment expenses decreased $93,000 or 3.3 percent to $2,735,000 versus second quarter results last year, and were $181,000 or 3.4 percent lower for the six months ended June 30, 2009 than in the same period of 2008. This comparison is affected by the sale of certain assets (including leasehold improvements) at closed WalMart locations, which netted the Company approximately $90,000 more than the carrying value of the assets sold in 2008. For the second quarter of 2009, lease payments for bank premises decreased $111,000 year over year and repair and maintenance costs declined $38,000, but utility costs were $24,000 higher. Also increasing for the second quarter year over year was depreciation, which increased by $34,000 reflecting the addition of newer offices, as well as furniture and equipment acquired over the past 12 months.

Marketing expenses, including sales promotion costs, ad agency production and printing costs, newspaper and radio advertising, and other public relations costs associated with the Company’s efforts to market products and services, decreased by $450,000 or 51.7 percent to $421,000 when compared to a year ago for the second quarter. Agency production and media costs (including newspaper, radio and television) costs were $263,000 lower. In addition, public relations, business meals, and donations, were $137,000, $36,000 and $29,000, respectively, less than the second quarter of 2008. Partially offsetting these were direct mail advertising, which was $26,000 higher

than a year ago. For the six months ended June 30, 2008, marketing costs were $560,000 or 38.1 percent lower. Included in the six months was an additional $138,000 decline in agency production costs that occurred year over year for the first quarter of 2009.

Legal and professional fees totaled $1,603,000 for the second quarter of 2009, an increase of $671,000 or 72.0 percent from the second quarter of 2008. Legal fees were $635,000 higher year over year and other professional fees were $51,000 higher, primarily due to problem asset resolution. Regulatory examination fees and CPA fees on an aggregate basis were $15,000 lower for 2009, compared to the second quarter of 2008. Similar to the quarterly comparison, legal and professional fees were $1,137,000 or 61.2 percent higher in the first six months of 2009 compared to the same period last year, primarily because of an increase in legal fees of $1,025,000 due to problem asset resolution.

The FDIC one-time credit for insurance premiums issued in 2007 was applied to reduce insurance assessments during the first quarter of 2008. As a result, FDIC assessments for the first quarter of 2008 totaled only $59,000 and for the second of 2008 totaled $392,000, whereas FDIC assessments for the first quarter and second quarter of 2009 totaled $877,000 and $2,026,000, respectively. The second quarter 2009 assessment includes a special assessment of $996,000, based upon 5 basis points of total assets less Tier 1 risk-based capital. In addition, on April 1, 2009 a higher base assessment went into effect (increasing from 17 basis points to 20 basis points) as well as the FDIC’s implementation of a more complex risk-based formula to calculate assessments. FDIC assessments were mitigated to some degree by Seacoast National working with public fund depositors to move deposits into sweep repurchase agreements, lessening the amount of deposits subject to the higher FDIC assessment rates recently approved for 2009. The Company anticipates that FDIC insurance costs are likely to rise, with more special assessments due to the decline in the FDIC’s Deposit Insurance Fund.

Remaining noninterest expenses increased $167,000 or 5.4 percent to $3,259,000 when comparing the second quarter of 2009 to the same quarter a year ago, and increased $557,000 or 9.8 percent to $6,245,000 when comparing the first six months of 2009 to the same period in 2008. Benefiting 2008’s first quarter was a $130,000 reversal of an accrual for the Company’s portion of Visa^® litigation and settlement costs, as a result of Visa’s successful IPO. Increasing year over year for the first six months of 2009 were costs associated with managing OREO (up $499,000, principally related to real estate taxes on OREO), telephone and data lines (up $16,000), correspondent bank clearing charges (up $93,000, because lower analysis credits provided for compensating balances in the current lower interest rate environment make the payment of charges more sensible), directors’ fees (up $72,000, reflecting more frequent meetings than a year ago), employee placement fees (up $29,000, principally headhunter fees), and higher losses associated with robbery and customer fraud (up $295,000). Partially offsetting these were decreases in expenditures for stationery, printing and supplies (down $58,000), postage and courier costs (down $15,000, primarily overnight services), insurance costs (down $63,000, including property and casualty as well as other liability coverage), education (down $60,000, with fewer education programs offered internally), travel related costs (down $86,000, including mileage reimbursement, airline and hotel costs), bank paid closing costs (down $62,000, as home equity line costs paid by Seacoast National have been limited), and origination fees for marine loan production (down $129,000).

INCOME TAXES

Income tax benefits for 2009 were 14.9 percent of loss before taxes, compared to 32.6 percent for all of 2008. The lower benefit for 2009 results from the no tax benefit attributable to the goodwill impairment of $49.8 million.

At the beginning of June 2009, Seacoast National dissolved its subsidiaries, FNB RE Services, Inc., which had elected to be taxed as a real estate investment trust, or “REIT”, and its immediate parent, FNB Property Holdings, Inc.

FINANCIAL CONDITION

CAPITAL RESOURCES

The Company’s ratio of shareholders’ equity to period end total assets was 6.95 percent at June 30, 2009, compared with 9.33 percent at December 31, 2008, and 8.28 percent one year earlier at June 30, 2008; and its tangible common equity ratio was 4.66 percent at June 30, 2009. Seacoast’s management uses certain “non-GAAP” financial measures in its analysis of the Corporation’s performance. These non-GAAP financial measures include the tangible common equity ratio. Seacoast’s management uses this measure to assess the quality of capital and believes that investors may find it useful in their analysis of the Corporation. This capital measure is not necessarily comparable to similar capital measures that may be presented by other companies.

The Company and its banking subsidiary, Seacoast National, are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast National and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Seacoast National has not paid a dividend to the Company since June 30, 2008. Prior OCC approval presently is required for any payments of dividends from Seacoast National to the Company.

The Company reduced its dividend payment to shareholders to $0.01 per share beginning in the third quarter of 2008 through the first quarter of 2009.

Under the National Bank Act, national banks may in any calendar year, without the approval of the OCC, pay dividends to the extent of net profits for that year, plus retained net profits for the preceding two years (less any required transfers to surplus). The need to maintain adequate capital in Seacoast National also limits dividends that may be paid to us. Beginning in the third quarter of 2008, we reduced our dividend per share of our common stock to $0.01 and, as of May 19, 2009, we have suspended the payment of dividends, as described below. As of December 31, 2008, Seacoast National cannot pay us any dividends without prior OCC approval, and in all events must maintain appropriate capital that meets regulatory requirements applicable to us.

The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determine that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast National or us, respectively. Under a recently adopted Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to the organization’s

financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with the its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

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

On May 19, 2009, our board of directors decided to suspend regular quarterly cash dividends on our outstanding common stock and Series A Preferred Stock pursuant to a request from the Federal Reserve as a result of recently adopted Federal Reserve policies related to dividends and other distributions. Dividends will be suspended until such time as dividends are allowed by the Federal Reserve. The Federal Reserve has a policy that it does not want bank holding companies that have TARP CPP capital to use TARP funds to pay dividends on common or preferred stock or to make distributions on outstanding trust preferred securities.

In December 2008, the Company sold $50.0 million in Series A Perpetual Preferred Stock and warrants to purchase Company common stock to the Treasury under the TARP Capital Purchase Program, which further strengthened the Company’s already “well-capitalized” status. As a result, the Company’s capital position remains strong with a total risk-based capital ratio of 13.41 percent at June 30, 2009, lower than December 31, 2008’s ratio of 14.00 percent but higher than 11.42 percent at June 30, 2008.

At June 30, 2009, the capital ratios for the Company and its subsidiary, Seacoast National, were as follows:

		Seacoast				Seacoast				Minimum to be
		(Consolidated)				National				Well Capitalized *
June 30, 2009:
Tier 1 capital ratio			11.83	%			11.63	%			6	%
Total risk-based capital ratio			13.41	%			12.90	%			10	%
Tier 1 leverage ratio			8.29	%			8.16	%			5	%

The Bank has agreed to maintain a Tier 1 capital (to adjusted average assets) ratio of at least 7.50% and a total risk-based capital ratio of at least 12.00% as of March 31, 2009 with its primary regulator the Office of the Comptroller of the Current (the “OCC”). The agreement with the OCC as to minimum capital ratios does not change the Bank’s status as “well-capitalized” for bank regulatory purposes.

The Company’s and Seacoast National’s risk based capital and required capital may improve in the future as risk-weighted assets, including problem assets, are reduced. We anticipate further improvements in our capital ratios through reductions in our risk-based asset levels, and are seeking more capital through sales of Company common stock and other securities.

We have a shelf registration statement on file with the Securities and Exchange Commission, or “SEC”, covering a wide variety of securities. As a result of the suspension of dividends on our outstanding Series A preferred stock we cannot utilize that shelf registration statement. On June 22, 2009, we filed a registration statement on SEC Form S-1 for an indeterminate amount of common stock. We are pursuing this offering of our common stock to enhance the amount and quality of our capital.

LOAN PORTFOLIO

Total loans (net of unearned income) were $1,584,340,000 at June 30, 2009, $224,447,000 or 12.4 percent less than at June 30, 2008, and $92,388,000 or 5.5 percent less than at December 31, 2008. The following table details loan portfolio composition at June 30, 2009, December 31, 2008 and June 30, 2008:

		June 30,				Dec. 31,				June 30,
(In thousands)		2009				2008				2008
Construction and land development
Residential		$	96,675			$	129,899			$	246,039
Commercial			166,818				209,297				227,165
			263,493				339,196				473,204
Individuals			44,215				56,047				67,079
			307,708				395,243				540,283
Real estate mortgage
Residential real estate
Adjustable			328,024				328,992				318,820
Fixed rate			90,579				95,456				90,189
Home equity mortgages			83,788				84,810				93,110

		June 30,				Dec. 31,				June 30,
(In thousands)		2009				2008				2008
Home equity lines			60,148				58,502				59,430
			562,539				567,760				561,549
Commercial real estate			572,772				557,705				535,683
			1,135,311				1,125,465				1,097,232
Commercial and financial			71,836				82,765				94,812
Installment loans to individuals			69,165				72,908				76,098
Other loans			320				347				362
Total		$	1,584,340			$	1,676,728			$	1,808,787

Overall loan growth was negative when comparing outstanding balances at June 30, 2009 to June 30, 2008, as a result of the economic recession, including lower demand for commercial loans, and the Company’s successful divestiture of residential construction and land development loans (including $38 million and $29 million that were sold during the third and fourth quarters of 2008, respectively). By reducing the Company’s exposure to residential construction and development loans, the overall risk profile has been improved, we seek better earnings performance and reduced risk in future quarters.

As shown in the table above, commercial real estate mortgage loans increased $37,089,000 or 6.9 percent from June 30, 2008 to $572,772,000 at June 30, 2009 while residential mortgage loans combined increased $990,000 to $562,539,000. More than offsetting the net increase in real estate mortgages were declines from June 30, 2008 in residential construction and land development loans of $149,364,000 or 60.7 percent to $96,675,247 at June 30, 2009, commercial construction and land development loans of $60,347,000 or 26.6 percent to $166,818,000, residential construction and lot loans to individuals of $22,864,000 or 34.1 percent to $44,215,000, commercial and financial loans of $22,976,000 or 24.2 percent to $71,836,000, and installment loans to individuals of $6,933,000 or 9.1 percent to $69,165,000 at June 30, 2009.

Construction and land development loans, including loans secured by commercial real estate, were comprised of the following types of loans at June 30, 2009 and June 30, 2008:

June 30		2009												2008
(In millions)		Funded				Unfunded				Total				Funded				Unfunded				Total
Construction and land development*
Residential:
Condominiums		$	16.8			$	0.3			$	17.1			$	47.4			$	4.7			$	52.1
Town homes			2.3				—				2.3				20.0				1.8				21.8
Single family residences			16.7				1.7				18.4				49.5				7.4				56.9
Single family land & lots			43.3				0.1				43.4				95.1				12.1				107.2
Multifamily			17.6				—				17.6				34.0				13.0				47.0
			96.7				2.1				98.8				246.0				39.0				285.0
Commercial:
Office buildings			13.8				0.6				14.4				31.1				3.2				34.3
Retail trade			55.9				2.0				57.9				63.6				10.1				73.7
Land			51.2				0.2				51.4				75.4				14.2				89.6
Industrial			8.5				0.3				8.8				20.8				1.8				22.6
Healthcare			6.0				3.0				9.0				1.0				—				1.0

June 30		2009												2008
(In millions)		Funded				Unfunded				Total				Funded				Unfunded				Total
Churches & educational facilities			—				—				—				0.1				0.4				0.5
Lodging			—				—				—				—				—				—
Convenience stores			—				—				—				—				—				—
Marina			30.0				2.2				32.2				28.9				5.5				34.4
Other			1.4				—				1.4				6.3				2.0				8.3
			166.8				8.3				175.1				227.2				37.2				264.4
			263.5				10.4				273.9				473.2				76.2				549.4
Individuals:
Lot loans			32.4				—				32.4				40.0				—				40.0
Construction			11.8				6.1				17.9				27.1				12.2				39.3
			44.2				6.1				50.3				67.1				12.2				79.3
Total		$	307.7			$	16.5			$	324.2			$	540.3			$	88.4			$	628.7

The following is the geographic location of the Company’s construction and land development loans (excluding loans to individuals) totaling $263,493,000 at June 30, 2009 and $473,204,000 at June 30, 2008:

		% of Total Construction
		and Land Development
Florida County		Loans
		2009				2008
St. Lucie			21.9				15.1
Palm Beach			20.7				16.5
Indian River			10.7				15.5
Brevard			8.4				7.9
Orange			7.3				6.9
Miami-Dade			6.5				2.0
Highlands			5.9				3.3
Martin			5.6				12.3
Volusia			5.3				4.3
Broward			2.3				1.1
Okeechobee			1.5				1.6
Collier			1.1				0.5
Charlotte			0.9				0.6
Marion			0.8				0.4
Hendry			0.6				0.3
Lake			0.2				0.6
Bradford			0.0				0.6
Dade			0.0				3.2
Osceola			0.0				3.4
Lee			0.0				3.2
Other			0.3				0.7
Total			100.0				100.0

The Company’s ten largest commercial real estate funded and unfunded loan relationships at June 30, 2009 aggregated to $199.3 million (versus $237.1 million a year ago) and for the top 44 commercial real estate relationships in excess of $5 million the aggregate funded and unfunded totaled $471.7 million (compared to 62 relationships aggregating to $688.0 million a year ago).

Commercial real estate mortgage loans, excluding construction and development loans, were comprised of the following loan types at June 30, 2009 and 2008:

June 30						2009												2008
(In millions)		Funded				Unfunded				Total				Funded				Unfunded				Total
Office buildings		$	141.6			$	2.2			$	143.8			$	142.3			$	2.4			$	144.7
Retail trade			120.0				0.8				120.8				93.5				1.1				94.6
Industrial			93.0				2.0				95.0				93.3				1.4				94.7
Healthcare			30.9				0.6				31.5				33.6				0.8				34.4
Churches and educational facilities			34.6				0.1				34.7				36.5				0.1				36.6
Recreation			1.4				0.4				1.8				1.8				0.4				2.2
Multifamily			31.7				0.7				32.4				19.1				1.0				20.1
Mobile home parks			5.6				—				5.6				3.1				—				3.1
Lodging			26.3				0.4				26.7				28.0				—				28.0
Restaurant			5.1				—				5.1				9.0				0.1				9.1
Agriculture			11.8				1.0				12.8				9.0				0.5				9.5
Convenience Stores			23.2				—				23.2				24.9				—				24.9
Other			47.6				0.6				48.2				41.6				1.1				42.7
Total		$	572.8			$	8.8			$	581.6			$	535.7			$	8.9			$	544.6