THIRD 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. 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 and in the second quarter opened one new branch in Brevard County on Murrell Road.
Branch additions to bank premises and equipment over the past twelve months have been more than offset by depreciation of $3.5 million over the same period, resulting in a decrease in bank premises and equipment (net) of $1,254,000 at September 30, 2009, compared to September 30, 2008.
EARNINGS SUMMARY
Net loss available to common shareholders for the third quarter of 2009 totaled $(41,714,000) or $(1.21) per average common diluted share, as a result of continued increased credit costs. This compares to $(63,937,000) or $(3.35) per average common share in the second quarter of 2009 which included the write-off of $49.8 million of all of the Company's goodwill (see "Goodwill Impairment" under "Critical Accounting Estimates") and $(5,697,000) or $(0.30) per average common diluted share in the first quarter of 2009. In the third quarter a year ago, net loss available to common shareholders totaled $(3,448,000) or ($0.18) per average common diluted share.
As forecasted, the net interest margin continued to improve, increasing by 9 basis points during the third quarter of 2009 from the second quarter of 2009, and by 21 basis points during the second quarter of 2009 from the first quarter of 2009, after improving 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 and its continuance of historically low interest rates, as well as our improved mix of deposits. The average cost of interest bearing liabilities was 15 basis points lower for the third quarter of 2009, compared to second quarter 2009, 40 basis points lower for the second quarter of 2009, compared to first quarter 2009, and was 47 basis points lower for the first quarter of 2009, compared to fourth quarter 2008, a total reduction of 102 basis points.

The improved mix of deposits reflects the continued success of our retail deposit growth initiatives. Signs of improved stability in home prices and greater transaction volumes increased fee income from residential real estate production during the first, second and third quarters of 2009.
Noninterest expenses increased by $0.5 million versus the prior year's third quarter result, and were up $52.7 million for the nine-month period ended September 30, 2009, compared to 2008. The increase for the nine-month period was primarily a result of our write-off of $49.8 million of goodwill (see "Goodwill Impairment" under "Critical Accounting Estimates") and a special Federal Deposit Insurance Corporation (FDIC) assessment of $996,000. We have managed our controllable overhead, with noninterest expenses (excluding the write-off of goodwill and the increase in FDIC assessments) virtually unchanged versus a year ago. While reductions in overhead occurred in salaries and wages, employee benefits, outsourced data processing costs, furniture and equipment expenses and marketing expenses, these reductions were almost entirely offset by higher legal and professional fees and costs to manage and liquidate foreclosed and repossessed property, reflecting economic conditions.
Our provision for loan losses was substantially higher than in the first and second quarter of 2009, with $45.4 million of provision for loan losses for the third quarter of 2009 compared to $26.2 million and $11.7 million for the second and first quarter of 2009, respectively. Provisions for loans losses were higher year over year for the first nine months of 2009 as a result of higher net charge-offs for 2009 and the Company increasing its allowance for loan losses to loans outstanding ratio to 3.25 percent, or 138 basis points since September 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 32-35 and 42-50 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 Available for Sale
At September 30, 2009, securities designated as available for sale totaled $342,742,000. The fair value of the available for sale portfolio at September 30, 2009 was more than historical amortized cost, producing net unrealized gains of $7,345,000 that have been included in other comprehensive income (loss) 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, second or third quarters of 2009. The fair value of each security available for sale was obtained from independent pricing sources utilized by many financial institutions. The fair value of many state and municipal securities are not readily available through market sources, so fair value estimates are based on quoted market price or prices of similar instruments. Generally the Company obtains one price for each security. However, actual values can only be determined in an arms-length transaction between a willing buyer and seller that can, and often do, vary from these reported values. Furthermore, significant changes in recorded values due to changes in actual and perceived economic conditions can occur rapidly, producing greater unrealized losses or gains in the available for sale portfolio.
The credit quality of the Company's securities holdings is investment grade and higher. These securities, except for approximately $2.1 million of states and their political subdivision's securities, as of September 30, 2009, generally are traded in highly liquid markets. Obligations of U.S. Treasury and U.S. Government agencies total $270 million, or 78.8 percent of the total portfolio. The remainder of the portfolio primarily consists of super senior private label securities secured by collateral originated prior to 2005. 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, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market inputs, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.
Changes in the fair values, as a result of deteriorating economic conditions and credit spread changes, should only be temporary. Further, management believes that the Company's other sources of liquidity, as well as the cash flow from principal and interest payments from the securities portfolio, reduces the risk that losses would be realized as a result of a need to sell securities to obtain liquidity.

The Company also holds stock in the Federal Home Loan Bank of Atlanta ("FHLB") totaling $7.1 million as of September 30, 2009, slightly less than at year-end 2008. The FHLB eliminated its dividend for the first quarter of 2009 but has since reinstated dividends, 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 ASC 942 formerly 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 September 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 the 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 September 30, 2009 continue to decline, totaling 3.8 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 ultimately allow for 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 from a forecast of future taxable income. The use of the Company's forecast of future taxable income was not considered positive evidence which could be used to offset the negative evidence at this time, 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. As a result of the third quarter loss a tax benefit of $15.7 million was recorded, however the Company also increased its DTA valuation allowance by the same amount. Should the economy show signs of improvement and our credit losses moderate, we anticipate that we could place increased reliance on our forecast of future taxable earnings, which would result in realization of additional future tax benefits.

Goodwill Impairment
After completing a second step goodwill impairment analysis during the third quarter of 2009, the preliminary conclusion that the entire value of goodwill was impaired in the second quarter of 2009 was confirmed. 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.

RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income (on a fully taxable equivalent basis) for the third quarter
of 2009 totaled $19,101,000, increasing from 2009's second quarter by $114,000
or 0.6 percent, but lower than third quarter 2008's result by $85,000 or
0.4 percent. The following table details net interest income and margin results
(on a tax equivalent basis) for the past five quarters:

                                      Net Interest           Net Interest
                                         Income                 Margin
          (Dollars in thousands)    (tax equivalent)       (tax equivalent)
          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
          Third quarter 2009                   19,101                   3.74

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

                                      Third        Second       First        Fourth       Third
                                     Quarter      Quarter      Quarter      Quarter      Quarter
                                       2009         2009         2009         2008         2008
                                                        (Dollars in thousands)
Non-taxable interest income          $    105     $    135     $    139     $    141     $    145
Tax Rate                                   35 %         35 %         35 %         35 %         35 %
Net interest income (TE)             $ 19,101     $ 18,987     $ 18,241     $ 17,535     $ 19,186
Total net interest income (not TE)     19,051       18,920       18,174       17,467       19,117
Net interest margin (TE)                 3.74 %       3.65 %       3.44 %       3.32 %       3.57 %
Net interest margin (not TE)             3.73         3.64         3.43         3.31         3.56

Net interest margin on a tax equivalent basis improved 9 basis points to 3.74 percent for the third quarter of 2009 compared to the second quarter of 2009, and was higher by 17 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 third quarter of 2009, average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 77.6 percent, compared to 84.2 percent a year ago. Average securities as a percent of average earning assets increased from 13.3 percent a year ago to 17.6 percent during third quarter 2009 and federal funds sold and other investments increased to 4.8 percent from 2.5 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 55.6 percent of total loans at September 30, 2009 (compared to 60.1 percent a year ago at September 30, 2008). This reflects our reduced exposure to commercial construction and land development loans on residential properties, which declined by $134.8 million from September 30, 2008 to September 30, 2009. Lower yielding residential loan balances with individuals (including home equity loans and lines, and personal construction loans) represented 39.9 percent of total loans at September 30, 2009 (versus 35.6 percent a year ago) (see "Loan Portfolio").

The yield on earning assets for the third quarter 2009 was 4.98 percent, 80 basis points lower than for third 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:

                       3rd           2nd           1st           4th           3rd
                     Quarter       Quarter       Quarter       Quarter       Quarter
                      2009          2009          2009          2008          2008
            Yield        4.98 %        5.03 %        5.16 %        5.45 %        5.78 %

The yield on loans declined 75 basis points to 5.26 percent over the last twelve months. Nonaccrual loans totaling $154.0 million or 10.2 percent of total loans at September 30, 2009, versus $75.8 million or 4.3 percent of total loans a year ago, reduced the yield on our loan portfolio. The yield on investment securities was lower as well, decreasing 6 basis points year over year to 4.93 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 22 basis points reported year over year for second quarter 2009 and the 64 basis points decrease reported year over year for first quarter 2009, reflecting recent securities purchases at higher yields that improved the overall yield for the third quarter by 7 basis points from second quarter 2009, and second quarter 2009's yield by 35 basis points from first quarter 2009. Federal funds sold and other investments yielded 0.67 percent for the third quarter 2009, lower when compared to 2.41 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 third quarter of 2009 decreased $63.6 million or 3.0 percent compared to the second quarter of 2009. Average loan balances decreased $60.5 million or 3.7 percent to $1,571.2 million and average investment securities were $8.1 million or 2.2 percent lower, totaling $355.5 million, average federal funds sold and other investments increased $5.1 million or 5.5 percent to $97.2 million. The decline in average earning assets is consistent with reduced funding as a result of seasonal declines during the summer in public fund sweep repurchase agreements.
Commercial and commercial real estate loan production for the first nine months of 2009 totaled $15 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. 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 September 30, 2009 the Company's total commercial and commercial real estate loan pipeline was $46 million, versus $108 million at September 30, 2008.
Closed residential mortgage loan production for the third quarter of 2009 totaled $28 million, all of it was sold servicing-released. In comparison, $43 million in residential loans were produced in the second quarter of 2009, of which $24 million was sold servicing-released, $38 million in residential loans were produced in the first quarter of 2009, with $20 million sold servicing-released, and $22 million was produced in the third quarter of 2008, with $8 million sold servicing released. Applications for residential mortgages totaled $43 million during the third quarter of 2009 compared to $71 million and $92 million, respectively, for the second and first quarters of 2009. Third quarter is historically a seasonally weak quarter for home purchases. 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 and into 2010.

During the third and second quarter of 2009, the sale of mortgage backed securities totaling $25.3 million and $29.5 million, respectively, resulted in securities gains of $1,425,000 and $1,786,000, respectively, for each quarter. Management believed these securities had minimal opportunity to further increase in value. During the third quarter of 2009 maturities (principally pay-downs) totaled $25.4 million and securities portfolio purchases totaled $47.3 million. In comparison, 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.
The cost of average interest-bearing liabilities in the third quarter of 2009 decreased 15 basis points to 1.50 percent from second quarter 2009 and was 114 basis points lower than for the third 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:

                       3rd           2nd           1st           4th           3rd
                     Quarter       Quarter       Quarter       Quarter       Quarter
                      2009          2009          2009          2008          2008
             Rate        1.50 %        1.65 %        2.05 %        2.52 %        2.64 %

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, second and third quarter of 2009. We have gained customers. A total of 1,622 new households were added in the third quarter of 2009, up 10.2 percent compared to the second quarter of 2009, and comparing to 1,566 new households in the third quarter of 2008. The improved deposit mix and lower rates paid on interest bearing deposits during the third quarter of 2009 reduced the overall cost of interest bearing deposits to 1.47 percent, 20 basis points lower than in the second quarter of 2009 and 113 basis points lower than in the third 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) totaled 52.7 percent in the third quarter of 2009, although this was lower than the average of 56.3 percent a year ago, as a result of customers shifting balances from these lower rate products to certificates in this low interest rate environment. The average rate for lower cost interest bearing deposits for the third quarter of 2009 was 0.58 percent, down by 13 basis points from the second quarter of 2009 and down 122 basis points from the third quarter of 2008. Certificate of deposit ("CD") rates paid were also lower compared to the second quarter of 2009 and third quarter of 2008, lower by 35 basis points and 119 basis points, respectively, and averaged 2.45 percent for the third quarter of 2009. Average CDs (the highest cost component of interest bearing deposits) were 47.3 percent of interest bearing deposits for third quarter 2009, a higher percentage than a year ago when the percentage was 43.7 percent.

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