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EX-32.2 - EXHIBIT 32.2 - SEACOAST BANKING CORP OF FLORIDAv451689_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SEACOAST BANKING CORP OF FLORIDAv451689_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SEACOAST BANKING CORP OF FLORIDAv451689_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SEACOAST BANKING CORP OF FLORIDAv451689_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from _______________ to __________________.

 

Commission File No. 0-13660

 

Seacoast Banking Corporation of Florida

(Exact Name of Registrant as Specified in its Charter)

 

Florida   59-2260678

(State or Other Jurisdiction of Incorporation or

Organization

  (I.R.S. Employer Identification No.)

 

 

815 COLORADO AVENUE, STUART FL   34994
(Address of Principal Executive Offices)   (Zip Code)

 

(772) 287-4000
(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x       No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x      No  ¨

 

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Accelerated Non-Accelerated Small Reporting
Filer  ¨ Filer  x Filer  ¨ Company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨     No x

Common Stock, $0.10 Par Value – 38,025,020 shares as of September 30, 2016

 

   

 

  

INDEX

 

SEACOAST BANKING CORPORATION OF FLORIDA

 

Part I FINANCIAL INFORMATION PAGE #
     
Item 1. Financial Statements (Unaudited)  
     
 

Condensed consolidated balance sheets – September 30, 2016 and December 31, 2015

3

     
 

Condensed consolidated statements of income – Three months and nine months ended September 30, 2016 and 2015

4

     
 

Condensed consolidated statements of comprehensive income – Three months and nine months ended September 30, 2016 and 2015

5

     
 

Consolidated statements of cash flows – Nine months ended September 30, 2016 and 2015

 6-7

     
  Notes to condensed consolidated financial statements 8-33
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

34-62

     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 63
     
Item 4. Controls and Procedures 64
     
Part II OTHER INFORMATION  
     
Item 1. Legal Proceedings 65
     
Item 1A. Risk Factors 65
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
     
Item 3. Defaults upon Senior Securities 66
     
Item 4. Mine Safety Disclosures 66
     
Item 5. Other Information 66
     
Item 6. Exhibits 67
     
SIGNATURES 68

 

  2

 

 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   September 30,   December 31, 
(Dollars in thousands, except share amounts)  2016   2015 
ASSETS        
Cash and due from banks  $89,777   $81,216 
Interest bearing deposits with other banks   77,606    54,851 
Total cash and cash equivalents   167,383    136,067 
           
Securities:          
Available for sale (at fair value)   866,613    790,766 
Held for investment (fair value: $397,264 at September 30,          
    2016, and $202,813 at December 31, 2015)   392,138    203,525 
Total Securities   1,258,751    994,291 
           
Loans held for sale (at fair value)   20,143    23,998 
           
Loans   2,769,338    2,156,330 
Less: Allowance for loan losses   (22,684)   (19,128)
NET LOANS   2,746,654    2,137,202 
           
Bank premises and equipment, net   59,035    54,579 
Other real estate owned   12,734    7,039 
Goodwill   64,649    25,211 
Other intangible assets, net   15,291    8,594 
Bank owned life insurance   44,044    43,579 
   Net deferred income taxes   58,848    60,274 
Other assets   66,402    43,946 
   $4,513,934   $3,534,780 
           
LIABILITIES          
Deposits  $3,510,493   $2,844,387 
Federal funds purchased and securities sold under          
agreements to repurchase, maturing within 30 days   167,693    172,005 
Federal Home Loan Bank (FHLB) borrowings   305,000    50,000 
Subordinated debt   70,171    69,961 
Other liabilities   25,058    44,974 
    4,078,415    3,181,327 
           
SHAREHOLDERS' EQUITY          
Common stock, par value $0.10 per share, authorized          
60,000,000 shares, issued 38,068,701 and          
outstanding 38,025,020 shares at September 30,          
2016 and issued 34,356,892 and outstanding          
34,351,409 shares at December 31, 2015   3,799    3,435 
Other shareholders' equity   431,720    350,018 
TOTAL SHAREHOLDERS' EQUITY   435,519    353,453 
   $4,513,934   $3,534,780 

 

See notes to condensed consolidated financial statements.

 

  3

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Three Months Ended   Nine months ended 
   September 30,   September 30, 
(Dollars in thousands, except per share data)  2016   2015   2016   2015 
Interest and fees on loans  $31,932   $25,276   $87,210   $69,285 
Interest and dividends on securities   7,253    5,298    20,002    15,470 
Interest on interest bearing deposits and other                    
investments   429    249    1,152    747 
TOTAL INTEREST INCOME   39,614    30,823    108,364    85,502 
                     
Interest on deposits   1,292    857    3,447    2,450 
Interest on borrowed money   874    955    2,754    2,665 
TOTAL INTEREST EXPENSE   2,166    1,812    6,201    5,115 
                     
NET INTEREST INCOME   37,448    29,011    102,163    80,387 
                     
Provision for loan losses   550    987    1,411    2,275 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   36,898    28,024    100,752    78,112 
                     
Noninterest income                    
Noninterest income, excluding securities gains   9,764    8,082    27,505    24,236 
Securities gains, net (includes net losses of $(648) and $(494) in other                    
comprehensive income reclassifications for the three months ended                    
September 30, 2016 and 2015 respectively, and net losses of $(620)                    
and $(325) for the nine months ended September 30, 2016 and 2015,                    
respectively.)   225    160    361    160 
TOTAL NONINTEREST INCOME (see NOTE H)   9,989    8,242    27,866    24,396 
                     
TOTAL NONINTEREST EXPENSE (see NOTE H)   33,435    29,127    100,584    76,601 
                     
INCOME BEFORE INCOME TAXES   13,452    7,139    28,034    25,907 
                     
Provision for income taxes (includes $(250) and $(191) in income tax                    
benefit from reclassification items for the three months ended                    
September 30, 2016 and 2015, respectively, and $(239) and $(125)                    
in income tax benefit for the nine months ended September 30,                    
2016 and 2015, respectively.)   4,319    2,698    9,603    9,802 
NET INCOME  $9,133   $4,441   $18,431   $16,105 
                     
PER SHARE COMMON STOCK:                    
Net income diluted  $0.24   $0.13   $0.49   $0.48 
Net income basic   0.24    0.13    0.50    0.48 
Cash dividends declared   0.00    0.00    0.00    0.00 
Average shares outstanding - diluted   38,169,863    34,193,540    37,258,133    33,524,718 
Average shares outstanding - basic   37,549,804    33,907,178    36,626,290    33,286,933 

 

See notes to condensed consolidated financial statements.

 

  4

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Dollars in thousands)  2016   2015   2016   2015 
NET INCOME  $9,133   $4,441   $18,431   $16,105 
Other comprehensive income:                    
Unrealized gains (losses) on securities available for sale   (1,020)   1,757    16,096    4,223 
Amortization of unrealized losses on securities transferred to held                    
for investment, net   (122)   (123)   (365)   (416)
Reclassification adjustment for losses (gains) included in net income   648    494    620    325 
Provision for income taxes   195    (822)   (6,307)   (1,595)
COMPREHENSIVE INCOME  $8,834   $5,747   $28,475   $18,642 

 

See notes to condensed consolidated financial statements.

 

  5

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Nine Months Ended 
   September 30, 
(Dollars in thousands)  2016   2015 
Cash flows from operating activities          
Interest received  $108,041   $85,115 
Fees and commissions received   26,761    23,833 
Interest paid   (5,693)   (5,091)
Cash paid to suppliers and employees   (86,824)   (71,573)
Origination of loans designated held for sale   (132,482)   (159,662)
Sale of loans designated held for sale   136,337    155,002 
Net change in other assets   (5,274)   (578)
Net cash provided by operating activities   40,866    27,046 
Cash flows from investing activities          
Maturity of securities available for sale   93,538    93,830 
Maturity of securities held for investment   29,582    23,115 
Proceeds from sale of securities available for sale   39,408    60,314 
Purchases of securities available for sale   (159,576)   (87,468)
Purchases of securities held for investment   (218,654)   (24,366)
Net new loans and principal repayments   (280,915)   (172,858)
Proceeds from the sale of other real estate owned   4,987    4,688 
Proceeds from sale of Federal Home Loan Bank          
(FHLB) and Federal Reserve Bank stock   1,700    7,427 
Purchase of FHLB and Federal Reserve Stock   (16,213)   (6,798)
Net cash from bank acquisition   235,546    32,927 
Additions to bank premises and equipment   (5,099)   (8,466)
Net cash (used in) provided by investing activities   (275,696)   (77,655)
Cash flows from financing activities          
Net increase in deposits   14,598    137,307 
Net decrease in federal funds purchased and          
repurchase agreements   (4,312)   (6,690)
Net increase (decrease) in FHLB borrowings   255,000    (80,000)
Stock based employee benefit plans   860    94 
Dividends paid   0    0 
Net cash provided by financing activities   266,146    50,711 
Net decrease in cash and cash equivalents   31,316    102 
Cash and cash equivalents at beginning of period   136,067    100,539 
Cash and cash equivalents at end of period  $167,383   $100,641 

 

See notes to condensed consolidated financial statements.

 

  6

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

Seacoast Banking Corporation of Florida and Subsidiaries

 

   Nine Months Ended 
   September 30, 
(Dollars in thousands)  2016   2015 
Reconciliation of net income to cash provided by        
operating activities          
Net income  $18,431   $16,105 
Adjustments to reconcile net income to net cash provided          
by operating activities:          
Depreciation   3,774    2,722 
Amortization of premiums and discounts on securities, net   6,381    3,061 
Other amortization and accretion, net   (1,862)   (1,895)
Change in loans held for sale, net   3,855    (4,660)
Provision for loan losses   1,411    2,275 
Gain on sale of securities   (361)   (160)
Gain on sale of loans   (935)   (658)
Losses (gains) on sale and write-downs of other real estate owned   (348)   397 
Losses on disposition of fixed assets   2,440    120 
Change in interest receivable   (2,866)   (527)
Change in interest payable   297    24 
Change in prepaid expenses   (889)   (1,097)
Change in accrued taxes   10,184    10,326 
Change in other assets   (5,274)   (578)
Change in other liabilities   6,628    1,591 
Net cash provided by operating activities  $40,866   $27,046 
           
Supplemental disclosure of non cash investing activities:          
Fair value adjustment to securities  $15,985   $3,711 
Transfer from loans to other real estate owned   2,996    4,937 
Transfer from bank premises to other real estate owned   7,708    0 
Securities principal recorded as a receivable   647    96 

 

See notes to condensed consolidated financial statements.

 

  7

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Seacoast Banking Corporation of Florida and Subsidiaries

 

NOTE A — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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, 2015.

 

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.

 

Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for loan losses, the valuation of investment securities available for sale, fair value of impaired loans, contingent liabilities, fair value of other real estate owned, the fair value of acquired assets and assumed liabilities, and the valuation of deferred tax assets. Actual results could differ from those estimates.

 

Early Adoption of Accounting Standard Update

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-09 for “Compensation—Stock Compensation, Improvements to Employee Share Based Payments Accounting.” The guidance alters the manner in which companies account for share based payments to employees. Entities are required to immediately recognize income tax effects of awards in the income statement when the awards vest or are settled. Additional paid-in capital pools are eliminated. The Company early adopted ASU 2016-09 during the three months ended September 30, 2016. As a result of the adoption, the Company recognized a $418,000 tax benefit in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016, which added $0.01 to diluted and basic earnings per share for the three and nine month periods ended September 30, 2016. In addition, the Company presented excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method. The Company also made an accounting policy election to account for forfeitures utilizing estimates for expected forfeiture rates. This policy election did not have a material impact on the Company’s consolidated financial statements. Adoption of all other changes did not have an impact on our consolidated financial statements.

 

  8

 

 

NOTE B — RECENTLY ISSUED ACCOUNTING STANDARDS, Not adopted as of September 30, 2016

 

The FASB issued ASU 2014-09. The ASU is a converged standard between the FASB and the IASB that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The primary objective of the ASU is revenue recognition that represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is effective on January 1, 2018, with early adoption permitted January 1, 2017. The Company is currently assessing the impact of adoption of ASU 2014-09.

 

In January 2016, the FASB issued ASU 2016-01 for “Recognition and Measurement of Financial Assets and Liabilities”. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The update requires: a) equity investments (except those accounted for under the equity method of accounting) to be measured at fair value and recognized in net income, b) simplifies impairment assessments of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and if impaired requires measurement of the investment at fair value, c) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value d) requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, e) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements, g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The ASU is effective for fiscal years beginning after December 15, 2017, and must be adopted on a modified retrospective basis, including interim periods within those fiscal years. The adoption of ASU 2016-01 is being evaluated for its impact on the Company’s operating results and financial condition.

 

In February 2016, the FASB amended existing guidance related to the recognition of lease assets and lease liabilities on the balance sheet and disclosures on key information about leasing arrangements, under ASU 2016-02. It will be necessary for all parties to classify leases to determine how to recognize lease-related revenue and expense. The amendment requires lessees to put most leases on their balance sheet and record expenses to the income statement. Changes in the guidance eliminate real estate centric provisions for sale-leaseback transactions, including initial direct costs and lease execution costs for all entities. For lessors, the new FASB standard modifies classification criteria and accounting for sales type and direct financing leases. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. The amended accounting is applicable to periods after December 15, 2018 and interim periods within that year.

 

In March 2016, under ASU 2016-04, “Liabilities – Extinguishments of Liabilities, Breakage for Certain Prepaid Stored-Value Products” the FASB intends for entities to recognize liabilities for the sale of prepaid stored value products redeemable for goods, services, or cash. This guidance aligns recognition of breakage for these liabilities in a way consistent with how gift card breakage will be recognized. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Effective date for implementation is for annual periods after December 15, 2018.

 

  9

 

 

In June 2016, the FASB issued ASU 2016-13 for “Measurement of Credit Losses on Financial Instruments” to replace the incurred loss impairment methodology with a current expected credit loss methodology for financial instruments measured at amortized cost and other commitments to extend credit. Expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of voluntary prepayments and considering available information about the collectability of cash flows, including information about past events, current conditions, and supportable forecasts. The resultant allowance for credit losses reflects the portion of the amortized cost basis that the entity does not expect to collect. Additional quantitative and qualitative disclosures are required upon adoption. The Company is evaluating the impact of the ASU. Adoption is required January 1, 2020, with early adoption permitted January 1, 2019.

 

In August 2016, The FASB issued final guidance via ASU 2016-15 for “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” The guidance may change how an entity classifies certain cash receipts and cash payments on its statement of cash flows, the purpose being to reduce diversity in practice. This ASU addresses the classification of cash flows for (a) debt prepayment or extinguishment costs, (b) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (c) contingent consideration payments made after a business combination, (d) proceeds from the settlement of insurance claims, (e) proceeds from the settlement of corporate owned life insurance, including bank owned life insurance, (f) distributions received from equity method investees, and (g) beneficial interests in securitization transactions. The guidance clarifies how the predominance principle should be applied. Entities should apply guidance in Accounting Standards Codification (ASC) 230. If not addressed, an entity should separately identify source or use and classify the receipt or payment based on the nature of the cash flow. Classification will depend on the predominant source of use. The Company is evaluating the impact of ASU 2016-15 which will generally be applied retrospectively for fiscal years beginning after December 15, 2017.

 

NOTE C — BASIC AND DILUTED EARNINGS PER COMMON SHARE

 

For each of the periods ended September 30, 2016 and 2015, options to purchase 189,000 shares and 282,000 shares, respectively, were antidilutive and accordingly were excluded in determining diluted earnings per share.

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Dollars in thousands, except per share data)  2016   2015   2016   2015 
Basic:                
Income available to common shareholders  $9,133   $4,441   $18,431   $16,105 
Average basic shares outstanding   37,549,804    33,907,178    36,626,290    33,286,933 
Basic earnings per share  $0.24   $0.13   $0.50   $0.48 
                     
Diluted:                    
Income available to common shareholders plus                    
assumed conversions  $9,133   $4,441   $18,431   $16,105 
Average basic shares outstanding   37,549,804    33,907,178    36,626,290    33,286,933 
Restricted stock and stock options   620,059    286,362    631,843    237,785 
Average diluted shares outstanding   38,169,863    34,193,540    37,258,133    33,524,718 
Diluted earnings per share  $0.24   $0.13   $0.49   $0.48 

 

NOTE D — SECURITIES

 

The amortized cost and fair value of securities available for sale and held for investment at September 30, 2016 and December 31, 2015 are summarized as follows:

 

  10

 

 

   September 30, 2016 
   Gross   Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
(Dollars in thousands)  Cost   Gains   Losses   Value 
SECURITIES AVAILABLE FOR SALE                    
U.S. Treasury securities and obligations                    
of U.S. Government Sponsored Entities  $12,485   $333   $0   $12,818 
Mortgage-backed securities of U.S.                    
Government Sponsored Entities   165,802    3,268    (96)   168,974 
Collateralized mortgage obligations of                    
U.S. Government Sponsored Entities   251,419    2,043    (979)   252,483 
Private mortgage backed securities   32,720    0    (688)   32,032 
Private collateralized mortgage obligations   73,371    617    (860)   73,128 
Collateralized loan obligations   124,663    437    (676)   124,424 
Obligations of state and political subdivisions   61,798    2,688    (52)   64,434 
Corporate and other debt securities   75,552    1,125    (39)   76,638 
Commercial mortgage backed securities   60,624    1,301    (243)   61,682 
   $858,434   $11,812   $(3,633)  $866,613 
                     
SECURITIES HELD FOR INVESTMENT                    
Mortgage-backed securities of                    
U.S. Government Sponsored Entities  $183,507   $4,306   $0   $187,813 
Collateralized mortgage obligations of                    
U.S. Government Sponsored Entities   160,377    1,618    (405)   161,590 
Collateralized loan obligations   41,494    183    (465)   41,212 
Private collateralized mortgage obligations   6,760    1    (112)   6,649 
   $392,138   $6,108   $(982)  $397,264 

 

   December 31, 2015 
   Gross   Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
(Dollars in thousands)  Cost   Gains   Losses   Value 
SECURITIES AVAILABLE FOR SALE                    
U.S. Treasury securities and obligations                    
of U.S. Government Sponsored Entities  $3,833   $78   $0   $3,911 
Mortgage-backed securities of U.S.                    
Government Sponsored Entities   192,224    847    (1,322)   191,749 
Collateralized mortgage obligations of                    
U.S. Government Sponsored Entities   242,620    470    (4,900)   238,190 
Private mortgage backed securities   32,558    0    (766)   31,792 
Private collateralized mortgage obligations   77,965    700    (708)   77,957 
Collateralized loan obligations   124,477    0    (1,894)   122,583 
Obligations of state and political subdivisions   39,119    882    (110)   39,891 
Corporate and other debt securities   44,652    37    (416)   44,273 
Commercial mortgage backed securities   41,127    13    (720)   40,420 
   $798,575   $3,027   $(10,836)  $790,766 
                     
SECURITIES HELD FOR INVESTMENT                    
Mortgage-backed securities of                    
U.S. Government Sponsored Entities  $64,993   $574   $(16)  $65,551 
Collateralized mortgage obligations of                    
U.S. Government Sponsored Entities   89,265    581    (406)   89,440 
Collateralized loan obligations   41,300    0    (1,360)   39,940 
Private collateralized mortgage obligations   7,967    0    (85)   7,882 
   $203,525   $1,155   $(1,867)  $202,813 

 

  11

 

 

Proceeds from sales of securities during the nine month period ended September 30, 2016 were $39.4 million, with gross gains of $448,000 and gross losses of $87,000. Proceeds from sales of securities during the nine month period ended September 30, 2015 were $60.3 million, with gross gains of $632,000 and gross losses of $472,000.

 

In 2014, approximately $158.8 million of investment securities available for sale were transferred into held for investment. The unrealized holding losses at the date of transfer totaled $3.1 million. For the securities transferred into the held for investment category from available for sale, unrealized holding losses at the date of the transfer will continue to be reported in other comprehensive income, and will be amortized over the remaining life of these securities as an adjustment of yield in a manner consistent with the amortization of a discount. The amortization of unrealized holding losses reported in equity will offset the effect on interest income of the amortization of the discount. At September 30, 2016, the remaining unrealized holding losses totaled $1.9 million.

 

Securities at September 30, 2016 with a carrying and fair value of $161.0 were pledged as collateral for United States Treasury deposits, other public deposits and trust deposits. Securities with both a carrying value and fair value of $167.7 million were pledged as collateral for repurchase agreements.

 

The amortized cost and fair value of securities at September 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because prepayments of the underlying collateral for these securities may occur, due to the right to call or repay obligations with or without call or prepayment penalties.

 

   Held for Investment   Available for Sale 
   Amortized   Fair   Amortized   Fair 
(Dollars in thousands)  Cost   Value   Cost   Value 
Due in less than one year  $0   $0   $7,760   $7,934 
Due after one year through                    
five years   0    0    83,490    84,017 
Due after five years                    
through ten years   41,494    41,212    139,005    140,811 
Due after ten years   0    0    33,131    34,422 
    41,494    41,212    263,386    267,184 
Mortgage-backed                    
securities of U.S. Government                    
Sponsored Entities   183,507    187,813    165,802    168,974 
Collateralized mortgage                    
obligations of  U.S. Government                    
Sponsored Entities   160,377    161,590    251,419    252,483 
Private mortgage backed securities   0    0    32,720    32,032 
Private collateralized mortgage                    
obligations   6,760    6,649    73,371    73,128 
Other debt securities   0    0    11,112    11,130 
Commercial mortgage                    
   backed securities   0    0    60,624    61,682 
   $392,138   $397,264   $858,434   $866,613 

  

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, using observable market data where available. The tables below indicate the amount of securities with unrealized losses and period of time for which these losses were outstanding at September 30, 2016 and December 31, 2015, respectively.

 

  12

 

 

   September 30, 2016 
   Less than 12 months   12 months or longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollars in thousands)  Value   Losses   Value   Losses   Value   Losses 
Mortgage-backed securities of                        
U.S. Government Sponsored Entities  $5,241   $(9)  $5,735   $(87)  $10,976   $(96)
Collateralized mortgage obligations of                              
U.S. Government Sponsored Entities   96,741    (492)   72,794    (892)   169,535    (1,384)
Private mortgage backed securities   15,007    (520)   17,025    (168)   32,032    (688)
Private collateralized mortgage obligations   3,588    (141)   43,918    (831)   47,506    (972)
Collateralized loan obligations   0    0    51,460    (1,141)   51,460    (1,141)
Obligations of state and political subdivisions   3,692    (52)   0    0    3,692    (52)
Corporate and other debt securities   8,192    (35)   1,996    (4)   10,188    (39)
Commercial mortgage backed securities   2,951    (10)   11,810    (233)   14,761    (243)
Total temporarily impaired securities  $135,412   $(1,259)  $204,738   $(3,356)  $340,150   $(4,615)

 

   December 31, 2015 
   Less than 12 months   12 months or longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollars in thousands)   Value    Losses    Value    Losses    Value    Losses 
Mortgage-backed securities of                              
U.S. Government Sponsored Entities  $112,236   $(1,082)  $14,508   $(256)  $126,744   $(1,338)
Collateralized mortgage obligations of                              
U.S. Government Sponsored Entities   97,512    (973)   147,266    (4,333)   244,778    (5,306)
Private mortgage backed securities   31,792    (766)   0    0    31,792    (766)
Private collateralized mortgage obligations   19,939    (321)   31,533    (472)   51,472    (793)
Collateralized loan obligations   101,601    (1,642)   60,922    (1,612)   162,523    (3,254)
Obligations of state and political subdivisions   11,570    (110)   0    0    11,570    (110)
Corporate and other debt securities   31,342    (416)   0    0    31,342    (416)
Commercial mortgage backed securities   37,838    (720)   0    0    37,838    (720)
Total temporarily impaired securities  $443,830   $(6,030)  $254,229   $(6,673)  $698,059   $(12,703)

 

The tables above include securities held for investment that were transferred from available for sale into held for investment during 2014. Those securities had unrealized losses of $3.1 million at the date of transfer. None of these securities had a fair value with an unrealized loss for less than twelve months at September 30, 2016. At December 31, 2015, the fair value of those securities in an unrealized loss position for less than twelve months was $38.9 million, and the unrealized losses on those securities in an unrealized loss position for less than twelve months was $0.4 million. None of these securities were in an unrealized loss position for more than twelve months at September 30, 2016 and December 31, 2015, respectively.

 

At September 30, 2016, private label securities with a fair value of $79.5 million secured by collateral originated in 2005 and prior were in an unrealized loss position. Their unrealized loss position of approximately $1.7 million is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The collateral underlying these mortgage investments are 30- and 15-year fixed and 10/1 adjustable rate mortgage loans with low loan to values, subordination and all historically have had minimal foreclosures. Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

  13

 

 

At September 30, 2016, the Company also had $1.5 million of unrealized losses on collateralized mortgage obligations and mortgage backed securities of government sponsored entities having a fair value of $180.5 million that were attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

At September 30, 2016, the Company also had $1.1 million of unrealized losses on collateralized loan obligations having a fair value of $51.5 million that were attributable to a combination of factors, including relative changes in interest rates, spreads and interest movements since the time of purchase. Based on our assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities.

 

At September 30, 2016, $28.7 million of remaining securities categories had unrealized losses of $0.3 million. Management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and interest movements and not change in credit quality.

 

As of September 30, 2016, management does not intend to sell securities that are in unrealized loss positions and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis. Therefore, management does not consider any investment to be other-than-temporarily impaired at September 30, 2016.

 

Included in other assets is $30.9 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. At September 30, 2016, the Company has not identified events or changes in circumstances which may have a significant adverse effect on the carrying value of the $30.9 million of cost method investment securities.

 

The Company also holds 11,330 shares of Visa Class B stock, which following resolution of Visa litigation will be converted to Visa Class A shares (the conversion rate was 1.6483 shares of Class A stock for each share of Class B stock) for a total of 18,675 shares of Visa Class A stock with a value of $1.5 million. Our ownership is related to prior ownership in Visa’s network, while Visa operated as a cooperative. This ownership is recorded on our financial records at a zero basis.

 

NOTE E — LOANS

 

Information relating to portfolio loans, purchased credit impaired (“PCI”) loans, and purchased unimpaired loans (“PUL”) is summarized as follows:

 

September 30, 2016  Portfolio Loans   PCI Loans   PUL's   Total 
   (Dollars in thousands) 
Construction and land development  $129,239   $114   $24,548   $153,901 
Commercial real estate   947,612    11,281    334,619    1,293,512 
Residential real estate   772,579    685    60,149    833,413 
Commercial and financial   278,065    977    63,459    342,501 
Consumer   144,291    0    1,231    145,522 
Other loans   489    0    0    489 
NET LOAN BALANCES (1)  $2,272,275   $13,057   $484,006   $2,769,338 

 

December 31, 2015  Portfolio Loans   PCI Loans   PUL's   Total 
   (Dollars in thousands) 
Construction and land development  $97,629   $114   $11,044   $108,787 
Commercial real estate   776,875    9,990    222,513    1,009,378 
Residential real estate   678,131    922    44,732    723,785 
Commercial and financial   188,013    1,083    39,421    228,517 
Consumer   82,717    0    2,639    85,356 
Other loans   507    0    0    507 
NET LOAN BALANCES (1)  $1,823,872   $12,109   $320,349   $2,156,330 

 

(1) Net loan balances as of September 30, 2016 and December 31, 2015 include deferred fee/costs (net) and fair value adjustments on acquired loans, aggregating to $12.4 million and $7.7 million for each period, respectively.

 

Purchased Loans - PCI loans are accounted for pursuant to ASC Topic 310-30. The excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan in situations where there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The difference between the contractually required payments and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the nonaccretable difference.

 

We have applied ASC Topic 310-20 accounting treatment to PULs. The unamortized fair value mark established at acquisition on the loans has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans.

 

The table below summarize the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of PCI loans during the three and nine month periods ended September 30, 2016 and 2015. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

  14

 

 

Three Months Ended September 30, 2016                  Reclassifications from     
   June 30,
2016
   Additions   Deletions   Accretion   nonaccretable difference   September 30,
2016
 
   (In thousands) 
Contractually required principal and interest  $24,576   $0   $(376)  $0   $0   $24,200 
Nonaccretable difference   (6,250)   0    (711)   0    0    (6,961)
Cash flows expected to be collected   18,326    0    (1,087)   0    0    17,239 
Accretable yield   (4,674)   0    113    379    0    (4,182)
Carrying value of acquired loans   13,652   $0   $(974)  $379   $0    13,057 
Allowance for loan losses   0                        0 
Carrying value less allowance for loan losses  $13,652                       $13,057 
                               
Nine Months Ended September 30, 2016                  Reclassifications from     
   December 31,
2015
   Additions   Deletions   Accretion   nonaccretable difference   September 30,
2016
 
   (In thousands) 
Contractually required principal and interest  $19,966   $9,148   $(4,914)  $0   $0   $24,200 
Nonaccretable difference   (5,247)   (4,109)   2,395    0    0    (6,961)
Cash flows expected to be collected   14,719    5,039    (2,519)   0    0    17,239 
Accretable yield   (2,610)   (1,831)   (1,158)   1,417    0    (4,182)
Carrying value of acquired loans   12,109   $3,208   $(3,677)  $1,417   $0    13,057 
Allowance for loan losses   0                        0 
Carrying value less allowance for loan losses  $12,109                       $13,057 
                               
Three Months Ended September 30, 2015                  Reclassifications from     
   June 30,
2015
   Additions   Deletions   Accretion   nonaccretable difference   September 30,
2015
 
   (In thousands) 
Contractually required principal and interest  $11,564   $12,552   $(609)  $0   $0   $23,507 
Nonaccretable difference   (3,901)   (4,249)   (1,656)   0    152    (9,654)
Cash flows expected to be collected   7,663    8,303    (2,265)   0    152    13,853 
Accretable yield   (1,101)   (702)   610    165    (152)   (1,180)
Carrying value of acquired loans   6,562   $7,601   $(1,655)  $165   $0    12,673 
Allowance for loan losses   (212)                       (49)
Carrying value less allowance for loan losses  $6,350                       $12,624 
                               
Nine Months Ended September 30, 2015                  Reclassifications from     
   December 31, 2014   Additions   Deletions   Accretion   nonaccretable difference   September 30,
2015
 
   (In thousands) 
Contractually required principal and interest  $14,831   $12,552   $(3,876)  $0   $0   $23,507 
Nonaccretable difference   (5,825)   (4,249)   7    0    413    (9,654)
Cash flows expected to be collected   9,006    8,303    (3,869)   0    413    13,853 
Accretable yield   (1,192)   (702)   758    369    (413)   (1,180)
Carrying value of acquired loans   7,814   $7,601   $(3,111)  $369   $0    12,673 
Allowance for loan losses   (64)                       (49)
Carrying value less allowance for loan losses  $7,750                       $12,624 

 

  15

 

 

The following tables present the contractual delinquency of the recorded investment in past due loans by class of loans as of September 30, 2016 and December 31, 2015:

 

           Accruing             
   Accruing   Accruing   Greater           Total 
September 30, 2016  30-59 Days   60-89 Days   Than           Financing 
(Dollars in thousands)  Past Due   Past Due   90 Days   Nonaccrual   Current   Receivables 
                               
Portfolio Loans                              
Construction and land development  $0   $0   $0   $229   $129,010   $129,239 
Commercial real estate   2,270    1,257    0    1,296    942,789    947,612 
Residential real estate   574    361    0    8,730    762,914    772,579 
Commercial and financial   399    0    0    137    277,529    278,065 
Consumer   66    0    0    169    144,056    144,291 
Other   0    0    0    0    489    489 
Total   3,309    1,618    0    10,561    2,256,787   $2,272,275 
                               
Purchased Unimpaired Loans                              
Construction and land development  $0   $0   $0   $34   $24,514   $24,548 
Commercial real estate   148    0    0    2,008    332,463    334,619 
Residential real estate   0    0    0    1,271    58,878    60,149 
Commercial and financial   333    352    0    209    62,565    63,459 
Consumer   0    0    0    0    1,231    1,231 
Other   0    0    0    0    0    0 
Total   481    352    0    3,522    479,651   $484,006 
                               
Purchased Credit Impaired Loans                              
Construction and land development  $0   $0   $0   $0   $114   $114 
Commercial real estate   0    0    0    4,354    6,927    11,281 
Residential real estate   182    0    0    0    503    685 
Commercial and financial   0    0    0    0    977    977 
Consumer   0    0    0    0    0    0 
Other   0    0    0    0    0    0 
Total   182    0    0    4,354    8,521   $13,057 
                               
Total Loans  $3,972   $1,970   $0   $18,437   $2,744,959   $2,769,338 

 

  16

 

 

           Accruing             
   Accruing   Accruing   Greater           Total 
December 31, 2015  30-59 Days   60-89 Days   Than           Financing 
(Dollars in thousands)  Past Due   Past Due   90 Days   Nonaccrual   Current   Receivables 
                         
Portfolio Loans                              
Construction and land development  $665   $0   $0   $269   $96,695   $97,629 
Commercial real estate   810    0    0    2,301    773,764    776,875 
Residential real estate   141    0    0    9,941    668,049    678,131 
Commercial and financial   59    0    0    0    187,954    188,013 
Consumer   430    0    0    247    82,040    82,717 
Other   0    0    0    0    507    507 
Total  $2,105   $0   $0   $12,758   $1,809,009   $1,823,872 
                               
Purchased Unimpaired Loans                              
Construction and land development  $0   $0   $0   $40   $11,004   $11,044 
Commercial real estate   179    0    0    2,294    220,040    222,513 
Residential real estate   66    0    0    0    44,666    44,732 
Commercial and financial   39    0    0    130    39,252    39,421 
Consumer   39    0    0    0    2,600    2,639 
Other   0    0    0    0    0    0 
Total  $323   $0   $0   $2,464   $317,562   $320,349 
                               
Purchased Impaired Loans                              
Construction and land development  $0   $0   $0   $0   $114   $114 
Commercial real estate   132    0    0    1,816    8,042    9,990 
Residential real estate   0    0    0    348    574    922 
Commercial and financial   0    0    0    0    1,083    1,083 
Consumer   0    0    0    0    0    0 
Other   0    0    0    0    0    0 
Total  $132   $0   $0   $2,164   $9,813   $12,109 
                               
Total Loans  $2,560   $0   $0   $17,386   $2,136,384   $2,156,330 

 

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful” and these loans are monitored on an ongoing basis.  Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  The principal balance of loans classified as doubtful are generally charged off. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants.

 

Loans not meeting the criteria above are considered to be pass-rated loans and risk grades are recalculated at least annually by the loan relationship manager.  The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of September 30, 2016 and December 31, 2015:

 

  17

 

 

September 30, 2016    
   Construction           Commercial         
   & Land   Commercial   Residential   and   Consumer     
(Dollars in thousands)  Development   Real Estate   Real Estate   Financial   Loans   Total 
Pass  $141,629   $1,257,999   $805,997   $336,238   $144,253   $2,686,116 
Special mention   5,893    8,335    1,762    3,824    1,129    20,943 
Substandard   5,550    13,429    3,398    2,093    100    24,570 
Doubtful   0    0    0    0    0    0 
Nonaccrual   263    7,658    10,001    346    169    18,437 
Pass-Troubled debt restructures   47    5,031    363    0    44    5,485 
Troubled debt restructures   519    1,060    11,892    0    316    13,787 
   $153,901   $1,293,512   $833,413   $342,501   $146,011   $2,769,338 

 

December 31, 2015    
   Construction           Commercial         
   & Land   Commercial   Residential   and   Consumer     
(Dollars in thousands)  Development   Real Estate   Real Estate   Financial   Loans   Total 
Pass  $100,186   $973,942   $697,907   $226,391   $83,786   $2,082,212 
Special mention   3,377    12,599    629    1,209    1,392    19,206 
Substandard   4,242    9,278    3,197    769    70    17,556 
Doubtful   0    0    0    0    0    0 
Nonaccrual   309    6,410    10,290    130    247    17,386 
Pass-Troubled debt restructures   58    5,893    0    18    0    5,969 
Troubled debt restructures   615    1,256    11,762    0    368    14,001 
   $108,787   $1,009,378   $723,785   $228,517   $85,863   $2,156,330 

 

NOTE F — IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES

 

During the nine months ending September 30, 2016 and 2015, the total of newly identified Troubled Debt Restructurings (“TDRs”) totaled $1.7 million and $2.0 million, respectively.

 

The Company’s TDR concessions granted generally do not include forgiveness of principal balances. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements. When a loan is modified as a TDR, there is not a direct, material impact on the loans within the consolidated balance sheet, as principal balances are generally not forgiven. Most loans prior to modification were classified as an impaired loan and the allowance for loan losses is determined in accordance with Company policy.

 

The following table presents loans that were modified within the nine months ending September 30, 2016:

 

       Pre-   Post-         
       Modification   Modification         
   Number   Outstanding   Outstanding   Specific   Valuation 
   of   Recorded   Recorded   Reserve   Allowance 
(Dollars in thousands)  Contracts   Investment   Investment   Recorded   Recorded 
Residential real estate   6   $1,660   $1,489   $0   $171 
    6   $1,660   $1,489   $0   $171 

 

  18

 

 

The following table presents loans that were modified within the nine months ending September 30, 2015:

 

       Pre-   Post-         
       Modification   Modification         
   Number   Outstanding   Outstanding   Specific   Valuation 
   of   Recorded   Recorded   Reserve   Allowance 
(Dollars in thousands)  Contracts   Investment   Investment   Recorded   Recorded 
Residential real estae   1   $26   $25   $0   $1 
Commercial real estate   3    1,881    1,787    0    94 
Consumer   4    48    45    0    3 
    8   $1,955   $1,857   $0   $98 

 

No accruing loans that were restructured within the twelve months preceding September 30, 2016 defaulted during the nine months ended September 30, 2016, and no loans restructured within the twelve months preceding September 30, 2015 defaulted during the twelve months ended September 30, 2015. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to other real estate owned. A defaulted TDR is generally placed on nonaccrual and specific allowance for loan loss is assigned in accordance with the Company’s policy.

 

As of September 30, 2016 and December 31, 2015, the Company’s recorded investment in impaired loans and the related valuation allowance were as follows:

 

   September 30, 2016 
       Unpaid   Related 
   Recorded   Principal   Valuation 
(Dollars in thousands)  Investment   Balance   Allowance 
Impaired Loans with No Related Allowance Recorded:               
Construction and land development  $211   $297   $0 
Commercial real estate   1,421    2,889    0 
Residential real estate   9,258    13,609    0 
Commercial and financial   19    19    0 
Consumer   136    229    0 
Impaired Loans with an Allowance Recorded:               
Construction and land development   585    595    42 
Commercial real estate   5,966    5,966    346 
Residential real estate   11,727    12,025    1,608 
Commercial and financial   0    0    0 
Consumer   392    392    49 
Total:               
Construction and land development   796    892    42 
Commercial real estate   7,387    8,855    346 
Residential real estate   20,985    25,634    1,608 
Commercial and financial   19    19    0 
Consumer   528    621    49 
   $29,715   $36,021   $2,045 

 

   December 31, 2015 
       Unpaid   Related 
   Recorded   Principal   Valuation 
(Dollars in thousands)  Investment   Balance   Allowance 
Impaired Loans with No Related Allowance Recorded:               
Construction and land development  $107   $255   $0 
Commercial real estate   2,363    3,911    0 
Residential real estate   9,256    13,707    0 
Commercial and financial   17    17    0 
Consumer   264    349    0 
Impaired Loans with an Allowance Recorded:               
Construction and land development   835    870    84 
Commercial real estate   7,087    7,087    429 
Residential real estate   12,447    12,803    1,964 
Commercial and financial   0    0    0 
Consumer   351    351    40 
Total:               
Construction and land development   942    1,125    84 
Commercial real estate   9,450    10,998    429 
Residential real estate   21,703    26,510    1,964 
Commercial and financial   17    17    0 
Consumer   615    700    40 
   $32,727   $39,350   $2,517 

 

  19

 

 

For the three months ended September 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:

 

   Three Months Ended   Three Months Ended 
   September 30, 2016   September 30, 2015 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
(Dollars in thousands)  Investment   Recognized   Investment   Recognized 
Impaired Loans with No Related Allowance                    
Recorded:                    
Construction & land development  $208   $3   $1,216   $2 
Commercial real estate   1,437    31    3,138    7 
Residential real estate   9,346    138    9,700    35 
Commercial and financial   16    0    83    0 
Consumer   157    3    152    0 
Impaired Loans with an Allowance Recorded:                    
Construction & land development   609    7    1,070    23 
Commercial real estate   6,565    64    6,638    78 
Residential real estate   12,038    102    14,762    89 
Commercial and financial   0    0    0    0 
Consumer   383    4    490    7 
Total:                    
Construction & land development   817    10    2,286    25 
Commercial real estate   8,002    95    9,776    85 
Residential real estate   21,384    240    24,462    124 
Commercial and financial   16    0    83    0 
Consumer   540    7    642    7 
   $30,759   $352   $37,249   $241 

 

For the nine months ended September 30, 2016 and 2015, the Company’s average recorded investments in impaired loans and related interest income were as follows:

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2016   September 30, 2015 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
(Dollars in thousands)  Investment   Recognized   Investment   Recognized 
Impaired Loans with No Related Allowance                    
Recorded:                    
Construction & land development  $188   $11   $1,632   $7 
Commercial real estate   1,854    97    3,012    13 
Residential real estate   9,444    406    10,745    103 
Commercial and financial   16    0    106    1 
Consumer   193    10    126    0 
Impaired Loans with an Allowance Recorded:                    
Construction & land development   671    20    912    39 
Commercial real estate   6,835    193    7,312    223 
Residential real estate   12,098    322    15,658    270 
Commercial and financial   0    0    0    0 
Consumer   363    14    507    17 
Total:                    
Construction & land development   859    31    2,544    46 
Commercial real estate   8,689    290    10,324    236 
Residential real estate   21,542    728    26,403    373 
Commercial and financial   16    0    106    1 
Consumer   556    24    633    17 
   $31,662   $1,073   $40,010   $673 

 

  20

 

 

Impaired loans also include loans that have been modified in troubled debt restructurings where concessions to borrowers who experienced financial difficulties have been granted. At September 30, 2016 and at December 31, 2015, accruing TDRs totaled $19.3 million and $20.0 million, respectively.

 

The impaired loans are measured for impairment based on the value of underlying collateral or the present value of expected future cash flows discounted at the loan’s effective rate. The valuation allowance is included in the allowance for loan losses.

 

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

 

Nonaccrual loans and accruing loans past due 90 days or more (excluding purchased loans) totaled $10.6 million and $0, respectively, at September 30, 2016, and $12.8 million and $0 at December 31, 2015, respectively. Purchased nonaccrual and accruing loans past due 90 days or more were $7.9 million and $0 at September 30, 2016, and $4.6 million and $0 at December 31, 2015.

 

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period ended and nine-month period ended September 30, 2016 is summarized as follows:

 

   Allowance for Loan Losses for the Three Months Ended September 30, 2016 
       Provision                 
   Beginning   for Loan   Charge-       Net   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $1,160   $48   $0   $25   $25   $1,233 
Commercial real estate   7,192    1,450    (78)   169    91    8,733 
Residential real estate   8,299    (662)   0    272    272    7,909 
Commercial and financial   2,591    (550)   (283)   1,278    995    3,036 
Consumer   1,483    264    (18)   44    26    1,773 
   $20,725   $550   $(379)  $1,788   $1,409   $22,684 
                               
   Allowance for Loan Losses for the Nine Months Ended September 30, 2016 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $1,151   $(132)  $0   $214   $214   $1,233 
Commercial real estate   6,756    1,960    (254)   271    17    8,733 
Residential real estate   8,057    (672)   (145)   669    524    7,909 
Commercial and financial   2,042    (403)   (376)   1,773    1,397    3,036 
Consumer   1,122    658    (98)   91    (7)   1,773 
   $19,128   $1,411   $(873)  $3,018   $2,145   $22,684 

 

  21

 

 

Activity in the allowance for loan losses (excluding PCI loans) for the three-month period and nine-month period ended September 30, 2015 is summarized as follows:

 

   Allowance for Loan Losses for the Three Months Ended September 30, 2015 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $887   $891   $(859)  $109   $(750)  $1,028 
Commercial real estate   5,278    925    (128)   315    187    6,390 
Residential real estate   9,686    (686)   (193)   359    166    9,166 
Commercial and financial   945    193    (160)   107    (53)   1,085 
Consumer   1,783    (173)   (22)   22    0    1,610 
   $18,579   $1,150   $(1,362)  $912   $(450)  $19,279 
                               
   Allowance for Loan Losses for the Nine Months Ended September 30, 2015 
       Provision           Net     
   Beginning   for Loan   Charge-       (Charge-Offs)   Ending 
(Dollars in thousands)  Balance   Losses   Offs   Recoveries   Recoveries   Balance 
Construction & land development  $722   $910   $(925)  $321   $(604)  $1,028 
Commercial real estate   4,528    1,690    (430)   602    172    6,390 
Residential real estate   9,784    (1,235)   (515)   1,132    617    9,166 
Commercial and financial   1,179    (245)   (284)   435    151    1,085 
Consumer   794    1,020    (276)   72    (204)   1,610 
   $17,007   $2,140   $(2,430)  $2,562   $132   $19,279 

  

The allowance for loan losses is composed of specific allowances for certain impaired loans and general allowances grouped into loan pools based on similar characteristics. The Company’s loan portfolio (excluding PCI loans) and related allowance at September 30, 2016 and December 31, 2015 is shown in the following tables:

 

   At September 30, 2016 
   Individually Evaluated for   Collectively Evaluated for         
   Impairment   Impairment   Total 
   Carrying   Associated   Carrying   Associated   Carrying   Associated 
(Dollars in thousands)  Value   Allowance   Value   Allowance   Value   Allowance 
Construction & land development  $796   $42   $152,991   $1,191   $153,787   $1,233 
Commercial real estate   7,387    346    1,274,844    8,387    1,282,231    8,733 
Residential real estate   20,985    1,608    811,743    6,301    832,728    7,909 
Commercial and financial   19    0    341,505    3,036    341,524    3,036 
Consumer   528    49    145,483    1,724    146,011    1,773 
   $29,715   $2,045   $2,726,566   $20,639   $2,756,281   $22,684 

 

   At December 31, 2015 
   Individually Evaluated for   Collectively Evaluated for         
   Impairment   Impairment   Total 
   Carrying   Associated   Carrying   Associated   Carrying   Associated 
(Dollars in thousands)  Value   Allowance   Value   Allowance   Value   Allowance 
Construction & land development  $942   $84   $107,731   $1,067   $108,673   $1,151 
Commercial real estate   9,450    429    989,938    6,327    999,388    6,756 
Residential real estate   21,703    1,964    701,160    6,093    722,863    8,057 
Commercial and financial   17    0    227,417    2,042    227,434    2,042 
Consumer   615    40    85,248    1,082    85,863    1,122 
   $32,727   $2,517   $2,111,494   $16,611   $2,144,221   $19,128 

 

  22

 

 

Loans collectively evaluated for impairment at December 31, 2015 included loans acquired from BANKshares on October 1, 2014 and Grand Bankshares on July 17, 2015 that are not PCI loans, and loans at September 30, 2016 included loans acquired from Floridian and BMO Harris as well that are not PCI loans. These loans are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment represents the total fair value discount of each PUL, is accreted into interest income over the remaining lives of the related loans on a level yield basis, and remained adequate at September 30, 2016.

 

The table below summarizes PCI loans that were individually evaluated for impairment based on expected cash flows at September 30, 2016 and December 31, 2015:

 

   PCI Loans Individually Evaluated for Impairment 
   September 30, 2016   December 31, 2015 
   Carrying   Associated   Carrying   Associated 
(Dollars in thousands)  Value   Allowance   Value   Allowance 
Construction & land development  $114   $0   $114   $0 
Commercial real estate   11,281    0    9,990    0 
Residential real estate   685    0    922    0 
Commercial and financial   977    0    1,083    0 
Consumer   0    0    0    0 
   $13,057   $0   $12,109   $0 

 

NOTE G — SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase are accounted for as secured borrowings. For securities sold under agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of collateral pledged. At September 30, 2016 and December 31, 2015, Company securities pledged were as follows by collateral type and maturity:

 

(Dollars in thousands)  Overnight and Continuous Maturity 
Fair Value  September 30,   December 31, 
   2016   2015 
Mortgage backed securities and collateralized mortgage          
  obligations of U.S. Government Sponsored Entities  $167,693   $172,005 

 

NOTE H – NONINTEREST INCOME AND EXPENSE

 

Details of noninterest income and expense follow:

 

   Three Months Ended   Nine months ended 
   September 30,   September 30, 
(Dollars in thousands  2016   2015   2016   2015 
                 
Noninterest income                    
     Service charges on deposit accounts  $2,698   $2,217   $7,057   $6,334 
     Trust fees   820    781    2,464    2,341 
     Mortgage banking fees   1,885    1,177    4,248    3,297 
     Brokerage commissions and fees   463    604    1,564    1,621 
        Marine finance fees   138    258    558    947 
        Interchange income   2,306    1,925    6,893    5,695 
        Other deposit based EFT fees   109    88    352    298 
     BOLI income   382    366    1,602    1,030 
        Gain on participated income   0    0    0    725 
     Other   963    666    2,767    1,948 
    9,764    8,082    27,505    24,236 
     Securities gains, net   225    160    361    160 
TOTAL NONINTEREST INCOME  $9,989   $8,242   $27,866   $24,396 

 

  23

 

 

   Three Months Ended   Nine months ended 
   September 30,   September 30, 
(Dollars in thousands  2016   2015   2016   2015 
                 
Noninterest expense                    
Salaries and wages  $14,337   $11,850   $41,620   $29,940 
Employee benefits   2,425    2,430    7,428    7,386 
Outsourced data processing costs   3,198    3,277    10,440    7,695 
Telephone / data lines   539    446    1,606    1,385 
Occupancy   3,675    2,396    10,292    6,430 
Furniture and equipment   1,228    883    3,509    2,434 
Marketing   780    1,099    2,786    3,300 
Legal and professional fees   2,213    2,189    7,226    5,442 
FDIC assessments   517    552    1,704    1,661 
Amortization of intangibles   728    397    1,767    1,027 
Asset dispositions expense   219    77    469    393 
Net loss on other real estate owned and repossessed assets   (96)   262    (348)   396 
Early redemption cost for FHLB advances   0    0    1,777    0 
Other   3,672    3,269    10,308    9,112 
TOTAL NONINTEREST EXPENSE  $33,435   $29,127   $100,584   $76,601 

 

NOTE I — EQUITY CAPITAL

 

The Company is well capitalized and at September 30, 2016, the Company and the Company’s principal banking subsidiary, Seacoast National Bank, or “Seacoast Bank”, met the common equity Tier 1 capital ratio (CET1) regulatory threshold of 6.5% for well-capitalized institutions under the Basel III standardized transition approach, as well as risk-based and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.

 

NOTE J — 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 K — FAIR VALUE

 

Under ASC 820, fair value measurements for items measured at fair value on a recurring and nonrecurring basis at September 30, 2016 and December 31, 2015 included:

 

  24

 

 

          Quoted Prices              
          in Active     Significant        
          Markets for     Other     Significant  
          Identical     Observable     Unobservable  
    Fair Value     Assets     Inputs     Inputs  
(Dollars in thousands)   Measurements     (Level 1)     (Level 2)     (Level 3)  
At September 30, 2016:                        
Available for sale securities (1)   $ 866,613     $ 100     $ 866,513     $ 0  
Loans held for sale (2)     20,143       0       20,143       0  
Loans (3)     4,704       0       3,805       899  
Other real estate owned (4)     12,734       0       662       12,072  
                                 
At December 31, 2015:                                
Available for sale securities (1)   $ 790,766     $ 225     $ 790,541     $ 0  
Loans held for sale (2)     23,998       0       23,998       0  
Loans (3)     7,511       0       6,052       1,459  
Other real estate owned (4)     7,039       0       598       6,441  

___________________________

(1)See Note D for further detail of fair value of individual investment categories.
(2)Recurring fair value basis determined using observable market data.
(3)See Note F. Nonrecurring fair value adjustments to loans identified as impaired reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with ASC 310.
(4)Fair value is measured on a nonrecurring basis in accordance with ASC 360.

 

The fair value of impaired real estate loans which are collateral dependent is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans, appraised values or internal evaluation are based on the comparative sales approach. These impaired loans are considered level 2 in the fair value hierarchy. For commercial and commercial real estate impaired loans, evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At September 30, 2016 the range of capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.9%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these impaired loans is considered level 3 in the fair value hierarchy. Impaired loans measured at fair value total $4.7 million with a specific reserve of $2.5 million at September 30, 2016, compared to $7.5 million with a specific reserve of $2.9 million at December 31, 2015.

 

Fair value of available for sale securities are determined using valuation techniques for individual investments as described in Note D.

 

When appraisals are used to determine fair value and the appraisals are based on a market approach, the fair value of other real estate owned (“OREO”) is classified as a level 2 input. When the fair value of OREO is based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, the fair value of OREO is classified as Level 3.

 

  25

 

 

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarter-end valuation process.

 

During the first nine months ended September 30, 2016, there were no transfers between level 1 and level 2 assets carried at fair value.

 

For loans classified as level 3 the transfers in totaled $0.3 million for the first nine months of 2016, consisting of loans that became impaired during 2016. Transfers out consisted of charge-offs of $0.1 million, and loan foreclosures migrating to OREO and other reductions (including principal payments) totaling $0.7 million.

 

Charge-offs recognized upon loan foreclosures are generally offset by general or specific allocations of the allowance for loan losses and generally do not, and did not during the reported periods, significantly impact the Company’s provision for loan losses.

 

For OREO classified as level 3 during the first nine months of 2016, foreclosed loans transferred in totaled $2.9 million and migrated bank branches taken out of service totaled $7.7 million. Transfers out summed to $4.9 million, consisting entirely of sales.

 

The carrying amount and fair value of the Company’s other significant financial instruments that are not measured at fair value on a recurring basis in the balance sheet as of September 30, 2016 and December 31, 2015 is as follows:

 

          Quoted Prices              
          in Active     Significant        
          Markets for     Other     Significant  
          Identical     Observable     Unobservable  
    Carrying     Assets     Inputs     Inputs  
(Dollars in thousands)   Amount     (Level 1)     (Level 2)     (Level 3)  
At September 30, 2016:                        
Financial Assets                                
Securities held to maturity (1)   $ 392,138     $ 0     $ 397,264     $ 0  
Loans, net     2,741,950       0       0       2,743,652  
Financial Liabilities                                
Deposit liabilities     3,510,493       0       0       3,512,632  
Subordinated debt     70,171       0       52,785       0  
                                 
At December 31, 2015:                                
Financial Assets                                
Securities held to maturity (1)   $ 203,525     $ 0     $ 202,813     $ 0  
Loans, net     2,129,691       0       0       2,147,024  
Financial Liabilities                                
Deposit liabilities     2,844,387       0       0       2,843,800  
FHLB advances, maturing in 2017 (2)     50,000       0       51,788       0  
Subordinated debt     69,961       0       52,785       0  

 

(1) See Note D for further detail of fair value of individual investment categories.

(2) Redemption in April 2016 and no longer outstanding

 

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The short maturity of Seacoast’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, interest bearing deposits with other banks, federal funds purchased and securities sold under agreement to repurchase, maturing within 30 days.

 

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 September 30, 2016 and December 31, 2015:

 

Securities: U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities are reported at fair value utilizing Level 2 inputs. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

 

The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company does not purchase investment portfolio securities that are esoteric or that have a complicated structure. The Company’s portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. The fair value of collateralized loan obligations are determined from broker quotes. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.

 

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, etc. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusting for prepayment assumptions using discount rates based on secondary market sources. The estimated fair value is not an exit price fair value under ASC 820 when this valuation technique is used.

 

Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with Company’s policy on loans held for investment. None of the loans are 90 days or more past due or on nonaccrual as of September 30, 2016 and December 31, 2015.

 

At September 30, 2016 and December 31, 2015, the aggregate fair value, contractual balance (including accrued interest) and gains or losses was as follows:

 

   September 30,   December 31, 
(Dollars in thousands)  2016   2015 
Aggregate fair value  $20,143   $23,998 
Contractual balance   19,604    23,384 
Gains (losses)   539    614 

 

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

 

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 was based on independent third party analysis, that included discounted cash flow analysis, assessments of the Company’s current incremental borrowing rate for similar instruments, and market quotes for similar debt.

 

NOTE L — BUSINESS COMBINATIONS

 

Acquisition of Grand Bankshares, Inc.

 

On July 17, 2015, the Company completed its acquisition of Grand Bankshares, Inc. (“Grand”) whereby Grand was merged with and into the Company. Grand’s subsidiary bank, Grand Bank & Trust of Florida (“GB”) was simultaneously merged with and into Seacoast National Bank. The Company acquired 100% of the outstanding common and preferred stock of Grand. The total purchase price was $18.7 million.

 

With the acquisition, the Company further solidified its market share in the attractive Palm Beach market, expanding its customer base and leveraging operating costs through economies of scale, enhancing its fee income and positively affecting its net interest income operating results. The acquisition contributed $188.4 million in total deposits and $111.3 million in total loans to our balance sheet.

 

The acquisition of Grand constitutes a business combination and was accounted for under ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are final and are no longer subject to change as the one year period post-closing of the acquisition date when measurement period adjustments were allowed has expired.

 

No goodwill was recognized for this whole bank acquisition that resulted in a bargain purchase gain of $416,000 recorded to income in the fourth quarter of 2015 due to a measurement period adjustment. In addition, a $2.6 million core deposit intangible (“CDI”) was recorded.

 

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Acquisition of Floridian Financial Group, Inc.

 

On March 11, 2016, the Company completed its acquisition of Floridian Financial Group, Inc. (“Floridian”), the parent company of Floridian Bank. Simultaneously, upon completion of the merger, Floridian’s wholly owned subsidiary bank, Floridian Bank, was merged with and into Seacoast National Bank. Floridian, headquartered in Lake Mary, Florida, operated 10 branches in Orlando and Daytona Beach, of which several will consolidate with Seacoast locations. This acquisition added approximately $417 million in total assets, $337 million in deposits, and $267 million in loans to Seacoast. As a result of this acquisition the Company expects to further solidify its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.


The Company acquired 100% of the outstanding common stock of Floridian. Under the terms of the definitive agreement, Floridian shareholders received, at their election, (i) the combination of $4.29 in cash and 0.5291 shares of Seacoast common stock, (ii) $12.25 in cash, or (iii) 0.8140 shares of Seacoast common stock, subject to a customary proration mechanism so that the aggregate consideration mix equals 35% cash and 65% Seacoast shares (based on Seacoast’s closing price of $15.47 per share on March 11, 2016).

 

This transaction closed on March 11, 2016.

 

   March 11, 2016 
Shares exchanged for cash  $26,699,000 
      
Number of Floridian Financial Group, Inc. common shares outstanding   6,222,119 
Per share exchange ratio   0.5289 
Number of shares of common stock issued   3,291,066 
Multiplied by common stock price per share on March 11, 2016  $15.47 
Value of common stock issued   50,912,791 
      
Total purchase price  $77,611,791 

 

The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

 

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       Measurement     
   Initial Report   Period   As Adjusted 
Date of acquisition  March 11, 2016   Adjustments   March 11, 2016 
         (in thousands)      
Assets:               
Cash  $28,243   $0   $28,243 
Investment securities   66,912    95    67,007 
Loans, net   268,249    (2,112)   266,137 
Fixed assets   7,801    (628)   7,173 
Core deposit intangibles   3,375    0    3,375 
Goodwill   29,985    1,647    31,632 
Other assets   12,879    998    13,877 
   $417,444   $0   $417,444 
                
Liabilities:               
Deposits  $337,341   $0   $337,341 
Other liabilities   2,492    0    2,492 
   $339,833   $0   $339,833 

 

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

 

   March 11, 2016 
(Dollars in thousands)  Book Balance   Fair Value 
Loans:        
Single family residential real estate  $38,304   $37,367 
Commercial real estate   172,531    167,105 
Construction/development/land   20,546    18,108 
Commercial loans   39,070    37,804 
Consumer and other loans   3,385    3,110 
Purchased credit-impaired   6,186    2,643 
Total acquired loans  $280,022   $266,137 

 

For the loans acquired we first segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we considered to identify loans as Purchase Credit Impaired (“PCI”) loans were all acquired loans that were nonaccrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard.” These loans were then evaluated to determine estimated fair values as of the acquisition date. As required by generally accepted accounting principles, we are accounting for these loans pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of March 11, 2016 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

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(Dollars in thousands)  March 11, 2016 
     
Contractually required principal and interest  $8,031 
Non-accretable difference   (4,820)
Cash flows expected to be collected   3,211 
Accretable yield   (568)
Total purchased credit-impaired loan acquired  $2,643 

 

Second, loans without specifically identified credit deficiency factors are referred to as Purchased Unimpaired Loans (“PULs”) for disclosure purposes. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the economic environment both nationally and locally as well as the real estate market particularly in Florida. We have applied ASC Topic 310-20 accounting treatment to the PULs.

 

The Company believes the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. In determining the valuation amount, a third party analyzed the deposits based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

 

The Company recognized goodwill of $32 million for this acquisition that is nondeductible for tax purposes. The acquisition of Floridian constitutes a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change, and in some instances rely on use of third party experts. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. For Floridian, fair values as presented for securities, loans, fixed assets, and certain other assets and liabilities are necessarily considered preliminary.

 

The operating results of the Company for the three months and nine months ended September 30 2016 include the operating results of the acquired assets and assumed liabilities since the date of acquisition of March 11, 2016. Results for the three-month period ended September 30, 2016 includes Floridian for the full quarter. Pro-forma data for the three months ended 2015 and nine months ending September 30, 2016 and 2015 listed in the table below present pro-forma information as if the acquisition occurred at the beginning of 2015.

 

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   Three Months         
   Ended   Nine Months Ended 
   September 30,   September 30, 
(Dollars in thousands, except per share amounts)  2015   2016   2015 
             
Net interest income  $32,145   $104,921   $89,851 
Net income available to common shareholders   4,805    21,440    17,462 
EPS - basic   0.13    0.58    0.48 
EPS - diluted   0.13    0.57    0.47 

 

Acquisition of BMO Harris Central Florida Offices, Deposits and Loans

 

On June 3, 2016, Seacoast National assumed approximately $314 million in deposits related to business and consumer banking customers at a deposit premium of 3.0% of the deposit balances, $63 million in business loans at a loan premium of 0.5%, and fourteen branches of BMO Harris Bank N.A. (“BMO”), located in the Orlando Metropolitan Statistical Area (“MSA”). As a result of this acquisition the Company expects to further improve its market share in the Central Florida market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

 

The fair values listed are preliminary and are subject to adjustment. The acquisition is accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values are known. Determining fair values of assets and liabilities, especially the loan portfolio and bank premises and leases related to the fourteen branches acquired, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values.

 

       Measurement     
       Period   As Adjusted 
Date of acquisition  June 3, 2016   Adjustments   June 3, 2016 
       (in thousands)     
Assets: